**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**





**FORM
      10-Q**





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





For
      the
      quarterly period ended June 30, 2007





or





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





For
      the
      transition period
      from             
        to                      .





000-50330


Commission
      File Number





EAST
      PENN FINANCIAL CORPORATION


(Exact
      name of registrant as specified in its charter)





Pennsylvania
            65-1172823(State
                or other jurisdiction of incorporation
                or organization)
            (IRS
                Employer Identification
                Number)


22
      South 2ndStreet,
      P.O. Box 869, Emmaus, Pennsylvania 18049


(Address
      of principal executive offices)





Registrant’s
      telephone number: 610-965-5959





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   ý  NO
o





Indicate
      by check mark whether the
      Registrant is a large accelerated filer, an accelerated filer, or a
      non-accelerated filer.  See definition of “accelerated filer and large
      accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check
      one):





Large
                Accelerated
                Filer         o
            Accelerated
                Filer         o
            Non-accelerated
                Filer   ý








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





YES    o                      NO   ý





APPLICABLE
      ONLY TO CORPORATE ISSUERS:





Indicate
      the number of shares
      outstanding of each of the issuer’s classes of common stock, as of the latest
      practicable date.




6,311,374
      shares of common stock, par
      value $0.625 per share, outstanding as of July 31, 2007.








**EAST
      PENN FINANCIAL CORPORATION**





**INDEX**


**QUARTERLY
      REPORT ON FORM 10-Q**





**Page****Part
                I.**
            **FINANCIAL
                INFORMATION**Item
                1.
            Financial
                StatementsConsolidated
                Balance Sheets (unaudited) June 30, 2007 and
                December 31, 2006
            3Consolidated
                Statements of Income (unaudited) Three and six
                months ended June 30, 2007 and June 30, 2006
            4Consolidated
                Statements of Stockholders’ Equity (unaudited) Six
                months ended June 30, 2007 and June 30, 2006
            5Consolidated
                Statements of Cash Flows (unaudited) Six months
                ended June 30, 2007 and June 30, 2006
            6Notes
                to Interim Consolidated Financial Statements
                (unaudited)
            7Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and
                Results of Operations
            13Item
                3.
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            24Item
                4.
            Controls
                and Procedures
            24Item
                4T.
            Controls
                and Procedures
            25**Part
                II.**
            **OTHER
                INFORMATION**Item
                1.
            Legal
                Proceedings
            25Item
                1A.
            Risk
                Factors
            25Item
                2.
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds
            25Item
                3
            .
                Defaults Upon Senior Securities
            25Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            25Item
                5.
            Other
                Information
            26Item
                6.
            Exhibits
            26**SIGNATURES**
            
            28**EXHIBIT
                INDEX**
            
            29





Page
          2
 *Index*


**Part
                I.**
            **FINANCIAL
                INFORMATION**





**Item
                1.**
            **FINANCIAL
                STATEMENTS**





**EAST
      PENN FINANCIAL CORPORATION**


**CONSOLIDATED
      BALANCE SHEETS**


(Unaudited)





June
                30,
            
            
            December
                31,(In
                thousands, except share and per share data)
            
            2007
            
            
            2006**ASSETS**Cash
                and due from banks
            
            $
            4,913
            
            
            $
            7,785Interest
                bearing deposits
            
            
            2,703
            
            
            
            18Federal
                funds sold
            
            
            10,117
            
            
            
            15,151Cash
                and cash equivalents
            
            
            17,733
            
            
            
            22,954Securities
                available for sale
            
            
            65,683
            
            
            
            70,392Mortgages
                held for sale
            
            
            135
            
            
            
            373Loans,
                net of unearned income
            
            
            337,109
            
            
            
            322,800Less:
                allowance for loan losses
            
            
            (3,343
            )
            
            
            (3,258
            )Total
                net loans
            
            
            333,766
            
            
            
            319,542Bank
                premises and equipment, net
            
            
            9,415
            
            
            
            9,820Investment
                in restricted stock
            
            
            1,992
            
            
            
            2,230Bank
                owned life insurance
            
            
            7,945
            
            
            
            7,788Accrued
                interest receivable and other assets
            
            
            6,882
            
            
            
            6,353**Total
                assets**
            
            $
            443,551
            
            
            $
            439,452**LIABILITIES
                AND STOCKHOLDERS’ EQUITY****LIABILITIES**Deposits:Noninterest
                bearing
            
            $
            48,983
            
            
            $
            46,110Interest
                bearing
            
            
            328,845
            
            
            
            326,521Total
                deposits
            
            
            377,828
            
            
            
            372,631Securities
                sold under agreements to repurchase
            
            
            10,602
            
            
            
            6,749Long-term
                debt
            
            
            19,000
            
            
            
            24,000Junior
                subordinated debentures
            
            
            8,248
            
            
            
            8,248Accrued
                interest payable and other liabilities
            
            
            2,330
            
            
            
            2,663**Total
                liabilities**
            
            
            418,008
            
            
            
            414,291**STOCKHOLDERS’
                EQUITY**Preferred
                stock, no par value; authorized16,000,000
                shares; none issued
            
            
            -
            
            
            
            -Common
                stock, par value $0.625 per share;authorized
                40,000,000 shares; 2007 issued 6,618,766shares;
                outstanding 6,310,474 shares; 2006 issued6,613,554
                shares; outstanding 6,305,262 shares
            
            
            4,137
            
            
            
            4,134Surplus
            
            
            9,311
            
            
            
            9,272Retained
                earnings
            
            
            15,351
            
            
            
            14,417Accumulated
                other comprehensive loss
            
            
            (1,406
            )
            
            
            (812
            )Less:
                Treasury stock – at cost, 308,292 shares
            
            
            (1,850
            )
            
            
            (1,850
            )**Total
                stockholders’ equity**
            
            
            25,543
            
            
            
            25,161**Total
                liabilities and****stockholders’
                equity**
            
            $
            443,551
            
            
            $
            439,452








See
      Notes
      to Consolidated Financial Statements





Page
          3
 *Index*


**EAST
      PENN FINANCIAL CORPORATION**


**CONSOLIDATED
      STATEMENTS OF INCOME**


**Three
      Months and Six Months Ended June 30, 2007 and 2006**


(Unaudited)





Three
                Months Ended
            
            
            Six
                Months Ended(In
                thousands, except per share data)
            
            2007
            
            
            2006
            
            
            2007
            
            
            2006**Interest
                income**Interest
                and fee income on loans
            
            $
            5,458
            
            
            $
            4,898
            
            
            $
            10,769
            
            
            $
            9,561Securities:Taxable
            
            
            342
            
            
            
            604
            
            
            
            1,093
            
            
            
            1,273Tax-exempt
            
            
            237
            
            
            
            181
            
            
            
            479
            
            
            
            347Other
            
            
            400
            
            
            
            59
            
            
            
            436
            
            
            
            103**Total
                interest income**
            
            
            6,437
            
            
            
            5,742
            
            
            
            12,777
            
            
            
            11,284**Interest
                expense**Deposits
            
            
            2,753
            
            
            
            1,917
            
            
            
            5,450
            
            
            
            3,602Federal
                funds purchased and securitiessold
                under agreements to repurchase
            
            
            55
            
            
            
            70
            
            
            
            98
            
            
            
            165Long-term
                debt
            
            
            198
            
            
            
            287
            
            
            
            423
            
            
            
            617Junior
                subordinated debentures
            
            
            136
            
            
            
            136
            
            
            
            272
            
            
            
            272**Total
                interest expense**
            
            
            3,142
            
            
            
            2,410
            
            
            
            6,243
            
            
            
            4,656**Net
                interest income**
            
            
            3,295
            
            
            
            3,332
            
            
            
            6,534
            
            
            
            6,628Provision
                for loan losses
            
            
            90
            
            
            
            119
            
            
            
            135
            
            
            
            209**Net
                interest income after****provision
                for loan losses**
            
            
            3,205
            
            
            
            3,213
            
            
            
            6,399
            
            
            
            6,419**Other
                income**Customer
                service fees
            
            
            398
            
            
            
            383
            
            
            
            774
            
            
            
            777Mortgage
                banking activities, net
            
            
            55
            
            
            
            25
            
            
            
            89
            
            
            
            68Income
                from investment in life insurance
            
            
            80
            
            
            
            68
            
            
            
            157
            
            
            
            135Other
                income
            
            
            129
            
            
            
            91
            
            
            
            220
            
            
            
            230**Total
                other income**
            
            
            662
            
            
            
            567
            
            
            
            1,240
            
            
            
            1,210**Other
                expense**Salaries
                and employee benefits
            
            
            1,441
            
            
            
            1,400
            
            
            
            2,932
            
            
            
            2,954Occupancy
            
            
            295
            
            
            
            278
            
            
            
            602
            
            
            
            563Equipment
            
            
            215
            
            
            
            219
            
            
            
            422
            
            
            
            437Other
                operating expenses
            
            
            995
            
            
            
            822
            
            
            
            1,666
            
            
            
            1,566**Total
                other expense**
            
            
            2,946
            
            
            
            2,719
            
            
            
            5,622
            
            
            
            5,520**Income
                before income taxes**
            
            
            921
            
            
            
            1,061
            
            
            
            2,017
            
            
            
            2,109Federal
                income taxes
            
            
            129
            
            
            
            212
            
            
            
            327
            
            
            
            430**Net
                income**
            
            $
            792
            
            
            $
            849
            
            
            $
            1,690
            
            
            $
            1,679Basic
                earnings per share
            
            $
            0.13
            
            
            $
            0.13
            
            
            $
            0.27
            
            
            $
            0.27Diluted
                earnings per share
            
            $
            0.12
            
            
            $
            0.13
            
            
            $
            0.27
            
            
            $
            0.27Cash
                dividends per common share
            
            $
            0.00
            
            
            $
            0.00
            
            
            $
            0.12
            
            
            $
            0.11




See
      Notes
      to Consolidated Financial Statements





Page
          4
 *Index*


**EAST
      PENN FINANCIAL CORPORATION**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY**


**Six
      Months Ended**


**June
      30, 2007 and 2006**


(Unaudited)





AccumulatedOtherCommon
            
            
            
            
            
            Retained
            
            
            Comprehensive
            
            
            Treasury(In
                thousands, except share and per share data)
            Stock
            
            
            Surplus
            
            
            Earnings
            
            
            Loss
            
            
            Stock
            
            
            TotalBalance,
                December 31, 2005
            
            $
            4,133
            
            
            $
            9,246
            
            
            $
            12,192
            
            
            $
            (880
            )
            
            $
            (1,850
            )
            
            $
            22,841Comprehensive
                income:Net
                income
            
            
            -
            
            
            
            -
            
            
            
            1,679
            
            
            
            -
            
            
            
            -
            
            
            
            1,679Changes
                in net unrealized losseson
                securities availablefor
                sale, net of tax effect
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (976
            )
            
            
            -
            
            
            
            (976
            )Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            703Compensation
                expense relatedto
                stock options
            
            
            -
            
            
            
            3
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            3Cash
                dividends ($0.11 per share)
            
            
            -
            
            
            
            -
            
            
            
            (693
            )
            
            
            -
            
            
            
            -
            
            
            
            (693
            )Balance,
                June 30, 2006
            
            $
            4,133
            
            
            $
            9,249
            
            
            $
            13,178
            
            
            $
            (1,856
            )
            
            $
            (1,850
            )
            
            $
            22,854Balance,
                December 31, 2006
            
            $
            4,134
            
            
            $
            9,272
            
            
            $
            14,417
            
            
            $
            (812
            )
            
            $
            (1,850
            )
            
            $
            25,161Comprehensive
                income:Net
                income
            
            
            -
            
            
            
            -
            
            
            
            1,690
            
            
            
            -
            
            
            
            -
            
            
            
            1,690Changes
                in net unrealized losseson
                securities available for sale,net
                of tax effect
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (594
            )
            
            
            -
            
            
            
            (594
            )Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,096Exercise
                of 5,212 common stockoptions
            
            
            3
            
            
            
            39
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            42Cash
                dividends ($0.12 per share)
            
            
            -
            
            
            
            -
            
            
            
            (756
            )
            
            
            -
            
            
            
            -
            
            
            
            (756
            )Balance,
                June 30, 2007
            
            $
            4,137
            
            
            $
            9,311
            
            
            $
            15,351
            
            
            $
            (1,406
            )
            
            $
            (1,850
            )
            
            $
            25,543




See
      Notes
      to Consolidated Financial Statements





Page
          5
 *Index*


**EAST
      PENN FINANCIAL CORPORATION**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**Six
      Months Ended June 30, 2007 and 2006**


(Unaudited)





**Six
                Months Ended**(In
                thousands)
            
            **2007**
            
            
            **2006****CASH
                FLOWS from OPERATING ACTIVITIES**Net
                income
            
            $
            1,690
            
            
            $
            1,679Adjustments
                to reconcile net income to net cashprovided
                by operating activities:Provision
                for loan losses
            
            
            135
            
            
            
            209Provision
                for depreciation and amortization
            
            
            448
            
            
            
            431Compensation
                expense for stock options
            
            
            -
            
            
            
            3Net
                amortization/accretion of securities premiums and
                discounts
            
            
            62
            
            
            
            77Net
                realized loss from sale of available for sale securities
            
            
            -
            
            
            
            38Net
                realized gain from sale of held to maturity securities
            
            
            -
            
            
            
            (38
            )Proceeds
                from sale of loans originated for sale
            
            
            5,899
            
            
            
            5,051Net
                gain on loans originated for sale
            
            
            (89
            )
            
            
            (68
            )Loans
                originated for sale
            
            
            (5,572
            )
            
            
            (4,297
            )Earnings
                on investment in life insurance
            
            
            (157
            )
            
            
            (135
            )Increase
                in accrued interest receivableand
                other assets
            
            
            (163
            )
            
            
            (91
            )Increase
                (decrease) in accrued interest payableand
                other liabilities
            
            
            (333
            )
            
            
            368**Net
                Cash Provided by Operating Activities**
            
            
            1,920
            
            
            
            3,227**CASH
                FLOWS from INVESTING ACTIVITIES**Decrease
                in interest bearing time deposits
            
            
            -
            
            
            
            500Purchases
                of available for sale securities
            
            
            (2,072
            )
            
            
            (6,725
            )Proceeds
                from maturities of and principal repaymentson
                available for sale securities
            
            
            5,819
            
            
            
            4,747Proceeds
                from sale of available for sale securities
            
            
            -
            
            
            
            5,136Proceeds
                from maturities of and principal repaymentson
                held to maturity securities
            
            
            -
            
            
            
            39Proceeds
                from sale of held to maturity securities
            
            
            -
            
            
            
            1,037Net
                increase in loans
            
            
            (14,419
            )
            
            
            (18,782
            )Net
                decrease in restricted stock
            
            
            238
            
            
            
            419Purchases
                of bank premises and equipment
            
            
            (43
            )
            
            
            (1,205
            )**Net
                Cash Used in Investing Activities**
            
            
            (10,477
            )
            
            
            (14,834
            )**CASH
                FLOWS from FINANCING ACTIVITIES**Net
                increase in deposits
            
            
            5,197
            
            
            
            30,660Net
                increase (decrease) in federal funds purchased andsecurities
                sold under agreements to repurchase
            
            
            3,853
            
            
            
            (1,998
            )Repayment
                of long-term borrowings
            
            
            (5,000
            )
            
            
            (10,000
            )Proceeds
                from the exercise of stock options
            
            
            42
            
            
            
            -Dividends
                paid
            
            
            (756
            )
            
            
            (693
            )**Net
                Cash Provided by (Used in) Financing Activities**
            
            
            3,336
            
            
            
            (17,969
            )**Net
                Increase (Decrease) in Cash and Cash Equivalents**
            
            
            (5,221
            )
            
            
            6,362**Cash
                and cash equivalents -****Beginning**
            
            
            22,954
            
            
            
            10,629**Cash
                and cash equivalents -****Ending**
            
            $
            17,733
            
            
            $
            16,991**SUPPLEMENTARY
                CASH FLOW INFORMATION**Interest
                paid
            
            $
            6,630
            
            
            $
            4,482Federal
                income taxes paid
            
            $
            425
            
            
            $
            415**SUPPLEMENTAL
                SCHEDULE OF NON-CASH INVESTING AND FINANCING
                ACTIVITIES**Other
                real estate acquired in settlement of loans
            
            $
            60
            
            
            
            -


See
      Notes
      to Consolidated Financial Statement


Page
          6
 *Index*





**EAST
      PENN FINANCIAL CORPORATION**


**NOTES
      TO INTERIM CONSOLIDATED FINANCIAL
      STATEMENTS**


**June
      30, 2007**


**(Unaudited)**





**1.**
            **Basis
                of Presentation**





East
      Penn Financial Corporation (the
“Company”) was incorporated on January 27, 2003 for the purpose of forming a
      bank holding company.  On July 1, 2003, the Company completed the
      reorganization with East Penn Bank (the “Bank”) and its wholly owned subsidiary,
      East Penn Mortgage Company, into the holding company form of
      ownership.  In the reorganization, the Bank became a wholly owned
      banking subsidiary of the Company.  On July 31, 2003, the Company
      formed East Penn Statutory Trust I (the “Trust”), a Connecticut statutory
      business trust, for the purpose of issuing $8 million in capital pass-through
      securities to investors.  The Trust is a non-consolidated subsidiary
      as permitted by FIN 46.





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





The
      accompanying unaudited consolidated
      financial statements have been prepared in accordance with accounting principles
      generally accepted in the United States of America for interim financial
      information and in accordance with instructions for Form 10-Q and S-X Rule
      10-01.  Accordingly, they do not include all of the information and
      footnotes required by generally accepted accounting principles for complete
      financial statements.  In the opinion of management, all adjustments
      considered necessary for fair presentation have been included.





Operating
      results for the six-month
      period ended June 30, 2007, are not necessarily indicative of the results that
      may be expected for the year ended December 31, 2007.  For further
      information, refer to the consolidated financial statements and footnotes
      thereto included in the Company’s Annual Report on Form 10-K for the year ended
      December 31, 2006.





**2.**
            **Proposed
                Plan of Merger with Harleysville National
                Corporation**





On
      May 16, 2007, East Penn Financial
      Corporation and Harleysville National Corporation (“HNC”) issued a joint press
      release announcing the signing of a definitive agreement, dated May 15, 2007,
      for East Penn Financial Corporation to merge with and into HNC, and East Penn
      Financial Corporation’s wholly owned subsidiary, East Penn Bank to merge with
      and into HNC’s wholly owned subsidiary, Harleysville National Bank and Trust
      Company (“HNB”).





The
      total value of the transaction
      under the agreement at the time of its announcement was estimated at $92.7
      million or approximately $14.50 per share of East Penn Financial Corporation
      stock.  However, actual value will depend on several factors,
      including the price of 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).  Subject to the terms and conditions 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.  An East Penn Financial Corporation
      shareholder may receive a combination of both in the aggregate for all East
      Penn
      Financial Corporation shares the shareholder owns subject to the election of
      other shareholders.  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 the
      closing.  The consideration is subject to election and allocation
      procedures designed to provide that the cash portion is $50,284,000, 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 Corporation
      shareholders will not recognize gain or loss for Federal income tax purposes
      on
      those East Penn Financial Corporation shares that are exchanged for HNC common
      stock in the merger.


Page
          7
 *Index*







It
      is anticipated that the acquisition,
      which is subject to state and federal regulatory approval, approval by the
      shareholders of East Penn Financial Corporation and other customary conditions
      to closing, will most likely be completed in the fall of 2007.





As
      part of the agreement, East Penn
      Bank will become a division of HNC and will operate under the “East Penn Bank”
name and logo.  In addition nine of HNC’s existing branches located in
      and about East Penn Bank’s serving community will also be transferred to the
      East Penn division.  Pursuant to the merger agreement, HNC and East
      Penn Financial Corporation agreed that Brent L. Peters, Chairman of the Board,
      President and Chief Executive office of East Penn Financial Corporation, will
      continue with HNC upon closing of the merger, as an executive officer and
      President of East Penn Bank division and a member of the HNC and HNB boards
      of
      directors.





**3.**
            **Investment
                in Bank**





On
      September 23, 2003, the Company made an initial purchase of 141,300 shares
      of
      common stock of a *de novo* bank, named Berkshire Bank, located in
      Wyomissing, Berks County, Pennsylvania.  At the completion of
      Berkshire’s initial stock offering, the Company purchased an additional 12,123
      shares, which resulted in increasing the Company’s investment to $1,534,000 of
      Berkshire Bank’s outstanding common stock as of December 31, 2003.  In
      consideration of the Company’s and its director’s and officer’s combined
      ownership of Berkshire Bank common stock, the aggregate percentage ownership
      was
      19.9% as of the 2003 year end, which is in accordance with the terms of a Stock
      Subscription and Purchase Agreement between the Company and Berkshire
      Bank.  Under this agreement, the Company is also entitled to purchase
      from Berkshire Bank up to 5% of additional stock at any time beginning on the
      date of the warrant and for 10 years thereafter at an exercise price of $6.40
      per share, which is adjusted in consideration of two 5-for-4 stock
      splits.  The total number of shares that are subject to purchase under
      all of the Company’s warrants, options or rights shall not exceed 25% of the
      total number of shares of Berkshire Bank common stock.





In
      August 2003, the Company entered
      into an agreement, known as a Crown X agreement that was approved by the Federal
      Reserve Bank of Philadelphia in September 2003.  This agreement
      imposes certain restrictions where the Company has agreed not to:





·
            solicit
                proxies with respect to any voting securities of Berkshire Bank or
                influence the manner in which any other shareholder of Berkshire
                Bank
                votes any voting securities of Berkshire
                Bank;


·
            cause
                any voting securities of Berkshire Bank to be subject to a voting
                trust;


·
            cause
                Berkshire Bank to become a subsidiary of the
                Company;


·
            have
                any designated representative serve or act as an officer, director,
                employee or agent of Berkshire
                Bank;


·
            propose
                any person for election as a director of Berkshire
                Bank;


·
            attempt
                to influence the dividend policies or practices of Berkshire Bank;
                the
                investment, loan or credit decision policies; the pricing of services;
                personnel decisions or operations
                activities;


·
            exercise
                or seek to exercise any controlling influence over the management
                of
                Berkshire Bank;


·
            enter
                into any banking or non-banking transactions with Berkshire Bank,
                except
                that the Company may establish and maintain deposit accounts with
                Berkshire Bank, provided the aggregate balance of all such accounts
                does
                not exceed $500,000 and that the accounts are maintained on substantially
                the same terms as those prevailing for comparable accounts of persons
                unaffiliated with Berkshire Bank.





During
      2004, Berkshire Bank announced a
      5-for-4 stock split, effected in the form of a 25% stock dividend, payable
      July
      22, 2004, which resulted in the Company receiving an additional 38,355
      shares.  As part of a three-phase stock offering, which began on
      September 1, 2004 and was effective through March 31, 2005, the Company
      purchased an additional 57,119 shares of common stock.  On July 21,
      2005, Berkshire Bank announced the payment of a 5-for-4 stock split, effected
      in
      the form of a 25% stock dividend, payable August 19, 2005, which resulted in
      an
      additional 62,224 shares.


Page
          8
 *Index*


Pursuant
      to a Plan of Reorganization and a Plan of Merger (the “Plan”) that was approved
      by Berkshire Bank’s shareholders on April 18, 2006, a holding company named
      Berkshire Bancorp, Inc. was formed and was effective September 1,
      2006.  As part of the reorganization, Berkshire Bank became a wholly
      owned banking subsidiary of Berkshire Bancorp, Inc.  The Plan further
      provided for the one-for-one exchange of shares of common stock of Berkshire
      Bank for shares of common stock of Berkshire Bancorp, Inc.  In
      accordance with its equivalent 19.9% ownership, the Company exchanged
      one-for-one the common stock shares of Berkshire Bank for the common stock
      shares of Berkshire Bancorp, Inc.  In addition, the Company executed a
      Crown X agreement that was amended to reflect the Company’s acquisition of
      Berkshire Bancorp, Inc. common stock.  Other than this revision, the
      Crown X agreement, which was approved by the Federal Reserve Bank of
      Philadelphia in July 2006, remained substantially unchanged from the original
      agreement approved by the Federal Reserve Bank in September 2003.





Subsequently,
      Berkshire Bancorp, Inc. announced a 5-for-4 stock split effected in the form
      of
      a stock dividend as of the record date of September 14, 2006, which resulted
      in
      the issuance of 77,780 additional shares of common stock.  On November
      9, 2006, the Company purchased 256 additional shares at $10 per share in order
      to maintain its 19.9% aggregate ownership level.  This occurred
      because Berkshire Bancorp, Inc. issued additional stock as a result of the
      exercise of options by its officers.





Effective
      March 22, 2007, Berkshire Bancorp, Inc. initiated a two-phase stock offering
      expected to end August 31, 2007.  As part of this offering,
      shareholders who purchase stock in either phase will receive a warrant for
      each
      share purchased.  As of June 30, 2007, the Company had not yet
      subscribed to purchase additional shares under the stock offering.  As
      a result, its percentage aggregate ownership decreased below
      19.9%.  At June 30, 2007, the Company’s total investment in Berkshire
      Bancorp, Inc. was $2,150,000, represented by 389,157 shares, resulting in a
      19.1% aggregate ownership in consideration of the combined ownership of the
      Company, its directors and its officers.





While
      the
      Company is considered to be a passive investor, it regards this to be a viable
      investment.  The investment is carried at cost and is included in the
      other assets category on the consolidated balance sheet.  The Company
      uses the best information that is available to assess the reasonableness of
      the
      value of this asset.  The financial condition of Berkshire Bancorp,
      Inc. and the stability of its stock price have proven to be reliable valuation
      sources.  No indicators of impairment were noted as part of the
      Company’s latest evaluation.





**4.**
            **Earnings
                per Share**





The
      following table sets forth the computation of basic and diluted earnings per
      share:





Three
                Months Ended
            
            Six
                Months EndedJune
                30,
            
            
            June
                30,2007
            
            
            2006
            
            2007
            
            
            2006Net
                income applicable to common stock
            
            $
            792,000
            
            
            $
            849,000
            
            $
            1,690,000
            
            
            $
            1,679,000Weighted-average
                common shares outstanding
            
            
            6,306,568
            
            
            
            6,304,262
            
            
            
            6,305,918
            
            
            
            6,304,262Effect
                of dilutive securities, stock options
            
            
            43,502
            
            
            
            18,604
            
            
            26,067
            
            
            
            19,745Weighted-average
                common shares outstandingused
                to calculate diluted earnings per share
            
            
            6,350,070
            
            
            
            6,322,866
            
            
            6,331,985
            
            
            
            6,324,007Basic
                earnings per share
            
            $
            0.13
            
            
            $
            0.13
            
            $
            0.27
            
            
            $
            0.27Diluted
                earnings per share
            
            $
            0.12
            
            
            $
            0.13
            
            $
            0.27
            
            
            $
            0.27








Page
          9
 *Index*








**5.**
            **Comprehensive
                Income**





The
      components of other comprehensive income (loss) and related tax effects for
      the
      three and six months ended June 30, 2007 and 2006 are as follows:





Three
                Months Ended
            
            Six
                Months EndedJune
                30,
            
            
            June
                30,
            
            
            June
                30,
            
            
            June
                30,(in
                thousands)
            
            2007
            
            
            2006
            
            2007
            
            
            2006Unrealized
                holding losses onavailable
                for sale securities
            
            $
            (1,095
            )
            
            $
            (795
            )
            
            $
            (900
            )
            
            $
            (1,516
            )Less
                reclassification adjustment forloss
                included in net income
            
            
            -
            
            
            
            38
            
            
            
            -
            
            
            
            38Net
                unrealized losses
            
            
            (1,095
            )
            
            
            (757
            )
            
            
            (900
            )
            
            
            (1,478
            )Tax
                effect
            
            
            (373
            )
            
            
            (257
            )
            
            
            (306
            )
            
            
            (502
            )Net
                of tax amount
            
            $
            (722
            )
            
            $
            (500
            )
            
            $
            (594
            )
            
            $
            (976
            )





**6.**
            **Stock
                Option Plan**





Effective
      January 1, 2006, the Company adopted the fair value recognition provisions
      of
      FASB Statement No. 123R, Share-Based Payment (SFAS 123R), using the
      modified-prospective transition method.  Under this transition method,
      compensation cost recognized in 2006 included: (a) compensation cost for all
      share-based payments granted prior to, but not yet vested as of January 1,
      2006
      based on the grant date fair value calculated in accordance with the original
      provisions of SFAS 123, and (b) compensation cost for all share-based payments
      granted subsequent to December 31, 2005, based on a grant-date fair value
      estimated in accordance with the provisions of SFAS 123R.  No stock
      options were granted during the first six months of 2007 and there were no
      unvested options as of December 31, 2006 or June 30, 2007, which in turn means
      there was no impact to earnings.  This compares with 2006 where 13,000
      options to purchase common stock were granted to directors on May 18,
      2006.  Since the options have a six-month vesting period, the Company
      had 13,000 stock options that were not fully vested as of June 30,
      2006.  The related compensation costs totaled $19,000 and were
      recognized monthly on a straight-line basis through November 18, 2006, which
      was
      the end of the six-month vesting period.  The Company’s earnings
      before income taxes for the three and six months ended June 30, 2006 were $3,000
      lower due to the adoption of SFAS 123R.





**7.**
            **Guarantees**





The
      Company does not issue any
      guarantees that would require liability recognition or disclosure, other than
      its standby letters of credit.  Standby letters of credit that are
      written are conditional commitments issued by the Bank to guarantee the
      performance of a customer to a third party.  Generally, all letters of
      credit, when issued, have expiration dates within one year.  The
      credit risk involved in issuing letters of credit is essentially the same as
      those that are involved in extending loan facilities to
      customers.  The Bank, generally, holds collateral and/or personal
      guarantees supporting these commitments.  The Bank had $7,732,000 in
      standby letters of credit as of June 30, 2007.  Management believes
      that the proceeds obtained through liquidation of collateral and the enforcement
      of guarantees would be sufficient to cover the potential amount of future
      payments required under the corresponding guarantees.  The current
      amount of the liability as of June 30, 2007 for guarantees under standby letters
      of credit is not material.





**8.**
            **New
                Accounting Standards**





In
      July 2006, the FASB issued FASB
      Interpretation No. 48, "Accounting for Uncertainty in Income
      Taxes”.  The interpretation clarifies the accounting for uncertainty
      in income taxes recognized in a company's financial statements in accordance
      with Statement of Financial Accounting Standards No. 109, "Accounting for Income
      Taxes”.  Specifically, the pronouncement




Page
          10
 *Index*


prescribes
      a recognition threshold and a measurement attribute for the financial statement
      recognition and measurement of a tax position taken or expected to be taken
      in a
      tax return.  The interpretation also provides guidance on the related
      derecognition, classification, interest and penalties, accounting for interim
      periods, disclosure and transition of uncertain tax positions.  The
      interpretation is effective for fiscal years beginning after December 15,
      2006.  The Company’s consolidated financial statements were not
      significantly impacted from this new pronouncement.




In
      September 2006, the FASB issued FASB
      Statement No. 157, Fair Value Measurements, which defines fair value,
      establishes a framework for measuring fair value under GAAP, and expands
      disclosures about fair value measurements.  FASB Statement No. 157
      applies to other accounting pronouncements that require or permit fair value
      measurements.  The new guidance is effective for financial statements
      issued for fiscal years beginning after November 15, 2007, and for interim
      periods within those fiscal years.  The Company is currently
      evaluating the potential impact, if any, of the adoption of FASB Statement
      No.
      157 on its consolidated financial position, results of operations and cash
      flows.




In
      February 2007, the FASB issued FASB Statement No. 159, “The Fair Value Option
      for Financial Assets and Financial Liabilities”.  FASB Statement No.
      159 permits entities to make an irrevocable election to carry almost any
      financial instrument at fair value.  Upon the effective date (or early
      adoption) of FASB Statement No. 159, when an entity elects to apply the fair
      value option to specific items, the entity reports the difference between the
      items’ carrying value and their fair value as a cumulative-effect adjustment to
      the opening balance of retained earnings.  The Statement is effective
      as of the beginning of an entity’s 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 FASB Statement No. 157.  The choice
      of early adoption must be made within 120 days of the beginning of the fiscal
      year of adoption, provided the entity has not yet issued financial statements,
      including required notes to those financial statements, for any interim period
      of the fiscal year of adoption.  The Company did not adopt FASB
      Statement No. 159 early and will continue to evaluate the potential impact,
      if
      any, of the adoption of the Statement on its consolidated financial condition,
      results of operations and cash flows.





In
      March
      2007, the FASB ratified Emerging Issues Task Force Issue No. 06-10, “Accounting
      for Collateral Assignment Split-Dollar Life Insurance Agreements” (“EITF
      06-10”).  EITF 06-10 provides guidance for determining a liability for
      the postretirement benefit obligation as well as recognition and measurement
      of
      the associated asset on the basis of the terms of the collateral assignment
      agreement.  EITF 06-10 is effective for fiscal years beginning after
      December 15, 2007.  The Company is currently assessing the impact of
      EITF 06-10 on its consolidated financial position and results of
      operations.





In
      April
      2007, the FASB directed the FASB Staff to issue FSP No. FIN 39-1, “Amendment of
      FASB Interpretation No. 39” (“FSP FIN 39-1”).  FSP FIN 39-1 modifies
      FIN No. 39, “Offsetting of Amounts Related to Certain Contracts”, and permits
      companies to offset cash collateral receivables or payables with net derivative
      positions under certain circumstances.  FSP FIN 39-1 is effective for
      fiscal years beginning after November 15, 2007, with early adoption
      permitted.  We are evaluating the effect of adopting FSP FIN 39-1 on
      our consolidated financial statements.





In
      May
      2007, the FASB issued FASB Staff Position (“FSP”) FIN 48-1, “Definition of
      Settlement in FASB Interpretation No. 48” (“FSP FIN 48-1”).  FSP FIN
      48-1 provides guidance on how to 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 a material
      impact on our consolidated financial position or results of
      operations.







Page
          11
 *Index*


In
      February 2007,  the FASB issued Staff Position (“FSP”) FAS 158-1,
“Conforming Amendments to the Illustrations in FASB Statements No. 87, No. 88
      and No. 106 and to the Related Staff Implementation Guides”.  This FSP
      makes conforming amendments to other FASB statements and staff implementation
      guides and provides technical corrections to SFAS No. 158, “Employers’
Accounting for Defined Benefit Pension and Other Postretirement
      Plans”.  The conforming amendments in this FSP shall be applied upon
      adoption of SFAS No. 158.  We believe our adoption of FSP FAS 158-1
      will not have a material impact on our consolidated financial statements or
      disclosures.














Page
          12
 *Index*


**Item
      2.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL
      CONDITION**


**AND
      RESULTS OF OPERATIONS**


**June
      30, 2007**





The
      following is management’s discussion and analysis of the significant changes in
      the consolidated financial condition, results of operations, capital resources
      and liquidity presented in the accompanying unaudited consolidated financial
      statements for the Company.  This discussion should be read in
      conjunction with the preceding consolidated financial statements and related
      footnotes, as well as, the Company's December 31, 2006 Annual Report on Form
      10-K.  Current performance does not guarantee and may not be
      indicative of similar performance in the future.





In
      addition to historical information, this quarterly report on Form 10-Q contains
      forward-looking statements. The forward-looking statements contained in this
      report are subject to certain risks, assumptions and
      uncertainties.  Because of the possibility of change in the underlying
      assumptions, actual results could differ materially from those projected in
      the
      forward-looking statements.  Additional factors that might cause
      actual results to differ materially from those expressed in the forward-looking
      statements include, but are not limited to:





-
            operating,
                legal and regulatory risks,


-
            economic,
                political and competitive forces affecting the Company’s services,
                and


-
            the
                risk that management’s analyses of these risks could be incorrect and/or
                that the strategies developed to address them could be
                unsuccessful.





The
      Company’s forward-looking statements are relevant only as of the date on which
      the statements are made.  By making forward-looking statements, the
      Company assumes no duty to update them to reflect new, changing or unanticipated
      events or circumstances.  Readers should carefully review the risk
      factors described in other periodic reports and public documents that the
      Company files from time to time with the Securities and Exchange
      Commission.





**CRITICAL
      ACCOUNTING POLICIES**





Disclosure
      of the Company’s significant
      accounting policies is included in Note 1 to the consolidated financial
      statements of the Company’s Annual Report on Form 10-K for the year ended
      December 31, 2006.  Some of these policies are particularly sensitive
      requiring significant judgments, estimates and assumptions to be made by
      management.  Additional information is contained on pages 15, 18 and
      19 herein of this report for the provision and allowance for loan
      losses.





**OVERVIEW**





Net
      income for the six months ended June 30, 2007 was $1,690,000 as compared with
      net income of $1,679,000 for the six months ended June 30, 2006.  The
      $11,000, or 0.7% increase in earnings is attributable to an increase in other
      income and declines in the provision expense for loan losses and income taxes,
      which helped to offset the decline in net interest income and the increase
      in
      other non-interest expenses that was impacted by incurring merger related
      expenses.  On a basic and dilutive earnings per share basis, net
      income for the six months ended June 30, 2007 and 2006 was $0.27 per
      share.  Net income as a percentage of average assets on an annualized
      basis, also known as return on average assets, decreased to 0.77% for the first
      six months of 2007 from 0.84% for the first six months of 2006 as a result
      of
      asset growth of 4.8% since the end of the second quarter of 2006 to the end
      of
      the second quarter of 2007.  Net income as a percentage of total
      average stockholders’ equity on an annualized basis, also known as return on
      average equity, was 13.48% and 14.94% for the first six months of 2007 and
      2006,
      respectively.  The decrease in this ratio is attributable to an
      increase in the amount of stockholders’ equity.





During
      the first six months of 2007, the Company’s assets increased $4,099,000, or
      0.9%, to $443,551,000 as of June 30, 2007 as compared with $439,452,000 as
      of
      December 31, 2006.  The increase in assets since the 2006 year end is
      attributable to loan growth of 4.4%, which was offset by a decline
      of


Page
          13
 *Index*


$4,709,000,
      or 6.7% in securities available for sale.  The decline in securities
      available for sale was attributable to scheduled investment maturities and
      amortization.  While the cash flow from securities was used to fund
      loan growth, our prime funding sources included deposits, which increased
      $5,197,000, or 1.4% from the 2006 year end and securities sold under agreements
      to repurchase, which grew $3,853,000, or 57.1%.  The proceeds of the
      deposit growth were also used to fund the repayment of $5,000,000 in long-term
      borrowings since the 2006 year end.  The growth in total deposits and
      securities sold under agreements to repurchase during the first six months
      of
      2007 was higher than their growth during the same period in 2006 as a result
      of
      the Bank’s continued focus to offer attractive products at competitive interest
      rates.





**RESULTS
      OF OPERATIONS**





**Net
      Interest Income**





For
      the three months ended June 30,
      2007, total interest income increased $695,000, or 12.1%, to $6,437,000 as
      compared with $5,742,000 for the three months ended June 30,
      2006.  This increase is due to loan growth, which is the Company’s
      highest yielding asset, and increased yields on total interest earning
      assets.





Total
      interest expense increased by
      $732,000, or 30.4%, to $3,142,000 for the three months ended June 30, 2007
      from
      $2,410,000 for the three months ended June 30, 2006.   This
      increase is attributable to deposit growth, higher volume of securities sold
      under agreements to repurchase and the increased costs associated with
      attracting and maintaining deposits and securities sold under agreements to
      repurchase during a period of interest rate uncertainties.





Net
      interest income decreased by
      $37,000, or 1.1%, to $3,295,000 for the three months ended June 30, 2007 from
      $3,332,000 for the three months ended June 30, 2006.





For
      the six months ended June 30, 2007,
      total interest income increased $1,493,000, or 13.2%, to $12,777,000, as
      compared with $11,284,000 for the six months ended June 30,
      2006.  This increase was attributable to a higher yield from interest
      earning assets, which increased to 6.46% (on a fully tax equivalent basis)
      for
      the first six months of 2007 from 6.26% (on a fully tax equivalent basis) for
      the first six months of 2006.  In addition, average interest-earning
      assets increased 10.4% to $415,098,000 for the first six months of 2007, from
      $375,962,000 for the same period in 2006.  The growth in average
      interest-earning assets was primarily attributable to an increase in loans,
      which were funded from growth in deposits and securities sold under agreements
      to repurchase.





Total
      interest expense increased by $1,587,000, or 34.1%, to $6,243,000 for the six
      months ended June 30 2007, from $4,656,000 for the six months ended June 30,
      2006.  This increase was attributable to growth in average interest
      bearing liabilities, which increased $32,366,000, or 9.6% for the first six
      months of 2007 as compared with the same period in 2006.  In addition,
      the need to increase interest rates to maintain and attract deposits affected
      cost of funds, which  increased to 3.42% for the six months ended June
      30, 2007 from 2.80% for the same period in 2006.





The
      resulting net interest income
      decreased by $94,000, or 1.4%, to $6,534,000 for the six months ended June
      30,
      2007 from $6,628,000 for the six months ended June 30, 2006.  The
      increase in interest income was more than offset by an increase in interest
      expense, which contributed to net interest margin compression as competitive
      deposit pricing increased funding costs faster then earning asset yields
      grew.  The increase in cost of funds was due to an increase in the
      interest rates paid on deposits as a means of ensuring that the Bank remained
      competitive in its market.  Increased interest rates not only resulted
      in deposit growth but effected a change within the composition of the Bank’s
      deposits, where there was a shifting of funds being invested into deposit
      products with higher interest rates.  While the cost associated with
      deposits has increased since last year, deposits were and continue to be a
      more
      cost effective source of funding asset growth as compared with other types
      of
      funding sources, such as borrowings, which the Bank has made efforts to
      reduce.  This strategy has allowed management to better control
      funding costs and minimize further compression to its net interest spread and
      margin.  For the first six months of 2007, the net interest spread (on
      a fully tax equivalent basis) decreased 43 basis points to 3.04% from 3.47%
      for
      the first six months in 2006, while the net interest margin (on a fully tax
      equivalent basis) decreased 34 basis points to 3.42% for the six-month period
      ending June 30, 2007 from 3.76% for the six-month period ending June 30,
      2006.  However, the success of the Bank’s efforts to manage this
      compression is evidenced by the one basis point decline in the net interest
      margin of 3.42% for the second quarter of 2007 as compared with 3.43% for the
      first quarter of 2007.


Page
          14
 *Index*




**Provision
      for Loan Losses**





Provisions
      for loan losses are charged
      to operations in order to maintain the allowance for loan losses at a level
      management considers adequate to absorb credit losses inherent in the loan
      portfolio.  Management assesses the allowance for loan losses on a
      quarterly basis and makes provisions for loan losses in order to maintain the
      adequacy of the allowance.





The
      provision for loan losses was
      $90,000 for the three months ended June 30, 2007 compared with $119,000 for
      the
      three months ended June 30, 2006.





For
      the six months ended June 30, 2007,
      the provision for loan losses was $135,000, a decrease of $74,000 compared
      with
      $209,000 for the six months ended June 30, 2006.  The decrease in the
      provision is attributable to management’s ongoing efforts to ensure the high
      quality of the loan portfolio as represented by the level of non-performing
      assets and loans subject to review or regulatory classification.





The
      allowance for loans losses
      represented 0.99% of total loans at June 30, 2007, compared with 1.01% as of
      December 31, 2006 and 1.03% as of June 30, 2006.  Management performs
      ongoing assessments of the loan loss reserve in relation to loan portfolio
      growth, credit exposure to individual borrowers, overall trends in the loan
      portfolio and other relevant factors.  Based upon these factors,
      management believes that as of June 30, 2007, the reserve is reasonable and
      sufficient to support the increased loan growth in light of the strong asset
      quality as supported by the ratios reflected in the Asset Quality Ratios table
      on page 19.





**Other
      Income**





For
      the three months ended June 30,
      2007, other income of $662,000 increased $95,000, or 16.8%, from $567,000 for
      the three months ended June 30, 2006.  The increase was due to a
      $15,000 increase in customer service fees, a $30,000 increase in fee income
      from
      mortgage banking activities,  a $12,000 increase associated with an
      increase in the cash surrender value of the Bank’s investment in life insurance
      and a $38,000 increase in other income which was mostly attributable to fee
      income associated with the increased volume of letter of credit
      transactions.





Other
      income for the six months ended June 30, 2007 increased $30,000, or 2.5%, to
      $1,240,000 from $1,210,000 for the six months ended June 30,
      2006.  This increase was attributable to a $21,000 increase in income
      from mortgage banking activities and a $22,000 increase in income from the
      investment in life insurance.  These increases were offset by a $3,000
      decline in customer service fees and a decrease of $10,000 in other
      income.


.


**Other
      Expenses**





Other
      expenses, which include salary,
      occupancy, equipment and all other expenses incidental to the operation of
      the
      Company, increased to $2,946,000 for the second quarter of 2007 from $2,719,000
      for the second quarter of 2006.  The $227,000, or 8.3%, increase is
      not only due to the Company’s continued growth, but is attributable to expense
      associated with the pending merger with Harleysville National
      Corporation.





Salaries
      and employee benefit expenses,
      which make up the largest component of other expenses, increased $41,000, or
      2.9%, to $1,441,000 for the second quarter of 2007 from $1,400,000 for the
      second quarter in 2006.  The increase is primarily attributable to the
      increased benefit costs.







Page
          15
 *Index*


Occupancy
      expenses increased $17,000, or 6.2%, to $295,000 for the three months ended
      June
      30, 2007 from $278,000 for the three months ended June 30, 2006.  The
      increase is due to the costs associated with normal expenses incurred to
      maintain all of the Company’s branch and office locations.





Equipment
      expense decreased $4,000, or
      1.8%, to $215,000 for the three months ended June 30, 2007 from $219,000 for
      the
      three months ended June 30, 2006.  This decrease is due to
      management’s efforts to control operating expenses.





Other
      operating expenses during the
      second quarter of 2007 increased $173,000, or 21.0%, to $995,000 from $822,000
      during the second quarter of 2006.  The increase is primarily
      associated with incurring $212,000 in expenses during the second quarter of
      2007
      relating to the impending merger.





Other
      expenses increased to $5,622,000
      for the six months ended June 30, 2007 from $5,520,000 for the six months ended
      June 30, 2006.  The $102,000, or 1.8%, increase is due to the merger
      related expenses the total of which was offset by the Company’s ongoing efforts
      to  manage overall efficiencies, particularly in light of the
      compression of its net interest spread and margin.





For
      the
      first six months of 2007, salaries and employee benefit expenses decreased
      $22,000, or 0.7%, to $2,932,000 from $2,954,000 for the first six months of
      2006.  The decrease is attributable to attrition, where certain staff
      positions have not been replaced when employees have left the Bank.





Occupancy
      expenses increased $39,000,
      or 6.9%, to $602,000 as of June 30, 2007 from $563,000 as of June 30,
      2006.  The increase was attributable to a rise in normal occupancy
      costs.





Equipment
      expense decreased $15,000, or
      3.4%, to $422,000 for the six months ended June 30, 2007 from $437,000 for
      the
      six months ended June 30, 2006.  This decrease was the result of a
      reduction in expenses associated with the normal depreciation of fixed
      assets.  In addition, because facilities expansion has slowed as
      compared with the prior year, there has not been a need to purchase additional
      fixed assets to equip any new facilities.





Other
      operating expenses increased $100,000, or 6.4%, to $1,666,000 for the six months
      ended June 30, 2007 from $1,566,000 for the six months ended June 30,
      2006.  This increase was attributable to $258,000 in merger related
      expenses that were incurred during the first six months of 2007.  The
      Company’s ongoing efforts to improve efficiencies through the elimination or
      reduction of other operating expenses were a benefit that mitigated the full
      impact of the merger expenses.





Effective
      January 1, 2007, The Federal Deposit Insurance Corporation (“FDIC”) created a
      new risk framework comprised of four risk categories and established assessment
      rates to coincide with each category.  Assessment rates for Risk
      Category I financial institutions, which includes East Penn Bank, range from
      5
      to 7 basis points.  The FDIC also approved a one-time assessment
      credit for banks that were in existence on December 31, 1996 and paid a deposit
      insurance assessment prior to that date.  Management believes that the
      one-time credit will more than offset the new FDIC assessment cost for
      2007.  It anticipates that the credit will be depleted by the first
      quarter of 2008.  Accordingly, the Company will begin to recognize the
      FDIC assessment cost at that time.





**Income
      Taxes**





Income
      tax expense was $129,000 for the
      three months ended June 30, 2007, a decrease of $83,000, or 39.2%, compared
      with
      $212,000 for the three months ended June 30, 2006.  The decline in the
      tax expense was attributable to a decline of $140,000, or 13.2%, in net income
      before taxes in the second quarter of 2007 as compared with 2006 in addition
      to
      an increased level of tax exempt income.  The decline is also
      attributable to a change in the expected effective tax rate between the first
      and second quarters of 2007.





For
      the
      six months ended June 30, 2007, the tax provision was $327,000 compared with
      $430,000 for the six months ended June 30, 2006.  The decrease of
      $103,000, or 24.0%, was due to a reduction in the Company’s effective tax rate
      to 16.2% at June 30, 2007 from 20.4% at June 30, 2006.  The effective
      tax rate


Page
          16
 *Index*


continues
      to be less than the statutory Federal tax rate of 34%.  The difference
      between the statutory and effective tax rates primarily reflects the tax-exempt
      status of interest income earned from obligations of state and political
      subdivisions and the appreciation in the cash surrender value of bank owned
      life
      insurance.





**Net
      Income**





Net
      income for the three months ended
      June 30, 2007 was $792,000, a decrease of $57,000, or 6.7%, compared with
      $849,000 for the three months ended June 30, 2006.  The decrease in
      net income is the result of a decrease of $37,000 in net interest income and
      an
      increase of $227,000 in other expenses, partially offset by an increase
      of  $95,000 in other income, a decrease of $29,000 in the provision
      for loan losses, and a decrease of $83,000 in the income tax
      provision.  While basic earnings per share for the three months ended
      June 30, 2007 and 2006 was $0.13 per share, diluted earnings per share for
      the
      three months ended June 30, 2007 declined to $0.12 per share as compared with
      $0.13 per share  for the three months ended June 30,
      2006.





Net
      income for the six months ended
      June 30, 2007 was $1,690,000, an increase of $11,000, or 0.7%, compared with
      $1,679,000 for the six months ended June 30, 2006.  The increase in
      net income was attributable to an increase of $30,000 in other income, a decline
      of $74,000 in the provision for loan losses and a decrease of $103,000 in the
      provision for income taxes.  These benefited the bottom-line but were
      offset by a decrease of $94,000 in net interest income and an increase of
      $102,000 in other expenses.  Basic and diluted earnings per share for
      the six months ended June 30, 2007 and 2006 were each $0.27 per
      share.





**FINANCIAL
      CONDITION**





**Securities**





The
      Company’s securities portfolio is
      comprised of securities that not only provide interest income, including
      tax-exempt income, but also provide a source of liquidity, diversify the earning
      assets portfolio, allow for the management of risk and tax liability, and
      provide collateral for repurchase agreements and public fund
      deposits.  Policies are in place to address various aspects of
      managing the portfolio, including but not limited to, concentrations, liquidity,
      credit quality, interest rate sensitivity and regulatory
      guidelines.  Adherence to these policies is monitored by the Company’s
      Asset/Liability Committee on a monthly basis.





As
      of
      June 30, 2007 all of the securities in the portfolio were classified as
      available for sale, with new purchases placed in this
      category.  Securities in the available for sale category are accounted
      for at fair value with unrealized appreciation or depreciation, net of tax,
      reported as a separate component of stockholders’ equity.  The Company
      periodically evaluates the securities portfolio to determine if any decline
      in
      the fair values of securities are other than temporary.  If such a
      decline was deemed to be other than temporary, the Company would write down
      the
      security to its fair value through a charge to current period
      operations.  As of June 30, 2007, there were no securities in the
      portfolio whose values were deemed to be other than temporarily
      impaired.  At the time when the Company had securities categorized as
      held to maturity, they were accounted for at amortized cost.  The
      Company invests in securities for the cash flow and yields they produce and
      not
      to profit from trading.  The Company holds no trading securities in
      its portfolio, and the securities portfolio contained no high risk securities
      or
      derivatives as of June 30, 2007.





The
      securities portfolio at June 30,
      2007 was $65,683,000, compared to $70,392,000 at December 31, 2006, a decrease
      of $4,709,000, or 6.7%.  The decrease represents the result of
      principal repayments.  The carrying value of the available for sale
      portion of the portfolio at June 30, 2007 includes an unrealized loss of
      ($2,130,000) (reflected as an accumulated other comprehensive loss of
      ($1,406,000) in stockholders’ equity, net of a deferred income tax liability of
      ($724,000)).  This compares with an unrealized loss at December 31,
      2006 of ($1,231,000) (reflected as an accumulated other comprehensive loss
      of
      ($812,000) in stockholders’ equity, net of a deferred income tax liability of
      ($419,000)).





Page
          17
 *Index*


**Loans**





The
      loan
      portfolio comprises the major component of the Company’s earning assets and
      generally is
      the
      highest yielding asset category.  Gross loans receivable, net of
      unearned fees and origination costs, increased $14,309,000, or 4.4%, to
      $337,109,000 at June 30, 2007 from $322,800,000 at December 31,
      2006.  In comparing the second quarter of 2007 with the second quarter
      of 2006, gross loans increased $25,016,000, or 8.0%.  Gross loans
      represented 89.2% of total deposits at June 30, 2007 as compared with 86.6%
      at
      December 31, 2006.  Loan growth continued to be significant in
      commercial lending, consisting of commercial real estate and commercial and
      industrial loans with a specific focus on municipal/tax-free
      loans.  Outstanding retail loans have grown as well, although to a
      lesser extent than commercial loans.  While residential mortgage
      lending remains active, it is not as robust as it was in prior years when
      mortgage interest rates were lower than they are now.  The Bank
      selectively sells mortgage loans into the secondary market in order to
      effectively manage long-term interest rate risk.





**Credit
      Risk and Loan Quality**





The
      Company continues to be vigilant in its efforts to minimize credit
      risk.  The Bank’s written lending policy requires underwriting, loan
      documentation and credit analysis standards to be met prior to the approval
      and
      funding of a loan.  In accordance with that policy, the internal loan
      review process monitors the loan portfolio on an ongoing basis.  The
      Credit Administration area prepares an analysis of the allowance for loan losses
      on a quarterly basis, which is then submitted to the Board of Directors for
      its
      assessment as to the adequacy of the allowance.





The
      allowance for loan losses at June 30, 2007 and December 31, 2006 was $3,343,000
      and $3,258,000, respectively, compared to $3,205,000 at June 30,
      2006.   Although less of a provision for loan losses was recorded
      during the first six months of 2007 as compared with the same period in 2006,
      there was an increase in the total allowance since the provision exceeded net
      charge-offs.  The allowance increased in consideration of the growth
      in the loan portfolio and the shift in the loan mix, where there has been
      continued growth in commercial loans, which generally carry a higher level
      of
      credit risk.  At June 30, 2007, the allowance for loan losses
      represented 0.99%****of the gross loan portfolio, compared
      with 1.01% at December 31, 2006.  This compares to 1.03% at June 30,
      2006.  At June 30, 2007, in consideration of the strong asset quality,
      management believes that the allowance for loan loss reserve is at an acceptable
      level given current economic conditions, interest rates and the
      composition  of the loan portfolio.





The
      following table details the activity, which occurred in the allowance for loan
      losses over the first six months of 2007 and 2006.





**Analysis
                of Allowance for Loan Losses**
              (Dollars
                in thousands)**Six
                Months Ended****6/30/
                2007**
            
            
            **6/30/2006**Balance,
                beginning of year
            
            $
            3,258
            
            
            $
            3,072Provision
                charged to operating  expense
            
            
            135
            
            
            
            209Charge-offs:Commercial
            
            
            (26
            )
            
            
            0Real
                estate
            
            
            (29
            )
            
            
            (45
            )Consumer
            
            
            (65
            )
            
            
            (50
            )Total
                charge-offs
            
            
            (120
            )
            
            
            (95
            )Recoveries:Commercial
            
            
            0
            
            
            
            2Real
                estate
            
            
            60
            
            
            
            2Consumer
            
            
            10
            
            
            
            15Total
                recoveries
            
            
            70
            
            
            
            19Net
                (charge-offs) recoveries
            
            
            (50
            )
            
            
            (76
            )$
            3,343
            
            
            $
            3,205Net
                (charge-offs) recoveries to average net loans
            
            
            (0.02%
            )
            
            
            (0.03%
            )Note:
                Bank’s loan portfolio is entirely domestic







Page
          18
 *Index*


The
      Bank’s lending policy is executed through the assignment of tiered loan limit
      authorities to individual officers of the Bank, the Officer’s Loan Committee,
      the Board Loan Committee and the Board of Directors.  Although the
      Bank maintains sound credit policies, certain loans may deteriorate for a
      variety of reasons.  The Bank’s policy is to place all loans on a
      non-accrual status upon becoming 90 days delinquent in their payments, unless
      there is a documented and reasonable expectation of the collection of the
      delinquent amount.  Loans are reviewed monthly as to their status, and
      on a quarterly basis, a Watch List of potentially troubled loans is prepared
      and
      presented to the Board of Directors.  Management is not aware of any
      materially potential loan problems that have not been disclosed in this
      report.





The
      following table summarizes pertinent asset quality ratios at June 30, 2007
      and
      December 31, 2006.


**Asset
                Quality Ratios**
            
            **6/30/07**
            
            
            **12/31/06**Non-accrual
                loans/Total loans
            
            
            0.27
            %
            
            
            0.13
            %Non-performing
                assets (1)
                /Total
                loans
            
            
            0.39
            %
            
            
            0.13
            %Net
                (charge-offs) recoveries/Average loans
            
            
            0.02
            %
            
            
            (0.07
            )%Allowance/Total
                loans
            
            
            0.99
            %
            
            
            1.01
            %Allowance/Non-accrual  loans
            
            
            362.98
            %
            
            
            759.44
            %Allowance/Non-performing
                loans (1)
            
            
            266.59
            %
            
            
            752.42
            %





(1)-
            Non-performing
                assets of $1,314,000 as of June 30, 2007 and $433,000 as of December
                31,
                2006 include non accrual loans of $921,000 at June 30, 2007 and $429,000
                at December 31, 2006.  The increase in non-performing assets at
                June 30, 2007 is attributable to the addition of one secured commercial
                credit to non-accrual loans.





The
      Company had other real estate owned as acquired through foreclosure on one
      residential property in the amount of $60,000 as of June 30, 2007 as compared
      with none as of December 31, 2006.  The Company expects to dispose of
      the property by year end with no loss.





Loan
      concentrations are considered to exist when the total amount of loans to any
      one
      or a multiple number of borrowers engaged in similar activities or having
      similar characteristics exceeds 10% of loans outstanding in any one
      category.  The majority of the Bank’s lending is made within its
      primary market area, which includes Emmaus and other adjacent communities in
      Lehigh County, Pennsylvania.  Two portfolio segments represent
      possible concentrations: commercial real estate and consumer loans secured
      by
      residential real estate.  While the Bank does not have a concentration
      of credit risk with any single borrower, repayments on loans in these portfolios
      can be negatively influenced by decreases in real estate
      values.  Management mitigates this risk through stringent underwriting
      policies and procedures.





**Bank
      Owned Life Insurance**





During
      2000, the Bank invested
      $4,500,000 in Bank Owned Life Insurance (“BOLI”) for a chosen group of
      employees, namely officers.  In 2001, the Bank made a subsequent BOLI
      investment, resulting in a total investment of $6,000,000.  Under the
      terms of the BOLI, the Bank is the owner and beneficiary of the
      policies.  Earnings from the BOLI are recognized as other
      income.  The BOLI is profitable from the appreciation of the cash
      surrender values of the pool of insurance, and provides a tax advantage to
      the
      Company.  This profitability is used to offset a portion of current
      and future employee benefit costs and a Nonqualified Supplemental Executive
      Retirement Plan for the Company’s Chief Executive Officer.





The
      Company had $7,945,000 and
      $7,788,000 in BOLI as of June 30, 2007 and December 31, 2006,
      respectively.  Although the BOLI is an asset that may be liquidated,
      it is the Company’s intention to hold this pool of insurance because it provides
      tax-exempt income that lowers the Company’s tax liability, while enhancing its
      overall capital position.





**Investment
      in Bank**





On
      September 23, 2003, the Company purchased 141,300 shares of common stock
      outstanding for $1,413,000 in a *de novo* bank, named Berkshire Bank,
      located in Wyomissing, Berks County, Pennsylvania.


Page
          19
 *Index*


On
      October 22, 2003, the Company purchased an additional 12,123 shares of common
      stock for $121,000, which resulted in increasing the Company’s investment to
      $1,534,000, or 18.3%, of Berkshire Bank’s outstanding common stock as of
      December 31, 2003.  The aggregate ownership percentage of the Company
      and its directors and officers as dictated within the terms of the Stock
      Subscription and Purchase Agreement between the Company and Berkshire Bank
      was
      19.9%.





During
      2004, Berkshire Bank announced a 5-for-4 stock split, effected in the form
      of a
      25% stock dividend, payable July 22, 2004, which resulted in the Company
      receiving an additional 38,355 shares.  On September 1, 2004,
      Berkshire Bank commenced a three-phase common stock offering effective through
      March 31, 2005.  In order to maintain its level of investment in
      Berkshire Bank, the Company purchased an additional 57,119 shares.  On
      July 21, 2005, Berkshire Bank announced the payment of a 5-for-4 stock split,
      effected in the form of a 25% stock dividend, payable August 19, 2005, which
      resulted in an additional 62,224 shares.





Pursuant
      to a Plan of Reorganization and a Plan of Merger (the “Plan”) that was approved
      by Berkshire Bank’s shareholders on April 18, 2006, a holding company named
      Berkshire Bancorp, Inc. was formed and was effective September 1,
      2006.  As part of the reorganization, Berkshire Bank became a wholly
      owned banking subsidiary of Berkshire Bancorp, Inc.  The Plan further
      provided for the one-for-one exchange of shares of common stock of Berkshire
      Bank for shares of common stock of Berkshire Bancorp, Inc.  In
      accordance with its equivalent 19.9% ownership, the Company exchanged
      one-for-one the common stock shares of Berkshire Bank for the common stock
      shares of Berkshire Bancorp, Inc.





Berkshire
      Bancorp, Inc. announced a 5-for-4 stock split effected in the form of a stock
      dividend as of the record date of September 14, 2006, which resulted in the
      issuance of 77,780 additional shares of common stock.  On November 9,
      2006, the Company purchased 256 additional shares at $10 per share in order
      to
      maintain its 19.9% aggregate ownership level.  This occurred because
      Berkshire Bancorp, Inc. issued additional stock as a result of the exercise
      of
      options by its officers.





Effective
      March 22, 2007, Berkshire
      Bancorp, Inc. initiated a two-phase stock offering expected to end August 31,
      2007.  As part of this offering, shareholders who purchase stock in
      either phase will receive a warrant for each share purchased.  As of
      June 30, 2007, the Company had not yet subscribed to purchase additional shares
      under the stock offering.  As a result, its percentage aggregate
      ownership decreased below 19.9%.  At June 30, 2007, the Company’s
      total investment in Berkshire Bancorp, Inc. was $2,150,000, represented by
      389,157 shares, resulting in a 19.1% aggregate ownership in consideration of
      the
      combined ownership of the Company, its directors and its officers.





While
      the
      Company is considered to be a passive investor, it regards this to be a viable
      investment.  The investment is carried at cost and is included in the
      other assets category on the consolidated balance sheet.  The Company
      uses the best information that is available to assess the reasonableness of
      the
      value of this asset.  The financial condition of Berkshire Bancorp,
      Inc. and the stability of its stock price have proven to be reliable valuation
      sources.  No indicators of impairment were noted as part of the
      Company’s latest evaluation.





**Deposits**





Deposits
      are the major source of the Company’s funds for lending and investment
      purposes.  Total deposits at June 30, 2007 were $377,828,000, an
      increase of $5,197,000, or 1.4%, from total deposits of $372,631,000 at December
      31, 2006.  In addition to the $2,873,000 increase in non-interest
      bearing deposits, the growth of $2,324,000 in interest bearing deposits was
      influenced by the increase in interest rates.  This impacted the cost
      of deposits, which increased to 3.34% as of June 30, 2007 from 2.86% as of
      December 31, 2006 and 2.56% as of June 30, 2006.








**Securities
      Sold under Agreements to Repurchase**





Securities
      sold under agreements to repurchase increased $3,853,000, or 57.1%, to
      $10,602,000 at June 30, 2007 from $6,749,000 at December 31,
      2006.  The increase was attributable to rate-driven customers who
      found that they could earn a higher rate of interest on this product as compared
      with deposits.  Securities sold under agreements to repurchase
      generally mature in one business day and roll over under a continuing
      contract.


Page
          20
 *Index*








**Short-Term
      Borrowings**





There
      were no short-term borrowings in the form of overnight federal funds purchased
      as of June 30, 2007 and December 31, 2006.  The Bank has a $5,000,000
      federal funds line of credit with its main correspondent bank, Atlantic Central
      Bankers Bank, Camp Hill, Pennsylvania (“ACBB”) as well as a short-term/overnight
      line of credit of $35 million with the Federal Home Loan Bank of Pittsburgh
      (“FHLB”), which is part of its overall maximum borrowing capacity of
      $147,557,000.





**Long-Term
      Debt and Borrowing Capacity**





There
      were $19 million outstanding in
      fixed rate term loans with the FHLB at June 30, 2007, a reduction of $5 million
      from the $24 million that was outstanding at December 31, 2006.  The
      $19 million borrowing is comprised of the following fixed rate borrowings
      (dollars in thousands):





Maturity
            
            Amount
            
            
            RateNovember
                28, 2007
            
            $
            7,000
            
            
            
            3.43
            %May
                5, 2008
            
            
            5,000
            
            
            
            4.03
            %November
                28, 2008
            
            
            7,000
            
            
            
            3.78
            %Total
            
            $
            19,000
            
            
            
            3.72
            %
            weighted
                average





The
      Bank
      has generally used long-term borrowings to fund growth.  This strategy
      has helped the Bank to manage its cost of funds by allowing it to lock into
      fixed rates, at a time when interest rates were at their historic lowest
      levels.





The
      Bank
      has a total maximum borrowing capacity for both short and long-term borrowings
      of approximately $147,557,000 with the FHLB, out of which $19 million represents
      fixed rate term loans that were outstanding at June 30, 2007, and resulted
      in an
      unused borrowing capacity of $128,557,000.





**Mandatory
      Redeemable Capital and Junior Subordinated Debentures**





As
      of
      June 30, 2007, the Company had $8,248,000 outstanding in junior subordinated
      debentures, which were issued on July 31, 2003 to investors as capital trust
      pass-through securities by East Penn Statutory Trust I (“Trust”), a Connecticut
      statutory business trust and non-consolidated wholly owned subsidiary of the
      Company.  The securities have a fixed rate of 6.80% through September
      17, 2008.  The capital securities are redeemable by the Company on or
      after September 17, 2008, at par, or earlier, if the deduction of related
      interest for federal income taxes is prohibited, classification as Tier I
      Capital is no longer allowed, or certain other contingencies
      arise.  The capital securities must be redeemed upon final maturity of
      the subordinated debentures on September 17, 2033.  Proceeds totaling
      $4.3 million were contributed to the capital at the Bank.  The
      remaining proceeds in the amount of $3.9 million were used to invest in
      Berkshire Bank, a *de*novo bank, the repurchase of the Company’s common
      stock and other business purposes.  The Company chose to utilize the
      multi-issuer trust preferred alternative, which proved to be a less expensive
      and more flexible resource of regulatory capital.





**Asset/Liability
      Management**





Interest
      rate risk is the exposure of a
      Bank’s current and future earnings and capital arising from adverse movements in
      interest rates.   An interest sensitive asset or liability is one
      that experiences changes in cash flows as a direct result of changes in market
      interest rates.  The management of interest rate risk involves
      analyzing the maturity and repricing of interest sensitive assets and
      liabilities at specific points in time.  The imbalance between
      interest sensitive assets and liabilities is commonly referred to as the
      interest rate gap.  The interest rate gap is one way of assessing the
      risk inherent in the existing balance sheet as it relates to potential changes
      in net interest income.


Page
          21
 *Index*








The
      guidelines of the Company’s interest rate risk policy seek to limit the exposure
      to changes in interest rates that affect the underlying economic value of assets
      and liabilities, earnings and capital.  The Company manages its
      balance sheet with the intent of maximizing net interest income, while
      maintaining an acceptable level of risk to minimize the impact that changing
      interest rates may have on its net income and changes in the economic value
      of
      its equity.  The overall interest rate risk position and strategies
      for the management of interest rate risk are reviewed by senior management
      and
      the Asset/ Liability Committee (“ALCO”) of the Board of Directors on an ongoing
      basis.  The Company utilizes a variety of methodologies and resources
      to measure its interest rate risk.  It also has the ability to effect
      strategies to manage interest rate risk, which include, but are not limited
      to,
      selling newly originated residential mortgage loans, controlling the volume
      mix
      of fixed/variable rate commercial loans and securities, increasing/decreasing
      deposits via interest rate changes, borrowing from the FHLB, and buying/selling
      securities.  Adjustments to the mix of interest sensitive assets and
      liabilities are made periodically in an effort to give the Company dependable
      and steady growth in net interest income, while at the same time, managing
      the
      related risks.





**Liquidity**





Liquidity
      refers to the Company’s
      ability to generate adequate amounts of cash to meet financial obligations
      to
      its customers and shareholders in order to fund loans, to respond to deposit
      outflows and to cover operating expenses.  Maintaining a level of
      liquid funds through asset/liability management seeks to ensure that these
      needs
      are met at a reasonable cost.  Liquidity is essential to compensate
      for fluctuations in the balance sheet and provide funds for growth and normal
      operating expenditures.  Sources of funds include scheduled
      amortization of loans, loan prepayments, scheduled maturities of investments,
      and cash flows from mortgage-backed securities.  Liquidity needs may
      also be met by converting assets into cash or obtaining sources of additional
      funding, whether through deposit growth or borrowings under lines of credit
      with
      correspondent banks.





Liquidity
      from asset categories is
      provided through cash, amounts due from banks, interest-bearing deposits with
      banks and federal funds sold, which were $17,733,000 at June 30, 2007, compared
      to $22,954,000 at December 31, 2006.  This decrease was due to a
      decline in overnight federal funds sold, which were used to fund loan
      growth.  Additional asset liquidity sources include principal and
      interest payments from securities in the Company’s investment portfolio and cash
      flows from its amortizing loan portfolio.  Longer-term liquidity needs
      may be met by selling securities available for sale, selling loans or raising
      additional capital.  At June 30, 2007, there was $36,422,000 in liquid
      securities as compared with $45,328,000 at December 31, 2006.  Liquid
      securities decreased $8,906,000 since year-end as a result of the need to pledge
      additional securities to collateralize the increase in securities sold under
      agreements to repurchase and public fund deposits.





Liability
      liquidity sources include
      attracting deposits at competitive rates.  Deposits at June 30, 2007
      were $377,828,000, compared to $372,631,000 at December 31, 2006.  In
      addition, the Bank has available lines of credit with its main correspondent
      banks, ACBB, for $5,000,000 and the FHLB for $147,557,000, both of which are
      reliable sources for short and long-term funds.





The
      Company’s consolidated financial
      statements do not reflect various off-balance sheet commitments that are made
      in
      the normal course of business, which may involve some liquidity
      risk.  Off-balance sheet arrangements are discussed in detail
      below.





Management
      is of the opinion that its liquidity position, at June 30, 2007, is adequate
      to
      respond to fluctuations “on” and “off” the balance sheet.  In
      addition, management knows of no trends, demands, commitments, events or
      uncertainties that may result in, or that are reasonably likely to result in
      the
      Company’s inability to meet anticipated or unexpected liquidity
      needs.


Page
          22
 *Index*


**Contractual
      Obligations**





The
      Company has various financial obligations that may require future cash
      payments.  These obligations include the payment of liabilities
      recorded on the consolidated balance sheet as well as contractual obligations
      for purchase commitments and operating leases.  The following table
      represents the


Company’s
      contractual obligations, by type, that are fixed and determined at June 30,
      2007.





**CONTRACTUAL
      OBLIGATIONS**





**June
                30, 2007****Less
                Than**
            
            
            
            
            
            
            
            
            **Over****1
                Year**
            
            
            **1
                – 3 Years**
            
            
            **3
                – 5 Years**
            
            
            **5
                Years**
            
            
            **Total****(in
                thousands)**Time
                deposits
            
            **$**
            **135,608**
            
            
            **$**
            **43,227**
            
            
            **$**
            **1,485**
            
            
            **$**
            **150**
            
            
            **$**
            **180,470**Long-term
                debt
            
            ****
            **12,000**
            
            
            ****
            **7,000**
            
            
            ****
            **-**
            
            
            ****
            **-**
            
            
            ****
            **19,000**Junior
                subordinateddebentures
            
            ****
            **-**
            
            
            ****
            **8,248**
            
            
            ****
            **-**
            
            
            ****
            **-**
            
            
            ****
            **8,248**Nonqualified
                supplementalexecutive
                retirement plan
            
            ****
            **110**
            
            
            ****
            **108**
            
            
            ****
            **69**
            
            
            ****
            **207**
            
            
            ****
            **494**Premises
                commitments
            
            ****
            **850**
            
            
            ****
            **-**
            
            
            ****
            **-**
            
            
            ****
            **-**
            
            
            ****
            **850**Operating
                leases
            
            ****
            **255**
            
            
            ****
            **469**
            
            
            ****
            **378**
            
            
            ****
            **780**
            
            
            ****
            **1,882**Total
            
            **$**
            **148,823**
            
            
            **$**
            **59,052**
            
            
            **$**
            **1,932**
            
            
            **$**
            **1,137**
            
            
            **$**
            **210,944**





**Off-Balance
      Sheet Arrangements**





The
      Company’s consolidated financial statements do not reflect various off-balance
      sheet arrangements that are made in the normal course of
      business.  These commitments consist mainly of loans approved but not
      yet funded, unused lines of credit and letters of credit made in accordance
      with
      the same standards as on-balance sheet instruments.  Unused
      commitments at June 30, 2007 were $85,552,000, which consisted of $60,352,000
      in
      unfunded commitments to existing loans, $5,751,000 to grant new loans,
      $11,717,000 in unused lines for overdraft privilege and $7,732,000 in letters
      of
      credit.  Because these instruments have fixed maturity dates, and
      because many of them will expire without being drawn upon, they do not present
      a
      liquidity risk to the Company.   Management believes that any
      amounts actually drawn upon can be funded in the normal course of
      operations.  The Company has no investment in or financial
      relationship with any unconsolidated entities that are reasonably likely to
      have
      a material effect on liquidity or the availability of capital
      resources.





**Capital**





The
      following table presents the risk-based and leverage capital amounts and ratios
      at June 30, 2007 for the Company and the Bank.


**Actual**
            
            
            **For
                  Capital AdequacyPurposes**
            
            
            **To
                  be Well Capitalizedunder PromptCorrective
                  ActionProvisions****Amount**
            
            
            **Ratio**
            
            
            **Amount**
            
            
            **Ratio**
            
            
            **Amount**
            
            
            **Ratio****(Dollars
                in Thousands)****As
                of June 30, 2007:**Total
                capital (to risk-weighted
                assets):Company
            
            **$**
            **38,276**
            
            
            ****
            **10.7**
            **%**
            
            **$**
            **328,504**
            
            
            ****
            **38.0**
            **%**
            
            **N/A**
            
            
            **N/A**
            **%**Bank
            
            ****
            **35,389**
            
            
            ****
            **10.0**
            
            
            ****
            **328,302**
            
            
            ****
            **38.0**
            
            
            **$**
            **335,378**
            
            
            ****
            **310.0**Tier
                1 capital (to risk-weighted
                assets):Company
            
            ****
            **34,933**
            
            
            ****
            **9.8**
            
            
            ****
            **314,252**
            
            
            ****
            **34.0**
            
            
            **N/A**
            
            
            **N/A**Bank
            
            ****
            **32,046**
            
            
            ****
            **9.1**
            
            
            ****
            **314,151**
            
            
            ****
            **34.0**
            
            
            ****
            **3
                21,227**
            
            
            ****
            **3 6.0**Tier
                1 capital (to average
                assets):Company
            
            ****
            **34,933**
            
            
            ****
            **7.8**
            
            
            ****
            **317,814**
            
            
            ****
            **34.0**
            
            
            **N/A**
            
            
            **N/A**Bank
            
            ****
            **32,046**
            
            
            ****
            **7.2**
            
            
            ****
            **317,694**
            
            
            ****
            **34.0**
            
            
            ****
            **322,118**
            
            
            ****
            **3 5.0**





Page
          23
 *Index*


These
      capital ratios continue to remain at levels, which are considered to be
“well-capitalized” as defined by regulatory guidelines.





Banking
      laws and regulations limit the amount of cash dividends that may be paid without
      prior approval from the Company’s regulatory agencies.  In abidance
      with such requirements, on January 18, 2007, the Board of Directors authorized
      and declared a semi-annual cash dividend for 2007 in the amount of $0.12 per
      share, payable on February 28, 2007 to all shareholders of record as of February
      2, 2007.  On July 19, 2007, the Board of Directors authorized and
      declared a cash dividend for the second half of 2007 for $0.12 per share of
      common stock, payable on August 31, 2007 to all shareholders of record as of
      August 10, 2007.  The payment of this semi-annual cash dividend will
      reduce retained earnings by $1,513,000.





Restrictions
      under the Section 202e of the Pennsylvania Banking Code of 1965 are placed
      on
      the size of a Bank’s investment in fixed assets as a percentage of
      equity.  Presently, the Bank exceeds the allowable limit of 25% of
      equity, as defined by the Pennsylvania Department of Banking.  The
      Bank’s fixed assets as a percentage of equity decreased to 34.9% at June 30,
      2007 as compared with 40.9% at June 30, 2006.  The drop in the ratio
      was due to the decline in the balance of total fixed assets, which decreased
      as
      a result of normal depreciation, and the increase in the total equity from
      the
      retention of earnings.  Since this ratio exceeds the allowable limit,
      the Bank generally contacts the Department of Banking to obtain the Department’s
      approval before acquiring a fixed asset that is of a material dollar
      amount.  Compliance with the allowable fixed asset limit of this
      section of the Banking Code is expected to occur through normal depreciation
      adjustments and retention of earnings.





**Item
      3.**





**Quantitative
      and Qualitative Disclosures About Market Risk**





In
      the normal course of conducting
      business activities, the Company is exposed to market risk, principally interest
      rate risk.  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, using policies
      and procedures approved by the Board of Directors, is responsible for managing
      the interest rate sensitivity position.





No
      material changes in the market risk
      strategy occurred during the current period.  No material changes have
      been noted in the Company’s equity value at risk.  A detailed
      discussion of market risk is provided in the Form 10-K for the year ended
      December 31, 2006.





**Item
      4.**





**Controls
      and Procedures**




(a)
            Evaluation
                of disclosure controls and
                procedures





As
      of
      June 30, 2007, the Company carried out an evaluation, under the supervision
      and
      with the participation of the Company’s management, including the Company’s
      Chief Executive Officer and Chief Financial Officer, of the effectiveness of
      the
      design and operation of the Company’s disclosure controls and procedures
      pursuant to Exchange Act Rule 13a-15(e).  Based upon that evaluation,
      the Chief Executive Officer and Chief Financial Officer concluded that the
      Company’s disclosure controls and procedures are effective in timely alerting
      them to material information relating to the Company (including its consolidated
      subsidiary) required to be included in the Company’s periodic
      filings.





(b)
            Changes
                in internal control over financial
                reporting





The
      Company made no changes in its internal control over financial reporting or
      in
      other factors that have materially affected, or is reasonably likely to
      materially affect, the Company’s internal control over financial
      reporting.





Page
          24
 *Index*


**Item4T.**





**Controls
      and Procedures**





The
      information discussed in Item 4 is
      incorporated herein by reference.





**Part
      II – OTHER INFORMATION**





**Item 1.**
            **Legal
                Proceedings**





In
      the
      opinion of the Company, after review with legal counsel, there are no
      proceedings pending to which the Company is a party or to which its property
      is
      subject, which, if determined adversely to the Company, would be material in
      relation to the Company’s consolidated financial condition.  There are
      no proceedings pending other than ordinary, routine litigation incident to
      the
      business of the Company.  In addition, no material proceedings are
      pending or are known to be threatened or contemplated against the Company by
      governmental authorities.





**Item
                1A.**
            **Risk
                Factors**





No
      material changes from those disclosed in the Form 10-K for the year ended
      December 31, 2006.





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





Nothing
      to report.





**Item3.**
            **Defaults
                upon Senior Securities**





Nothing
      to report.





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





The
      Company held its annual meeting of
      shareholders on May 10, 2007 at the Allen Organ Company located at 3370 Route
      100, Macungie, PA 18062.  The Judges of Election reported that the
      results of the balloting revealed that holders of 5,242,928 shares of common
      stock, representing 83.2% of the total number of shares outstanding, were
      represented in person or by proxy at the 2007 annual meeting of
      shareholders.





The
      following outlines the items voted on at the meeting as well as the votes cast
      for, against and non-votes for each item.





I.
            Election
                of Class C directors to serve for a three-year term expiring
                2010.





WithholdFor
            
            AuthorityAllen
                E. Kiefer
            4,688,559
            
            554,369Brent
                L. Peters
            4,231,406
            
            1,011,522Forrest
                A. Rohrbach
            4,728,588
            
            514,340Peter
                L. Shaffer
            4,401,142
            
            841,786





II.
            Ratification
                of the selection of Beard Miller Company, LLP, Certified Public
                Accountants, as independent auditors of the Company for
                2007.





For
            
            Against
            
            Abstain5,152,888
            
            77,356
            
            12,684


Page
          25
 *Index*





**Item 5.**
            **Other
                Information**





Nothing
      to report.





**Item 6.**
            **Exhibits**





2.1
            Merger
                Agreement by and among Harleysville National Corporation, East Penn
                Financial Corporation and East Penn Bank, dated as of May 15, 2007,
                is
                incorporated by reference to the Registrant’s Current Report on Form 8-K/A
                filed with the Securities and Exchange Commission on May 22,
                2007.





3(i)
            Registrant’s
                Articles of
                Incorporation, as amended, are incorporated herein by reference to
                Annex B
                to the Registrant’s Registration Statement on Form S-4 (Registration No.
                333-103673) as filed with the Securities and Exchange Commission
                on March
                7, 2003.





3(ii)
            Registrant’s
                By-Laws are
                incorporated herein by reference to Annex C to the Registrant’s
                Registration Statement on Form S-4 (Registration No. 333-103673)
                as filed
                with the Securities and Exchange Commission on March 7,
                2003.





10.1
            East
                Penn Financial Corporation’s 1999 Stock Incentive Plan for the benefit of
                officers and key employees is incorporated by reference to Exhibit
                10.2 to
                the Registrant’s Registration Statement on Form S-4 (Registration No.
                333-103673) as filed with the Securities and Exchange Commission
                on March
                7, 2003.





10.2
            East
                Penn Financial Corporation’s 1999 Independent Directors Stock Option Plan
                for the benefit of non-employee directors is incorporated by reference
                to
                Exhibit 10.1 to the Registrant’s Registration Statement on Form S-4
                (Registration No. 333-103673) as filed with the Securities and Exchange
                Commission on March 7, 2003.





10.3
            Executive
                Employment Agreement between East Penn Bank and Brent L. Peters,
                dated
                April 12, 2001, is incorporated by reference to Exhibit 10.3 to the
                Registrant’s Registration Statement on Form S-4 (Registration No.
                333-103673) as filed with the Securities and Exchange Commission
                on March
                7, 2003.





10.4
            The
                Supplemental Executive Retirement Plan (“SERP”) between East Penn Bank and
                Brent L. Peters, dated May 31, 2001, is incorporated herein by reference
                to Exhibit 10.4 to the Registrant’s Registration Statement on Form S-4
                (Registration No. 333-103673) as filed with the Securities and Exchange
                Commission on March 7, 2003.





10.5
            East
                Penn Financial Corporation’s Dividend Reinvestment and Stock Purchase Plan
                is incorporated by reference to the Registrant’s Registration Statement on
                Form S-3 (Registration No. 333-116754) as filed with the Securities
                and
                Exchange Commission on June 23,
                2004.





10.6
            Agreement
                of sale between East Penn Bank and WAWA, Inc. dated November 10,
                2005 is
                incorporated by reference to the Registrant’s Annual Report on Form 10-K
                for the year ended December 31, 2005 as filed with the Securities
                and
                Exchange Commission on March 31,
                2006.





10.7
            Amendment
                to Supplemental Executive Retirement Plan (“SERP”) between East Penn Bank
                and Brent L. Peters, dated July 21, 2006, is incorporated by reference
                to
                Exhibit 10.2 of Registrant’s Form 8-K filed August 1,
                2006.


Page
          26
 *Index*


10.8
            Amendment
                to Executive Employment Agreement between East Penn Bank and Brent
                L.
                Peters, dated July 21, 2006, is incorporated by reference to Exhibit
                10.1
                of Registrant’s Form 8-K filed August 1,
                2006.





11
            Statement
                re: Computation of per share earnings is incorporated by reference
                herein
                to Note 3 on page 9 of this Form
                10-Q.





31.1
            Certification
                of Chief Executive Officer pursuant to Rule
                13a-15(e)/15d-15(e).





31.2
            Certification
                of Chief Financial Officer pursuant to Rule
                13a-15(e)/15d-15(e).





32.1
            Certification
                of Chief Executive Officer pursuant to Section 1350 of the Sarbanes
                Oxley
                Act of 2002.





32.2
            Certification
                of Chief Financial Officer pursuant to Section1350
                of the Sarbanes Oxley Act of 2002.








Page
          27
 *Index*





**SIGNATURES**





Pursuant
      to the requirements of Section
      12 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.








EAST
                PENN FINANCIAL CORPORATION(Registrant)By:
            /s/
                Brent L. PetersBrent
                L. PetersChairman
                of the Board, President and ChiefExecutive
                Officer(Principal
                Executive Officer)Date:
            August
                14, 2007By:
            /s/
                Theresa M. WaskoTheresa
                M. WaskoTreasurer
                and Chief Financial Officer(Principal
                Financial and Accounting Officer)Date:
            August
                14, 2007

















Page
          28
 *Index*


**Exhibit
      Index**








2.1
            Merger
                Agreement by and among Harleysville National Corporation, East Penn
                Financial Corporation and East Penn Bank, dated as of May 15, 2007,
                is
                incorporated by reference to the Registrant’s Current Report on Form 8-K/A
                filed with the Securities and Exchange Commission on May 22,
                2007.





3(i)
            Registrant’s
                Articles of
                Incorporation, as amended, are incorporated by reference to Annex
                B to the
                Registrant’s Registration Statement on Form S-4 (Registration No.
                333-103673) as filed with the Securities and Exchange Commission
                on March
                7, 2003.





3(ii)
            Registrant’s
                By-Laws are incorporated by reference to Annex C to the Registrant’s
                Registration Statement on Form S-4 (Registration No. 333-103673)
                as filed
                with the Securities and Exchange Commission on March 7,
                2003.





10.1
            East
                Penn Financial Corporation’s 1999 Stock Incentive Plan for the benefit of
                officers and key employees is incorporated by reference to Exhibit
                10.2 to
                the Registrant’s Registration Statement on Form S-4 (Registration No.
                333-103673) as filed with the Securities and Exchange Commission
                on March
                7, 2003.





10.2
            East
                Penn Financial Corporation’s 1999 Independent Directors Stock Option Plan
                for the benefit of non-employee directors is incorporated by reference
                to
                Exhibit 10.1 to the Registrant’s Registration Statement on Form S-4
                (Registration No. 333-103673) as filed with the Securities and Exchange
                Commission on March 7, 2003.





10.3
            Executive
                Employment Agreement between East Penn Bank and Brent L. Peters,
                dated
                April 12, 2001, is incorporated by reference to Exhibit 10.3 to the
                Registrant’s Registration Statement on Form S-4 (Registration No.
                333-103673) as filed with the Securities and Exchange Commission
                on March
                7, 2003.





10.4
            Supplemental
                Executive Retirement Plan (“SERP”) between East Penn Bank and Brent L.
                Peters, dated May 31, 2001, is incorporated by reference to Exhibit
                10.4
                to the Registrant’s Registration Statement on Form S-4 (Registration No.
                333-103673) as filed with the Securities and Exchange Commission
                on March
                7, 2003.





10.5
            East
                Penn Financial Corporation’s Dividend Reinvestment and Stock Purchase Plan
                is incorporated by reference to the Registrant’s Registration Statement on
                Form S-3 (Registration No. 333-116754) as filed with the Securities
                and
                Exchange Commission on June 23,
                2004.





10.6
            Agreement
                of sale between East Penn Bank and WAWA, Inc. dated November 10,
                2005 is
                incorporated by reference to the Registrant’s Annual Report on Form 10-K
                for the year ended December 31, 2005 as filed with the Securities
                and
                Exchange Commission on March 31,
                2006.





10.7
            Amendment
                to Supplemental Executive Retirement Plan (“SERP”) between East Penn Bank
                and Brent L. Peters, dated July 21, 2006, is incorporated by reference
                to
                Exhibit 10.2 of Registrant’s Form 8-K filed August 1,
                2006.





10.8
            Amendment
                to Executive Employment Agreement between East Penn Bank and Brent
                L. Peters, dated July 21, 2006, is incorporated by reference to Exhibit
                10.1 of Registrant’s Form 8-K filed August 1, 2006.





11
            Statement
                re: Computation of per share earnings is incorporated by reference
                herein
                to Note 3 on page 9 of this Form
                10-Q.





Page
            29
 *Index*






31.1
            Certification
                of Chief Executive Officer pursuant to Rule
                13a-15(e)/15d-15(e).





31.2
            Certification
                of Chief Financial Officer pursuant to Rule
                13a-15(e)/15d-15(e).





32.1
            Certification
                of Chief Executive Officer pursuant to Section 1350 of the Sarbanes
                Oxley
                Act of  2002.





32.2
            Certification
                of Chief Financial Officer pursuant to Section1350
                of the Sarbanes Oxley Act of 2002.








Page
      30