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 June 30, 2005

                                       or

                                       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 it charter)

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

          731 Chestnut 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   X           NO
             -----            -----

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

         YES               NO   X
             -----            -----

                      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.

      6,303,212 shares of common stock, par value $0.625 per share, outstanding
as of July 31, 2005.

<PAGE>

                         EAST PENN FINANCIAL CORPORATION

                                      INDEX
                          QUARTERLY REPORT ON FORM 10-Q
<TABLE>
<CAPTION>
                                                                                      Page
<S>                                                                                 <C>
Part  I.  FINANCIAL INFORMATION

          Item 1.     Financial Statements

                      Consolidated Balance Sheets                                       3
                         June 30, 2005 (Unaudited) and December 31, 2004

                      Consolidated Statements of Income (Unaudited)                     4
                         Three and six months ended June 30, 2005
                         and June 30, 2004

                      Consolidated Statements of Stockholders' Equity (Unaudited)       5
                         Six months ended June 30, 2005 and June 30, 2004

                      Consolidated Statements of Cash Flows (Unaudited)                 6
                         Six months ended June 30, 2005 and June 30, 2004

                      Notes to Interim Consolidated Financial Statements (Unaudited)    7

          Item 2.     Management's Discussion and Analysis of Financial Condition      11
                       and Results of Operations

          Item 3.     Quantitative and Qualitative Disclosures About Market Risk       21

          Item 4.     Controls and Procedures                                          21

Part II.  OTHER INFORMATION

          Item 1.     Legal Proceedings                                                21

          Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds      22

          Item 3.     Defaults Upon Senior Securities                                  22

          Item 4.     Submission of Matters to a Vote of Security Holders              22

          Item 5.     Other Information                                                22

          Item 6.     Exhibits                                                         23

SIGNATURES                                                                             24

EXHIBIT INDEX                                                                          25

</TABLE>

                                     Page 2
<PAGE>

 ITEM 1. FINANCIAL STATEMENTS

                         EAST PENN FINANCIAL CORPORATION
                           CONSOLIDATED BALANCE SHEETS

                                                         June 30,   December 31,
(In thousands, except share data)                          2005         2004
                                                       (Unaudited)    (Audited)
                                                        ---------     ---------
ASSETS
  Cash and due from banks                               $   8,629     $   7,334
  Interest bearing deposits                                    72         1,234
  Federal funds sold                                        4,388           214
                                                        ---------     ---------
    Cash and cash equivalents                              13,089         8,782
  Securities available for sale                            83,505        87,609
  Securities held to maturity                               1,038         1,040
                                                        ---------     ---------
   Total securities                                        84,543        88,649
  Mortgages held for sale                                   2,121         1,146
  Loans, net of unearned income                           266,139       240,669
    Less: allowance for loan losses                        (3,005)       (2,838)
                                                        ---------     ---------
      Total net loans                                     263,134       237,831

  Bank premises and equipment, net                          8,208         7,510
  Investment in restricted stock                            3,366         2,986
  Other real estate owned                                      20            20
  Bank owned life insurance                                 7,365         7,224
  Accrued interest receivable and other assets              5,791         5,266
                                                        ---------     ---------


         Total assets                                   $ 387,637     $ 359,414
                                                        =========     =========

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
  Deposits:
     Noninterest bearing                                $  43,587     $  42,029
     Interest bearing                                     263,276       256,236
                                                        ---------     ---------
     Total deposits                                       306,863       298,265
  Securities sold under agreements to repurchase            3,575         2,349
  Short-term borrowings                                        --         3,000
  Long-term debt                                           45,000        25,000
  Junior subordinated debentures                            8,248         8,248
  Accrued interest payable and other liabilities            1,193           885
                                                        ---------     ---------


         Total liabilities                                364,879       337,747

STOCKHOLDERS' EQUITY
  Preferred stock, no par value; authorized
     16,000,000 shares; none issued                            --            --
 Common stock, par value $0.625 per share
     authorized 40,000,000 shares; issued 2005
     6,611,504 shares; 2004 6,608,852 shares;
     outstanding 2005  6,303,212 shares; 2004
     6,300,560 shares                                       4,132         4,131
  Surplus                                                   9,238         9,225
  Retained earnings                                        11,106         9,887
  Accumulated other comprehensive income                      132           274
  Less: Treasury stock - at cost, 308,292 shares           (1,850)       (1,850)
                                                        ---------     ---------
         Total stockholders' equity                        22,758        21,667
                                                        ---------     ---------

         Total liabilities and
            stockholders' equity                        $ 387,637     $ 359,414
                                                        =========     =========

See Notes to Consolidated Financial Statements

                                     Page 3
<PAGE>

                         EAST PENN FINANCIAL CORPORATION
                        CONSOLIDATED STATEMENTS OF INCOME
            Three Months and Six Months Ended June 30, 2005 and 2004
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                    Three Months Ended   Six Months Ended
                                                    ------------------   ----------------
(In thousands, except share data)                     2005      2004      2005      2004
                                                     ------    ------    ------    ------
<S>                                                  <C>       <C>       <C>       <C>
Interest income
  Interest and fee income on loans                   $3,894    $3,048    $7,455    $5,997
  Securities:
     Taxable                                            777       887     1,593     1,862
     Tax-exempt                                         157       132       302       259
  Other                                                  33        22        61        41
                                                     ------    ------    ------    ------
         Total interest income                        4,861     4,089     9,411     8,159
                                                     ------    ------    ------    ------

Interest expense
  Deposits                                            1,201       898     2,211     1,843
  Federal funds purchased and securities
    sold under agreements to repurchase                  59         9       114        22
  Long-term debt                                        317       199       513       397
  Junior subordinated debentures                        136       136       272       272
                                                     ------    ------    ------    ------

         Total interest expense                       1,713     1,242     3,110     2,534
                                                     ------    ------    ------    ------

         Net interest income                          3,148     2,847     6,301     5,625

  Provision for loan losses                             126       129       252       283
                                                     ------    ------    ------    ------

         Net interest income after
           provision for loan losses                  3,022     2,718     6,049     5,342
                                                     ------    ------    ------    ------

Other income
  Customer service fees                                 384       239       623       460
  Mortgage banking activities, net                      110       111       213       225
  Net realized gains on sale of securities               --         8        --        25
  Income from investment in life insurance               68        75       141
                                                                                      151
  Net realized gains on sale of other real estate        16        61        16        61
  Other income                                           67        58       175       139
                                                     ------    ------    ------    ------
         Total other income                             645       552     1,168     1,061
                                                     ------    ------    ------    ------

Other expense
  Salaries and wages                                    970       881     1,926     1,789
                                                     ------    ------    ------    ------
  Employee benefits                                     308       282       657       560
  Occupancy                                             212       180       425       357
  Equipment                                             210       181       403       355
  Other operating expenses                              744       679     1,478     1,296
                                                     ------    ------    ------    ------
         Total other expense                          2,444     2,203     4,889     4,357
                                                     ------    ------    ------    ------

  Income before income taxes                          1,223     1,067     2,328     2,046

  Federal income taxes                                  287       257       542       485
                                                     ------    ------    ------    ------


         Net income                                  $  936    $  810    $1,786    $1,561
                                                     ======    ======    ======    ======


Basic and diluted earnings per share                 $ 0.15    $ 0.13    $ 0.28    $ 0.25

Cash dividends per common share                      $ 0.00    $ 0.00    $ 0.09    $ 0.08

</TABLE>

See Notes to Consolidated Financial Statements

                                     Page 4
<PAGE>

                         EAST PENN FINANCIAL CORPORATION
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                            For the Six Months Ended
                         June 30, 2005 and June 30, 2004
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                           Accumulated
                                                                              Other
                                         Common                 Retained   Comprehensive  Treasury
(In thousands, except share data)         Stock     Surplus     Earnings   Income (Loss)    Stock       Total
---------------------------------------------------------------------------------------------------------------
<S>                                   <C>         <C>         <C>          <C>          <C>          <C>
Balance, December 31, 2003              $  4,130    $  9,218    $  7,645     $    400     ($ 1,850)    $ 19,543
                                                                                                       --------
 Comprehensive income:
 Net income                                   --          --       1,561           --           --        1,561
 Changes in net unrealized gains
   (losses) on securities available
   for sale, net of tax effect                --          --          --       (1,280)          --       (1,280)
                                                                                                       --------

    Total comprehensive income                                                                              281
                                                                                                       --------

Exercise of 300 common stock options          --           2          --           --           --            2

Cash dividends ($0.08 per share)              --          --        (504)          --           --         (504)
                                        -----------------------------------------------------------------------
  Balance, June 30, 2004                $  4,130    $  9,220    $  8,702     ($   880)    ($ 1,850)    $ 19,322
                                        =======================================================================


Balance, December 31, 2004              $  4,131    $  9,225    $  9,887     $    274     ($ 1,850)    $ 21,667
 Comprehensive income:
 Net income                                   --          --       1,786           --           --        1,786
 Changes in net unrealized gains
   on securities available for sale,
   net of tax effect                          --          --          --         (142)          --         (142)
                                                                                                       --------

     Total comprehensive income                                                                           1,644
                                                                                                       --------

Exercise of 2,652 common stock
   options                                     1          13          --           --           --           14

Cash dividends ($0.09 per share)              --          --        (567)          --           --         (567)
                                        -----------------------------------------------------------------------
  Balance, June 30, 2005                $  4,132    $  9,238    $ 11,106     $    132     ($ 1,850)    $ 22,758
                                        =======================================================================
</TABLE>

See Notes to Consolidated Financial Statements

                                     Page 5
<PAGE>

                         EAST PENN FINANCIAL CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                     Six Months Ended June 30, 2005 and 2004
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                Six Months Ended June 30,
(In thousands)                                                     2005         2004
                                                                 --------     --------
<S>                                                              <C>          <C>
CASH FLOWS from OPERATING ACTIVITIES
  Net income                                                     $  1,786     $  1,561
Adjustments to reconcile net income to net cash
    provided by operating activities:
  Provision for loan losses                                           252          283
  Provision for depreciation and amortization                         353          318
  Net amortization of securities premiums and discounts               120          160
  Net realized gain on sale of foreclosed real estate                 (16)         (61)
  Net realized gain on sale of securities                              --          (25)
         Proceeds from sale of mortgage loans                      13,195       16,849
  Net gain on sale of loans                                          (213)        (225)
  Loans originated for sale                                       (13,957)     (16,731)
  Earnings on investment in life insurance                           (141)        (151)
  Decrease in accrued interest receivable
     and other assets                                                (165)        (164)
  Increase (decrease) in accrued interest payable
     and other liabilities                                            308          (20)
                                                                 --------     --------

         Net Cash Provided by Operating Activities                  1,522        1,794
                                                                 --------     --------


CASH FLOWS from INVESTING ACTIVITIES
  Decrease in interest bearing time deposits                           --          200
  Purchases of available for sale securities                       (2,557)      (6,490)
  Proceeds from maturities of and principal repayments
     on available for sale securities                               6,326       10,796
  Proceeds from sales of available for sale securities                 --        4,091
  Proceeds from maturities of and principal repayments
     on held to maturity securities                                     2            1
  Proceeds from the sale of other real estate owned                    31          321
  Net increase in loans                                           (25,570)     (20,120)
  Net increase in restricted stock                                   (380)        (577)
  Purchases of bank premises and equipment                         (1,051)      (1,535)
  Investment in Berkshire Bank                                       (287)          --
  Purchase of life insurance                                           --       (1,500)
                                                                 --------     --------

         Net Cash Used in Investing Activities                    (23,486)     (14,813)
                                                                 --------     --------

CASH FLOWS from FINANCING ACTIVITIES
  Net increase in deposits                                          8,598       11,158
  Net increase in federal funds purchased and
     securities sold under agreements  to repurchase               (1,774)       1,114
  Increase in long-term borrowings                                 20,000           --
  Proceeds from the exercise of stock options                          14            2
  Dividends paid                                                     (567)        (504)
                                                                 --------     --------

         Net Cash Provided by Financing Activities                 26,271       11,770
                                                                 --------     --------

         Net (Increase) Decrease in Cash and Cash Equivalents       4,307       (1,249)

   Cash and cash equivalents - Beginning                            8,782        8,593
                                                                 --------     --------

    Cash and cash equivalents - Ending                           $ 13,089     $  7,344
                                                                 ========     ========

SUPPLEMENTARY CASH FLOW INFORMATION

  Interest paid                                                  $  2,887     $  2,603
                                                                 ========     ========
  Federal income taxes paid                                      $    600     $    591
                                                                 --------     --------

SUPPLEMENTAL SCHEDULE of NON-CASH INVESTING
   and FINANCING ACTIVITIES

  Other real estate acquired in settlement of loans              $     15     $      0
                                                                 ========     ========
</TABLE>

See Notes to Consolidated Financial Statements

                                     Page 6
<PAGE>

                         EAST PENN FINANCIAL CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2005
                                   (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 and merger 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 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.
      Accordingly, they do not include all of the information and footnotes
      required by generally accepted accounting principles for complete
      financial statements. In the opinion of management, all adjustments
      considered necessary for fair presentation have been included.

            Operating results for the six-month period ended June 30, 2005, are
      not necessarily indicative of the results that may be expected for the
      year ended December 31, 2005. For further information, refer to the
      financial statements and footnotes thereto included in the Company's
      Annual Report on Form 10-K for the year ended December 31, 2004.

2.    Investment in Bank

            On September 23, 2003, the Company made an initial purchase of
      141,300 common stock shares of a newly formed de novo bank, named
      Berkshire Bank, located in Wyomissing, Berks County, Pennsylvania. Upon
      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 line 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 $7.50 per share, which was
      adjusted in consideration of a 5-for-4 stock split. The total number of
      shares that are subject to purchase under all Company's warrants, options
      or rights shall not exceed 25% of the total number of shares of Berkshire
      Bank common stock.

            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. As of June 30, 2005, the Company's total
      investment in Berkshire Bank was $2,147,000, represented by 248,897
      shares, resulting in a 19.9% aggregate ownership in consideration of the
      combined ownership of the Company, its directors and its officers. The
      investment is carried at cost and is included in the other assets category
      on the balance sheet.

            In August 2003, the Company entered into an agreement that was
      approved by the Federal Reserve


                                     Page 7
<PAGE>

      Bank of Philadelphia in September 2003. This agreement imposes certain
      restrictions where the Company has agreed not to:

      o     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;
      o     cause any voting securities of Berkshire Bank to be subject to a
            voting trust;
      o     cause Berkshire Bank to become a subsidiary of the Company;
      o     have any designated representative serve or act as an officer,
            director, employee or agent of Berkshire Bank;
      o     propose any person for election as a director of Berkshire Bank;
      o     attempt to influence the dividend policies or practices of Berkshire
            Bank; the investment, loan or credit decision policies; the pricing
            of services; personnel decisions; operations activities;
      o     exercise or seek to exercise any controlling influence over the
            management of Berkshire Bank;
      o     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.

            Based upon the limitations imposed by this agreement, the Company is
      considered to be a passive investor.

3.    Earnings per Share

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

<TABLE>
<CAPTION>
                                                              Six Months Ended            Three Months Ended
                                                                   June 30,                    June 30,
                                                              2005          2004          2005          2004
                                                           ------------------------    ------------------------

<S>                                                        <C>           <C>           <C>           <C>
      Net income applicable to common stock                $1,786,000    $1,561,000    $  936,000    $  810,000
                                                           ========================    ========================
      Weighted-average common shares outstanding            6,301,889     6,299,315     6,302,677     6,299,460
      Effect of dilutive securities, stock options             20,466        18,041        20,799        19,490
                                                           ------------------------    ------------------------

      Weighted-average common shares outstanding
           used to calculate diluted earnings per share     6,322,355     6,317,356     6,323,476     6,318,950
                                                           ========================    ========================
      Basic and diluted earnings per share                 $     0.28    $     0.25    $     0.15    $     0.13
                                                           ========================    ========================
</TABLE>

4.    Comprehensive Income

            The components of other comprehensive income (loss) and related tax
      effects for the three and six months ended June 30, 2005 and 2004 are as
      follows:

<TABLE>
<CAPTION>
                                                 Six Months Ended       Three Months Ended
                                               --------------------     ------------------
                                                June 30,   June 30,     June 30,  June 30,
                                                  2005       2004         2005      2004
                                               --------------------     ------------------
<S>                                            <C>         <C>         <C>         <C>
      (In thousands)

      Unrealized holding gains (losses) on
           available for sale securities       ($  215)    ($1,914)    $   966     ($3,114)

      Less reclassification adjustments for
           gains included in net income             --          25          --           8
                                               -------------------------------------------

      Net unrealized gains (losses)               (215)     (1,939)        966      (3,122)
      Tax effect                                   (73)       (659)       (329)     (1,061)
                                               -------------------------------------------

               Net of tax amount               ($  142)    ($1,280)    $   637     ($2,061)
                                               ===========================================
</TABLE>

5.    Stock Option Plan

                                     Page 8
<PAGE>

            The Company has adopted the disclosure-only provisions of Statement
      of Financial Accounting Standards (SFAS) No. 123, "Accounting for
      Stock-Based Compensation". Accordingly, no compensation costs have been
      recognized for options granted in 2005 and 2004. Had compensation costs
      for stock options granted been determined based on the fair value at the
      grant date for awards under the plan consistent with the provisions of
      SFAS No. 123, the Company's net income and earnings per share for the
      three and six months ended June 30, 2005 and 2004, would have been reduced
      to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                            Six Months Ended           Three Months Ended
                                                          ----------------------    ----------------------
                                                                 June 30,                  June 30,
                                                             2005        2004          2005         2004
                                                          ----------------------    ----------------------

                                                                  (In thousands, except share data)
<S>                                                       <C>          <C>          <C>          <C>
      Net income as reported                              $   1,786    $    1561    $     936    $     810
      Total stock-based compensation cost, net of tax,
               that would have been included in the
               determination of net income if the fair
               value based method had been applied
               to all awards                                     78            3           40            3
                                                          ----------------------    ----------------------

      Pro forma net income                                $   1,708    $   1,558    $     896    $     807
                                                          ======================    ======================

      Basic earnings per share:
               As reported                                $    0.28    $    0.25    $    0.15    $    0.13
               Pro forma                                  $    0.27    $    0.25    $    0.14    $    0.13
      Diluted earnings per share:
               As reported                                $    0.28    $    0.25    $    0.15    $    0.13
               Pro forma                                  $    0.27    $    0.25    $    0.14    $    0.13
</TABLE>

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 $970,000 of standby letters of credit as of June 30, 2005.
      Management believes that the proceeds obtained through liquidation of
      collateral and the enforcement of guarantees would be sufficient to cover
      the potential amount of future payments required under the corresponding
      guarantees. The current amount of the liability as of June 30, 2005 for
      guarantees under standby letters of credit is not material.

7.    New Accounting Standards

            In December 2004, the FASB issued Statement No. 123(R), "Share-Based
      Payment'. Statement No. 123(R) revised Statement No. 123, "Accounting for
      Stock-Based Compensation", and supercedes APB Opinion No. 25, "Accounting
      for Stock Issued to Employees", and its related implementation guidance.
      Statement No. 123(R) will require compensation costs related to
      share-based payment transactions to be recognized in the financial
      statements (with limited exceptions). The amount of compensation cost will
      be measured based on the grant-date fair value of the equity or liability
      instruments issued. Compensation cost will be recognized over the period
      that an employee provides service in exchange for the award.

            On April 14, 2005, the Securities and Exchange Commission ("SEC")
      adopted a new rule that amends the compliance dates for Statement No.
      123(R). Under the new rule, the Company is required to adopt Statement No.
      123(R) in the first annual period beginning after June 15, 2005. The
      Company has not yet determined the method of adoption or the effect of
      adopting Statement No. 123(R), and it has not determined whether the
      adoption will result in amounts that are similar to the current pro forma
      disclosures under Statement No. 123(R).

                                     Page 9
<PAGE>

            In December 2003, the Accounting Standards Executive Committee
      issued Statement of Position 03-3 (SOP 03-3), "Accounting for Certain
      Loans or Debt Securities Acquired in a Transfer." SOP 03-3 addresses
      accounting for differences between contractual cash flows and cash flows
      expected to be collected from an investor's initial investment in loans or
      debt securities acquired in a transfer, including business combinations,
      if those differences are attributable, at least in part, to credit
      quality. SOP 03-3 is effective for loans for debt securities acquired in
      fiscal years beginning after December 15, 2004. The Company adopted the
      provisions of SOP 03-3 on January 1, 2005.

            In March 2005, the SEC issued Staff Accounting Bulletin No. 107
      ("SAB No. 107"), "Share-Based Payment", providing guidance on option
      valuation methods, the accounting for income tax effects of share-based
      payment arrangements upon adoption of SFAS No. 123(R), and the disclosures
      in MD&A subsequent to the adoption. The Company will provide SAB No. 107
      required disclosures upon adoption of SFAS No. 123(R) on January 1, 2006.

            In March 2005, the FASB issued Interpretation No. 47 ("FIN 47"),
      "Accounting for Conditional Asset Retirement Obligations," that requires
      an entity to recognize a liability for a conditional asset retirement
      obligation when incurred if the liability can be reasonably estimated. FIN
      47 clarifies that the term Conditional Asset Retirement Obligation refers
      to a legal obligation to perform an asset retirement activity in which the
      timing and/or method of settlement are conditional on a future event that
      may or may not be within the control of the entity. FIN 47 also clarifies
      when an entity would have sufficient information to reasonably estimate
      the fair value of an asset retirement obligation. FIN 47 is effective for
      all fiscal years ending after December 15, 2005 (December 31, 2005, for
      calendar-year companies). Retrospective application for interim financial
      information is permitted but is not required. Early adoption of this
      Interpretation is encouraged. We do not expect the adoption of FIN 47 to
      materially impact our consolidated financial statements.

            In May 2005, FASB issued SFAS 154, "Accounting Changes and Error
      Corrections". The Statement requires retroactive application of a
      voluntary change in accounting principle to prior period financial
      statements unless it is impracticable. SFAS 154 also requires that a
      change in method of depreciation, amortization, or depletion for
      long-lived, non-financial assets be accounted for as a change in
      accounting estimate that is affected by a change in accounting principle.
      SFAS 154 replaces APB Opinion 20, "Accounting Changes", and SFAS 3,
      "Reporting Accounting Changes in Interim Financial Statements". SFAS 154
      will be effective for accounting changes and corrections of errors made in
      fiscal years beginning after December 15, 2005. Management currently
      believes that adoption of the provisions of SFAS 154 will not have a
      material impact on the Company's consolidated financial statements.


                                    Page 10
<PAGE>

ITEM 2.

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS
                                  June 30, 2005

      The following is management's discussion and analysis of the significant
changes in the consolidated 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, 2004 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, 2004. Some of these policies are
particularly sensitive requiring significant judgments, estimates and
assumptions to be made by management. Additional information is contained on
pages 14 and 16 of this report for the provision and allowance for loan losses.

OVERVIEW

      Net income for the six months ended June 30, 2005 and 2004 was $1,786,000
and $1,561,000. The increase of $225,000, or 14.4%, is attributable to the
Company's core banking business, where net interest income increased 12.0%,
other income increased 10.0% and the provision for loan losses decreased 11.0%.
On a basic and diluted per share basis, net income for the six months ended June
30, 2005 was $0.28, respectively, as compared with $0.25 for the six months
ended June 30, 2004. Net income as a percentage of average assets on an
annualized basis, also known as return on average assets, increased to 0.98% for
the first six months of 2005 from 0.92% for the first six months of 2004 as a
result of increased net income. Net income as a percentage of total average
stockholders' equity on an annualized basis, also known as return on average
equity, was 16.74% and 15.6% for the first six months of 2005 and 2004,
respectively. The increase in this ratio is also attributable to an increased
level of net income.

      During the first six months of 2005, the Company's assets grew
$28,223,000, or 7.9%, to $387,637,000 as of June 30, 2005 from $359,414,000 as
of December 31, 2004. This increase is primarily attributable to strong internal
loan growth, which increased to $266,139,000 as of June 30, 2005 from


                                    Page 11
<PAGE>


$240,669,000 as of December 31, 2004, offset by a decline of $4,106,000, or
4.6%, in the investment securities portfolio, the proceeds of which were
reinvested to fund loans. Total deposits increased by $8,598,000, or 2.9%,
during the first six months of 2005 to $306,863,000 as of June 30, 2005 from
$298,265,000 as of December 31, 2004. This compares to an increase of
$11,158,000, or 4.0%, to $291,056,000 at June 30, 2004 from $279,898,000 as of
December 31, 2003. The growth in total deposits during the first six months of
2005 was less than the growth in deposits during the same period in 2004 as a
result of competition in the market, and, to a certain degree, customers'
continued uncertainty as to how to best invest their monies. Since deposit
growth was not sufficient enough to fund the increased loan demand, long-term
borrowings were used, which account for the $20,000,000 increase in long-term
borrowings to $45,000,000 as of June 30, 2005 from $25,000,000 as of December
31, 2004.

RESULTS OF OPERATIONS

Net Interest Income

      For the three months ended June 30, 2005, total interest income increased
by $772,000, or 18.9%, to $4,861,000 as compared with $4,089,000 for the three
months ended June 30, 2004. This increase is primarily due to loan growth, which
is the Company's highest yielding asset, and to a 25-basis point increase in the
prime rate, which occurred during the second quarter of 2005.

      Total interest expense increased by $471,000, or 37.9%, to $1,713,000 for
the three months ended June 30, 2005 from $1,242,000 for the three months ended
June 30, 2004. This increase is not only attributable to the increased costs
associated with attracting deposits at a time when short-term interest rates are
rising, but is primarily impacted by the higher costs associated with the
increased level of borrowings.

      Net interest income increased by $301,000, or 10.6%, to $3,148,000 for the
three months ended June 30, 2005 from $2,847,000 for the three months ended June
30, 2004.

      For the six months ended June 30, 2005, total interest income increased by
$1,252,000, or 15.3%, to $9,411,000, compared with $8,159,000 for the six months
ended June 30, 2004. This increase is the result of a 5.55% increase in average
interest-earning assets, which grew to $342,127,000 for the first six months of
2005, from $318,069,000 for the first six months of 2004. The growth in average
interest earning assets was attributable to increased loan volume, which was
funded from the cash flow generated from the investment securities portfolio,
long-term borrowings and deposit growth. Further impacting interest income were
three 25-basis point increases in the prime rate during the first half of 2005
that resulted in better than anticipated yields on interest earning assets.

      Total interest expense increased by $576,000, or 22.7%, to $3,110,000 for
the six months ended June 30 2005, from $2,534,000 for the six months ended June
30, 2004. This increase is attributable to the growth in average interest
bearing liabilities, which increased to $305,548,000 for the first six months of
2005 from $283,166,000 for the first six months of 2004. The need to increase
long-term borrowings to complement deposit growth in order to fund loan volume,
contributed to the increase in average interest bearing liabilities. However,
due of the higher costs associated with long-term borrowings as well as the need
to increase interest rates to remain competitive in maintaining and attracting
deposits, cost of funds increased to 2.05% for the six months ended June 30,
2005 from 1.80% for the same period in 2004.

      Net interest income increased by $676,000, or 12.0%, to $6,301,000 for the
six months ended June 30, 2005 from $5,625,000 for the six months ended June 30,
2004. This increase is attributable to the growth of interest sensitive assets,
prime rate increases and ongoing efforts to proactively manage the cost of
funding sources. In addition, the shift in the composition of the Company's
interest sensitive assets, where cash flow from investment securities was
reinvested in loans, which are a higher yielding asset, had a positive impact on
the net interest rate spread, which increased to 3.49% for the first six months
of 2005 from 3.36% for the first six months in 2004. The net interest margin
increased to 3.71% from 3.56% for the six-month periods ending June 30, 2005 and
2004. While interest rates started to rise during 2004 and continued into 2005,
the Bank strived to manage the possible deterioration of its net interest rate
spread and margin in consideration of the growth of its interest sensitive
assets and liabilities.


                                    Page 12
<PAGE>

Provision for Loan Losses

      The provision for loan losses was $126,000 for the three months ended June
30, 2005 compared with $129,000 for the three months ended June 30, 2004.

      For the six months ended June 30, 2005, the provision for loan losses was
$252,000, a decrease of $31,000, or 11.0%, compared with $283,000 for the six
months ended June 30, 2004. The decrease in the provision is attributable to the
consistency in the high quality of the loan portfolio.

      The allowance for loans losses represented 1.12% of total loans at June
30, 2005, compared with 1.18% as of December 31, 2004 and 1.17% as of March 30,
2004. Management performs ongoing assessments of the loan loss reserve in
relation to loan portfolio growth, credit exposure to individual borrowers,
overall trends in the loan portfolio and other relevant factors. Based upon
these factors, management believes that as of June 30, 2005, the reserve is
reasonable and sufficient to support the increased loan growth in light of the
strong asset quality as supported by the ratios reflected in Table 2 on page 16.

Other Income

      For the three months ended June 30, 2005, other income was $645,000, an
increase of $93,000, or 16.8%, compared with other income of $552,000 for the
three months ended June 30, 2004. The increase was primarily due to an increase
of $145,000 in customer service fee income, which was attributable to the
implementation of an overdraft privilege product introduced during the second
quarter of 2005 and a $9,000 increase in other miscellaneous income. Other
income was negatively impacted by decreases of $1,000 in fee income from
mortgage banking activities, $8,000 in less gains from sales of available for
sale investment securities since no securities were sold during 2005 as compared
with 2004, $7,000 in less income from the investment in life insurance, and
$45,000 in less income as a result of there being fewer sales of other real
estate.

      Other income for the six months ended June 30, 2005 increased $107,000, or
10.1%, to $1,168,000 from $1,061,000 for the first six months ended June 30,
2004. This increase was due to a $163,000 increase in customer service fees and
a $36,000 increase in other miscellaneous income that occurred from a higher
than normal volume of processing merchant credit card transactions earlier in
2005. Offsetting these increases were declines in income as a result of there
being $12,000 in less income from mortgage banking activities, $25,000 in less
income as a result of there being no sales of available for sale securities
during 2005, $10,000 decline in income associated with the investment in life
insurance, and a $45,000 decline in income as a result of there being fewer
sales of other real estate.

Other Expenses

      Other expenses, which include salary, occupancy, equipment and all other
expenses incidental to the operation of the Company, increased to $2,444,000 for
the second quarter of 2005 from $2,203,000 for the second quarter of 2004. The
$241,000, or 10.9%, increase is not only due to the Company's continued growth,
but is attributable to increased occupancy and equipment costs associated with
the renovation, occupancy and full utilization of a 3-story brick building
purchased in 2004.

      Salaries and employee benefit expenses, which make up the largest
component of other expenses, increased $115,000, or 9.9%, to $1,278,000 for the
second quarter of 2005 from $1,163,000 for the second quarter in 2004. The
increase is primarily attributable to the increase in normal salary and benefit
costs.

      Occupancy expenses increased $32,000, or 17.8%, to $212,000 for the three
months ended June 30, 2005 from $180,000 for the three months ended June 30,
2004. The increase is due to the cost associated with the renovation and full
occupancy of a 3-story brick building located at 22 South 2nd Street, Emmaus,
Pennsylvania, to house operational, administrative and executive offices of the
Company.


                                    Page 13
<PAGE>

      Equipment expense increased $29,000, or 16.0%, to $210,000 for the three
months ended June 30, 2005 from $181,000 for the three months ended June 30,
2004. This increase is the result of additional costs and depreciation
associated with equipment purchased to accommodate the Company's growth and its
occupancy of the newly renovated building at 22 South 2nd Street in Emmaus.

      Other operating expenses during the second quarter of 2005 increased
$65,000, or 9.6%, to $744,000 from $679,000 during the second quarter of 2004.
The increase is primarily associated with the continued growth of the Company.

      For the six months ended June 30, 2005, total other expenses increased
$532,000, or 12.2%, to $4,889,000 from $4,357,000 for the six months ended June
30, 2004. The increase is the result of the Company's growth and the addition
and occupancy of new office space.

      Salary expenses and related employee benefits were $2,583,000 for the six
months ended June 30, 2005, an increase of $234,000, or 10.0%, compared with
$2,349,000 for the six months ended June 30, 2004. The increase is attributable
to staff additions and increases in normal salary and benefit related expenses.

      Occupancy expenses for the first six months of 2005 increased to $425,000
from $357,000 for the first six months of 2004. The increase of $68,000, or
19.0%, is attributable to the costs associated with the renovation, occupancy
and full utilization of a building that is being used for operational,
administrative and executive offices.

      Equipment expenses increased $48,000, or 13.5%, to $403,000 for the first
six months of 2005 from $355,000 for the first six months of 2004. The increase
in this expense category is due to the added depreciation expense from the
additions made to equipment to support the growth of the Company and its
utilization of new office space.

      Other operating expenses increased $182,000, or 14.0%, to $1,478,000 for
the six months ended June 30, 2005 from $1,296,000 for the six months ended June
30, 2004. This increase was primarily the result of the Company's growth and
increased transactional volume, which impacted certain volume driven expenses.

Income Taxes

      Income tax expense was $287,000 for the three months ended June 30, 2005,
an increase of $30,000, or 11.7%, compared with $257,000 for the three months
ended June 30, 2004. The increased tax expense is due to achieving a higher
level of net income.

      For the six months ended June 30, 2005, the tax provision was $542,000
compared with $485,000 for the six months ended June 30, 2004. This increase of
$57,000, or 11.8%, is the result of achieving a higher level of pre-tax net
income with a level amount of tax-exempt income.

Net Income

      Net income for the three months ended June 30, 2005 was $936,000, an
increase of $126,000, or 15.6%, compared with $810,000 for the three months
ended June 30, 2004. The increase in net income is the result of increases of
$301,000 in net interest income, $93,000 in other income, and a decrease of
$3,000 in the provision for loan losses, offset by increases of $241,000 in
other expenses and $30,000 in taxes. Basic and diluted earnings per share for
the three months ended June 30, 2005 were each $0.15 per share as compared with
$0.13 per share for the three months ended June 30, 2004.

      Net income for the six months ended June 30, 2005 was $1,786,000, an
increase of $225,000, or 14.4%, compared with $1,561,000 for the six months
ended June 30, 2004. The increase in net income is the result of increases of
$676,000 in net interest income, a decrease of $31,000 in the provision for loan
losses, and an increase of $107,000 in other income, offset by increases of
$532,000 in other expenses and $57,000 in taxes. Factors contributing to the
increased level of net income include increased interest


                                    Page 14
<PAGE>

income from loan growth and the impact of prime rate increases, as well as the
Bank's efforts to manage its cost of funds. Increased other income, derived from
increased customer service fees and credit card processing, further enhanced net
income. Basic and diluted earnings per share for the six months ended June 30,
2005 were each $0.28 per share compared with $0.25 per share for the six months
ended June 30, 2004.

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.

      Although the Company generally intends to hold its investment securities
to maturity, a significant portion of the securities portfolio is classified as
available for sale, with new purchases generally categorized as such. 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. Securities in the held to maturity category
are accounted for at amortized cost. The Company invests in securities for the
yield they produce and not to profit from trading. The Company holds no trading
securities in its portfolio.

      The securities portfolio at June 30, 2005 was $84,543,000, compared to
$88,649,000 at December 31, 2004, a decrease of $4,106,000, or 4.6%. The decline
is attributable to repayments of principal, which were used to fund the
Company's strong internal loan growth. Securities available for sale decreased
to $83,505,000 at June 30, 2005 from $87,609,000 at December 31, 2004, while
securities held to maturity were $1,038,000 at June 30, 2005 as compared with
$1,040,000 at December 31, 2004.

      The carrying value of the available for sale portion of the portfolio at
June 30, 2005 includes an unrealized gain of $200,000 (reflected as accumulated
other comprehensive income of $132,000 in stockholders' equity, net of a
deferred income tax liability of $68,000). This compares with an unrealized gain
at December 31, 2004 of $416,000 (reflected as accumulated other comprehensive
income of $274,000 in stockholders' equity, net of a deferred income tax
liability of $142,000).

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 $25,470,000,
or 10.6%, to $266,139,000 at June 30, 2005 from $240,669,000 at December 31,
2004. Gross loans represented 86.7% of total deposits at June 30, 2005 as
compared with 80.7% at December 31, 2004, since loan growth has outpaced deposit
growth. Loan growth was most significant in commercial lending, where the Bank's
general business development program and specific focus on municipal/tax-free
lending have led this effort. Outstanding retail loans have grown as well,
although to a lesser extent than commercial loans. Residential mortgage lending
has remained active. However, the Bank continues to sell the majority of its
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 prudent 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 any loan. In accordance with that policy, the internal loan review
process monitors the loan portfolio on an ongoing basis. The Credit
Administration area then prepares an analysis


                                    Page 15
<PAGE>

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 is an accumulation of expenses that has
been charged against past and present earnings in anticipation of potential
losses in the loan portfolio.

      The allowance for loan losses at June 30, 2005 and December 31, 2004 was
$3,005,000 and $2,838,000, respectively, compared to $2,654,000 at June 30,
2004. The increase in the allowance is attributable to the growth of the loan
portfolio and the shift in the loan mix, where there has been continued growth
in commercial loans, which generally carry a higher level of credit risk. At
June 30, 2005, the allowance for loan losses represented 1.12% of the gross loan
portfolio, compared with 1.18% at December 31, 2004. This compares to 1.17% at
June 30, 2004. At June 30, 2005, in consideration of the strong asset quality,
management believes the allowance for loan loss reserve to be reasonable and
adequate to support the loan growth and to address any potential losses.

      Table 1 - "Analysis of Allowance for Loan Loss" - details the activity,
which occurred in the allowance over the first six months of 2005 and 2004.

      Table 1 - Analysis of Allowance for Loan Loss (1)
      ------------------------------------------------------------------
      (in thousands)
                                                        2005        2004
                                                        ----        ----
      Balance, beginning of year                     $ 2,838     $ 2,403
      Provision charged to operating  expense            252         283
      Charge-offs:
        Commercial                                         0           0
        Real estate                                      (36)          0
        Consumer                                         (56)        (42)
                                                     -------     -------
        Total charge-offs                                (92)         42)

      Recoveries:
        Commercial                                         0           3
        Real estate                                        3           0
        Consumer                                           4           7
                                                     -------     -------
        Total recoveries                                   7          10


      Net (charge-offs)                                  (85)        (32)
                                                     -------     -------
                                                     $ 3,005     $ 2,654
                                                     =======     =======

      Net (charge-offs) recoveries to
       average net loans                              (0.03)%     (0.02)%

      (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 material potential loan
problems that have not been disclosed in this report.

      Table 2 - "Asset Quality Ratios" - summarizes pertinent asset quality
ratios at June 30, 2005 and December 31, 2004.


                                    Page 16
<PAGE>

      Table 2 -Asset Quality Ratios
      ------------------------------------------------------------------
                                                    6/30/05    12/31/04
                                                    -------    --------
      Non-accrual loans/Total loans                    0.28%       0.41%
      Non-performing assets (1) /Total loans           0.46%       0.45%
      Net charge-offs/Average loans                    0.03%       0.03%
      Allowance/Total loans                            1.12%       1.18%
      Allowance/Non-accrual  loans                   409.40%     287.83%
      Allowance/Non-performing loans (1)             248.96%     267.48%

      (1) - Includes non-accrual loans.
      ------------------------------------------------------------------

      At June 30, 2005, the Company had other real estate owned as acquired
through foreclosure, in the amount of $20,000, which the same amount outstanding
at December 31, 2004. The Company expects to dispose of the remaining properties
with minimal or no loss.

      Loan concentrations are considered to exist when the total amount of loans
to any one or a multiple number of borrowers engaged in similar activities or
having similar characteristics exceeds 10% of loans outstanding in any one
category. The majority of the Bank's lending is made within its primary market
area, which includes Emmaus and the East Penn community in Lehigh County,
Pennsylvania.

Bank Owned Life Insurance

      The Company has Bank Owned Life Insurance ("BOLI") for a chosen group of
employees, namely officers, where the Bank is the owner and beneficiary of the
policies. The Bank's deposits and proceeds from the sale of investment
securities funded the BOLI. 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 its 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 $7,365,000 and $7,224,000 in BOLI as of June 30, 2005 and
December 31, 2004. 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 for $1,413,000
of common stock outstanding of a newly formed de novo bank, named Berkshire
Bank, located in Wyomissing, Berks County, Pennsylvania. On October 22, 2003,
the Company purchased an additional 12,123 shares 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. 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 line with the terms of a Stock Subscription and Purchase
Agreement between the Company and 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. On September 1, 2004, Berkshire
Bank commenced a three-phase common stock offering effective through March 31,
2005. The offering price of the stock during the first two phases was $10.50 per
share through October 31, 2004 and $11.00 per share thereafter. In order to
maintain its level of investment in Berkshire Bank, the Company purchased an
additional 30,618 shares at $10.50 per share and 26,501 shares at $11.00 per
share, respectively. As of June 30, 2005, the Company's total investment in
Berkshire Bank was $2,147,000, represented by 248,897 shares, resulting in a
19.9% aggregate ownership. The investment is carried at cost and is included in
the other assets category on the balance sheet.

Deposits

      Deposits are the major source of the Company's funds for lending and
investment purposes. Total deposits at June 30, 2005 were $306,863,000, an
increase of $8,598,000, or 2.9%, from total deposits of $298,265,000 at December
31, 2004. The increase in deposits is due to increases of $15,956,000 in time


                                    Page 17
<PAGE>

deposits, $1,558,000 in non-interest bearing demand deposits and $958,000 in
savings accounts, offset by a decline of $9,874,000 in interest bearing demand
deposit accounts. While deposit growth was limited, there was a shift between
deposit categories, where customers invested more funds in longer-term deposits
as rates on time deposits have been increasing due to competitive pressures.
This trend impacted the cost of deposits, which increased to 1.74% as of June
30, 2005 from 1.57% as of December 31, 2004 and 1.52% as of June 30, 2004.

Securities Sold under Agreements to Repurchase

      Securities sold under agreements to repurchase increased $1,226,000, or
52.2%, to $3,575,000 at June 30, 2005 from $2,349,000 at December 31, 2004 due
to an increase in the interest rate paid on this product, which attracted
additional investors. 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/overnight borrowings outstanding as of June 30,
2005 as compared with $3,000,000 at December 31, 2004. Federal funds purchased
and overnight borrowings with the Federal Home Loan Bank of Pittsburgh ("FHLB")
are considered to be short-term borrowings as of June 30, 2005. 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 FHLB, which is part of
its overall maximum borrowing capacity of $179,780,000.

Long-Term Debt and Borrowing Capacity

      There were $45 million outstanding in fixed rate term loans with the FHLB
at June 30, 2005, an increase of $20 million as compared with the $25 million
that was outstanding at December 31, 2004. The $45 million borrowing is
comprised of the following fixed rate borrowings (in thousands):

                     Maturity            Amount          Rate
                -----------------      --------          -----
                November 28, 2005       $ 5,000          2.22%
                February 6, 2006          5,000          3.55%
                May 5, 2006               5,000          3.64%
                November 28, 2006         6,000          2.80%
                May 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          $45,000          3.42% weighted average
                                        =======          =====

      Because loan growth outpaced deposit growth during the first half of 2005,
short-term overnight borrowings were initially used as an alternate source of
funding the strong loan demand. However, as the amount of short-term overnight
borrowings increased, short-term interest rates were rising as well. In the
early part of May 2005, management decided to shift $20 million from short-term
overnight borrowings into four term loans with laddered maturities ranging from
9 months to 36 months, which are included in the above table. The purpose for
this transaction was to proactively manage the potential interest rate risk
associated with borrowing $20 million on an overnight basis at a time when
short-term rates were rising. This strategy allowed the Bank to control its
borrowing costs by locking into fixed rates, which, over time, would help to
minimize the impact that future short-term interest rate increase could have on
its net interest spread and margin.

      The Bank has a total maximum borrowing capacity for both short and
long-term borrowings of approximately $179,780,000 with the FHLB, out of which
$45 million represents fixed rate term loans, that were outstanding at June 30,
2005, and resulted in an unused borrowing capacity of $134,780,000.


                                    Page 18
<PAGE>

Mandatory Redeemable Capital and Junior Subordinated Debentures

      As of June 30, 2005, 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 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 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

      The management of interest rate risk involves measuring and analyzing the
maturity and repricing of interest-earning assets and interest bearing
liabilities at specific points in time. The imbalance between interest-earning
assets and interest bearing liabilities is commonly referred to as the interest
rate gap. The interest rate gap is one measure of the risk inherent in the
existing balance sheet as it relates to potential changes in net interest
income. Maintaining an appropriate balance between interest-earning assets and
interest bearing liabilities is a means of monitoring and possibly avoiding
material fluctuations in the net interest margin during periods of changing
interest rates.

      The Company's overall sensitivity to interest rate risk is low due to its
non-complex balance sheet. The Company manages its balance sheet with the intent
of stabilizing net interest income and net economic value under a broad range of
interest rate environments. The Company has the ability to effect various
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 assets and liabilities are made
periodically in an effort to give the Company dependable and steady growth in
net interest income, while at the same time, managing the related risks.

Liquidity

      Liquidity represents the Company's ability to efficiently manage cash
flows at reasonable rates to support possible commitments to borrowers or the
demands of depositors. Liquidity is essential to compensate for fluctuations in
the balance sheet and provide funds for growth and normal operating
expenditures. Liquidity needs may be met by converting assets into cash or
obtaining sources of additional funding.

      Liquidity from asset categories is provided through cash, amounts due from
banks, interest-bearing deposits with banks and federal funds sold, which were
$13,089,000 at June 30, 2005, compared to $8,782,000 at December 31, 2004.
Additional asset liquidity sources include principal and interest payments from
securities in the Company's investment portfolio and cash flow from its
amortizing loan portfolio. Longer-term liquidity needs may be met by selling
securities available for sale, selling loans or raising additional capital. At
June 30, 2005, there were $66,471,000 in liquid securities as compared with
$72,232,000 at December 31, 2004. Liquid securities decreased by $5,761,000
since year-end due to the $4.1 million decline in securities that are available
for sale and the need to pledge additional securities as collateral cash
management accounts and public fund deposit accounts, whose balances have
similarly increased from year end.

      Liability liquidity sources include attracting deposits at competitive
rates. Deposits at June 30, 2005 were $306,863,000, compared to $298,265,000 at
December 31, 2004. 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.


                                    Page 19
<PAGE>

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

      Management is of the opinion that its liquidity position, at June 30,
2005, 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.

Off-Balance Sheet Arrangements

      The Company's financial statements do not reflect various off-balance
sheet arrangements that are made in the normal course of business. These
commitments consist mainly of loans approved but not yet funded, unused lines of
credit and letters of credit made in accordance with the same standards as
on-balance sheet instruments. Unused commitments at June 30, 2005 were
$84,931,000, which consisted of $66,892,000 in unfunded commitments to existing
loans, $5,106,000 to grant new loans, $11,963,000 in unused lines for overdraft
privilege and $970,000 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 generally present a significant 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 3 presents the risk-based and leverage capital amounts
and ratios at June 30, 2005 for the Company and the Bank.

<TABLE>
<CAPTION>
                                                                                                    To be Well
                                                                                                 Capitalized under
                                                                        For Capital Adequacy     Prompt Corrective
                                                     Actual                   Purposes           Action Provisions
                                               -------------------     ---------------------    -------------------
                                               Amount       Ratio        Amount        Ratio    Amount        Ratio
                                               -------      -----      ---------       -----    --------     ------
                                                                       (Dollars in Thousands)
<S>                                            <C>            <C>        <C>           <C>       <C>           <C>
As of June 30, 2005:
     Total capital (to risk-weighted assets):
         Company                               $33,631        11.7  %   >$22,912      >8.0   %     N/A          N/A    %
                                                                        -             -
         Bank                                   31,132        11.0       >22,691      >8.0      >$28,363      >10.0
                                                                         -            -         -             -
     Tier 1 capital (to risk-weighted assets):
         Company
                                                30,168        10.5       >11,456      >4.0         N/A          N/A
                                                                         -            -
         Bank                                   28,127         9.9       >11,345      >4.0       >17,018     >  6.0
                                                                         -            -         -             -
     Tier 1 capital (to average assets):
         Company                                30,168         8.0       >15,067      >4.0         N/A          N/A
                                                                         -            -
         Bank                                   28,127         7.5       >14,957      >4.0       >18,696     >  5.0
                                                                         -            -         -             -
</TABLE>

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

      Banking laws and regulations limit the amount of cash dividends that may
be paid without prior approval from the Company's regulatory agencies. In
abidance with such requirements, on January 21, 2005, the Board of Directors
authorized and declared a semi-annual cash dividend for 2005 in the amount of
$0.09 per share, payable on February 28, 2005 to all shareholders of record as
of February 4, 2005. The payment of this semi-annual cash dividend decreased
retained earnings by $567,000. In addition, on July 21, 2005, the Board
authorized and declared a cash dividend for the second half of 2005 for $0.10
per share, payable on August 31, 2005 to all shareholders of record as of August
10, 2005.


                                    Page 20
<PAGE>

      Restrictions under 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 36.3% at June 30, 2005, as compared with 36.6% at June
30, 2004. This decrease is due to the increase in stockholders' equity, which
offset any increases in fixed assets. Generally, the Bank contacts the
Department of Banking prior to the acquisition of material dollar fixed asset
additions to obtain the Department's approval. On an ongoing basis, compliance
with 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 risk. Interest 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 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 period ended December 31, 2004.

ITEM 4.

Controls and Procedures

      (a)   Evaluation of disclosure controls and procedures

            As of June 30, 2005, 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 significant changes in its internal control over
            financial reporting or in other factors that could significantly
            affect these controls during the quarter ended June 30, 2005,
            including any corrective actions with regard to significant
            deficiencies and material weaknesses.

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
            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.


                                    Page 21
<PAGE>

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

            Nothing to report.

Item 3. Defaults upon Senior Securities
------

            Nothing to report.

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

            The Company held its annual meeting of shareholders on May 12, 2005
            at the Allen Organ Company located at 3370 Route 100, Macungie, PA
            18062. The Judges of Election reported that the results of the
            balloting revealed that holders of 5,071,512 shares of common stock,
            representing 80.5% of the total number of shares outstanding, were
            represented in person or by proxy at the 2005 annual meeting of
            shareholders.

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

            I.    Election of Class A directors to serve for a three-year term
                  expiring 2008.

                                                                      Withhold
                                                      For             Authority
                                                   ---------          ---------
                   Gordon K. Schantz               4,986,895            84,617
                   Donald R. Schneck               5,006,060            65,452
                   Konstantinos A. Tantaros        5,002,181            69,331
                   Dr. F. Geoffrey Toonder         4,778,428           293,084

            Directors whose terms continued after the meeting include:

                  Class B directors who serve a one-year term expiring 2006:

                                 Dale A. Dries
                                 Thomas R. Gulla
                                 Linn H. Schantz
                                 Donald S. Young

                  Class C directors who serve a two-year term expiring 2007:

                                 Allen E. Kiefer
                                 Brent L. Peters
                                 Forrest A. Rohrbach
                                 Peter L. Shaffer

            II.   Ratification of the selection of Beard Miller Company, LLP,
                  Certified Public Accountants, as independent auditors of the
                  Company for 2005.

                          For               Against          Abstain
                       ---------            -------          -------
                       5,042,686            16,784            12,042

Item 5. Other Information
------

                  Nothing to report.

                                    Page 22
<PAGE>

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 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.

                  11       Statement re: Computation of per share earnings is
                           incorporated by reference herein to Note
                           4 on page 8 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
                           Section 1350 of the Sarbanes Oxley Act of 2002.


                                    Page 23
<PAGE>

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. Peters
                                   ----------------------------------------
                                    Brent L. Peters
                                    President and Chief Executive Officer
                                    (Principal Executive Officer)

                               Date:    August 12, 2005





                               By:  /s/ Theresa M. Wasko
                                   ----------------------------------------
                                    Theresa M. Wasko
                                    Treasurer and Chief Financial Officer
                                    (Principal Financial and Accounting Officer)

                               Date:  August 12, 2005



                                    Page 24
<PAGE>

                                  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.

11       Statement re: Computation of per share earnings is incorporated by
         reference herein to Note 4 on page 8 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 Section 1350 of
         the Sarbanes Oxley Act of  2002.


                                    Page 25