**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**





**FORM
      10-Q**





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





For
      the
      quarterly period ended March 31, 2007





or





**( 
                 )**
            **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
            (IRS
                Employer Identificationincorporation
                or organization)
            Number)





22
      South 2nd
      Street, 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.





6,305,262
      shares of common stock, par value $0.625 per share, outstanding as of April
      25,
      2007.

















**EAST
      PENN FINANCIAL CORPORATION**





**INDEX**


**QUARTERLY
      REPORT ON FORM 10-Q**





**Page****Part  I.**
            **FINANCIAL
              INFORMATION**Item
                1.
            Financial
                StatementsConsolidated
                Balance Sheets
            3March
                31, 2007 and December 31, 2006
                (unaudited)Consolidated
                Statements of Income
                (unaudited)
            4Three
                months ended March 31, 2007 and March 31,
                2006Consolidated
                Statements of Stockholders’ Equity
                (unaudited)
            5Three
                months ended March 31, 2007 and March 31,
                2006Consolidated
                Statements of Cash Flows
                (unaudited)
            6Three
                months ended March 31, 2007 and March 31,
                2006Notes
                to Interim Consolidated Financial Statements
                (unaudited)
            7Item
                2.
            Management’s
                Discussion and Analysis of Financial
                Condition
            11and
                Results of OperationsItem
                3.
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            21Item
                4.
            Controls
                and Procedures
            21Item
                4T.
            Controls
                and Procedures
            22**Part
                II.**
            **OTHER
              INFORMATION**Item
                1.
            Legal
                Proceedings
            22Item
                1A.
            Risk
                Factors
            22Item
                2.
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds
            22Item
                3.
            Defaults
                Upon Senior Securities
            22Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            22Item
                5.
            Other
                Information
            22Item
                6.
            Exhibits
            22**SIGNATURES**
            
            24**EXHIBIT
                INDEX**
            25


Page
          2
 *Index*





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





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





**EAST
      PENN FINANCIAL CORPORATION**


**CONSOLIDATED
      BALANCE SHEETS**


(Unaudited)





March
                31,
            
            
            December
                31,(In
                thousands, except share data)
            
            2007
            
            
            2006**ASSETS**Cash
                and due from banks
            
            $
            6,997
            
            
            $
            7,785Interest
                bearing deposits
            
            
            1,690
            
            
            
            18Federal
                funds sold
            
            
            20,007
            
            
            
            15,151Cash
                and cash equivalents
            
            
            28,694
            
            
            
            22,954Securities
                available for sale
            
            
            70,884
            
            
            
            70,392Mortgages
                held for sale
            
            
            606
            
            
            
            373Loans,
                net of unearned income
            
            
            327,851
            
            
            
            322,800Less:
                allowance for loan losses
            
            
            (3,328
            )
            
            
            (3,258
            )Total
                net loans
            
            
            324,523
            
            
            
            319,542Bank
                premises and equipment, net
            
            
            9,622
            
            
            
            9,820Investment
                in restricted stock
            
            
            2,196
            
            
            
            2,230Bank
                owned life insurance
            
            
            7,865
            
            
            
            7,788Accrued
                interest receivable and other assets
            
            
            6,369
            
            
            
            6,353**Total
                assets**
            
            $
            450,759
            
            
            $
            439,452**LIABILITIES
                AND STOCKHOLDERS’ EQUITY****LIABILITIES**Deposits:Noninterest
                bearing
            
            $
            47,592
            
            
            $
            46,110Interest
                bearing
            
            
            333,534
            
            
            
            326,521Total
                deposits
            
            
            381,126
            
            
            
            372,631Securities
                sold under agreements to repurchase
            
            
            9,077
            
            
            
            6,749Long-term
                debt
            
            
            24,000
            
            
            
            24,000Junior
                subordinated debentures
            
            
            8,248
            
            
            
            8,248Accrued
                interest payable and other liabilities
            
            
            2,877
            
            
            
            2,663**Total
                liabilities**
            
            
            425,328
            
            
            
            414,291**STOCKHOLDERS’
                EQUITY**Preferred
                stock, no par value; authorized16,000,000
                shares; none issued
            
            
            -
            
            
            
            -Common
                stock, par value $0.625 per shareauthorized
                40,000,000 shares; issued 2007 and 20066,613,554
                shares; outstanding 2007 and 20066,305,262
                shares
            
            
            4,134
            
            
            
            4,134Surplus
            
            
            9,272
            
            
            
            9,272Retained
                earnings
            
            
            14,559
            
            
            
            14,417Accumulated
                other comprehensive loss
            
            
            (684
            )
            
            
            (812
            )Less:
                Treasury stock – at cost, 308,292 shares
            
            
            (1,850
            )
            
            
            (1,850
            )**Total
                stockholders’ equity**
            
            
            25,431
            
            
            
            25,161**Total
                liabilities and****stockholders’
                equity**
            
            $
            450,759
            
            
            $
            439,452





See
      Notes
      to Consolidated Financial Statements


Page
          3
 *Index*


**EAST
      PENN FINANCIAL CORPORATION**


**CONSOLIDATED
      STATEMENTS OF INCOME**


**Three
      Months Ended March 31, 2007 and 2006**


(Unaudited)





Three
                Months Ended(In
                thousands, except share data)
            
            2007
            
            
            2006**Interest
                income**Interest
                and fee income on loans
            
            $
            5,311
            
            
            $
            4,663Securities:Taxable
            
            
            751
            
            
            
            669Tax-exempt
            
            
            242
            
            
            
            166Other
            
            
            36
            
            
            
            44**Total
                interest income**
            
            
            6,340
            
            
            
            5,542**Interest
                expense**Deposits
            
            
            2,697
            
            
            
            1,685Federal
                funds purchased and securitiessold
                under agreements to repurchase
            
            
            43
            
            
            
            95Long-term
                debt
            
            
            225
            
            
            
            330Junior
                subordinated debentures
            
            
            136
            
            
            
            136**Total
                interest expense**
            
            
            3,101
            
            
            
            2,246**Net
                interest income**
            
            
            3,239
            
            
            
            3,296Provision
                for loan losses
            
            
            45
            
            
            
            90**Net
                interest income after****provision
                for loan losses**
            
            
            3,194
            
            
            
            3,206**Other
                income**Customer
                service fees
            
            
            376
            
            
            
            394Mortgage
                banking activities, net
            
            
            34
            
            
            
            43Income
                from investment in life insurance
            
            
            77
            
            
            
            67Other
                income
            
            
            91
            
            
            
            139**Total
                other income**
            
            
            578
            
            
            
            643**Other
                expense**Salaries
                and employee benefits
            
            
            1,491
            
            
            
            1,554Occupancy
            
            
            307
            
            
            
            285Equipment
            
            
            207
            
            
            
            218Other
                operating expenses
            
            
            671
            
            
            
            744**Total
                other expense**
            
            
            2,676
            
            
            
            2,801**Income
                before income taxes**
            
            
            1,096
            
            
            
            1,048Federal
                income taxes
            
            
            198
            
            
            
            218**Net
                income**
            
            $
            898
            
            
            $
            830Basic
                earnings per share
            
            $
            0.14
            
            
            $
            0.13Diluted
                earnings per share
            
            $
            0.14
            
            
            $
            0.13Cash
                dividends per common share
            
            $
            0.12
            
            
            $
            0.11








See
      Notes
      to Consolidated Financial Statements





Page
          4
 *Index*





**EAST
      PENNFINANCIAL CORPORATION**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY**


**Three
      Months Ended**


**March
      31, 2007 and 2006**


(Unaudited)








AccumulatedOtherCommon
            
            
            
            
            
            Retained
            
            
            Comprehensive
            
            
            Treasury(In
                thousands, except 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
            
            
            -
            
            
            
            -
            
            
            
            830
            
            
            
            -
            
            
            
            -
            
            
            
            830Changes
                in net unrealized losseson
                securities availablefor
                sale, net of tax effect
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (476
            )
            
            
            -
            
            
            
            (476
            )Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            354Cash
                dividends ($0.11 per share)
            
            
            -
            
            
            
            -
            
            
            
            (693
            )
            
            
            -
            
            
            
            -
            
            
            
            (693
            )Balance,
                March 31, 2006
            
            $
            4,133
            
            
            $
            9,246
            
            
            $
            12,329
            
            
            $
            (1,356
            )
            
            $
            (1,850
            )
            
            $
            22,502Balance,
                December 31, 2006
            
            $
            4,134
            
            
            $
            9,272
            
            
            $
            14,417
            
            
            $
            (812
            )
            
            $
            (1,850
            )
            
            $
            25,161Comprehensive
                income:Net
                income
            
            
            -
            
            
            
            -
            
            
            
            898
            
            
            
            -
            
            
            
            -
            
            
            
            898Changes
                in net unrealized losseson
                securities available for sale,net
                of tax effect
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            128
            
            
            
            -
            
            
            
            128Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,026Cash
                dividends ($0.12 per share)
            
            
            -
            
            
            
            -
            
            
            
            (756
            )
            
            
            -
            
            
            
            -
            
            
            
            (756
            )Balance,
                March 31, 2007
            
            $
            4,134
            
            
            $
            9,272
            
            
            $
            14,559
            
            
            $
            (684
            )
            
            $
            (1,850
            )
            
            $
            25,431








See
      Notes to Consolidated Financial
      Statements








Page
          5
 *Index*


**EAST
      PENN FINANCIAL CORPORATION**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**Three
      Months Ended March 31, 2007 and 2006**


(Unaudited)





**Three
                Months Ended**(In
                thousands)
            
            **2007**
            
            
            **2006****CASH
                FLOWS from OPERATING ACTIVITIES**Net
                income
            
            $
            898
            
            
            $
            830Adjustments
                to reconcile net income to net cashprovided
                by operating activities:Provision
                for loan losses
            
            
            45
            
            
            
            90Provision
                for depreciation and amortization
            
            
            224
            
            
            
            214Net
                amortization/accretion of securities premiums and
                discounts
            
            
            32
            
            
            
            38Proceeds
                from sale of mortgage loans
            
            
            1,986
            
            
            
            2,359Net
                gain on sale of loans
            
            
            (34
            )
            
            
            (43
            )Loans
                originated for sale
            
            
            (2,185
            )
            
            
            (1,560
            )Earnings
                on investment in life insurance
            
            
            (77
            )
            
            
            (67
            )(Increase)
                decrease in accrued interest receivableand
                other assets
            
            
            (83
            )
            
            
            176Increase
                in accrued interest payableand
                other liabilities
            
            
            214
            
            
            
            11**Net
                Cash Provided by Operating Activities**
            
            
            1,020
            
            
            
            2,048**CASH
                FLOWS from INVESTING ACTIVITIES**Decrease
                in interest bearing time deposits
            
            
            -
            
            
            
            500Purchases
                of available for sale securities
            
            
            (2,072
            )
            
            
            -Proceeds
                from maturities of and principal repaymentson
                available for sale securities
            
            
            1,743
            
            
            
            2,586Proceeds
                from maturities of and principal repaymentson
                held to maturity securities
            
            
            -
            
            
            
            12Net
                increase in loans
            
            
            (5,026
            )
            
            
            (2,136
            )Net
                decrease in restricted stock
            
            
            34
            
            
            
            94Purchases
                of bank premises and equipment
            
            
            (26
            )
            
            
            (522
            )**Net
                Cash Provided by (Used in) Investing Activities**
            
            
            (5,347
            )
            
            
            534**CASH
                FLOWS from FINANCING ACTIVITIES**Net
                increase in deposits
            
            
            8,495
            
            
            
            3,864Net
                increase (decrease) in federal funds purchased andsecurities
                sold under agreements  to repurchase
            
            
            2,328
            
            
            
            (2,769
            )Repayment
                of long-term borrowings
            
            
            -
            
            
            
            (5,000
            )Dividends
                paid
            
            
            (756
            )
            
            
            (693
            )**Net
                Cash Provided by (Used in) Financing Activities**
            
            
            10,067
            
            
            
            (4,598
            )**Net
                Increase (Decrease) in Cash and Cash Equivalents**
            
            
            5,740
            
            
            
            (2,016
            )**Cash
                and cash equivalents -****Beginning**
            
            
            22,954
            
            
            
            10,629**Cash
                and cash equivalents -****Ending**
            
            $
            28,694
            
            
            $
            8,613**SUPPLEMENTARY
                CASH FLOW INFORMATION**Interest
                paid
            
            $
            2,811
            
            
            $
            2,205Federal
                income taxes paid
            
            $
            150
            
            
            $
            0








See
      Notes to Consolidated Financial Statements


Page
          6
 *Index*





**EAST
      PENN FINANCIAL CORPORATION**


**NOTES
      TO INTERIMCONSOLIDATED FINANCIAL
      STATEMENTS**


**March
      31, 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 three-month
      period ended March 31, 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.**
            **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;


Page
          7
 *Index*


·
            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.





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.  As of March 31, 2007, the
      Company’s total investment in Berkshire Bancorp, Inc. was $2,150,000,
      represented by 389,157 shares, resulting in a 19.9% 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.











Page
          8
 *Index*


**3.**
            **Earnings
                per Share**





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





Three
                Months EndedMarch
                31,2007
            
            
            2006Net
                income applicable to common stock
            
            $
            898,000
            
            
            $
            830,000Weighted-average
                common shares outstanding
            
            
            6,305,262
            
            
            
            6,304,262Effect
                of dilutive securities, stock options
            
            
            10,704
            
            
            
            20,886Weighted-average
                common shares outstandingused
                to calculate diluted earnings per share
            
            
            6,315,966
            
            
            
            6,325,148Basic
                and diluted earnings per share
            
            $
            0.14
            
            
            $
            0.13





**4.**
            **Comprehensive
                Income**





The
      components of other comprehensive income (loss) and related tax effects for
      the
      three months ended March 31, 2007 and 2006 are as follows:





Three
                Months EndedMarch
                31,2007
            
            
            2006(In
                thousands)Unrealized
                holding gains (losses)on
                available for sale securities
            
            $
            195
            
            
            $
            (721
            )Less
                reclassification adjustments forgains
                included in net income
            
            
            -
            
            
            
            -Net
                unrealized gains (losses)
            
            
            195
            
            
            
            (721
            )Tax
                effect
            
            
            (67
            )
            
            
            245Net
                of tax amount
            
            $
            128
            
            
            $
            (476
            )





**5.**
            **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.  As of March
      31, 2007 and March 31, 2006, there were no unvested options, and no stock
      options were granted during the first three months of 2007 and
      2006.





**6.**
            **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 $4,630,000 in
      standby letters of credit as of March 31, 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 March 31, 2007 for guarantees under standby
      letters of credit is not material.


Page
          9
 *Index*





**7.**
            **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 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.




On
      September 7, 2006, the Task Force
      reached a conclusion on EITF Issue No. 06-5, “Accounting for Purchases of Life
      Insurance – Determining the Amount That Could Be Realized in Accordance with
      FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance”
(“EITF 06-5”).  The scope of EITF 06-5 consists of six separate issues
      relating to accounting for life insurance policies purchased by entities
      protecting against the loss of “key persons”.  The six issues are
      clarifications of previously issued guidance on FASB Technical Bulletin No.
      85-4.  EITF 06-5 is effective for the fiscal years beginning after
      December 15, 2006.  The EITF did not have a material impact on the
      Company’s consolidated financial statements.




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.  As of March 31, 2007, the Company
      does not plan to 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.


Page
          10
 *Index*


**Item
      2.**





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


**AND
      RESULTS OF OPERATIONS**


**March
      31, 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 12 and 14
      herein of this report for the provision and allowance for loan
      losses.





**OVERVIEW**





Net
      income for the three months ended March 31, 2007 was $898,000 as compared with
      net income of $830,000 for the three months ended March 31, 2006.  The
      $68,000, or 8.2% increase in earnings is attributable to the decline in other
      non-interest expenses associated with the Company’s ongoing efforts to control
      its operating costs.  In addition, less of a provision was made to the
      allowance for loan losses due to the continued strong quality of the Company’s
      loan portfolio.  Incurring less operating expenses helped to offset
      the decline in net interest income and other income.  On a basic and
      dilutive earnings per share basis, net income for the three months ended March
      31, 2007 and 2006 was $0.14 per share and $0.13 per share,
      respectively.  Net income as a percentage of average assets on an
      annualized basis, also known as return on average assets, decreased to 0.83%
      for
      the first three months of 2007 from 0.94% for the first three months of 2006
      as
      a result of asset growth of 12.7% from the end of the first quarter of 2006
      to
      the end of the first 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 14.66% and 14.92% for the first three months of 2007
      and
      2006, respectively.  The decrease in this ratio is attributable to the
      increase in the amount of stockholders’ equity.








Page
          11
 *Index*


During
      the first three months of 2007, the Company’s assets increased $11,307,000, or
      2.6%, to $450,759,000 as of March 31, 2007 as compared with $439,452,000 as
      of
      the year ended December 31, 2006.  The increase in assets since the
      2006 year end is attributable to the increase in cash and cash equivalents
      and
      loans.  The source of funds used to support the asset growth was the
      result of deposits, which increased $8,495,000, or 2.3%, from year end and
      securities sold under agreements to repurchase which grew $2,328,000, or
      34.5%.  This compares to a decrease of $4,233,000 to $399,996,000 at
      March 31, 2006 from $404,229,000 as of December 31, 2005.  The growth
      in total deposits during the first three months of 2007 was higher than the
      growth in deposits during the same period in 2006 as a result of the Bank’s
      continued focus to offer competitive interest rates and provide quality customer
      service.





**RESULTS
      OF OPERATIONS**





**Net
      Interest Income**





For
      the three months ended March 31,
      2007, total interest income increased $798,000, or 14.4%, to $6,340,000, as
      compared with $5,542,000 for the three months ended March 31,
      2006.  This increase was supported by the yield from interest earning
      assets, which increased to 6.48% (on a fully tax equivalent basis) for the
      first
      quarter of 2007 from 6.23% for the first quarter of 2006 as a result of prime
      rate increases, which contributed to the better than anticipated
      yields.  In addition, average interest-earning assets increased 10.5%
      to $412,493,000 for the first three months of 2007, from $373,276,000 for the
      first three months of 2006.  The growth in average interest-earning
      assets was primarily attributable to an increase in federal funds sold and
      loan
      volume, both of which were funded from deposit growth.





Total
      interest expense increased by
      $855,000, or 38.1%, to $3,101,000 for the three months ended March 31 2007,
      from
      $2,246,000 for the three months ended March 31, 2006.  This increase
      was attributable to the growth of 9.5% in average interest bearing liabilities,
      which increased to $366,686,000 for the first three months of 2007 from
      $334,958,000 for the first three months of 2006.  The need to increase
      interest rates to maintain and attract deposits affected the cost of funds,
      which  increased to 3.43% for the three months ended March 31, 2007
      from 2.72% for the same period in 2006.





Net
      interest income decreased by
      $57,000, or 1.7%, to $3,239,000 for the three months ended March 31, 2007 from
      $3,296,000 for the three months ended March 31, 2006.  This decrease
      was attributable to the yield from interest earning assets not increasing as
      quickly as the increase in the cost of funds associated with
      deposits.  The increase in the 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 higher
      interest paying products.  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 brokered deposits or borrowings.  This strategy
      allowed management to better control funding costs and minimize further
      compression to its net interest spread and margin.  For the first
      three months of 2007, the net interest spread (on a fully tax equivalent basis)
      decreased to 3.05% from 3.50% for the first three months in 2006, while the
      net
      interest margin (on a fully tax equivalent basis) decreased to 3.43% for the
      three-month period ending March 31, 2007 from 3.78% for the three-month period
      ending March 31, 2006.





**Provision
      for Loan Losses**





For
      the three months ended March 31,
      2007, the provision for loan losses was $45,000, a decrease of $45,000 compared
      with $90,000 for the three months ended March 31, 2006.  The decrease
      in the provision is attributable to management’s consistent efforts to ensure
      the high quality of the loan portfolio, as represented by a lower percentage
      of
      non-performing assets and loans subject to review or regulatory
      classification.





The
      allowance for loans losses
      represented 1.02% of total loans at March 31, 2007, compared with 1.01% as
      of
      December 31, 2006 and 1.07% as of March 31, 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 March 31, 2007, the reserve is reasonable and
      sufficient to support the


Page
          12
 *Index*


increased
      loan growth in light of the strong asset quality as supported by the ratios
      reflected in the Asset Quality Ratios table on page 16.





**Other
      Income**





Other
      income for the three months ended March 31, 2007 decreased $65,000, or 10.1%,
      to
      $578,000 from $643,000 for the three months ended March 31,
      2006.  This decrease was not only due to an $18,000 decrease in income
      from customer service fees and a $9,000 decrease in mortgage banking activities,
      but it was also attributable to a $48,000 decline in other income from a
      one-time gain recorded in the first quarter of 2006 from the exchange of one
      type of asset into another type of asset.  Offsetting these declines
      was a $10,000 increase in income from the investment in life
      insurance.


.


**Other
      Expenses**





Other
      expenses, which include salary,
      occupancy, equipment and all other expenses incidental to the operation of
      the
      Company, decreased to $2,676,000 for the first quarter of 2007 from $2,801,000
      for the first quarter of 2006.  The $125,000, or 4.5%, decrease is due
      to the Company’s ongoing efforts to better manage overall efficiencies,
      particularly in light of the compression of its net interest spread and
      margin.





Salaries
      and employee benefit expenses, which make up the largest component of other
      expenses, decreased $63,000, or 4.1%, to $1,491,000 for the first quarter of
      2007 from $1,554,000 for the first quarter in 2006.  The decrease is
      attributable to attrition, where certain staff positions have not been replaced
      when employees have left the Bank.





Occupancy
      expenses increased $22,000,
      or 7.7%, to $307,000 for the three months ended March 31, 2007 from $285,000
      for
      the three months ended March 31, 2006.  The increase was attributable
      to a rise in normal occupancy costs.





Equipment
      expense decreased $11,000, or
      5.1%, to $207,000 for the three months ended March 31, 2007 from $218,000 for
      the three months ended March 31, 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 decreased $73,000, or 9.8%, to $671,000 for the three months
      ended March 31, 2007 from $744,000 for the three months ended March 31,
      2006.  This decrease was the result of the Company’s efforts to add
      value to the bottom line by improving efficiencies through the elimination
      or
      reduction of other operating expenses.





**Income
      Taxes**





For
      the
      three months ended March 31, 2007, the tax provision was $198,000 compared
      with
      $218,000 for the three months ended March 31, 2006.  The decrease of
      $20,000, or 9.2%, was due to a reduction in the Company’s effective tax rate to
      18.1% at March 31, 2007 from 20.8% at March 31, 2006.  The effective
      tax rate 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
      March 31, 2007 was $898,000, an increase of $68,000, or 8.2%, compared with
      $830,000 for the three months ended March 31, 2006.  The increase in
      net income was attributable to a decrease of $125,000 in other expenses, a
      decrease of $45,000 in the provision for loan losses and a $20,000 decrease
      in
      the income tax provision.  These decreases offset the declines of
      $57,000 in net interest income and $65,000 in other income.  Basic and
      diluted earnings per share for the three months ended March 31, 2007 were each
      $0.14 per share as compared with $0.13 per share for the three months ended
      March 31, 2006.


Page
          13
 *Index*








**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
      March 31, 2007 all of the securities in the portfolio were classified as
      available for sale, with new purchases generally placed in this
      category.  As part of the Company’s strategy to reduce some of the
      future risk inherent within the investment portfolio, the Company sold during
      the second quarter of 2006, the balance of its held to maturity securities,
      which at the time totaled $1,026,000.  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 March 31, 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 March 31, 2007.





The
      securities portfolio at March 31,
      2007 was $70,884,000, compared to $70,392,000 at December 31, 2006, an increase
      of $492,000, or 0.7%.  The increase represents the net result of
      principal repayments offset by additional security purchases.  The
      carrying value of the available for sale portion of the portfolio at March
      31,
      2007 includes an unrealized loss of ($1,036,000) (reflected as an accumulated
      other comprehensive loss of ($684,000) in stockholders’ equity, net of a
      deferred income tax liability of ($352,000)).  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)).





**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 $5,051,000,
      or
      1.6%, to $327,851,000 at March 31, 2007 from $322,800,000 at December 31,
      2006.  In comparing the first quarter of 2007 with the first quarter
      of 2006, gross loans increased $32,339,000, or 10.9%.  Gross loans
      represented 86.0% of total deposits at March 31, 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


Page
          14
 *Index*


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 March 31, 2007 and December 31, 2006 was $3,328,000
      and $3,258,000, respectively, compared to $3,151,000 at March 31,
      2006.   Although less of a provision for loan losses was recorded
      for the first three 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 March 31, 2007, the allowance for loan losses
      represented 1.02%****of the gross loan portfolio, compared
      with 1.01% at December 31, 2006.  This compares to 1.07% at March 31,
      2006.  At March 31, 2007, in consideration of the strong asset
      quality, management believes that the allowance for loan loss reserve is
      reasonable and adequate to address any potential losses.





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





**Analysis
                of Allowance for Loan Losses**
              (in
                thousands)**2007**
            
            
            **2006**Balance,
                beginning of year
            
            $
            3,258
            
            
            $
            3,072Provision
                charged to operating  expense
            
            
            45
            
            
            
            90Charge-offs:Commercial
            
            
            (12
            )
            
            
            0Real
                estate
            
            
            0
            
            
            
            0Consumer
            
            
            (26
            )
            
            
            (19
            )Total
                charge-offs
            
            
            (38
            )
            
            
            (19
            )Recoveries:Commercial
            
            
            0
            
            
            
            0Real
                estate
            
            
            60
            
            
            
            1Consumer
            
            
            3
            
            
            
            7Total
                recoveries
            
            
            63
            
            
            
            8Net
                (charge-offs) recoveries
            
            
            25
            
            
            
            (11
            )$
            3,328
            
            
            $
            3,151Net
                (charge-offs) recoveries to average net loans
            
            
            0.01
            %
            
            
            0.00
            %(1)  Bank’s
                loan portfolio is entirely domestic





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.





Page
          15
 *Index*


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




**Asset
                Quality Ratios**
            
            **3/31/07**
            
            
            **12/31/06**Non-accrual
                loans/Total loans
            
            
            0.08
            %
            
            
            0.13
            %Non-performing
                assets (1)
                /Total
                loans
            
            
            0.12
            %
            
            
            0.13
            %Net
                (charge-offs) recoveries/Average loans
            
            
            0.01
            %
            
            
            (0.07
            )%Allowance/Total
                loans
            
            
            1.02
            %
            
            
            1.01
            %Allowance/Non-accrual  loans
            
            
            1270.23
            %
            
            
            759.44
            %Allowance/Non-performing
                loans (1)
            
            
            817.69
            %
            
            
            752.42
            %(1)-Non-performing assets of $407,000 as of March 31, 2007 and
                $433,000 as of December 31, 2006 include non-accrual loans of $262,000
                at
                March 31, 2007 and $429,000 at December 31, 2006.




The
      Company had no other real estate owned as acquired through foreclosure as of
      March 31, 2007 and December 31, 2006.





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 $7,865,000 and
      $7,788,000 in BOLI as of March 31, 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.  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


Page
          16
 *Index*


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.  As of March 31, 2007, the Company’s total
      investment in Berkshire Bancorp, Inc. was $2,150,000, represented by 389,157
      shares, resulting in a 19.9% 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 March 31, 2007 were $381,126,000, an
      increase of $8,495,000, or 2.3%, from total deposits of $372,631,000 at December
      31, 2006.  In addition to the $1,482,000 increase in non-interest
      bearing deposits, the growth of $7,012,000 in interest bearing deposits was
      influenced by the increase in interest rates.  This impacted the cost
      of deposits, which increased to 3.35% as of March 31, 2007 from 2.86% as of
      December 31, 2006 and 2.45% as of March 31, 2006.





**Securities
      Sold under Agreements to Repurchase**





Securities
      sold under agreements to repurchase increased $2,328,000, or 34.5%, to
      $9,077,000 at March 31, 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.





**Short-Term
      Borrowings**





There
      were no short-term borrowings in the form of overnight federal funds purchased
      as of March 31, 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
      $147,431,000.


Page
          17
 *Index*





**Long-Term
      Debt and Borrowing Capacity**





There
      were $24 million outstanding in
      fixed rate term loans with the FHLB at March 31, 2007 and December 31,
      2006.  The $24 million borrowing is comprised of the following fixed
      rate borrowings (dollars in thousands):





Maturity
            
            Amount
            
            
            RateMay
                7, 2007
            
            $
            5,000
            
            
            
            3.89
            %November
                28, 2007
            
            
            7,000
            
            
            
            3.43
            %May
                5, 2008
            
            
            5,000
            
            
            
            4.03
            %November
                28, 2008
            
            
            7,000
            
            
            
            3.78
            %Total
            
            $
            24,000
            
            
            
            3.75
            %
            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 $147,431,000 with the FHLB, out of which $24 million represents
      fixed rate term loans that were outstanding at March 31, 2007, and resulted
      in
      an unused borrowing capacity of $123,431,000.





**Mandatory
      Redeemable Capital and Junior Subordinated Debentures**





As
      of
      March 31, 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, and in the repurchase of the Company’s
      common stock.  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 risk to
      interest income that is attributed to the repricing characteristics of interest
      sensitive assets and liabilities.   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.





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.


Page
          18
 *Index*





**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 $28,694,000 at March 31, 2007, compared
      to $22,954,000 at December 31, 2006.  This increase was due to
      overnight federal funds sold, which were enhanced as a result of deposit
      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 March 31, 2007, there was $44,643,000 in
      liquid securities as compared with $45,328,000 at December 31,
      2006.  Liquid securities decreased $685,000 since year-end as a result
      of the need to pledge additional securities to collateralize the increase in
      securities sold under agreements to repurchase.





Liability
      liquidity sources include
      attracting deposits at competitive rates.  Deposits at March 31, 2007
      were $381,126,000, compared to $372,631,000 at December 31, 2006.  In
      addition, the Bank has lines of credit with its main correspondent bank, ACBB,
      and with the FHLB, 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 March 31, 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.





**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 March 31, 2007.


Page
          19
 *Index*


**CONTRACTUAL
      OBLIGATIONS**





**March
                31, 2007****Less
                Than**
            
            
            
            
            
            
            
            
            **Over****1
                Year**
            
            
            **1
                – 3 Years**
            
            
            **3
                – 5 Years**
            
            
            **5
                Years**
            
            
            **Total****(in
                thousands)**Time
                deposits
            
            **$**
            **148,129**
            
            
            **$**
            **38,163**
            
            
            **$**
            **1,845**
            
            
            **$**
            **168**
            
            
            **$**
            **188,305**Long-term
                debt
            
            ****
            **12,000**
            
            
            ****
            **12,000**
            
            
            ****
            **-**
            
            
            ****
            **-**
            
            
            ****
            **24,000**Junior
                subordinateddebentures
            
            ****
            **-**
            
            
            ****
            **8,248**
            
            
            ****
            **-**
            
            
            ****
            **-**
            
            
            ****
            **8,248**Nonqualified
                supplementalexecutive
                retirement plan
            
            ****
            **112**
            
            
            ****
            **126**
            
            
            ****
            **70**
            
            
            ****
            **215**
            
            
            ****
            **523**Premises
                commitments
            
            ****
            **850**
            
            
            ****
            **-**
            
            
            ****
            **-**
            
            
            ****
            **-**
            
            
            ****
            **850**Operating
                leases
            
            ****
            **260**
            
            
            ****
            **476**
            
            
            ****
            **386**
            
            
            ****
            **824**
            
            
            ****
            **1,946**Total
            
            **$**
            **161,351**
            
            
            **$**
            **59,013**
            
            
            **$**
            **2,301**
            
            
            **$**
            **1,207**
            
            
            **$**
            **223,872**





**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 March 31, 2007 were $90,367,000, which consisted of $57,096,000
      in unfunded commitments to existing loans, $16,920,000 to grant new loans,
      $11,721,000 in unused lines for overdraft privilege and $4,630,000 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 March 31, 2007 for the Company and the Bank.





**Actual**
              
              
              **For
                    Capital Adequacy**
                  **Purposes**
              
              
              **To
                    be Well Capitalized**
                  **under
                    Prompt**
                  **Corrective
                    Action**
                  **Provisions****Amount**
              
              
              **Ratio**
              
              
              **Amount**
              
              
              **Ratio**
              
              
              **Amount**
              
              
              **Ratio****(Dollars
                  in Thousands)****As
                  of March 31, 2007:**Total
                  capital (to risk-weighted
                  assets):Company
              
              **$**
              **37,432**
              
              
              ****
              **10.8**
              **%**
              
              **$**
              **327,744**
              
              
              ****
              **38.0**
              **%**
              
              **N/A**
              
              
              **N/A**
              **%**Bank
              
              ****
              **34,623**
              
              
              ****
              **10.1**
              
              
              ****
              **327,551**
              
              
              ****
              **38.0**
              
              
              **$**
              **334,438**
              
              
              ****
              **310.0**Tier
                  1 capital (to risk-weighted
                  assets):Company
              
              ****
              **34,104**
              
              
              ****
              **9.8**
              
              
              ****
              **313,887**
              
              
              ****
              **34.0**
              
              
              **N/A**
              
              
              **N/A**Bank
              
              ****
              **31,295**
              
              
              ****
              **9.1**
              
              
              ****
              **313,775**
              
              
              ****
              **34.0**
              
              
              ****
              **320,663**
              
              
              ****
              **3 6.0**Tier
                  1 capital (to average
                  assets):Company
              
              ****
              **34,104**
              
              
              ****
              **7.8**
              
              
              ****
              **317,580**
              
              
              ****
              **34.0**
              
              
              **N/A**
              
              
              **N/A**Bank
              
              ****
              **31,295**
              
              
              ****
              **7.2**
              
              
              ****
              **317,459**
              
              
              ****
              **34.0**
              
              
              ****
              **321,824**
              
              
              ****
              **3 5.0**


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


Page
          20
 *Index*


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.  The payment of this semi-annual cash dividend decreased
      retained earnings by $756,000.





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 36.8% at March 31,
      2007 as compared with 40.4% at March 31, 2006.  The ratio decrease was
      due to the decline in the balance of total fixed assets, which decreased due
      to
      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
      March 31, 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
          21
 *Index*


**Item
      4T.**





**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**





Nothing
      to report.





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





Nothing
      to report.





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





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


Page
          22
 *Index*


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.





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
          23
 *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:
            May
                9, 2007By:
            /s/
                Theresa M. WaskoTheresa
                M. WaskoTreasurer
                and Chief Financial Officer(Principal
                Financial and Accounting Officer)Date:
            May
                9, 2007

















Page
          24
 *Index*





**Exhibit
      Index**





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
                10.3 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.





10.2
            East
                Penn Financial Corporation’s 1999 Independent Directors Stock Option Plan
                for the benefit of non-employee directors is incorporated by reference
                to
                Exhibit 10.2 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.





10.3
            Executive
                Employment Agreement between East Penn Bank and Brent L. Peters,
                dated
                April 12, 2001, 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.





10.4
            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.





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
      25