GRAPHIC

2003 ANNUAL REPORT
ON FORM 10-K

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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Form 10-K

|(Mark One) |                                                                                                                                                   
|---------- | --------------------------------------------------------------------------------------------------------------------------------------------------
|ý          | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2003.                 
|OR        
|o          | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period
from            to            .

Commission file number 0-15237

Harleysville National Corporation(Exact name of registrant as specified in its charter)

|Pennsylvania                                                   |  | 23-2210237                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction
of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               |  |                                     
|483 Main Street,
Harleysville, Pennsylvania                    |  | 19438                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

(215) 256-8851Registrant's telephone number, including area code:

Securities registered pursuant to Section 12(b) of the Act: N/A

|Title of each class |  | Name of each exchange on which registered
|------------------- |  | -----------------------------------------
|N/A                 |  | N/A                                      

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $1.00 par value
Title of Class

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the
past 90 days. Yes ý No o

Indicate
by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.) Yes
ý No o

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

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State the aggregate market value of the voting stock held by nonaffiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock
was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing.

$586,042,000
as of February 25, 2004

Indicate
the number of shares outstanding of each class of the registrant's classes of common stock, as of the latest practicable date.

23,971,006
shares of Common Stock, $1 par value per share,
were outstanding as of February 25, 2004

DOCUMENTS INCORPORATED BY REFERENCE:

HARLEYSVILLE NATIONAL CORPORATION    Index

|                                                                                      |                                                                                      | Page
|------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------ | ----
|Form 10-K Cross Reference Sheet of Material Incorporated by Reference                 |                                                                                      | 3   
|Forward Looking Statements                                                            |                                                                                      | 4   
|Management's Discussion and Analysis of Financial Condition and Results of Operations |                                                                                      | 5   
|Consolidated Summary of Operations                                                    |                                                                                      | 5   
|Harleysville National Corporation                                                     |                                                                                      | 6   
|Market Information                                                                    |                                                                                      | 23  
|Consolidated Financial Statements                                                     |                                                                                      | 24  
|Report of Independent Certified Public Accountants                                    |                                                                                      | 57  
|Other Material Required by Form 10-K:                                                 |                                                                                      |     
|                                                                                      | History and Business                                                                 |     
|                                                                                      | Properties                                                                           |     
|                                                                                      | Legal Proceedings                                                                    |     
|                                                                                      | Submission of Matters to a vote of Security Holders                                  |     
|                                                                                      | Changes in and disagreements with Accountants of Accounting and Financial Disclosure |     
|                                                                                      | Controls and Procedures                                                              |     
|                                                                                      | Executive Officers of Registrant                                                     |     
|                                                                                      | Exhibits, Financial Statements and Reports on Form 8-K                               |     
|                                                                                      | Signatures                                                                           |     

2

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Form 10-K Cross Reference Sheet of Material Incorporated by Reference

The following table shows the location in this Annual Report on Form 10-K or the accompanying Proxy Statement of the information required to be
disclosed by the United States Securities and Exchange Commission ("SEC") in Form 10-K. Where indicated below, information has been incorporated by reference in this Report from the
Proxy Statement. Other portions of the Proxy Statement are not included in this Report. This Report is not part of the Proxy Statement. References are to pages in this report unless otherwise
indicated.

|         |  | Item of Form 10-K                                                                                            |  | Location                                                                                                                                                                                                                   
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|PART I.  |  |                                                                                                              |  |                                                                                                                                                                                                                            
|Item 1.  |  | Business                                                                                                     |  | "Forward-Looking Statements" on page 4 and "Business" on page 28 and "Item 1. History and Business" on page 58. "Additional Information" in proxy statement on page 29 is information on our website and filings.          
|Item 2.  |  | Properties                                                                                                   |  | "Properties" on page 63.                                                                                                                                                                                                   
|Item 3.  |  | Legal Proceedings                                                                                            |  | "Legal Proceedings" on page 64.                                                                                                                                                                                            
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                          |  | Not applicable. No matter was submitted to a vote of security holders during the fourth quarter of 2003.                                                                                                                   
|PART II. |  |                                                                                                              |  |                                                                                                                                                                                                                            
|Item 5.  |  | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | "Market Information" on page 23.                                                                                                                                                                                           
|Item 6.  |  | Selected Financial Data                                                                                      |  | "Consolidated Summary of Operations" on page 5.                                                                                                                                                                            
|Item 7.  |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                        |  | "Forward-Looking Statements" on page 4, "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 5 through 23.                                                                     
|Item 7A. |  | Quantitative and Qualitative Disclosures about Market Risk                                                   |  | "Interest Rate Sensitivity Analysis" on pages 18 through 20.                                                                                                                                                               
|Item 8.  |  | Financial Statements and Supplementary Data                                                                  |  | Pages 24 through 56.                                                                                                                                                                                                       
|Item 9.  |  | Changes in and Disagreements with Accountants On Accounting and Financial Disclosure                         |  | Not applicable. During the past two years or any Subsequent period there has been no change in or reportable disagreement with the certifying Accountants for Harleysville National Corporation or any of its subsidiaries.
|Item 9A. |  | Controls and Procedures                                                                                      |  | Page 64.                                                                                                                                                                                                                   
|         |  |                                                                                                              |  |                                                                                                                                                                                                                            

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|PART III.  |  |                                                                                                |  |                                                                                                                                                                                                                  
|---------- |  | ---------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Item 10.   |  | Directors and Executive Officers of the Registrant                                             |  | Information regarding Directors is included in the Proxy Statement on pages 13 through 15. Information regarding executive officers is included under the caption "Executive Officers" on page 65 of this Report.
|Item 11.   |  | Executive Compensation                                                                         |  | Information regarding executive compensation is included in the Proxy Statement on pages 16 through 25.                                                                                                          
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management and related Stockholder Matters |  | Information regarding security ownership of certain beneficial owners and management is included in the Proxy Statement on page 12.                                                                              
|Item 13.   |  | Certain Relationships and Related Transactions                                                 |  | Information regarding certain relationships and related transactions is included in the Proxy Statement on Page 22 and on page 41 of this Form 10-K.                                                             
|Item 14.   |  | Principal Accountant Fees and Services                                                         |  | Information regarding principal accounting fees and services is included in the proxy statement on page 27.                                                                                                      
|PART IV.   |  |                                                                                                |  |                                                                                                                                                                                                                  
|Item 15.   |  | Exhibits, Financial Statement Schedules, And Reports on Form 8-K                               |  | Pages 66, 67 and 69.                                                                                                                                                                                             
|Signatures |  |                                                                                                |  | Signatures on page 68                                                                                                                                                                                            

Forward-Looking Statements

In addition to historical information, this document contains forward-looking statements. We have made forward-looking statements in this document that are
subject to risks and uncertainties. Forward-looking statements include the information concerning possible or assumed future results of operations of Harleysville National Corporation and its
subsidiaries. When we use words such as "believes," "expects," "anticipates," or similar expressions, we are making forward-looking statements.

Shareholders
should note that many factors, some of which are discussed elsewhere in this document and in the documents that we incorporate by reference, could affect the future
financial results of the Corporation and its subsidiaries and could cause those results to differ materially from those expressed in our forward-looking statements contained or incorporated by
reference in this document. These factors include the following:



The SEC has not approved or disapproved this Report or passed upon its accuracy or adequacy.

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Management's Discussion and Analysis of Financial Condition and Results of Operations

HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES  CONSOLIDATED SUMMARY OF OPERATIONS

|                                                                                  |  | Year Ended December 31,
|--------------------------------------------------------------------------------- |  | -----------------------
|
|Income and expense                                                                |  |                        
|Interest income                                                                   |  | $                      
|Interest expense                                                                  |  |                        
|                                                                                  |  |                        
|Net interest income                                                               |  |                        
|Provision for loan losses                                                         |  |                        
|                                                                                  |  |                        
|Net interest income after provision for loan losses                               |  |                        
|Noninterest income                                                                |  |                        
|Noninterest expense                                                               |  |                        
|                                                                                  |  |                        
|Income before income tax expense                                                  |  |                        
|Income tax expense                                                                |  |                        
|                                                                                  |  |                        
|Net income                                                                        |  | $                      
|                                                                                  |  |                        
|Per Share*                                                                        |  |                        
|Diluted earnings                                                                  |  | $                      
|Basic earnings                                                                    |  |                        
|Cash dividends paid                                                               |  |                        
|Diluted average shares outstanding                                                |  |                        
|Basic average shares outstanding                                                  |  |                        
|Average balance sheet                                                             |  |                        
|Loans                                                                             |  | $                      
|Investments                                                                       |  |                        
|Other interest-earning assets                                                     |  |                        
|Total assets                                                                      |  |                        
|Deposits                                                                          |  |                        
|Guaranteed preferred beneficial interest in Corporation's subordinated debentures |  |                        
|Other interest-bearing liabilities                                                |  |                        
|Shareholders' equity                                                              |  |                        
|Balance sheet at year-end                                                         |  |                        
|Loans                                                                             |  | $                      
|Investments                                                                       |  |                        
|Other interest-earning assets                                                     |  |                        
|Total assets                                                                      |  |                        
|Deposits                                                                          |  |                        
|Guaranteed preferred beneficial interest in Corporation's subordinated debentures |  |                        
|Other interest-bearing liabilities                                                |  |                        
|Shareholders' equity                                                              |  |                        

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HARLEYSVILLE NATIONAL CORPORATION

The following is management's discussion and analysis of the significant changes in the results of operations, capital resources and liquidity presented in its
accompanying consolidated financial statements for Harleysville National Corporation (the Corporation), Harleysville National Bank and Trust Company, Citizens National Bank, Security National Bank
(the Banks), HNC Financial Company and HNC Reinsurance Company. The Corporation's consolidated financial condition and results of operations consist almost entirely of the Banks' financial condition
and results of operations. Current performance does not guarantee, and may not be indicative of, similar performance in the future.

Critical Accounting Policies

The accounting and reporting policies of the Corporation and its subsidiaries conform with accounting principles generally accepted in the United States of
America (US GAAP) applicable to banks. All significant inter-company transactions are eliminated in consolidation and certain reclassifications are made when necessary to conform with the previous
year's financial statements to the current year's presentation. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported
amount of assets and liabilities as of the dates of the balance sheets and revenues and expenditures for the periods presented. Therefore, actual results could differ significantly from those
estimates.

The
principal estimates that are particularly susceptible to significant change in the near term relate to the allowance for loan losses. The evaluation of the adequacy of the allowance
for loan losses includes, among other factors, an analysis of historical loss rates, by category, applied to current loan totals. However, actual losses may be higher or lower than historical trends,
which vary. Actual losses on specified problem loans, which also are provided for in the evaluation, may vary from estimated loss percentages, which are established based upon a limited number of
potential loss classifications.

The
Corporation accounts for income taxes under the liability method whereby deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the
enactment date. The principal types of accounts, resulting in differences between assets and liabilities for financial statement and tax return purposes, are the allowance for loan losses, leased
assets, deferred loan fees and compensation.

Introduction

The Corporation achieved its 28th consecutive year of record earnings in 2003. Net income in 2003 exceeded 2002 net income by 7.3%. This increase in
earnings was driven by a 6.9% growth in average earning assets and our persistent focus on controlling expenses. The increase in net income was also due to the gains on the sale of investments, and an
increase in both deposit service charges and gains on the sale of residential mortgages. Asset quality at December 31, 2003, also improved through a reduction in nonperforming loans, compared
to December 31, 2002.

The
Corporation's net income of $35,333,000 in 2003, increased 7.3% compared to the $32,927,000 reported in 2002. Diluted earnings of $1.44 per share in 2003 increased 7.5% from $1.34 in
2002. Basic earnings per share in 2003 were $1.48 compared to $1.38 in 2002, a 7.2% increase. Net interest income decreased $899,000, as a result of the continued pressures of interest rates reaching
45-year lows. The Corporation saw an improvement in the net interest margin during the fourth quarter of 2003, compared to the fourth quarter of 2002. Other operating income of $19,906,000
earned in 2003, net of gains on sales of investment securities and income on life insurance, increased $858,000, or 4.5%, compared to 2002, primarily due to both higher service charges and gains on
the sale of residential mortgage loans. The 2003 other operating expense, net of a $2.6 million Federal Home Loan Bank

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(FHLB)
borrowing prepayment fee, grew only 1.3% compared to 2002. The ratio of overhead expenses to average assets was 2.42% as of December 31, 2003, improved from 2.44% at December 31,
2002. The 2003 ratio was well below our peer ratio of 3.05% at September 30, 2003.

The
quality of the loan portfolio is a key focus of the Corporation. Loan quality performance ratios at December 31, 2003 reflect the improvement in loan quality, compared to
2002. The ratio of the allowance for loan losses to nonperforming loans and leases of 371.7% at December 31, 2003, improved from the December 31, 2002 and December 31, 2001 ratios
of 272.8% and 187.9%, respectively. The ratio of nonperforming loans and leases to total loans outstanding at December 31, 2003 was 0.32%, compared the December 31, 2002 and
December 31, 2001 ratios of 0.47% and 0.63%, respectively.

Interest-Earning Assets and Interest-Bearing Liabilities

Average interest-earning assets of $2,333,134,000 in 2003, increased $151,419,000, or 6.9%, compared to $2,181,715,000 in 2002. The growth in average earning
assets was primarily due to the increase in the average investment portfolio. During 2003, the average balance of investments increased $127,221,000, or 15.5%, the average loan portfolio grew
$20,827,000, or 1.6% and average other earning assets grew $3,371,000, or 13.3%. Total loans at December 31, 2003 grew 5.7%, compared to the December 31, 2002
balance as a result of stronger loan growth during the last two quarters of 2003. Average interest-earning assets were $1,944,961,000 in 2001.

Average
interest-bearing liabilities totaled $1,932,825,000 in 2003, an increase of $114,893,000, or 6.3%, compared to 2002. This increase was primarily the result of the efforts of the
Corporation to grow core deposits. Average interest bearing core deposits grew $131,068,000, or 15.9% in 2003. Higher costing average time deposits decreased $39,279,000, or 5.3% during 2003. Also
contributing to this rise in average interest bearing liabilities was an increase in other borrowings of $23,104,000, or 9.3%. Average interest-bearing liabilities were $1,606,394,000 in 2001.

Investment Securities

SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, requires, among other things, that debt and equity securities classified as
available for sale be reported at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. The net effect of unrealized gains or losses, caused
by marking an available for sale portfolio to market, causes fluctuations in the level of shareholders' equity and equity-related financial ratios as market interest rates cause the fair value of
fixed-rate securities to fluctuate.

Investment
securities decreased 4.8% from $971,467,000 at December 31, 2002 to $924,874,000 at December 31, 2003. This decrease was the result of reduced funding from time
deposits over $100,000. During 2003, the Corporation adopted the strategy to be less aggressive in obtaining higher rate time deposits over $100,000 from school districts and municipalities. The
investment securities available for sale decreased $44,186,000 and the investment securities held to maturity decreased $2,407,000. During 2003, $1,233,050,000 of securities available for sale were
sold which generated a pretax gain of $6,613,000. In comparison, $897,327,000 securities available for sale were sold during 2002 to generate a pretax gain of $3,475,000. The Corporation sells
investment securities available for sale to fund the purchase of other securities in an effort to enhance the overall return of the portfolio, and to reduce the interest rate risk within different
interest rate environments.

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Table 1Investment Portfolio

The
following table shows the carrying value of the Corporation's investment securities held to maturity:

|                                                 |       | 2003 |        | 2002   |   | 2001  
|------------------------------------------------ | ----- | ---- | ------ | ------ | - | ------
|
|Obligations of states and political subdivisions |       | $    | 19,568 |        | $ | 20,410
|Mortgage-backed securities                       |       |      | 436    |        |   | 1,451 
|Other securities                                 |       |      |       |        |   | 550   
|                                                 |       |      |        |        |   |       
|                                                 | Total |      | $      | 20,004 |   | $     
|                                                 |       |      |        |        |   |       

The following table shows the carrying value of the Corporation's investment securities available for sale:

|                                                               |       | 2003 |         | 2002    |   | 2001   
|-------------------------------------------------------------- | ----- | ---- | ------- | ------- | - | -------
|
|U.S. Treasury notes                                            |       | $    |        |         | $ | 18,434 
|Obligations of other U.S. Government agencies and corporations |       |      | 32,495  |         |   | 18,509 
|Obligations of states and political subdivisions               |       |      | 240,149 |         |   | 333,663
|Mortgage-backed securities                                     |       |      | 575,788 |         |   | 517,428
|Other securities                                               |       |      | 56,438  |         |   | 61,022 
|                                                               |       |      |         |         |   |        
|                                                               | Total |      | $       | 904,870 |   | $      
|                                                               |       |      |         |         |   |        

Table 2There are no significant concentrations of securities (greater than 10% of shareholders' equity) in
any individual security issuer. The maturity analysis of investment securities held to maturity, including the weighted average yield for each category as of December 31, 2003, is as follows:

|                                                  |                           | Under
1 year |   | 1-5
Years |   | 5-10
Years |        | Over
10 years |   | Total |  
|------------------------------------------------- | ------------------------- | ------------ | - | --------- | - | ---------- | ------ | ------------- | - | ----- | -
|
|Obligations of states and political subdivisions: |                           |              |   |           |   |            |        |               |   |       |  
|                                                  | Carrying value            |              | $ | 5,421     |   | $          | 12,985 |               | $ | 1,162 |  
|                                                  | Weighted average yield    |              |   | 8.51      | % |            | 8.67   | %             |   | 8.40  | %
|                                                  | Weighted average maturity |              |   |           |   |            |        |               |   |       |  
|Mortgage-backed securities:                       |                           |              |   |           |   |            |        |               |   |       |  
|                                                  | Carrying value            |              |   |          |   |            | 436    |               |   |      |  
|                                                  | Weighted average yield    |              |   |          | % |            | 7.57   | %             |   |      | %
|                                                  | Weighted average maturity |              |   |           |   |            |        |               |   |       |  
|Total:                                            |                           |              |   |           |   |            |        |               |   |       |  
|                                                  | Carrying value            |              | $ | 5,421     |   | $          | 13,421 |               | $ | 1,162 |  
|                                                  | Weighted average yield    |              |   | 8.51      | % |            | 8.63   | %             |   | 8.40  | %
|                                                  | Weighted average maturity |              |   |           |   |            |        |               |   |       |  

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The maturity analysis of securities available for sale, including the weighted average yield for each category, as of December 31, 2003 is
follows:

|                                                                |                           | Under
1 year |   | 1-5
Years |   | 5-10
Years |         | Over
10 years |   | Total   |  
|--------------------------------------------------------------- | ------------------------- | ------------ | - | --------- | - | ---------- | ------- | ------------- | - | ------- | -
|
|Obligations of other U.S. Government agencies and corporations: |                           |              |   |           |   |            |         |               |   |         |  
|                                                                | Fair value                |              | $ | 18,965    |   | $          | 1,968   |               | $ | 7,774   |  
|                                                                | Weighted average yield    |              |   | 3.64      | % |            | 3.36    | %             |   | 4.75    | %
|                                                                | Weighted average maturity |              |   |           |   |            |         |               |   |         |  
|Obligations of states and political subdivisions:               |                           |              |   |           |   |            |         |               |   |         |  
|                                                                | Fair value                |              |   | 2,431     |   |            | 94,455  |               |   | 103,147 |  
|                                                                | Weighted average yield    |              |   | 8.01      | % |            | 7.37    | %             |   | 7.25    | %
|                                                                | Weighted average maturity |              |   |           |   |            |         |               |   |         |  
|Mortgage-backed securities:                                     |                           |              |   |           |   |            |         |               |   |         |  
|                                                                | Fair value                |              |   | 84,471    |   |            | 238,019 |               |   | 76,990  |  
|                                                                | Weighted average yield    |              |   | 2.21      | % |            | 3.29    | %             |   | 4.32    | %
|                                                                | Weighted average maturity |              |   |           |   |            |         |               |   |         |  
|Other securities:                                               |                           |              |   |           |   |            |         |               |   |         |  
|                                                                | Fair value                |              |   | 503       |   |            | 13,381  |               |   | 42,554  |  
|                                                                | Weighted average yield    |              |   | 5.80      | % |            | 5.26    | %             |   | 2.59    | %
|                                                                | Weighted average maturity |              |   |           |   |            |         |               |   |         |  
|Total:                                                          |                           |              |   |           |   |            |         |               |   |         |  
|                                                                | Fair value                |              | $ | 106,370   |   | $          | 347,823 |               | $ | 230,465 |  
|                                                                | Weighted average yield    |              |   | 2.61      | % |            | 4.47    | %             |   | 5.33    | %
|                                                                | Weighted average maturity |              |   |           |   |            |         |               |   |         |  

Loans

Loans increased 5.7% in 2003, compared to a 1.4% growth in 2002. The growth in loans during 2003 was impacted by planned declines in both the indirect vehicle
loan and vehicle leasing portfolios. Net of these two portfolios, total loans grew 12.3%, led by increases in commercial related and home equity loans.

Total
loans grew $76,114,000 or 5.7%, from $1,331,956,000 at December 31, 2002, to $1,408,070,000 at December 31, 2003. The growth in loans was primarily the result of
increases in commercial, consumer and real estate loans. During 2003, real estate, consumer and commercial loans grew $77,404,000, $15,187,000 and $9,158,000 respectively. The growth in real estate
loans was in commercial mortgages, partially offset by a reduction in residential mortgages. Due to the continued low mortgage rate-driven refinancing activity during 2003, higher rate
mortgages in the Banks' portfolios were refinanced into lower rate mortgages. In an effort to reduce interest rate risk, the banks sold the majority of the fixed rate mortgages settled during 2003 and
did not add them to our mortgage portfolio. Residential mortgages sold during 2003 were $196,290,000 compared to $136,202,000 in 2002.

Consumer
loans grew primarily due to the growth in home equity lines of credit, partially offset by a reduction in indirect automobile dealer loans. The reduction in indirect automobile
dealer loans was due to the planned reduction in this loan portfolio resulting from the low profit margins currently existing in this market segment.

Table 3The following table shows the composition of the Banks' loans (in thousands):

|                          |             | December 31,
|------------------------- | ----------- | ------------
|
|Real estate               |             | $           
|Commercial and industrial |             |             
|Consumer loans            |             |             
|Lease financing           |             |             
|                          |             |             
|                          | Total loans |             
|                          |             |             

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Table 4The following table details maturities and interest sensitivity of real estate, commercial and
industrial, consumer loans and lease financing at December 31, 2003:

|                                               |       | Within
1 year |         | 1-5 Years |   | Over 5 years |         | Total
|---------------------------------------------- | ----- | ------------- | ------- | --------- | - | ------------ | ------- | -----
|
|Real estate                                    |       | $             | 145,942 |           | $ | 254,306      |         | $    
|Commercial and industrial                      |       |               | 240,662 |           |   | 106,194      |         |      
|Consumer                                       |       |               | 271,947 |           |   | 115,262      |         |      
|Lease financing                                |       |               | 33,989  |           |   | 27,530       |         |      
|                                               |       |               |         |           |   |              |         |      
|                                               | Total |               | $       | 692,540   |   | $            | 503,292 |      
|                                               |       |               |         |           |   |              |         |      
|Loans with variable or floating interest rates |       | $             | 504,378 |           | $ | 73,688       |         | $    
|Loans with fixed predetermined interest rates  |       |               | 188,162 |           |   | 429,604      |         |      
|                                               |       |               |         |           |   |              |         |      
|                                               | Total |               | $       | 692,540   |   | $            | 503,292 |      
|                                               |       |               |         |           |   |              |         |      

Table 5The following table details those loans that were placed on nonaccrual status, or were delinquent by
90 days or more and still accruing interest (in thousands):

|                 |       | December 31,
|---------------- | ----- | ------------
|
|Nonaccrual loans |       | $           
|Delinquent loans |       |             
|                 |       |             
|                 | Total |             
|                 |       |             

The Banks had no concentration of loans to individual borrowers which exceeded 10% of total loans at December 31, 2003 and 2002. The Banks
actively monitor the risk of this loan concentration. The Banks have no foreign loans, and the impact of nonaccrual and delinquent loans on total interest income was not material.

A
loan is generally classified as nonaccrual when principal or interest has consistently been in default for a period of 90 days or more or because of a deterioration in the
financial condition of the borrower or payment in full of principal or interest is not expected. Delinquent loans past due 90 days or more and still accruing interest are loans that are
generally well-secured and expected to be restored to a current status in the near future.

Loan
quality performance ratios at December 31, 2003 reflect the improvement in loan quality, compared to 2002. Nonperforming assets (nonaccruing loans, loans 90 days or
more past due and net assets in foreclosure) were 0.22% of total assets at December 31, 2003, compared to 0.27% at December 31, 2002, and 0.40% at December 31, 2001. The ratio of
nonperforming loans and leases to total net loans and leases was 0.32% at December 31, 2003, compared to 0.47% at December 31, 2002, and 0.63% at December 31, 2001.

Nonaccruing
loans decreased $1,766,000 from $5,109,000 at December 31, 2002, to $3,343,000 at December 31, 2003. All loan categories experienced decreases in nonaccrual
loans during 2003. The December 31, 2002, balance of nonaccrual loans was $1,245,000 lower than the December 31, 2001, balance of $6,354,000. During 2003, interest accrued on nonaccruing
loans and not recognized as interest income was $227,000, and interest paid on nonaccruing loans of $29,000 was recognized as interest income.

The
December 31, 2003 net assets in foreclosure balance of $935,000, increased from the $390,000 balance at December 31, 2002. During 2003, sales of foreclosed properties
totaled $1,232,000, transfers from loans to assets in foreclosure were $1,777,000. There were no write-downs of assets in foreclosure in 2003. Efforts to liquidate assets acquired in foreclosure are
proceeding as quickly as potential buyers can be located and legal constraints permit. Generally accepted accounting principles require foreclosed

10

---

assets
to be carried at the lower of cost (lesser of carrying value of asset or fair value at date of acquisition) or estimated fair value, less selling costs.

Loans
past due 90 days or more and still accruing interest are loans that are generally well secured and are in the process of collection. As of December 31, 2003, loans
past due 90 days or more and still accruing interest were $1,164,000, a slight decrease compared to $1,193,000 as of December 31, 2002. This decrease was primarily the result of a
reduction in commercial real estate related loans past due 90 days, partially offset with higher credit cards past due 90 days. Loans past due as of December 31, 2001 were
$1,926,000.

The
Banks use the reserve method of accounting for loan losses. The balance in the allowance for loan and lease losses is determined based on management's review and evaluation of the
loan portfolio in relation to past loss experience, the size and composition of the portfolio, current economic events and conditions, and other pertinent factors, including management's assumptions
as to future delinquencies, recoveries and losses. Additions to the allowances are charged to operations. The allowance for loan losses decreased 2.6% from $17,190,000 at December 31, 2002, to
$16,753,000 at December 31, 2003. Even though the actual allowance for loan losses decreased during 2003, the allowance for loan losses to nonperforming loans ratio at December 31, 2003
of 371.7%, was significantly higher than the December 31, 2002 ratio of 272.8%.

Table 6Analysis of Credit Risk

|                                                 |                            | December 31,
2003 |           | December 31,
2002 |   | December 31,
2001 |          
|------------------------------------------------ | -------------------------- | ----------------- | --------- | ----------------- | - | ----------------- | ---------
|Non-accrual loans                                |                            | $                 | 3,343,000 |                   | $ | 5,109,000         |          
|Loans and leases 90 days or more past due        |                            |                   | 1,164,000 |                   |   | 1,193,000         |          
|                                                 |                            |                   |           |                   |   |                   |          
|                                                 | Total nonperforming loans  |                   |           | 4,507,000         |   |                   | 6,302,000
|Net assets in foreclosure                        |                            |                   | 935,000   |                   |   | 390,000           |          
|                                                 |                            |                   |           |                   |   |                   |          
|                                                 | Total nonperforming assets |                   | $         | 5,442,000         |   | $                 | 6,692,000
|                                                 |                            |                   |           |                   |   |                   |          
|Allowance for loan losses to nonperforming loans |                            |                   | 371.7     | %                 |   | 272.8             | %        
|Nonperforming loans to total loans               |                            |                   | 0.32      | %                 |   | 0.47              | %        
|Allowance for loan to total loans                |                            |                   | 1.19      | %                 |   | 1.29              | %        
|Nonperforming assets to total assets             |                            |                   | 0.22      | %                 |   | 0.27              | %        

11

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Allowance for Loan Losses

Table 7A summary of the allowance for loan losses is as follows:

|                               |                                                       | December 31,            |          
|------------------------------ | ----------------------------------------------------- | ----------------------- | ---------
|
|Average loans                  |                                                       | $                       | 1,354,127
|                               |                                                       |                         |          
|Allowance, beginning of period |                                                       |                         | 17,190   
|                               |                                                       |                         |          
|Loans charged off:             |                                                       |                         |          
|                               | Commercial and Industrial                             |                         |          
|                               | Consumer                                              |                         |          
|                               | Real estate                                           |                         |          
|                               | Lease financing                                       |                         |          
|                               |                                                       |                         |          
|                               |                                                       | Total loans charged off |          
|                               |                                                       |                         |          
|Recoveries:                    |                                                       |                         |          
|                               | Commercial and Industrial                             |                         |          
|                               | Consumer                                              |                         |          
|                               | Real estate                                           |                         |          
|                               | Lease financing                                       |                         |          
|                               |                                                       |                         |          
|                               |                                                       | Total recoveries        |          
|                               |                                                       |                         |          
|                               | Net loans charged off                                 |                         |          
|                               |                                                       |                         |          
|                               | Provision for loan losses                             |                         |          
|                               |                                                       |                         |          
|                               | Allowance, end of period                              |                         | $        
|                               |                                                       |                         |          
|                               | Ratio of net charge offs to average loans outstanding |                         |          
|                               |                                                       |                         |          

Table 8The following table sets forth an allocation of the allowance for loan losses by category. The
specific allocations in any particular category may be reallocated in the future to reflect then current conditions. Accordingly, management considers the entire allowance to be available to absorb
losses in any category.

|                          |       | December 31, |      
|------------------------- | ----- | ------------ | -----
|
|
|
|Real estate               |       | $            | 3,919
|Commercial and industrial |       |              | 6,840
|Consumer                  |       |              | 4,990
|Lease financing           |       |              | 1,004
|                          |       |              |      
|                          | Total |              | $    
|                          |       |              |      

Allowance for Loan Losses

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

While
management considers the allowance for loan losses to be adequate based on information currently available, future additions to the allowance may be necessary due to changes in
economic

12

---

conditions
or management's assumptions as to future delinquencies, recoveries and losses and management's intent with regard to the disposition of loans and leases. In addition, the Office of the
Comptroller of the Currency, as an integral part of their examination process, periodically reviews the Banks' allowance for loan losses. The OCC may require the Banks to recognize additions to the
allowance for loan losses based on their judgements about information available to them at the time of their examination.

The
Banks' allowance for loan losses is the accumulation of various components that are calculated based on various independent methodologies. All components of the allowance for credit
losses are an estimation. Management bases its recognition and estimation of each allowance component on certain observable data that it believes is the most reflective of the underlying loan losses
being estimated. The observable data and accompanying analysis is directionally consistent, based upon trends, with the resulting component amount for the allowance for loan and lease losses. The
Banks' allowance for loan and lease losses components include the following: historical loss estimation by loan product type and by risk rating within each product type, payment (past due) status,
industry concentrations, internal and external variables such as economic conditions, credit policy and underwriting changes, competence of the loan review process and other historical loss model
imprecision. The Banks' historical loss component is the most significant component of the allowance for loan and lease losses, and all other allowance components are based on the inherent loss
attributes that management believes exist within the total portfolio that are not captured in the historical loss component.

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

The
historical loss components of the allowance for commercial loans are based principally on current risk ratings, historical loss rates adjusted, by adjusting the risk window, to
reflect current events and conditions, as well as analysis of other factors that may have affected the collectability of loans. The Banks analyze all commercial loans that have been identified as
having potential credit risk. The review is accomplished via Watchlist Memorandum, and designed to determine whether such loans are individually impaired, with impairment measured by reference to the
collateral coverage and/or debt service coverage. The historical loss component of the allowance for consumer loans is based principally on loan payment status, retail classification and historical
loss rates, adjusted by altering the risk window, to reflect current events and conditions.

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

The
historic loss model includes an imprecision component (soft factors and unallocated portion) that reflects management's belief that there were additional inherent credit losses based
on loss attributes not adequately captured in the lagging indicators. Furthermore, given that past-performance indicators may not adequately capture current risk levels, allowing for a
real-time adjustment enhances the validity of the loss recognition process. There are many credit risk management reports that are synthesized by credit management staff to assess the
direction of credit risk and its instant affect on losses. These reports include the exception tracking reports, the credit bureau score distribution report, the debt to income summary, etc. These are
a few of the many reports that drive the judgmental component. It is important to continue to use experiential data to confirm risk as measurable losses will continue to manifest themselves at higher
than normal levels even after the economic cycle has begun an upward swing and lagging indicators begin to show improvement.

13

---

Deposits and Borrowings and Other Interest-Bearing Liabilities

Deposits and other borrowings are the primary funding sources of the Corporation. During 2003, the Corporation defined a strategy to reduce higher costing time
deposits and grow lower costing core deposit (noninterest-bearing checking, interest-bearing checking, money market accounts and savings accounts). Total deposits of $1,979,081,000 at
December 31, 2003, decreased $741,000 from the $1,979,822,000 balance at December 31, 2002. This decrease was primarily the result of a $96,389,000, or 12.5% reduction in time deposits,
offset by a $95,648,000, or 7.9% rise in core deposits. Interest bearing checking, non-interest bearing deposits, savings deposits and money market deposits grew $33,961,000, $24,340,000,
$19,775,000 and $17,572,000, respectively during 2003. Time deposits under $100,000 decreased $35,145,000 and time deposits greater than $100,000 declined $61,244,000.

Deposit Structure

Table 9The following table is a distribution of average balances and average rates paid on the deposit categories for the
last three years:

|                           |       | December 31, |        
|-------------------------- | ----- | ------------ | -------
|
|
|
|Demandnoninterest-bearing |       | $            | 265,399
|Demandinterest-bearing    |       |              | 245,116
|Money market and savings   |       |              | 709,327
|Timeunder $100,000        |       |              | 509,757
|Time$100,000 or greater   |       |              | 198,300
|                           |       |              |        
|                           | Total |              | $      
|                           |       |              |        

Table 10The maturity distribution of certificates of deposit of $100,000 and over as of December 31,
2003 is as follows:

(Dollars in thousands)Three months or less

$
89,857Over three months to six months


57,332Over six months to twelve months


18,713Over twelve months


15,417Total

$
181,319


Other borrowings increased $1,150,000 from $248,906,000 at December 31, 2002 to $250,056,000 at December 31, 2003. This increase was
due to a $10,000,000 increase in Federal Home Loan Bank (FHLB) borrowings and a $3,000,000 rise in federal funds purchased. The additional FHLB funding was used to match fund commercial mortgages.
These increases in other borrowings were partially offset by a $11,850,000 decrease in securities sold under agreements to repurchase. During 2003, the Corporation paid off $29 million of FHLB
borrowings with rates over 6.0% prior to their scheduled maturity dates. This provided the opportunity to lock in historically low rates on new long-term borrowings. The early retirement
of these borrowings resulted in a $2,594,000 prepayment fee. Borrowings and other interest-bearing liabilities include federal funds purchased, FHLB borrowings, securities sold under agreements to
repurchase and U.S. Treasury demand notes.

Securities
sold under agreements to repurchase are generally overnight transactions. These borrowings had balances of $72,291,000, $84,141,000 and $80,393,000 at December 31,
2003, 2002 and 2001, respectively. Daily average balances and weighted average interest rates for the years ended December 31, 2003, 2002 and 2001 were $83,277,000, $83,750,000 and $88,417,000
and 0.87%, 1.51% and 3.35%, respectively. The maximum amount outstanding at any month-end during 2003, 2002, and 2001 were $101,991,000, $96,665,000, and $96,224,000, respectively.

14

---

Income Statement Analysis

Results of Operations

The 2003 net income of $35,333,000 increased $2,406,000, or 7.3% from the 2002 net income of $32,927,000. On a per share basis, diluted earnings were $1.44 in
2003 and $1.34 in 2002, a 7.5% increase. Basic earnings per share were $1.48 in 2003 compared to $1.38 in 2002. Net income increased in 2002 by $4,107,000, or 14.3% over 2001.

The
2003 return on average shareholders' equity of 16.29% was lower than the 16.60% for 2002 and higher than the 15.82% in 2001. The 2003 and 2002 return on average assets were both
1.43% and the 2001 ratio was 1.40%. Excluding accumulated other comprehensive income, the annualized return on average realized shareholders' equity for 2003, 2002 and 2001 were 16.87% and 17.06% and
16.23%, respectively.

Net
income is affected by five major elements: (1) net interest income, or the difference between interest income earned on loans and investments and interest expense paid on
deposits and borrowed funds; (2) the provision for loan losses, or the amount added to the allowance for loan losses to provide reserves for future losses on loans; (3) other operating
income, which is made up primarily of certain service fees and Investment Management and Trust Services income; (4) other operating expenses, which consist primarily of salaries and other
operating expenses; and (5) income taxes. Each of these major elements is reviewed in more detail in the following discussion.

Net Interest Income

The 2003 net interest income of $79,121,000 decreased $899,000, or 1.1%, from 2002 levels. Net interest income was $80,020,000 in 2002, which was 8.5% higher than
the $73,742,000 reported in 2001. The decrease in the 2003 net interest income was the result of the continued pressures of interest rates reaching 45-year lows. The year ended with
positive net interest income growth in the fourth quarter of the 2003. The Corporation recognized a 8.4% increase in the net interest income during the fourth quarter of 2003, compared to the fourth
quarter of 2002.



For
analytical purposes, the following table reflects tax-equivalent net interest income in recognition of the income tax savings on tax-exempt items such as
interest on municipal securities and tax-exempt loans. Adjustments are made using a statutory federal tax rate of 35%.

Year Ended December 31,2003

2002

2001(Dollars in thousands)Interest income

$
119,200

$
132,630

$
138,679Interest expense


40,079


52,610


64,937Net interest income


79,121


80,020


73,742Tax equivalent adjustment


9,589


7,325


5,792Net interest income

$
88,710

$
87,345

$
79,534


15

---

Table 12The rate volume analysis set forth in the following table, which is computed on a
tax-equivalent basis (tax rate of 35%), analyzes changes in net interest income for the last three years by their rate and volume components.

|                  |                                                   | 2003 Over (Under) 2002 |   | 2002 Over (Under) 2001
|----------------- | ------------------------------------------------- | ---------------------- | - | ----------------------
|
|
|
|
|Interest Income:  |                                                   |                        |   |                       
|                  | Investment securities(1)                          |                        | $ | (3,841                
|                  | Loans(1)                                          |                        |   | (7,117                
|                  | Other rate-sensitive assets                       |                        |   | (208                  
|                  |                                                   |                        |   |                       
|                  |                                                   | Total                  |   |                       
|                  |                                                   |                        |   |                       
|Interest Expense: |                                                   |                        |   |                       
|                  | Savings deposits                                  |                        |   | (4,283                
|                  | Time deposits                                     |                        |   | (7,803                
|                  | Borrowings and other interest bearing liabilities |                        |   | (445                  
|                  |                                                   |                        |   |                       
|                  |                                                   | Total                  |   |                       
|                  |                                                   |                        |   |                       
|                  | Changes in net interest income                    |                        | $ | 1,365                 
|                  |                                                   |                        |   |                       

---

The 2003 tax-equivalent net interest income was $88,710,000 for 2003, compared to $87,345,000 for 2002, an increase of $1,365,000, or
1.6%. This increase in tax-equivalent net interest income was primarily due to the net $6,398,000 increase related to volume, partially offset by a decrease related to interest rates of
$5,033,000. Total interest income decreased $11,166,000, the result of lower rates earned within each earning asset category, partially offset by higher volumes. The 2003 higher earning asset volumes
were primarily due to a 15.5% increase in average investments. Total average loans grew 1.6% during 2003. The increase in investment securities was primarily funded by the 6.6% growth in average
deposits and the 9.3% increase in other borrowings during 2003.

Total
interest expense decreased $12,531,000 during 2003 or 23.8%, compared to 2002. This decrease was the result of the lower interest rate environment experienced during 2003 and the
Corporation's strategy of decreasing higher costing time deposits. The decrease related to interest rates was partially offset by higher deposit and other borrowing levels. Average interest bearing
core deposits (interest bearing checking accounts, money market accounts and savings accounts) grew 15.9%, while average time deposits decreased 5.3%. Average borrowings and other interest-bearing
volumes increased 9.3% during 2003. Borrowings and other interest-bearing liabilities include federal funds purchased, Federal Home Loan Bank (FHLB) borrowings, securities sold under agreements to
repurchase and U.S. Treasury notes.

Tax-equivalent
net interest income in 2002 was $87,345,000, a $7,811,000 increase compared to $79,534,000 for 2001. This increase in tax-equivalent net interest
income was primarily due to the $8,454,000 increase related to volumes, partially offset by the $643,000 decrease in net interest income related to rates. The growth in earning asset volumes was
primarily due to investment securities and loans of 24.5% and 5.4%, respectively. During 2002 average interest-bearing deposit grew 13.8% and average other borrowings increased 9.3%.

16

---

Net Interest Margin

The 2003 net interest margin of 3.80% was lower than the net interest margins for 2002 and 2001 of 4.00% and 4.09%, respectively. The lower interest rate
environment during the last few years has impacted the net interest margin. The Corporation did see an improvement in the net interest margin during the fourth quarter of 2003. The fourth quarter of
2003 net interest margin of 3.82% was higher than the fourth quarter of 2002 net interest margin of 3.64%. The tax-equivalent yield on total interest-earning assets decreased 89 basis
points from 6.41% in 2002 to 5.52% in 2003. The 2003 interest expense to average earning assets ratio of 1.72%, decreased 69 basis points from 2002. The 89 basis point drop in the yield on earning
assets was higher than the 69 basis point drop in interest expense to earnings assets ratio, resulting in the 20 basis point drop in the 2003 net interest margin, compared to 2002. The
tax-equivalent yield on total interest-earnings assets in 2001 was 7.43% and the 2001 cost of interest-bearing liabilities was 3.34%, resulting in a net interest margin of 4.09%.

Table 13Balance Sheet Analysis

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

Distribution of Assets, Liabilities and Shareholders' Equity, Interest Rates and Interest Differential:

|                                                       |                             | Year Ended December 31,                   
|------------------------------------------------------ | --------------------------- | ------------------------------------------
|
|
|
|Assets                                                 |                             |                                           
|Investment securities:                                 |                             |                                           
|                                                       | Taxable Investments         |                                           
|                                                       | Nontaxable investments(1)   |                                           
|                                                       |                             |                                           
|                                                       |                             | Total investment securities               
|                                                       | Loans(1)(2)                 |                                           
|                                                       | Other rate-sensitive assets |                                           
|                                                       |                             |                                           
|                                                       |                             | Total earning assets                      
|                                                       |                             |                                           
|                                                       | Noninterest-earning assets  |                                           
|                                                       |                             |                                           
|                                                       |                             | Total assets                              
|                                                       |                             |                                           
|Liabilities and Shareholders' Equity Deposits:         |                             |                                           
|                                                       | Demand                      |                                           
|                                                       | Savings                     |                                           
|                                                       | Time                        |                                           
|                                                       |                             |                                           
|                                                       |                             | Total                                     
|Borrowings and other interest-
bearing liabilities     |                             |                                           
|Other liabilities                                      |                             |                                           
|                                                       |                             |                                           
|                                                       |                             | Total liabilities                         
|                                                       |                             |                                           
|Shareholders' equity                                   |                             |                                           
|                                                       |                             | Total liabilities and
shareholders' equity
|                                                       |                             |                                           
|Average effective rate on
interest-bearing liabilities |                             | $                                         
|                                                       |                             |                                           
|Interest Income/Earning Assets                         |                             | $                                         
|Interest Expense/Earning Assets                        |                             | $                                         
|                                                       |                             |                                           
|Effective Interest Differential                        |                             |                                           
|                                                       |                             |                                           

---

17

---

Interest Rate Sensitivity Analysis

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

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

The
Corporation entered into three interest-rate swaps with a notional value totaling $45.0 million during 2003. As of December 31, 2003, these
interest-rate swaps have a positive fair market value of $173,000.



The Corporation uses three principal reports to measure interest rate risk: asset/ liability simulation reports; gap analysis reports; and net interest margin
reports. The Corporation's interest rate sensitivity, as measured by the repricing of its interest sensitive assets and liabilities at December 31, 2003, is presented in Table 13. The data in
the table was based in part on assumptions that are regularly reviewed for accuracy. The table presents data at a single point in time and includes management assumptions estimating the prepayment
rate and the interest rate environment prevailing

18

---

at
December 31, 2003. The table indicates an asset sensitive one-year cumulative gap position of 14.66% of total earning assets.

|                                   |       | December 31, 2003 |        
|---------------------------------- | ----- | ----------------- | -------
|
|
|ASSETS                             |       |                   |        
|Other rate-sensitive assets        |       | $                 | 38,551 
|Loans                              |       |                   | 512,705
|Investment securities              |       |                   | 278,507
|                                   |       |                   |        
|                                   | Total |                   |        
|                                   |       |                   |        
|LIABILITIES                        |       |                   |        
|Noninterest-bearing deposits       |       |                   | 294,121
|Time deposits                      |       |                   | 150,816
|Money market funds                 |       |                   | 21,095 
|Interest-bearing checking accounts |       |                   | 7,210  
|Savings accounts                   |       |                   | 7,476  
|Other borrowings                   |       |                   | 92,306 
|                                   |       |                   |        
|                                   | Total |                   |        
|                                   |       |                   |        
|Incremental gap                    |       | $                 | 256,739
|                                   |       |                   |        
|Cumulative gap*                    |       | $                 | 256,739
|                                   |       |                   |        
|% of earning assets                |       |                   | 10.82  
|                                   |       |                   |        

---

Management
also simulates possible economic conditions and interest rate scenarios in order to quantify the impact on net interest income. The effect that changing
interest rates have on the Corporation's net interest income is simulated by increasing and decreasing interest rates. This simulation is known as rate shocking. The report below forecasts changes in
the Corporation's market value of equity under alternative interest rate environments. The market value of equity is defined as the net present value of the Corporation's existing assets and
liabilities. The results of the December 31, 2003, rate shock simulations show that the Corporation is within all guidelines set by the Corporation's Asset/Liability policy.



|                   |  | Market Value
of Equity |  | Change in
Market Value
of Equity |   | Percentage
Change |   | Asset/Liability
Approved
Percent Change |  
|------------------ |  | ---------------------- |  | -------------------------------- | - | ----------------- | - | --------------------------------------- | -
|+300 Basis Points  |  | 303,986                |  | (33,748                          | ) | -9.99             | % | +/- 45                                  | %
|+200 Basis Points  |  | 322,599                |  | (15,135                          | ) | -4.48             | % | +/- 30                                  | %
|+100 Basis Points  |  | 341,530                |  | 3,796                            |   | 1.12              | % | +/- 15                                  | %
|Flat Rate          |  | 337,734                |  |                                 |   | 0.00              | % |                                        |  
|- 100 Basis Points |  | 314,310                |  | (23,424                          | ) | -6.94             | % | +/- 15                                  | %
|- 200 Basis Points |  | 287,659                |  | (50,075                          | ) | -14.83            | % | +/- 30                                  | %
|- 300 Basis Points |  | 266,338                |  | (71,396                          | ) | -21.14            | % | +/- 45                                  | %

19

---

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

Provision for Loan Losses

The provision for loan losses of $3,200,000 for 2003, reflected a decrease of $1,170,000, compared to the 2002 provision of $4,370,000. The decrease in the
provision during 2003 is based on management's analysis of the adequacy of the reserve for losses in the loan portfolio. The allowance for loan losses to nonperforming loans ratio for
December 31, 2003, 2002 and 2001 were 371.7%, 272.8%, and 187.9%, respectively. Total net loans charged off in 2003, 2002 and 2001 were $3,637,000, $2,738,000 and $3,582,000, respectively.

Other Operating Income

The 2003 other operating income of $27,638,000 increased $5,115,000, or 22.7% higher than the $22,523,000 earned in 2002. This rise in other operating income is
primarily the result of increases in security gains and income on life insurance of $3,138,000 and $1,119,000, respectively. Net of security gains and income on life insurance, other operating income
grew 4.5%. This growth was primarily the result of increased service charges on deposit accounts.

Service
charges on deposit accounts of $7,855,000 in 2003 increased $923,000, or 13.5%, from the 2002 income from service charges on deposit accounts of $6,923,000. This rise is the
result of management's continued effort to institute equitable fees for services performed and to closely manage the collection of these fees. The growth in 2003 overdraft fees contributed $732,000 of
this increase. The remaining increase is related to the fees associated with the 15.0% growth in average fee generating deposits in 2003, compared to 2002.

The
2003 net security gains on the sale of securities available for sale of $6,613,000 in 2003, were $3,138,000 higher than the $3,475,000 gains recorded in 2002. The Corporation sells
investment securities available for sale to fund the purchase of other securities in an effort to enhance the overall
return of the portfolio, and to reduce the interest rate risk within different interest rate environments. The 2001 net security gains were $4,629,000.

Income
from the Investment Management and Trust Services Division of $3,837,000 increased $73,000 in 2003, compared to 2002. This increase was the result of higher fees related to retail
investment sales. The 2001 income from the Investment Management and Trust Services Division was $3,300,000.

The
Corporation's bank owned life insurance (BOLI) income decreased $74,000, or 2.8%, to $2,615,000 during 2003, compared to $2,689,000 in 2002. This reduction is related to the
reinvestment of maturing BOLI investments into the current lower rate market environment. BOLI involves the purchasing of life insurance by the Corporation on a chosen group of employees. The
Corporation is the owner and beneficiary of the policies. This pool of insurance, due to tax advantages to the Banks, is profitable to the Corporation. This profitability is used to offset a portion
of future employee benefit cost increases. Bank deposits fund BOLI and the earnings from BOLI are recognized as other operating income. The Corporation recognized $2,472,000 of BOLI income in 2001.

The
2003 other income decreased $73,000 during 2003, compared to 2002, as a result of lower fees generated by HNC Reinsurance Company. HNC Reinsurance Company was formed during 2001 to
generate fees through reinsuring consumer loan credit life and accident and health insurance. During

20

---

2003,
fees generated from HNC Reinsurance Company decreased $1,111,000, compared to 2002. This reduction is due to the decrease in new consumer installment loans generated and a regulatory change
related to the timing of the recognition of insurance income. The 2003 other income reduction associated to HNC Reinsurance Company of $1,111,000 was offset by lower other expenses related to HNC
Reinsurance Company of $1,007,000. Net of the reduction in fees generated by HNC Reinsurance Company, other income grew $1,038,000 or 21.0%. This growth was the result of increases in gains on the
sale of residential mortgage loans, mortgage servicing fees and ATM fees. The other income in 2001 of $6,354,000 was higher than the 2002 net income primarily due to higher fees generated by HNC
Reinsurance Company.

Other Operating Expenses

The Corporation's ratio of overhead expenses to average assets was 2.42% as of December 31, 2003, improved from 2.44% at December 31, 2002. The 2003
ratio was well below our peer ratio of 3.05% at September 30, 2003. Other operating expenses rose to $59,629,000 in 2003, an increase of $3,332,000, or 5.9% increase over the $56,297,000
recorded in 2002. During 2003, the Corporation paid off approximately $29 million of FHLB borrowings with rates over 6.0% prior to their scheduled maturity dates. This provided the opportunity
to lock in historically low rates on new long-term borrowings. The early retirement of these borrowings resulted in a $2,594,000 prepayment fee. The
2003 expenses related to HNC Reinsurance Company were $1,007,000 less than 2002, due to a decrease in new policies generated. Net of the prepayment fee and the reduction in HNC Reinsurance Company
expenses, other operating expenses increased $1,745,000, or 3.1%

The
2003 employee salaries and benefits of $31,173,000 increased $1,360,000, or 4.6%, from $29,813,000 in 2002. The increase in 2003 salaries was 6.5% and benefits decreased 3.4%. The
increase in salaries reflects additional staff necessitated by the growth of the Corporation, and both cost-of-living and merit increases. The decrease in employee benefits is
the result of lower pension expenses, partially offset by higher medical insurance cost. The 2002 salaries and benefits expense increased 11.8% over the 2001 salary and benefits expense of
$26,668,000.

The
2003 net occupancy costs decreased by $59,000, or 1.5%, compared to the 2002 net occupancy expense of $3,829,000. Included in the 2002 net occupancy expense was a $365,000 expense
related to a branch closure during the first quarter of 2002. Net of this branch closing related expense, occupancy expenses grew $306,000, or 8.8% in 2003. Contributing to this increase were higher
expenses relating to snow removal, real estate taxes and utility expenses. Furniture and equipment expenses increased $308,000, or 5.6%, during 2003. The 2003 increase was the result of expenses
related to equipment required for a new operational center and the continued enhancement of sales and application processing systems for the branches.

Other
expenses decreased $871,000, or 5.1%, from $17,120,000 in 2002 to $16,249,000 in 2003. This decrease was related to the $1,007,000 lower HNC Reinsurance Company expenses recorded
in 2003. Net of this reduction, the 2003 other expenses were $136,000, or 0.8% higher than 2002. This increase in other expense was the result of a higher advertising, postage and insurance expenses.
The 2002 other expenses were 13.7% lower than 2001, primarily due to both lower HNC Reinsurance Company expenses and the off-lease vehicle residual reserve expense.

Income Taxes

The Corporation accounts for income taxes under the liability method specified by SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109,
deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Under SFAS No. 109, the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. The

21

---

principal
types of accounts resulting in differences between assets and liabilities for financial statement and tax return purposes are the allowance for loan losses, leased assets, deferred loan fees
and compensation.

Capital

Capital formation is important to the Corporation's well being and future growth. Capital, at the end of 2003, was $227,053,000, an increase of $20,847,000, or
10.1%, over the end of 2002. The increase was due to the retention of the Corporation's earnings and an increase in accumulated other comprehensive income, partially offset by the purchase of treasury
stock. The accumulated other comprehensive income at December 31, 2003 was a gain of $8,098,000, compared to a gain of $6,937,000 at December 31, 2002. The corporation purchased
$2,271,000 of treasury stock during 2003, compared to $6,244,000 in 2002. Management believes that the Corporation's current capital position and liquidity position are strong and that its capital
position is adequate to support its operations. Management is not aware of any recommendation by any regulatory authority, which, if it were to be implemented, would have a material effect on the
Corporation's capital.

Pursuant
to the federal regulators' risk-based capital adequacy guidelines, the components of capital are called Tier 1 and Tier 2 capital. For the Corporation, Tier 1
capital is shareholders' equity and Tier 2 capital is the allowance for loan losses. The risk-based capital ratios are computed by dividing the components of capital by
risk-adjusted assets. Risk-adjusted assets are determined by assigning credit risk-weighting factors from 0% to 100% to various categories of assets and
off-balance sheet financial instruments. The minimum for the Tier 1 capital ratio is 4.0%, and the total capital ratio (Tier 1 plus Tier 2 capital divided by risk-adjusted
assets) minimum is 8.0%. At December 31, 2003, the Corporation's Tier 1 risk-adjusted capital ratio was 12.66%, and the total risk-adjusted capital ratio was 13.73%,
both well above regulatory requirements. The risk-based capital ratios of each of the Corporation's commercial banks also exceeded regulatory requirements at the end of 2003.

To
supplement the risk-based capital adequacy guidelines, the Federal Reserve Board (FRB) established a leverage ratio guideline. The leverage ratio consists of Tier 1
capital divided by quarterly average total assets, excluding intangible assets. The minimum leverage ratio guideline is 3% for banking organizations that do not anticipate significant growth and that
have well-diversified risk, excellent asset quality, high liquidity, good earnings and, in general, are considered top-rated, strong banking organizations. Other banking
organizations are expected to have ratios of at least 4% or 5%, depending upon their particular condition and growth plans. Higher leverage ratios could be required by the particular circumstances or
risk profile of a given banking organization. The Corporation's leverage ratios were 8.79% and 8.19% at December 31, 2003 and 2002, respectively.

Under
FDIC regulations, a "well capitalized" institution must have a leverage ratio of at least 5%, a Tier 1 risk-based capital ratio of at least 6% and a total
risk-based capital ratio of at least 10% and not be subject to a capital directive order. To be considered "adequately capitalized" an institution must generally have a leverage ratio of
at least 4%, a Tier 1 risk-based capital ratio of at least 4% and a total risk-based capital ratio of at least 8%. An institution is deemed to be "critically under capitalized"
if it has a tangible equity ratio of 2% or less. As of December 31, 2003, the Banks are above the regulatory minimum guidelines and meet the criteria to be categorized as "well capitalized"
institutions.

Liquidity

Liquidity is a measure of the ability of the Banks to meet their needs and obligations on a timely basis. For a bank, liquidity requires the ability to meet the
day-to-day demands of deposit customers, and the ability to fulfill the needs of borrowing customers. Generally, the Banks arrange their mix of cash, money market investments,
investment securities and loans in order to match the volatility,

22

---

seasonality,
interest sensitivity and growth trends of its deposit funds. The liquidity measurement is based on the asset/liability model's projection of potential sources and uses of funds for the
next 120 days. The resulting projections as of December 31, 2003, show the potential sources of funds exceeding the potential uses of funds. The Corporation has external sources of
funds, which can be drawn upon when funds are required. The primary source of external liquidity is an available line of credit with the FHLB of Pittsburgh. Unused lines of credit at the FHLB of
Pittsburgh were $291,204,000, as of December 31, 2003. The Banks also have unused federal funds lines of credit of $60,000,000 and non-pledged investment securities available for
sale of $434,119,000 as of December 31, 2003.

There
are no known trends or any known demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in liquidity increasing or decreasing in
any material way. Footnote number 13 contains information concerning the approximate minimum rental commitments for existing operating leases at December 31, 2003.

The
following table sets forth contractual obligations and other commitments representing required and potential cash outflows as of December 31, 2003:

|                                                  |  | Total |           | Within
one year |   | After one
but within
three years |  | After three
but within
five years |         | After five
years
|------------------------------------------------- |  | ----- | --------- | --------------- | - | -------------------------------- |  | --------------------------------- | ------- | ----------------
|Minimum annual operating leases                   |  | $     | 13,535    |                 | $ | 2,054                            |  | $                                 | 2,533   |                 
|Remaining contractual maturities of time deposits |  |       | 673,059   |                 |   | 379,906                          |  |                                   | 221,028 |                 
|Long-term borrowings                              |  |       | 172,750   |                 |   |                                 |  |                                   | 20,000  |                 
|Loan lines of credit                              |  |       | 486,929   |                 |   | 254,773                          |  |                                   | 232,156 |                 
|Unfunded residential mortgages                    |  |       | 2,257     |                 |   | 2,257                            |  |                                   |        |                 
|Standby letters of credit                         |  |       | 13,644    |                 |   | 13,644                           |  |                                   |        |                 
|                                                  |  |       |           |                 |   |                                  |  |                                   |         |                 
|Total                                             |  | $     | 1,362,174 |                 | $ | 652,634                          |  | $                                 | 475,717 |                 
|                                                  |  |       |           |                 |   |                                  |  |                                   |         |                 

Market Information

The following table sets forth quarterly dividend information and the high and low prices for the Corporation's common stock for 2003 and 2002. The Corporation's
stock is traded under the symbol HNBC on the NASDAQ National Market Systems.

Table 16Price of Common Stock

2003

Low Price

High Price

DividendFirst Quarter*

$
19.46

$
21.36

$
0.152Second Quarter*


19.61


23.73


0.152Third Quarter


20.80


26.31


0.160Fourth Quarter


23.08


32.70


0.190


2002

Low Price

High Price

DividendFirst Quarter**

$
16.76

$
18.67

$
0.130Second Quarter**


17.52


21.46


0.130Third Quarter*


17.19


21.80


0.137Fourth Quarter*


18.33


21.40


0.167


---

The
corporation has a stock repurchase program that permits the repurchase of 5% (approximately 1,189,000 shares) of its outstanding common stock. The repurchased shares will be used for
general corporate purposes. A total of 822,633 shares have been repurchased since 2000, when stock
repurchases began, through December 31, 2003. The shares purchased during 2003 and 2002 were 253,526 and 477,741, respectively. At December 31, 2003, there were 3,413 shareholders.

23

---



HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES  CONSOLIDATED BALANCE SHEETS

|                                                                                     |                                                                                                                                    | December 31               |                                           
|------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | ------------------------------------------
|
|
|Assets                                                                               |                                                                                                                                    |                           |                                           
|Cash and due from banks                                                              |                                                                                                                                    | $                         | 56,306                                    
|Federal funds sold                                                                   |                                                                                                                                    |                           | 30,000                                    
|Interest-bearing deposits in banks                                                   |                                                                                                                                    |                           | 8,551                                     
|                                                                                     |                                                                                                                                    |                           |                                           
|                                                                                     |                                                                                                                                    |                           | Total cash and cash equivalents           
|Investment securities available for sale                                             |                                                                                                                                    |                           | 904,870                                   
|Investment securities held to maturity (fair value $21,497 and $23,650 respectively) |                                                                                                                                    |                           | 20,004                                    
|Loans                                                                                |                                                                                                                                    |                           | 1,408,070                                 
|Less: Deferred costs, net                                                            |                                                                                                                                    |                           | 321                                       
|                                                                                     | Allowance for loan losses                                                                                                          |                           |                                           
|                                                                                     |                                                                                                                                    |                           |                                           
|                                                                                     |                                                                                                                                    |                           | Net loans                                 
|                                                                                     |                                                                                                                                    |                           |                                           
|Bank premises and equipment, net                                                     |                                                                                                                                    |                           | 23,329                                    
|Accrued interest receivable                                                          |                                                                                                                                    |                           | 10,169                                    
|Net assets in foreclosure                                                            |                                                                                                                                    |                           | 935                                       
|Bank-owned life insurance                                                            |                                                                                                                                    |                           | 50,693                                    
|Other assets                                                                         |                                                                                                                                    |                           | 14,444                                    
|                                                                                     |                                                                                                                                    |                           |                                           
|                                                                                     |                                                                                                                                    |                           | Total assets                              
|                                                                                     |                                                                                                                                    |                           |                                           
|Liabilities and Shareholders' Equity                                                 |                                                                                                                                    |                           |                                           
|Deposits                                                                             |                                                                                                                                    |                           |                                           
|                                                                                     | Noninterest-bearing                                                                                                                |                           | $                                         
|                                                                                     | Interest-bearing:                                                                                                                  |                           |                                           
|                                                                                     |                                                                                                                                    | Checking accounts         |                                           
|                                                                                     |                                                                                                                                    | Money market accounts     |                                           
|                                                                                     |                                                                                                                                    | Savings                   |                                           
|                                                                                     |                                                                                                                                    | Time, under $100,000      |                                           
|                                                                                     |                                                                                                                                    | Time, $100,000 or greater |                                           
|                                                                                     |                                                                                                                                    |                           |                                           
|                                                                                     |                                                                                                                                    |                           | Total deposits                            
|Accrued interest payable                                                             |                                                                                                                                    |                           | 22,920                                    
|U.S. Treasury demand notes                                                           |                                                                                                                                    |                           | 2,015                                     
|Federal funds purchased                                                              |                                                                                                                                    |                           | 3,000                                     
|Securities sold under agreements to repurchase                                       |                                                                                                                                    |                           | 72,291                                    
|Long-term borrowings                                                                 |                                                                                                                                    |                           | 172,750                                   
|Guaranteed preferred beneficial interest in Corporation's subordinated debentures    |                                                                                                                                    |                           | 5,000                                     
|Other liabilities                                                                    |                                                                                                                                    |                           | 26,829                                    
|                                                                                     |                                                                                                                                    |                           |                                           
|                                                                                     |                                                                                                                                    |                           | Total liabilities                         
|                                                                                     |                                                                                                                                    |                           |                                           
|Shareholders' equity:                                                                |                                                                                                                                    |                           |                                           
|                                                                                     | Series preferred stock, par value $1 per share; authorized 8,000,000 shares,
none issued                                           |                           |                                           
|                                                                                     | Common stock, par value $1 per share; authorized 75,000,000 shares;
issued 24,667,707 shares in 2003 and 19,597,290 shares in 2002 |                           |                                           
|                                                                                     | Additional paid-in capital                                                                                                         |                           |                                           
|                                                                                     | Retained earnings                                                                                                                  |                           |                                           
|                                                                                     | Treasury stock, at cost: 822,633 shares in 2003 and 569,107 shares in 2002                                                         |                           |                                           
|                                                                                     | Accumulated other comprehensive income                                                                                             |                           |                                           
|                                                                                     |                                                                                                                                    |                           |                                           
|                                                                                     |                                                                                                                                    |                           | Total shareholders' equity                
|                                                                                     |                                                                                                                                    |                           |                                           
|                                                                                     |                                                                                                                                    |                           | Total liabilities and shareholders' equity
|                                                                                     |                                                                                                                                    |                           |                                           

See accompanying notes to consolidated financial statements.

24

---



HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF INCOME

|                                            |                           | Year Ended December 31
|------------------------------------------- | ------------------------- | ----------------------
|
|
|Interest income                             |                           |                       
|Loans, including fees                       |                           | $                     
|Lease financing                             |                           |                       
|Investment securities:                      |                           |                       
|                                            | Taxable                   |                       
|                                            | Exempt from federal taxes |                       
|Federal funds sold                          |                           |                       
|Deposits in banks                           |                           |                       
|                                            |                           |                       
|                                            |                           |                       
|                                            |                           |                       
|Interest expense                            |                           |                       
|Savings deposits                            |                           |                       
|Time, under $100,000                        |                           |                       
|Time, $100,000 or greater                   |                           |                       
|Borrowed funds                              |                           |                       
|                                            |                           |                       
|                                            |                           |                       
|                                            |                           |                       
|                                            |                           |                       
|Provision for loan losses                   |                           |                       
|                                            |                           |                       
|                                            |                           |                       
|                                            |                           |                       
|Other operating income                      |                           |                       
|Service charges                             |                           |                       
|Gains on the sales of investment securities |                           |                       
|Trust and investment services income        |                           |                       
|Bank-owned life insurance income            |                           |                       
|Income on life insurance                    |                           |                       
|Other income                                |                           |                       
|                                            |                           |                       
|                                            |                           |                       
|                                            |                           |                       
|                                            |                           |                       
|                                            |                           |                       
|Other operating expenses                    |                           |                       
|Salaries, wages and employee benefits       |                           |                       
|Occupancy                                   |                           |                       
|Furniture and equipment                     |                           |                       
|Prepayment fee                              |                           |                       
|Other expenses                              |                           |                       
|                                            |                           |                       
|Total other operating expenses              |                           |                       
|                                            |                           |                       
|                                            |                           |                       
|                                            |                           |                       
|                                            |                           |                       
|Net income                                  |                           | $                     
|                                            |                           |                       
|Weighted average number of common shares:   |                           |                       
|                                            | Diluted                   |                       
|                                            | Basic                     |                       
|Net income per share information:           |                           |                       
|                                            | Diluted                   |                       
|                                            |                           |                       
|                                            | Basic                     |                       
|                                            |                           |                       
|Cash dividends per share                    |                           | $                     
|                                            |                           |                       

See accompanying notes to consolidated financial statements.

25

---



HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

|                                                             |  | Common Stock |  |   |        |  |   |        |   |   |         |   |   |      
|------------------------------------------------------------ |  | ------------ |  | - | ------ |  | - | ------ | - | - | ------- | - | - | -----
|
|
|
|Balance January 1, 2001                                      |  | 9,254        |  | $ | 9,254  |  | $ | 79,869 |   | $ | 83,244  |   | $ | 1,422
|Stock options                                                |  | 44           |  |   | 44     |  |   | 812    |   |   |        |   |   |     
|Stock dividends                                              |  | 9,273        |  |   | 9,273  |  |   | (9,273 | ) |   |        |   |   |     
|Stock awards                                                 |  |             |  |   |       |  |   | 11     |   |   |        |   |   |     
|Net income for 2001                                          |  |             |  |   |       |  |   |       |   |   | 28,820  |   |   |     
|Other comprehensive income, net of reclassifications and tax |  |             |  |   |       |  |   |       |   |   |        |   |   | 3,112
|Purchases of Treasury stock                                  |  |             |  |   |       |  |   |       |   |   |        |   |   |     
|Cash dividends                                               |  |             |  |   |       |  |   |       |   |   | (11,893 | ) |   |     
|                                                             |  |              |  |   |        |  |   |        |   |   |         |   |   |      
|Comprehensive Income                                         |  |              |  |   |        |  |   |        |   |   |         |   |   |      
|                                                             |  |              |  |   |        |  |   |        |   |   |         |   |   |      
|Balance December 31, 2001                                    |  | 18,571       |  |   | 18,571 |  |   | 71,419 |   |   | 100,171 |   |   | 4,534
|Stock options                                                |  | 94           |  |   | 94     |  |   | 1,166  |   |   |        |   |   |     
|Stock dividends                                              |  | 932          |  |   | 932    |  |   | 23,994 |   |   | (24,942 | ) |   |     
|Stock awards                                                 |  |             |  |   |       |  |   | 6      |   |   |        |   |   |     
|Net income for 2002                                          |  |             |  |   |       |  |   |       |   |   | 32,927  |   |   |     
|Other comprehensive income, net of reclassifications and tax |  |             |  |   |       |  |   |       |   |   |        |   |   | 2,403
|Purchases of Treasury stock                                  |  |             |  |   |       |  |   |       |   |   |        |   |   |     
|Cash dividends                                               |  |             |  |   |       |  |   |       |   |   | (13,479 | ) |   |     
|                                                             |  |              |  |   |        |  |   |        |   |   |         |   |   |      
|Comprehensive income                                         |  |              |  |   |        |  |   |        |   |   |         |   |   |      
|                                                             |  |              |  |   |        |  |   |        |   |   |         |   |   |      
|Balance December 31, 2002                                    |  | 19,597       |  |   | 19,597 |  |   | 96,585 |   |   | 94,677  |   |   | 6,937
|Stock options                                                |  | 142          |  |   | 142    |  |   | 2,055  |   |   |        |   |   |     
|Stock dividend                                               |  | 4,929        |  |   | 4,929  |  |   |       |   |   | (4,942  | ) |   |     
|Stock awards                                                 |  |             |  |   |       |  |   | 6      |   |   |        |   |   |     
|Net Income for 2003                                          |  |             |  |   |       |  |   |       |   |   | 35,333  |   |   |     
|Other comprehensive income, net of reclassifications and tax |  |             |  |   |       |  |   |       |   |   |        |   |   | 1,161
|Purchase of Treasury stock                                   |  |             |  |   |       |  |   |       |   |   |        |   |   |     
|Cash Dividends                                               |  |             |  |   |       |  |   |       |   |   | (15,566 | ) |   |     
|                                                             |  |              |  |   |        |  |   |        |   |   |         |   |   |      
|Comprehensive income                                         |  |              |  |   |        |  |   |        |   |   |         |   |   |      
|                                                             |  |              |  |   |        |  |   |        |   |   |         |   |   |      
|Balance December 31, 2003                                    |  | 24,668       |  | $ | 24,668 |  | $ | 98,646 |   | $ | 109,502 |   | $ | 8,098
|                                                             |  |              |  |   |        |  |   |        |   |   |         |   |   |      

See accompanying notes to consolidated financial statements.

26

---



HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                            |                                                             | Year Ended December 31, |                                                 
|----------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------- | ----------------------- | ------------------------------------------------
|
|
|Operating activities                                                                                        |                                                             |                         |                                                 
|Net income                                                                                                  |                                                             | $                       | 35,333                                          
|Adjustments to reconcile net income to net cash provided by operating activities:                           |                                                             |                         |                                                 
|                                                                                                            | Provision for loan losses                                   |                         |                                                 
|                                                                                                            | Depreciation and amortization                               |                         |                                                 
|                                                                                                            | Net amortization of investment securities discount/premiums |                         |                                                 
|                                                                                                            | Deferred income taxes                                       |                         |                                                 
|                                                                                                            | Net gains on sales of investment securities                 |                         |                                                 
|                                                                                                            | Decrease (increase) in accrued income receivable            |                         |                                                 
|                                                                                                            | Increase (decrease) in accrued interest payable             |                         |                                                 
|                                                                                                            | Net decrease (increase) in other assets                     |                         |                                                 
|                                                                                                            | Net (decrease) increase in other liabilities                |                         |                                                 
|                                                                                                            | Decrease (increase) in deferred costs                       |                         |                                                 
|                                                                                                            | Write-down of other real estate owned                       |                         |                                                 
|                                                                                                            |                                                             |                         |                                                 
|                                                                                                            |                                                             |                         | Net cash provided by operating activities       
|                                                                                                            |                                                             |                         |                                                 
|Investing activities                                                                                        |                                                             |                         |                                                 
|Proceeds from sales of investment securities available for sale                                             |                                                             |                         | 1,233,050                                       
|Proceeds, maturity or calls of investment securities held to maturity                                       |                                                             |                         | 2,811                                           
|Proceeds, maturity or calls of investment securities available for sale                                     |                                                             |                         | 594,762                                         
|Purchases of investment securities available for sale                                                       |                                                             |                         | (1,784,799                                      
|Net increase in loans                                                                                       |                                                             |                         | (81,528                                         
|Net increase in premises and equipment                                                                      |                                                             |                         | (4,808                                          
|Purchase of bank-owned life insurance                                                                       |                                                             |                         | (2,062                                          
|Proceeds from sales of other real estate                                                                    |                                                             |                         | 1,232                                           
|                                                                                                            |                                                             |                         |                                                 
|                                                                                                            |                                                             |                         | Net cash used in investing activities           
|                                                                                                            |                                                             |                         |                                                 
|Financing activities                                                                                        |                                                             |                         |                                                 
|Net (decrease) increase in deposits                                                                         |                                                             |                         | (741                                            
|(Decrease) increase in U.S. Treasury demand notes                                                           |                                                             |                         |                                                
|Increase (decrease) in federal funds purchased                                                              |                                                             |                         | 3,000                                           
|Increase in long-term borrowings                                                                            |                                                             |                         | 10,000                                          
|(Decrease) increase in securities sold under agreement                                                      |                                                             |                         | (11,850                                         
|Proceeds from issuance of guaranteed preferred beneficial interest in Corporation's subordinated debentures |                                                             |                         |                                                
|Cash dividends and fractional shares                                                                        |                                                             |                         | (15,566                                         
|Repurchase of common stock                                                                                  |                                                             |                         | (2,271                                          
|Stock options and awards                                                                                    |                                                             |                         | 2,190                                           
|                                                                                                            |                                                             |                         |                                                 
|                                                                                                            |                                                             |                         | Net cash (used) provided by financing activities
|                                                                                                            |                                                             |                         |                                                 
|Net (decrease) increase in cash and cash equivalents                                                        |                                                             |                         | (9,230                                          
|Cash and cash equivalents at beginning of year                                                              |                                                             |                         | 104,087                                         
|                                                                                                            |                                                             |                         |                                                 
|Cash and cash equivalents at end of year                                                                    |                                                             | $                       | 94,857                                          
|                                                                                                            |                                                             |                         |                                                 
|Cash paid during the year for:                                                                              |                                                             |                         |                                                 
|                                                                                                            | Interest                                                    |                         | $                                               
|                                                                                                            |                                                             |                         |                                                 
|                                                                                                            | Income taxes                                                |                         | $                                               
|                                                                                                            |                                                             |                         |                                                 
|Supplemental disclosure of noncash investing and financing activities:                                      |                                                             |                         |                                                 
|                                                                                                            | Transfer of assets from loans to other real estate owned    |                         | $                                               
|                                                                                                            |                                                             |                         |                                                 

See accompanying notes to consolidated financial statements.

27

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES

Note 1Summary of Significant Accounting Policies

Business

Harleysville National Corporation (the Corporation) through its subsidiary banks, Harleysville National Bank and Trust Company, Citizens National Bank, and
Security National Bank (collectively the Banks), provides a full range of banking services to individual and corporate customers located in eastern Pennsylvania. HNC Financial Company and HNC
Reinsurance Company are wholly-owned subsidiaries of the Corporation. HNC Financial Company's principal business function is to expand the investment opportunities of the Corporation. HNC Reinsurance
Company functions as a reinsurer of consumer loan credit life and accident and health insurance. A summary of the significant accounting policies consistently applied in the preparation of the
accompanying consolidated financial statements follows.

The
Banks operate as commercial banks offering a wide variety of commercial loans and leases and, to a lesser degree, mortgage and consumer credits. The Banks compete with other banking
and financial institutions in their primary market communities, including financial institutions with resources substantially greater than their own. Commercial banks, savings banks, savings and loan
associations, credit unions, and money market funds actively compete for deposits and loans. Such institutions, as well as consumer finance and insurance companies, may be considered competitors with
respect to one or more services they render.

The
Corporation and the Banks are subject to regulations of certain state and federal agencies and, accordingly, these regulatory authorities periodically examine the Corporation and the
Banks. As a
consequence of the extensive regulation of commercial banking activities, the Corporation and the Banks' business is susceptible to being affected by state and federal legislation and regulations.

Basis of Financial Statement Presentation

The accounting and reporting policies of the Corporation and its subsidiaries conform with accounting principles generally accepted in the United States of
America (US GAAP) applicable to banks. All significant inter-company transactions are eliminated in consolidation and certain reclassifications are made when necessary to conform with the previous
year's financial statements to the current year's presentation. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported
amount of assets and liabilities as of the dates of the balance sheets and revenues and expenditures for the periods presented. Therefore, actual results could differ significantly from those
estimates.

The
principal estimates that are particularly susceptible to significant change in the near term relate to the allowance for loan losses.

The
evaluation of the adequacy of the allowance for loan losses includes, among other factors, an analysis of historical loss rates, by category, applied to current loan totals. However,
actual losses may be higher or lower than historical trends, which vary. Actual losses on specified problem loans, which also are provided for in the evaluation, may vary from estimated loss
percentages, which are established based upon a limited number of potential loss classifications.

Investment Securities

The Corporation accounts for securities under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, which requires, among other
things, that debt and equity securities classified as available for sale be reported at fair value with unrealized gains and losses excluded from

28

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earnings
and reported in other comprehensive income, net of income taxes. The net effect of unrealized gains or losses, caused by marking an available for sale portfolio to market, could cause
fluctuations in the level of shareholders' equity and equity-related financial ratios as changes in market interest rates cause the fair value of fixed-rate securities to fluctuate.

Investment
securities are classified as held to maturity when the Corporation and its subsidiaries have the ability and intent to hold those securities to maturity. These investment
securities are carried at cost, adjusted for amortization of premiums and accretion of discounts using the interest method over the life of the investment securities.

Investment
securities expected to be held for an indefinite period of time are classified as available for sale and are stated at fair value. Realized gains and losses on the sale of
investment securities are recognized using the specific identification method and are included in the consolidated statements of income.

The
Bank adopted EITF 03-1The Meaning of Other than Temporary Impairment and Its Application to Certain Investmentsas of
December 31, 2003.EITF 03-1 includes certain disclosures regarding quantitative and qualitative disclosures for investment
securities accounted for under FAS 115, Accounting for Certain Investments in Debt and Equity Securities that are impaired at the balance sheet date, but an
other-than-temporary impairment has not been recognized. The disclosure under EITF 03-1 are required for financial statements for years ending after
December 15, 2003 and are included in these financial statements.

Loans

Loans that management intends to hold to maturity are stated at the principal amount outstanding. Net loans represent the principal loan amount outstanding net of
deferred cost and unearned income and reduced by the allowance for loan losses. Interest on loans is credited to income based on the principal amount outstanding.

Lease
financing represents automobile and equipment leasing. The lease financing receivable included in loans is stated at the gross amount of lease payments receivable, plus the
residual value, less income to be earned over the life of the leases. Such income is recognized over the term of the leases using the level yield method.

Loan
origination fees and direct loan origination costs of completed loans are deferred and recognized over the life of the loan as an adjustment to yield. The net loan origination fees
recognized as yield adjustments are reflected in total interest income in the consolidated statements of income, and the unamortized balance of such net loan origination fees is reported in the
consolidated balance sheets as part of deferred costs, net.

Income
recognition of interest is discontinued when, in the opinion of management, the collectibility of such interest becomes doubtful. A loan is generally classified as nonaccrual when
principal or interest has consistently been in default for a period of 90 days or more or because of a deterioration in the financial condition of the borrower, and payment in full of principal
or interest is not expected. Loans past due 90 days or more and still accruing interest are loans that are generally well-secured and expected to be restored to a current status in
the near future.

29

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The
Corporation accounts for impaired loans under SFAS No. 114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for
Impairment of a LoanIncome Recognition and Disclosures. This standard requires that a creditor measure impairment based on the present value of expected future cash flows discounted at
the loan's effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan's observable market price, or the fair value of the collateral if the loan
is collateral dependent. Regardless of the measurement method, a creditor must measure impairment based on the fair value of the collateral when the creditor determines that foreclosure is probable.

The
Corporation accounts for its transfers and servicing financial assets in accordance with SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. SFAS No. 140 revises the standards for accounting for the securitizations and other transfers of financial assets and collateral.

The
Corporation adopted FIN 45Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of
Otherson January 1, 2003. FIN 45 requires a guarantor entity, at the inception of a guarantee covered by the measurement provisions of the interpretation, to record a
liability for the fair value of the obligation undertaken in issuing the guarantee. The Corporation has financial and performance letters of credit. Financial letters of credit require the Corporation
to make payment if the customer's financial condition deteriorates, as defined in the agreements. FIN 45 applies prospectively to guarantees the Corporation issues or modifies subsequent to
December 31, 2002.

In
October 2003, the AICPA issued SOP 03-3Accounting for Loans or Certain Debt Securities Acquired in a Transfer. SOP
03-3 applies to a loan with the evidence of deterioration of credit quality since origination acquired by completion of a transfer for which it is probable at acquisition, that the
Corporation will be unable to collect all contractually required payments receivable. SOP 03-3 is effective for loans acquired in fiscal years beginning after December 31, 2004.
Early adoption is permitted. Management is currently evaluating the provisions of SOP 03-3 and does not anticipate its adoption to have a material affect on the Corporation's financial
position or results of operations.

Allowance for Loan Losses

The allowance for loan losses is maintained at a level that management considers adequate to provide for probable losses based upon an evaluation of known and
inherent risks in the loan portfolio. Allowance for loan losses is based on estimated net realizable value unless it is probable that loans will be foreclosed, in which case allowance for loan losses
is based on fair value less selling costs. Management's periodic evaluation is based upon evaluation of the portfolio, past loss experience, current economic conditions and other relevant factors.
While management uses the best information available to make such evaluations, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions
used in making the evaluation. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Banks' allowances for loan losses. Such agencies may
require the Banks to recognize additions to the allowance based on their judgment of information available to them at the time of their examination.

In
July 2001, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 102,Selected Loan Loss Allowance Methodology
and Documentation Issues. SAB No. 102 provides guidance on the development, documentation, and application of a systematic methodology for

30

---

determining
allowances for loans and leases in accordance with US GAAP. The adoption of SAB No. 102 did not have a material impact on the Corporation's financial position, or results of
operations.

Bank Premises and Equipment

Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is recorded using the straight-line and accelerated
depreciation methods over the estimated useful lives of the assets. Leasehold improvements are amortized over the term of the lease or estimated useful lives, whichever is shorter.

Net Assets in Foreclosure

Net assets in foreclosure include foreclosed real estate which is carried at the lower of cost (lesser of carrying value of loan or fair value at date of
acquisition) or estimated fair value less selling costs. Any write-down, at or prior to the dates the real estate is considered foreclosed, is charged to the allowance for loan losses. Subsequent
write-downs are recorded in other expenses, and expenses incurred in connection with holding such assets and any gains or losses upon their sale are included in other income and expenses. Net assets
in foreclosure also includes foreclosed leases which are carried at lower of cost (lesser of carrying value of loan or fair value at date of acquisition) or estimated fair value less selling costs.

Stock Based Compensation

The Corporation follows the disclosures provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 contains a fair
value-based method for valuing stock-based compensation that entities may use, which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized
over the service period, which is usually the vesting period. The Corporation has chosen an alternative permitted by SFAS No. 123 to continue accounting for employee stock options and similar
instruments under Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees."

Entities
that continue to account for stock options using APB Opinion 25 are required to make pro forma disclosures of net income and earnings per share, as if the fair value-based
method of accounting defined in SFAS No. 123 has been applied.

The
Corporation has five shareholder approved fixed stock options plans that allow the Corporation to grant options up to an aggregate of 2,300,917 shares of common stock to key
employees and directors. At December 31, 2003, 2,038,786 stock options had been granted under the stock option plans. The options have a term of ten years when issued and are completely vested
over a five-year period. The exercise price of each option equals the market price of the Corporation's stock on the date of grant.

The
fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in
2003, 2002 and 2001, respectively: dividend yield of 2.17%, 2.72% and 3.00%; expected volatility of 5.30%, 2.37% and 3.61%; risk-free interest rate of 4.08%, 3.55% and 4.90%; and an
expected life of 7.41 years, 7.74 years and 8.55 years.

31

---

The
following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, to stock-based
employee compensation (in thousands, except per share amounts).

Years ended December 31,2003

2002

2001Net incomeAs reported

$
35,333

$
32,927

$
28,820Stock-based compensation costs determined under fair value method for all awards


2,046


893


1,552Pro forma

$
33,287

$
32,034

$
27,268Earnings per share (Diluted)As reported

$
1.44

$
1.34

$
1.17Pro forma

$
1.35

$
1.30

$
1.11Earnings per share (Basic)As reported

$
1.48

$
1.38

$
1.20Pro forma

$
1.40

$
1.34

$
1.13


Income Taxes

The Corporation accounts for income taxes under the liability method whereby deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date. The principal types of accounts, resulting in differences between assets and liabilities for financial statement
and tax return purposes, are the allowance for loan losses, leased assets, deferred loan fees and compensation.

Pension Plans

The Corporation has certain employee benefit plans covering substantially all employees. The Corporation accrues service cost as incurred.

Restrictions on Cash and Due From Banks

As of December 31, 2003, the Banks did not need to maintain reserves (in the form of deposits with the Federal Reserve Bank) to satisfy federal regulatory
requirements.

Bank Owned Life Insurance

The Corporation invests in bank owned life insurance (BOLI). BOLI involves the purchasing of life insurance by the Corporation on a chosen group of employees. The
Corporation is the owner and beneficiary of the policies. This pool of insurance, due to tax advantages to the Banks, is profitable to the Corporation. This profitability is used to offset a portion
of future benefit cost increases. Banks' deposits fund BOLI and the earnings from BOLI are recognized as other operating income.

32

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Advertising Costs

The Corporation expenses advertising costs as incurred.

Net Income Per Share

The Corporation follows the provisions of SFAS No. 128, "Earnings per Share." Basic earnings per share excludes dilution and is computed by dividing income
available to common shareholders by the
weighted-average common shares outstanding during the period. Diluted earnings per share take into account the potential dilution that could occur if securities or other contracts to issue common
stock were exercised and converted into common stock. All weighted average, actual shares and per share information in these financial statements have been adjusted retroactively for the effect of
stock dividends and splits. The reconciliation of the numerators and denominators of the basic and diluted EPS follows:

Year Ended December 31, 2003Income
(Numerator)

Shares
(Denominator)

Per Share
AmountBasic EPSIncome available to common shareholders

$
35,333,000

23,804,813

$
1.48Effect of DilutiveSecurities Stock options




819,250


(.04
)Diluted EPSIncome available to common shareholders

$
35,333,000

24,624,063

$
1.44


Options
to purchase 122,000 shares of common stock at $31.69 per share have been excluded in the computation of 2003 diluted EPS because the options' exercise price was greater than the
average market price of the common stock.

Year Ended December 31, 2002Basic EPSIncome available to common shareholders

$
32,927,000

23,902,223

$
1.38Effect of DilutiveSecurities Stock options




723,386


(.04
)Diluted EPSIncome available to common shareholders

$
32,927,000

24,625,609

$
1.34


Options
to purchase 12,500 shares of common stock at $19.54 per share have been excluded in the computation of 2002 diluted EPS because the options' exercise price was greater than the
average market price of the common stock.

33

---



Year Ended December 31, 2001Basic EPSIncome available to common shareholders

$
28,820,000

24,026,568

$
1.20Effect of Dilutive SecuritiesStock options




597,137


(.03
)Diluted EPSIncome available to common shareholders

$
28,820,000

24,623,705

$
1.17


Comprehensive Income

The Corporation follows SFAS No. 130, "Reporting Comprehensive Income," which establishes standards to provide prominent disclosure of comprehensive income
items.

The
components of other comprehensive income are as follows(Dollars in thousands):

For the year ended December 31, 2003

Before tax
amount

Tax
Expense

Net of tax
amountUnrealized gains on available for sale securities:Unrealized holding gains arising during period

$
8,839

$
(3,094
)
$
5,745Less reclassification adjustment for gains realized in net income


6,613


(2,315
)

4,298Net unrealized gains


2,226


(779
)

1,447Minimum pension liability


(460
)




(460
)Change in fair value of derivatives used for cash flow hedges


267


(93
)

174Other comprehensive income, net

$
2,033

$
(872
)
$
1,161


For the year ended December 31, 2002

Before tax
amount

Tax
Expense

Net of tax
amountUnrealized gains on available for sale securities:Unrealized holding gains arising during period

$
7,171

$
(2,508
)
$
4,663Less reclassification adjustment for gains realized in net income


3,475


(1,215
)

2,260Other comprehensive income, net

$
3,696

$
(1,293
)
$
2,403


For the year ended December 31, 2001

Before tax
amount

Tax
Expense

Net of tax
amountUnrealized gains on available for sale securities:Unrealized holding gains arising during period

$
9,416

$
(3,295
)
$
6,121Less reclassification adjustment for gains realized in net income


4,629


(1,620
)

3,009Other comprehensive income, net

$
4,787

$
(1,675
)
$
3,112


34

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Derivatives

The Corporation adopted the provisions of SFAS No. 133,Accounting for Derivative Instruments and Hedging
Activities(SFAS No. 133), as amended, as of January 1, 2001. The statement requires the Corporation to recognize all derivative instruments at fair value as
either assets or liabilities. Financial derivatives are reported at fair value in other assets or other liabilities. The accounting for changes in the fair value of a derivative instrument depends on
whether it has been designated and qualifies as part of a hedging relationship. For derivatives not designated as hedges, the gain or loss is recognized in current earnings.

The
Corporation enters into interest rate swap contracts to modify the interest rate characteristics from variable to fixed in order to reduce the impact of interest rate changes on
future net interest. Net amounts payable or receivable from this contract are accrued as an adjustment to net interest. The fair value of these derivatives is reported in other assets or other
liabilities and offset in accumulated other comprehensive income for the effective portion of the derivatives. Amounts reclassed into earnings, when the hedged transaction culminates, are included in
net interest. Ineffectiveness of the strategy, as defined under SFAS No. 133, if any, is reported in net interest. The Corporation performs an assessment, both at the inception of the hedge and
quarterly thereafter, to determine whether these derivatives are highly effective in offsetting changes in the value of the hedged items. The change in fair value of the swaps attributed to hedge
ineffectiveness was not material for the year ended December 31, 2003.

Mortgage Servicing

The Corporation performs various servicing functions on loans owned by others. A fee, usually based on a percentage of the outstanding principal balance of the
loan, is received for these services. At December 31, 2003 and 2002, the Banks are servicing approximately $339,341,000 and $219,035,000, respectively, of loans for others.

The
Corporation accounts for its transfers and servicing financial assets in accordance with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." The Corporation originates mortgages under a definitive plan to sell or securitize those loans and
service the loans owned by the investor. Upon the transfer of the mortgage loans in a sale or a securitization, the Corporation records the servicing assets retained in accordance with SFAS
No. 140. The Corporation records mortgage servicing rights and the loans based on relative fair values at the date of origination.

Mortgage
loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or estimated fair value. Gains and losses on sales of loans are also
accounted for in accordance with SFAS No. 134, "Accounting for Mortgage Securities Retained after the Securitizations of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise". This
statement requires that an entity engaged in mortgage banking activities classify the retained mortgage-backed security or other interest, which resulted from the securitizations of a mortgage loan
held for sale, based upon its ability and intent to sell or hold these investments.

35

---



The
Company adopted Statement of Financial Accounting Standard 149 (SFAS No. 149),Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, on July 1, 2003. Implementation issue C13 "When a Loan Commitment Is Included in the Scope of Statement 133" is included in SFAS No. 149. SFAS
No. 149 amends SFAS No. 133 to add a scope exception for borrowers (all commitments) and lenders (all commitments except those relating to mortgage loans that will be held for sale).
Statement 149 also amends paragraph SFAS No. 133 to require a lender to account for loan commitments related to mortgage loans that will be held for sale as derivatives. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003. The Company periodically enters into commitments with its customers, which it intends to sell in the future. Commitments to
extend credit for loans the Corporation intends to sell are not material at December 31, 2003 and 2002.

Segment Information

SFAS No. 131 establishes standards for the way public business enterprises report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating segments in subsequent interim financial reports issued to shareholders. It also establishes standards for related
disclosure about products and services, geographic areas, and major customers. Operating segments are components of an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. The statement also requires that public enterprises report a measure of segment
profit or loss, certain specific revenue and expense items and segment assets. It also requires that information be reported about revenues derived from the enterprises' products or services, or about
the countries in which the enterprises earn revenues and holds assets, and about major customers, regardless of whether the information is used in making operating decisions.

The
Corporation has one reportable segment, "Community Banking." All of the Corporation's activities are interrelated, and each activity is dependent and assessed based on how each of
the activities of the Corporation supports the others. For example, commercial lending is dependent upon the ability of the Banks to fund themselves with retail deposits and other borrowings and to
manage interest rate and credit risk. This situation is also similar for consumer and residential mortgage lending. Accordingly, all
significant operating decisions are based upon analysis of the Corporation as one operating segment or unit.

The
Corporation has also identified several operating segments. These operating segments within the Corporation's operations do not have similar characteristics to the community banking
operations and do not meet the quantitative thresholds requiring separate disclosure. These nonreportable segments include HNC Financial Company, HNC Reinsurance Company and the Parent.

Variable Interest Entities

In
January 2003, the FASB issued FASB Interpretation 46 (FIN 46),Consolidation of Variable Interest Entities.FIN 46
clarifies the application of Accounting Research Bulletin 51,Consolidated Financial Statements,to certain entities in which voting rights are
not effective in identifying the investor with the controlling financial interest. An entity is subject to consolidation under FIN 46 if the

36

---

investors
either do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support, are unable to direct the entity's activities, or are
not exposed to the entity's losses or entitled to its residual returns ("variable interest entities"). Variable interest entities within the scope of FIN 46 will be required to be consolidated
by their primary beneficiary. The primary beneficiary of a variable interest entity is determined to be the party that absorbs a majority of the entity's expected losses, receives a majority of its
expected returns, or both.

Management
has determined that Harleysville Statutory Trust 1 (the Trust) qualifies as a variable interest entity under FIN 46. The Trust issued mandatorily redeemable
preferred stock to investors and loaned the proceeds to the Corporation. The Trust holds, as its sole asset, subordinated debentures issued by the Corporation in 2002. The Trust is currenly included
in the Corporation's consolidated balance sheet and statements of income. The Corporation has evaluated the impact of FIN 46 and concluded it should continue to consolidate the Trust as of
December 31, 2003, in part due to its ability to call the preferred stock prior to the mandatory redemption date and thereby benefit from a decline in required dividend yields.

Subsequent
to the issuance of FIN 46, the FASB issued a revised interpretation, FIN 45(R), the provisions of which must be applied to certain variable interest entities by
March 31, 2004. The Corporation plans to adopt the provision under the revised interpretation in the first quarter of 2004. FIN 46(R) will require the Corporation to deconsolidate the
Trust as of March 31, 2004. FIN 46(R) precludes consideration of the call option embedded in the preferred stock when determining if the
Corporation has the right to a majority of the Trust's expected residual returns. Accordingly, the Corporation will deconsolidate the Trust at the end of the first quarter, which will result in an
increase in outstanding debt by $155,000. The banking regulatory agencies have not issued any guidance that would change the regulatory capital treatment for the trust-preferred securities issued by
the Trust based on the adoption of FIN 46(R). However, as additional interpretations from the banking regulators related to entites such as the Trust become available, management will
reevaluate its potential impact to its Tier I capital calculation under such interpretations.

Note 2Acquisitions

On October 15, 2003, the Corporation entered into a definitive Agreement and Plan of Merger to acquire Millennium Bank. Under the terms of the merger,
Millennium Bank's shareholders will receive 0.6256 shares of the Corporation's common stock or $16.00 cash per share. Sixty percent (60%) of the transaction value will be paid in common stock of
Harleysville National Corporation and forty percent (40%) will be paid in cash, or approximately $21 million. Options held by Millennium Bank option holders will also be subject to 60% stock
and 40% cash allocation. Upon completion of the acquisition, Millennium Bank will be merged into Harleysville National Bank and Trust Company, a wholly-owned subsidiary of the Corporation. This
transaction will be accounted for in accordance with SFAS No. 141 "Business Combinations" and is subject to various regulatory approvals and other closing provisions.

37

---

Note 3Investment Securities

The amortized cost, unrealized gains and losses, and the estimated market value of the Corporation's investment securities held to maturity and available for sale
are as follows:

|                                                               |        | December 31, 2003
|-------------------------------------------------------------- | ------ | -----------------
|
|
|Held to maturity                                               |        |                  
|Obligation of states and political subdivisions                |        | $                
|Mortgage-backed securities                                     |        |                  
|                                                               |        |                  
|                                                               | Totals |                  
|                                                               |        |                  
|Available for sale                                             |        |                  
|Obligations of other U.S. government agencies and corporations |        | $                
|Obligations of states and political subdivisions               |        |                  
|Mortgage-backed securities                                     |        |                  
|Other securities                                               |        |                  
|                                                               |        |                  
|                                                               | Totals |                  
|                                                               |        |                  

|                                                               |        | December 31, 2002
|-------------------------------------------------------------- | ------ | -----------------
|
|Held to maturity                                               |        |                  
|Obligations of states and political subdivisions               |        | $                
|Mortgage-backed securities                                     |        |                  
|Other securities                                               |        |                  
|                                                               |        |                  
|                                                               | Totals |                  
|                                                               |        |                  
|Available for sale                                             |        |                  
|U.S. Treasury notes                                            |        | $                
|Obligations of other U.S. Government agencies and corporations |        |                  
|Obligations of states and political subdivisions               |        |                  
|Mortgage-backed securities                                     |        |                  
|Other securities                                               |        |                  
|                                                               |        |                  
|                                                               | Totals |                  
|                                                               |        |                  

38

---

The
table below indicates the length of time individual securities have been in a continuous unrealized loss position at December 31, 2003 (in thousands):

|                                                               |        | Less than 12 months |     | 12 months or longer |         | Total   |  
|-------------------------------------------------------------- | ------ | ------------------- | --- | ------------------- | ------- | ------- | -
|
|Obligations of other U.S. Government agencies and corporations |        | 12                  |     | $                   | 18,584  |         | $
|Obligations of states and political subdivisions               |        | 94                  |     |                     | 42,092  |         |  
|Mortgage-backed securities                                     |        | 189                 |     |                     | 331,656 |         |  
|Other securities                                               |        | 4                   |     |                     | 3,470   |         |  
|                                                               |        |                     |     |                     |         |         |  
|                                                               | Totals |                     | 299 |                     | $       | 395,802 |  
|                                                               |        |                     |     |                     |         |         |  

There are no significant concentrations of securities (greater than 10% of shareholders' equity) in any individual security issuer.

Securities
with a carrying value of $457,569,000 and $481,989,000 at December 31, 2003 and 2002, respectively, were pledged to secure public funds, government deposits and
repurchase agreements.

The
amortized cost and estimated market value of investment securities, at December 31, 2003, by contractual maturities, are shown below. Actual maturities will differ from
contractual maturities because issuers and borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Held to Maturity
Estimated

Available for Sale
EstimatedAmortized Cost

Fair Value

Amortized Cost

Fair Value(Dollars in thousands)Due in one year or less

$
5,421

$
5,628

$
21,844

$
21,899Due after one year through five years


12,985


14,065


104,975


109,804Due after five years through ten years


1,162


1,335


144,200


153,475Due after ten years








44,420


43,90419,568


21,028


315,439


329,082Mortgage-backed securities


436


469


576,532


575,788Totals

$
20,004

$
21,497

$
891,971

$
904,870


Proceeds
from sales of investment securities available for sale during 2003 were $1,233,050,000. Gross gains of $11,420,000 and gross losses of $4,807,000 were realized
on these sales. Proceeds from sales of investment securities available for sale during 2002 were $897,327,000. Gross gains of $4,902,000 and gross losses of $1,427,000 were realized on these sales.
Proceeds of sales of investment securities available for sale during 2001 were $468,270,000. Gross gains of $5,415,000 and gross losses of $786,000 were realized on these sales.

During
July 2000, the Corporation reclassified $7,574,000 of investment securities from the held to maturity category to the available for sale category, due to its acquisition of
Citizens Bank and Trust Company. As a result of the reclassification, the Corporation recorded $19,000 net of taxes unrealized holding losses in accumulated other comprehensive income.

39

---



Note 4Loans

Major classification of loans are as follows:

December 31,2003

2002(Dollars in thousands)Real estate

$
499,672

$
422,268Commercial and industrial


385,187


376,029Consumer loans


461,692


446,505Lease financing


61,519


87,154Total loans


1,408,070


1,331,956Deferred costs, net


321


1,336Allowance for loan losses


(16,753
)

(17,190
)Net loans

$
1,391,638

$
1,316,102


On
December 31, 2003, nonaccrual loans were $3,343,000 and loans 90 days or more past due and still accruing interest were $1,164,000. On December 31, 2002,
nonaccrual loans were $5,109,000 and loans 90 days or more past due and still accruing interest were $1,193,000.

The
balance of impaired loans was $1,811,000 at December 31, 2003, compared to $3,153,000 and $3,721,000 at December 31, 2002 and 2001, respectively. The Banks have
identified a loan as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement.

The
allowance for loan loss associated with the impaired loans was $185,000 at December 31, 2003, and $329,000 and $429,000 at December 31, 2002 and 2001, respectively. The
average impaired loan balance was $2,189,000 in 2003, compared to $2,836,000 and $3,505,000 in 2002 and 2001, respectively. The income recognized on impaired loans during 2003, 2002 and 2001 was
$63,000, $186,000 and $78,000, respectively. The Banks' policy for interest income recognition on impaired loans is to recognize income on restructured loans under the accrual method. The Banks
recognize income on nonaccrual loans under the cash basis when the loans are both current and the collateral on the loan is sufficient to cover the outstanding obligation to the Banks. The Banks will
not recognize income if these factors do not exist.

The
Banks have no concentration of loans to individual borrowers which exceeded 10% of total loans at December 31, 2003 and 2002. The Banks actively monitor the risk of this loan
concentration. The Banks continued to pursue new lending opportunities while seeking to maintain a portfolio that is diverse as to industry concentration, type and geographic distribution. The Banks'
geographic lending area is primarily concentrated in Montgomery, Carbon, Bucks, and Wayne counties, but also includes Chester, Berks, Bucks, Lehigh, Monroe, Northhampton and Schuylkill counties.

40

---

Loans
to directors, executive officers and their associates, are made in the ordinary course of business and on substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with others. Activity of these loans is as follows:

Year Ended December 31,2003

2002

2001(Dollars in thousands)Balance, January 1

$
15,280

$
16,483

$
8,344New loans


65,528


61,157


68,011Repayments


(59,770
)

(62,360
)

(59,872
)Balance, December 31

$
21,038

$
15,280

$
16,483


Note 5Allowance for Loan Losses

Transactions in the allowance for loan losses are as follows:

Year Ended December 31,2003

2002

2001(Dollars in thousands)Balance, beginning of year

$
17,190

$
15,558

$
15,210Provision charged to operating expenses


3,200


4,370


3,930Loans charged off:Commercial and industrial


(515
)

(108
)

(494
)Consumer


(2,173
)

(2,589
)

(2,594
)Real estate


(1,311
)

(352
)

(498
)Lease financing


(556
)

(828
)

(1,075
)Total charged off


(4,555
)

(3,877
)

(4,661
)Recoveries:Commercial and industrial


33


105


38Consumer


685


786


607Real estate


80


163


328Lease financing


120


85


106Total recoveries


918


1,139


1,079Balance, end of year

$
16,753

$
17,190

$
15,558


41

---

Note 6Bank Premises and Equipment

Bank premises and equipment consist of the following:

December 31,Estimated
Useful Lives2003

2002(Dollars in thousands)Land

Indefinite

$
4,245

$
4,230Buildings

15-39 years


23,313


20,862Furniture, fixtures and equipment

3-7 years


27,079


24,851Total cost




54,637


49,943Less accumulated depreciation and amortization




31,308


28,298Total



$
23,329

$
21,645


Note 7Deposits

At December 31, 2003, scheduled maturities of certificates of deposit are as follows:

Amount2004

$
379,9062005


127,3332006


93,6952007


67,6152008


4,460Thereafter


50Total

$
673,059


Note 8Borrowings

Long-Term Borrowings

Federal Home Loan Bank (FHLB) advances at December 31, 2003, totaled $172,750,000. The advances are collateralized by FHLB stock and certain first mortgage
loans and mortgage-backed securities. First mortgages used as collateral for these advances totaled $59,352,000. These advances had a weighted average interest rate of 4.21%. Advances are made
pursuant to several different credit programs offered from time to time by the FHLB. Unused lines of credit were $291,204,000 at December 31, 2003 and $292,813,000 at December 31, 2002.
During 2003, the Corporation paid off approximately $29 million of FHLB borrowings with rates over 6.0% prior to their scheduled maturity dates. This provided the opportunity to lock in
historically low rates on new long-term borrowings. The early retirement of these borrowings resulted in a $2,594,000 prepayment fee.

42

---

The
following table is a summary of long-term borrowings with the FHLB at December 31, 2003:

Balance2004

$
2005


2006


20,0002007


35,0002008


58,000Thereafter


59,750Total

$
172,750


The
Banks, pursuant to a designated cash management agreement, utilize securities sold under agreements to repurchase as vehicles for customers' sweep and term investment products.
Securitization under these cash management agreements are in U.S. Treasury Securities and obligations of states and political subdivisions securities.

Securities sold under agreement to repurchase

These securities are held in a third-party custodian's account, designated by the Banks under a written custodial agreement that explicitly recognizes the Banks'
interest in the securities. A detail of securities sold under agreement to repurchase are presented below:

At or for the year ended December 31,Securities sold under agreement to repurchase:2003

2002

2001Balance at year-end

$
72,291,000

$
84,141,000

$
80,393,000Average during the year


83,277,000


83,750,000


88,418,000Maximum month-end balance


101,991,000


96,665,000


96,224,000Weighted average rate during the year


0.87
%

1.51
%

3.35
%


Guaranteed Preferred Beneficial Interest in Corporation's Subordinated Debentures

On February 22, 2001, the Corporation issued $5,000,000 of 10.2% junior subordinate deferrable interest debentures (the debentures) to Harleysville
Statutory Trust 1 (the Trust), a Connecticut business trust, in which the Corporation owns all of the common equity. The debentures are the sole asset of the Trust. The Trust issued $5,000,000 of
preferred securities to investors. The Corporation's obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Corporation of the
Trust's obligations under the preferred securities. The preferred securities must be redeemed upon maturity of the subordinate debentures on February 22, 2031.

43

---

Note 9Federal Income Taxes

Income tax expense from current operations is composed of the following:

Year Ended December 31,2003

2002

2001(Dollars in thousands)Current tax payable

$
11,512

$
10,940

$
6,847Deferred income tax


(2,915
)

(1,991
)

1,327Tax expense

$
8,597

$
8,949

$
8,174


The
effective income tax rates of 19.6% for 2003, 21.4% for 2002 and 22.1% for 2001 were less than the applicable federal income tax rate of 35% for each year. The reason for these
differences follows:

Year Ended December 31,2003

2002

2001(Dollars in thousands)Expected tax expense

$
15,374

$
14,656

$
12,946Tax-exempt income net of interest disallowance


(6,769
)

(5,717
)

(4,749
)Other


(8
)

10


(23
)Actual tax expense

$
8,597

$
8,949

$
8,174


The
tax effect of temporary differences that give rise to significant portions of deferred tax assets and liabilities are as follows:

2003

2002Asset

Liability

Asset

Liability(Dollars in thousands)Allowance for loan losses

$
5,724

$


$
5,877

$
Lease assets





16,440





19,966Deferred loan fees





12





12Deferred compensation


2,279





1,986


Unrealized gain on investment securities





4,514





3,735Net unrealized gain on derivative used for cash flow hedge





93





Pension


174





481


Depreciation





621





496Other





9


310


Total deferred taxes

$
8,177

$
21,689

$
8,654

$
24,209


The
exercise of stock options which have been granted under the Corporation's various stock option plans gives rise to compensation, which is includible in the taxable income of the
applicable employees and deductible by the Corporation for income tax purposes. Compensation resulting from increases in the fair market value of the Corporation's common stock subsequent to the date
of grant of the applicable exercised stock options is not recognized, in accordance with APB Opinion No. 25, as

44

---

an
expense for financial accounting purposes and the related tax benefits are taken directly to additional paid in capital.

Note 10Pension Plans

Defined Benefit Pension Plan

The Corporation has a noncontributory defined benefit pension plan covering substantially all employees. The plan's benefits are based on years of service and the
employee's average compensation during any five consecutive years within the 10-year period preceding retirement. The plan's funded status and amounts recognized in the financial
statements follow:

2003

2002(Dollars in thousands)Change in benefit obligation:Benefit obligation at beginning of year

$
8,330

$
7,487Service cost


785


593Interest cost


488


437Actual gain


217


(475
)Benefits paid


(381
)

(414
)Change in assumptions





702Benefits obligation at end of year

$
9,439

$
8,330Change in plan assets:Fair value of plan assets at beginning of year

$
5,207

$
5,373Actual return on plan assets


1,044


(552
)Employer contribution


1,000


800Benefits paid


(381
)

(414
)Fair value of plan assets at end of year

$
6,870

$
5,207Funded status

$
(2,568
)
$
(3,123
)Unrecognized transition (asset)


(120
)

(138
)Unrecognized prior service cost


(105
)

(217
)Unrecognized net loss


3,123


3,806Minimum liability recognized


(459
)

(1,289
)Accrued benefit cost

$
(129
)
$
(961
)2003

2002(Dollars in thousands)Amounts recognized in the statement of financial position consist of:Prepaid benefit cost

$
330

$
328Accumulated other comprehensive income


(459
)

(1,289
)Net amount recognized

$
(129
)
$
(961
)


45

---

Year ended December 31,Weighted-average assumptions used to determine
pension plan obligations as of December 31,2003

2002

2001Discount rate

6.00
%
6.00
%
6.00
%Rate of compensation increase

4.00
%
4.00
%
4.50
%Year ended December 31,Weighted-average assumptions used to determine
pension plan net periodic benefit cost as of December 31,2003

2002

2001Discount rate

6.00
%
6.00
%
6.00
%Expected return on plan assets

6.50
%
7.00
%
7.00
%Rate of compensation increase

4.00
%
4.00
%
4.50
%


Year ended
December 31,Components of net periodic benefit cost

2003

2002

2001(Dollars in thousands)Service cost

$
785

$
593

$
524Interest cost


488


437


364Expected return on plan assets


(359
)

(398
)

(402
)Amortization of prior service cost


(111
)

(111
)

(111
)Recognized net actuarial losses


195


251


95Net periodic benefit cost

$
998

$
772

$
470


The
pension plan assets are invested according to a growth and income strategy with target asset allocation. From an investment standpoint, the asset allocation parameter for equity
securities ranges between 40% and 70%. The asset allocation parameter for debt securities is between 30% and 60%. Long-term rate of return assumptions of the various asset classes are
based primarily on empirical long-term historical return data, adjusted for near-term expectations. To make the return expectations more conservative, our near-term
expectations are for 8.0% equity and 4.5% fixed income returns for the next 10 years. The expected 2004 employer contribution to the pension plan is $1,300,000.

As
of December 31, 2003, Harleysville National Corporation's Pension Plans had an investment in the Corporation's stock with a market value of $236,000.

On
January 20, 1999, the Corporation consummated its acquisition of Northern Lehigh Bancorp. Northern Lehigh Bancorp had a noncontributory defined benefit pension plan covering
substantially all employees. During 2002, the Northern Lehigh Bancorp Pension Benefit Plan was terminated. All liabilities of this plan were satisfied prior to December 31, 2002. As of
December 31, 2001, the benefits obligation was $854,000, the fair value of plan assets was $725,000 and the accrued benefit cost was $129,000.

46

---

The
Corporation's pension plan weighted-average asset allocations by asset category is as follows:

Plan Assets at December 31,2003

2002Asset CategoryEquity securities

67.0
%
54.4
%Debt securities

32.9
%
45.2
%Other

.1
%
.4
%Total

100.0
%
100.0
%


Supplemental Benefit Plans

The Corporation maintains a non-tax qualified plan for certain of its executives ("SERP") to supplement the benefit these executives can receive under
the Company's 401(k) plan and defined benefit plans. The SERP plan's funded status follows:

2003

2002(Dollars in thousands)Change in benefit obligation:Benefit obligation at beginning of year

$
3,578

$
2,580Service cost


1,133


998Benefits obligation at end of year

$
4,711

$
3,578Funded status

$
(4,711
)
$
(3,578
)Accrued benefit cost

$
(4,711
)
$
(3,578
)


2003

2002

2001Components of net benefit cost:Service cost

$
1,133

$
998

$
927Net periodic benefit cost

$
1,133

$
998

$
9272003

2002

2001Weighted-average assumptions used to determine SERP plan obligations as of December 31,Discount rate


6.00
%

6.00
%

6.00
%2003

2002

2001Weighted-average assumptions used to determine SERP plan net periodic benefit cost as of December 31,Discount rate


6.00
%

6.00
%

6.00
%Expected return on plan assets


6.50
%

7.00
%

7.00
%


47

---

The
SERP provides for payments based on a certain percentage of salary for a period of 10 years after retirement. As of December 31, 2003, and 2002, the Corporation had
accrued a liability of $4,655,000 and $3,781,000, respectively, for the SERP.

Defined Contribution Plan

A 401(k) deferred savings plan covers eligible employees of the Banks. Employees may contribute up to a maximum of 15% of salary on a pretax basis with a 50%
employer match up to a maximum of 3% of salary. Contributions charged to earnings were $471,000, $519,000, and $371,000 for 2003, 2002 and 2001, respectively.

Note 11Shareholders' Equity

On September 15, 2003, the Corporation paid a five-for-four common stock split to shareholders of record as of September 2,
2003.

On
September 16, 2002, the Corporation paid a 5% stock dividend on its common stock to shareholders of record as of September 3, 2002.

On
August 10, 2001, the Corporation paid a two-for-one stock split on its common stock in the form of a 100% stock dividend to shareholders of record
July 27, 2001.

Note 12Stock Options

Information about stock options outstanding at December 31, 2003, is summarized as follows:

Outstanding

Weighted-Average
Exercise PriceBalance 1/1/01

1,896,305

$
10.76Granted

11,571


13.16Exercised

(82,848
)

10.42Cancelled

(89,648
)

10.64Balance 12/31/01

1,735,380


10.79Granted

50,563


18.12Exercised

(122,670
)

10.27Cancelled

(4,725
)

10.57Balance 12/31/02

1,658,548


11.06Granted

164,000


28.90Exercised

(182,759
)

10.58Cancelled

(781
)

10.57Balance 12/31/03

1,639,008

$
11.74


The
weighted average fair value of options granted during 2003, 2002 and 2001 were $28.90, $18.12 and $13.16, respectively.

48

---

The
following table summarizes information about options as of December 31, 2003:

Options as of December 31, 2003Options Outstanding

Options ExercisableRange of Exercise price

Number Outstanding

Weighted- Average Remaining Contractual Life

Weighted- Average Exercise Price

Number Exercisable

Weighted- Average Exercise Price$9.51  $12.68

1,403,044

6.6 Years

$
10.82

933,936

$
10.9412.68  15.85

21,701

5.6 Years

$
13.97

21,701

$
13.9715.85  19.01

37,763

8.0 Years

$
17.66

37,106

$
17.6619.01  22.18

54,500

9.0 Years

$
20.50

54,500

$
20.5028.52  31.69

122,000

10.0 Years

$
31.69



$
1,639,008






1,047,243


Note 13Commitments and Contingent Liabilities

Lease Commitments

Lease commitments for equipment and banking locations expire intermittently over the years through 2036. Most banking location leases require the lessor to pay
insurance, maintenance costs and property taxes. Approximate minimum rental commitments for existing operating leases at December 31, 2003, are as follows:

|(In thousands) |       | Total
Operating
Leases
|-------------- | ----- | ----------------------
|2004           |       | $                     
|2005           |       |                       
|2006           |       |                       
|2007           |       |                       
|2008           |       |                       
|Thereafter     |       |                       
|               |       |                       
|               | Total |                       
|               |       |                       

Total
lease expense amounted to $2,171,000, $2,090,000 and $2,109,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

Other

Based on consultation with the Corporation's legal counsel, management is not aware of any litigation that would have a material adverse effect on the
consolidated financial position of the Corporation. There are no proceedings pending other than the ordinary routine litigation incident to the business of the Corporation. In addition, no material
proceedings are pending or are known to be threatened or contemplated against the Corporation by government authorities.

49

---



Note 14Financial Instruments with Off-Balance Sheet Risk

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

The
Banks' exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is
represented by the contractual or notional amounts of those instruments. The Banks use the same stringent credit policies in extending these commitments as they do for recorded financial instruments
and control their exposure to loss through credit approval and monitoring procedures. These commitments are generally issued for one year or less, often expire without being drawn upon, and often are
secured with appropriate collateral.

The
Banks offer commercial, mortgage and consumer credit products to their customers in the normal course of business. These products represent a diversified credit portfolio and are
generally issued to borrowers within the Banks' branch office systems in eastern Pennsylvania. The ability of the customers to repay their credits is, to some extent, dependent upon the economy in the
Banks' market areas.

Unless
noted otherwise, the Banks do not require collateral or other security to support financial instruments with credit risk. The approximate contract amounts are as follows (in
thousands):

|Commitments                                                                                |                                                             | 2003
Total
Amount
Committed |   | 2002
Total
Amount
Committed
|------------------------------------------------------------------------------------------ | ----------------------------------------------------------- | --------------------------- | - | ---------------------------
|Financial Instruments whose contract amounts represent credit risk:                        |                                                             |                             |   |                            
|                                                                                           | Commitments to extend credit                                |                             | $ | 489,186                    
|                                                                                           | Standyby letters of credit and financial guarantees written |                             |   | 13,644                     
|Financial instruments whose notional or contract amounts exceed the amount of credit risk: |                                                             |                             |   |                            
|                                                                                           | Interest rate swap agreements                               |                             |   | 45,000                     

The
interest rate swaps have the effect of converting the rates on money market deposit accounts to a more market-driven floating rate typical of prime in order for the Banks to
recognize a more even interest rate spread on this business segment. This strategy will cause the Banks to recognize, in a rising rate environment, a lower overall interest rate spread than it
otherwise would have without the swaps in effect. Likewise, in a falling rate environment, the Banks will recognize a larger interest rate spread than it otherwise would have without the swaps in
effect.

50

---

Note 15Regulatory Capital

|                                          |  | Actual |         | For capital
Adequacy purposes |       | To be well
capitalized under
prompt corrective
Action provision |  
|----------------------------------------- |  | ------ | ------- | ----------------------------- | ----- | --------------------------------------------------------------- | -
|
|
|Total Capital (to risk weighted assets):  |  |        |         |                               |       |                                                                 |  
|Corporation                               |  | $      | 242,363 |                               | 13.73 | %                                                               | $
|Harleysville National Bank and Trust Co   |  |        | 148,666 |                               | 11.44 | %                                                               |  
|Citizens National Bank                    |  |        | 39,397  |                               | 13.07 | %                                                               |  
|Security National Bank                    |  |        | 18,511  |                               | 12.56 | %                                                               |  
|Tier 1 Capital (to risk weighted assets): |  |        |         |                               |       |                                                                 |  
|Corporation                               |  | $      | 223,613 |                               | 12.66 | %                                                               | $
|Harleysville National Bank and Trust Co   |  |        | 137,756 |                               | 10.60 | %                                                               |  
|Citizens National Bank                    |  |        | 35,630  |                               | 11.82 | %                                                               |  
|Security National Bank                    |  |        | 16,666  |                               | 11.31 | %                                                               |  
|Tier 1 Capital (to risk weighted assets): |  |        |         |                               |       |                                                                 |  
|Corporation                               |  | $      | 223,613 |                               | 8.79  | %                                                               | $
|Harleysville National Bank and Trust Co   |  |        | 137,756 |                               | 7.45  | %                                                               |  
|Citizens National Bank                    |  |        | 35,630  |                               | 7.49  | %                                                               |  
|Security National Bank                    |  |        | 16,666  |                               | 7.90  | %                                                               |  

|                                          |  | Actual |         | For capital
Adequacy purposes |       | To be well
capitalized under
prompt corrective
Action provision |  
|----------------------------------------- |  | ------ | ------- | ----------------------------- | ----- | --------------------------------------------------------------- | -
|
|Total Capital (to risk weighted assets):  |  |        |         |                               |       |                                                                 |  
|Corporation                               |  | $      | 222,217 |                               | 13.38 | %                                                               | $
|Harleysville National Bank and Trust Co   |  |        | 133,945 |                               | 11.16 | %                                                               |  
|Citizens National Bank                    |  |        | 37,125  |                               | 12.01 | %                                                               |  
|Security National Bank                    |  |        | 17,033  |                               | 12.60 | %                                                               |  
|Tier 1 Capital (to risk weighted assets): |  |        |         |                               |       |                                                                 |  
|Corporation                               |  | $      | 203,896 |                               | 12.28 | %                                                               | $
|Harleysville National Bank and Trust Co   |  |        | 122,990 |                               | 10.25 | %                                                               |  
|Citizens National Bank                    |  |        | 33,258  |                               | 10.76 | %                                                               |  
|Security National Bank                    |  |        | 15,338  |                               | 11.35 | %                                                               |  
|Tier 1 Capital (to average assets):       |  |        |         |                               |       |                                                                 |  
|Corporation                               |  | $      | 203,896 |                               | 8.19  | %                                                               | $
|Harleysville National Bank and Trust Co   |  |        | 122,990 |                               | 6.88  | %                                                               |  
|Citizens National Bank                    |  |        | 33,258  |                               | 6.91  | %                                                               |  
|Security National Bank                    |  |        | 15,338  |                               | 7.77  | %                                                               |  

The
Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory
and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material affect on the Corporation's financial statements. Under capital adequacy guidelines and
the regulatory

51

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framework
for prompt corrective action, the Banks must meet specific capital guidelines that involve quantitative measures of the Banks' assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Banks' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings,
and other factors.

Quantitative
measures established by regulation to ensure capital adequacy require the Banks to maintain minimum amounts and ratios (set forth in the table) of total and Tier 1 capital
to risk-weighted assets. Management believes, as of December 31, 2003, that the Banks meet all capital adequacy requirements to which they are subject. To be categorized as well
capitalized, the Banks must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events that
have occurred that management believes has changed the Banks' category.

The
National Banking Laws require the approval of the Office of the Comptroller of the Currency if the total of all dividends declared by a national bank in any calendar year exceed the
net profits of the bank (as defined) for that year combined with its retained net profits for the preceding two calendar years. Under this formula, the Banks may declare dividends in 2004 of
approximately $39,000,000 plus an amount equal to the net profits of the Banks in 2004 up to the date of any such dividend declaration.

Additionally,
banking regulations limit the amount of investments, loans, extensions of credit and advances that one subsidiary bank can make to the Corporation at any time to 10% and in
the aggregate 20% of the Banks' capital stock and surplus. These regulations also require that any such investment, loan, extension of credit or advance be secured by securities having a market value
in excess of the amount thereof. At December 31, 2003, there were no investments, loans, extensions of credit or advances from any of the Banks to the Corporation.

Note 16Fair Value of Financial Instruments

SFAS No. 107 "Disclosures about Fair Values of Financial Instruments," requires disclosure of the estimated fair value of an entity's assets and
liabilities considered to be financial instruments. For the Corporation, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments as defined
in SFAS No. 107. However, many such instruments lack an available
trading market, as characterized by a willing buyer and seller engaging in an exchange transaction. Also, it is the Corporation's general practice and intent to hold its financial instruments to
maturity and not to engage in trading or sales activities, except for certain loans and investments. Therefore, the Corporation had to use significant estimates and present value calculations to
prepare this disclosure.

Changes
in the assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. Also, management is concerned that there may not be reasonable
comparability between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high degree of
subjectivity in estimating financial instrument fair values.

Estimated
fair values have been determined by the Corporation using the best available data and an estimation methodology suitable for each category of financial instruments. The
estimation

52

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methodologies
used, the estimated fair values and recorded book balances at December 31, 2003 and 2002 are outlined as follows:

For
cash and due from banks, interest-bearing deposits in banks and federal funds sold, the recorded book values of $94,857,000 and $104,087,000 at December 31, 2003 and 2002,
respectively, approximate fair values. The estimated fair values of investment securities are based on quoted market prices, if available. Estimated fair values are based on quoted market prices of
comparable instruments if quoted market prices are not available.

The
loan portfolio, net of unearned income, at December 31, 2003 and 2002, has been valued using a present value discounted cash flow analysis where market prices were not
available. The discount rate used in these calculations is the estimated current market rate adjusted for credit risk. The carrying value approximates its fair value.

|                      |  | 2003 |           | 2002
|--------------------- |  | ---- | --------- | ----
|
|
|Investment Securities |  | $    | 924,874   |     
|Loans, Net            |  | $    | 1,408,391 |     

The
estimated fair values of demand deposits (i.e., interest and noninterest-bearing checking accounts, savings and certain types of money market accounts) are, by definition, equal to
the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable rate, fixed-term money market accounts and certificates of deposit
approximate their fair values at the reporting date. The carrying amount of accrued interest receivable and payable approximates fair value.

|              |  | 2003 |         | 2002
|------------- |  | ---- | ------- | ----
|
|
|Time Deposits |  | $    | 673,059 |     
|Borrowings    |  | $    | 250,056 |     

The
fair values of demand notes, federal funds purchased, borrowings, and securities sold under agreements to repurchase of $250,056,000 and $248,906,000 at December 31, 2003 and
2002, respectively, approximate their recorded book balances.

The
fair value of commitments to extend credit is estimated based on the amount of unamortized deferred loan commitment fees. The fair value of letters of credit is based on the amount
of unearned fees plus the estimated cost to terminate the letters of credit. Fair values of unrecognized financial instruments including commitments to extend credit and the fair value of letters of
credit are considered immaterial.

The
fair value of interest rate swaps are based upon the estimated amount the Company would receive or pay to terminate the contracts or agreements, taking into account current interest
rates and, when appropriate, the current creditworthiness of the counterparties. The fair value of the interest rate swap agreements are $173,000 at December 31, 2003.

53

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Note 17Condensed Financial Information Parent-Company Only

Condensed financial statements of Harleysville National Corporation follow:

CONDENSED BALANCE SHEETS

|                                      |                                                                                   | December 31,                               |  
|------------------------------------- | --------------------------------------------------------------------------------- | ------------------------------------------ | -
|
|
|Assets:                               |                                                                                   |                                            |  
|                                      | Cash                                                                              |                                            | $
|                                      | Investments in subsidiaries                                                       |                                            |  
|                                      | Other assets                                                                      |                                            |  
|                                      |                                                                                   |                                            |  
|                                      |                                                                                   | Total assets                               |  
|                                      |                                                                                   |                                            |  
|Liabilities and shareholders' equity: |                                                                                   |                                            |  
|                                      | Guaranteed preferred beneficial interest in Corporation's subordinated debentures |                                            | $
|                                      | Other liabilities                                                                 |                                            |  
|                                      |                                                                                   |                                            |  
|                                      |                                                                                   | Total liabilities                          |  
|                                      |                                                                                   |                                            |  
|Shareholders' equity:                 |                                                                                   |                                            |  
|                                      | Common stock                                                                      |                                            |  
|                                      | Additional paid in capital                                                        |                                            |  
|                                      | Retained earnings                                                                 |                                            |  
|                                      | Treasury stock                                                                    |                                            |  
|                                      | Net unrealized gain on investment securities available for sale                   |                                            |  
|                                      |                                                                                   |                                            |  
|                                      |                                                                                   | Total shareholders' equity                 |  
|                                      |                                                                                   |                                            |  
|                                      |                                                                                   | Total liabilities and shareholders' equity |  
|                                      |                                                                                   |                                            |  

CONDENSED STATEMENTS OF INCOME

|                                                                                        |                          | Year Ended December 31, |       
|--------------------------------------------------------------------------------------- | ------------------------ | ----------------------- | ------
|
|
|Dividends from subsidiaries                                                             |                          | $                       | 16,566
|Investment income                                                                       |                          |                         | 16    
|                                                                                        |                          |                         |       
|                                                                                        | Total operating income   |                         |       
|                                                                                        |                          |                         |       
|Interest on subordinated debt                                                           |                          |                         | 517   
|Other expenses                                                                          |                          |                         | 9     
|                                                                                        |                          |                         |       
|                                                                                        | Total operating expenses |                         |       
|                                                                                        |                          |                         |       
|Income before income tax expense and equity in undistributed net income of subsidiaries |                          |                         | 16,056
|Income tax expense                                                                      |                          |                         | (179  
|                                                                                        |                          |                         |       
|Income before equity in undistributed net income of subsidiaries                        |                          |                         | 16,235
|Equity in undistributed net income of subsidiaries                                      |                          |                         | 19,098
|                                                                                        |                          |                         |       
|                                                                                        | Net income               |                         | $     
|                                                                                        |                          |                         |       

54

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CONDENSED STATEMENTS OF CASH FLOWS

|                                               |                                                                                   | Year Ended December 31,                      |        
|---------------------------------------------- | --------------------------------------------------------------------------------- | -------------------------------------------- | -------
|
|
|Operating activities:                          |                                                                                   |                                              |        
|Net income                                     |                                                                                   | $                                            | 35,333 
|                                               | Adjustments to reconcile net income to net cash provided by operating activities: |                                              |        
|                                               |                                                                                   | Equity in undistributed net income of banks  |        
|                                               |                                                                                   | Net (increase) decrease in assets            |        
|                                               |                                                                                   | Net (decrease) increase in other liabilities |        
|                                               |                                                                                   |                                              |        
|Net cash provided by operating activities      |                                                                                   |                                              | 15,526 
|                                               |                                                                                   |                                              |        
|Investing activities:                          |                                                                                   |                                              |        
|Capital contributions made to the subsidiaries |                                                                                   |                                              |       
|                                               |                                                                                   |                                              |        
|Net cash used in investing activities          |                                                                                   |                                              |       
|                                               |                                                                                   |                                              |        
|Financing activities:                          |                                                                                   |                                              |        
|                                               | Proceeds from issuance of long-term debt                                          |                                              |        
|                                               | Cash dividends and fractional shares                                              |                                              |        
|                                               | Repurchase of common stock                                                        |                                              |        
|                                               | Stock options and awards                                                          |                                              |        
|                                               |                                                                                   |                                              |        
|Net cash used in financing activities          |                                                                                   |                                              | (15,647
|                                               |                                                                                   |                                              |        
|Net (decrease) increase in cash                |                                                                                   |                                              | (121   
|Cash and cash equivalents at beginning of year |                                                                                   |                                              | 2,031  
|                                               |                                                                                   |                                              |        
|Cash and cash equivalents at end of year       |                                                                                   | $                                            | 1,910  
|                                               |                                                                                   |                                              |        

55

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Note 18Quarterly Financial Data (Unaudited)

The
following is the summarized (unaudited) consolidated quarterly financial data of the Corporation which, in the opinion of management, reflects all adjustments, consisting only of
normal recurring adjustments, necessary for fair presentation of the Corporations' results of operations:

|                                 |         | Three Months Ended 2003
|-------------------------------- | ------- | -----------------------
|
|
|Interest income                  |         | $                      
|Net interest income              |         |                        
|Provision for loan losses        |         |                        
|Other operating income           |         |                        
|Operating expenses               |         |                        
|Income before income tax expense |         |                        
|Income tax expense               |         |                        
|                                 |         |                        
|Net income                       |         | $                      
|                                 |         |                        
|Net income per share             |         |                        
|                                 | Diluted |                        
|                                 |         |                        
|                                 | Basic   |                        
|                                 |         |                        

|                                 |         | Three Months Ended 2002
|-------------------------------- | ------- | -----------------------
|
|Interest income                  |         | $                      
|Net interest income              |         |                        
|Provision for loan losses        |         |                        
|Other operating income           |         |                        
|Operating expenses               |         |                        
|Income before income tax expense |         |                        
|Income tax expense               |         |                        
|                                 |         |                        
|Net income                       |         | $                      
|                                 |         |                        
|Net income per share             |         |                        
|                                 | Diluted |                        
|                                 |         |                        
|                                 | Basic   |                        
|                                 |         |                        

56

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Accountants and Business Advisors

GRAPHIC

Report of Independent Certified Public Accountants

Board
of Directors and Shareholders
Harleysville National Corporation

We
have audited the accompanying consolidated balance sheets of Harleysville National Corporation and Subsidiaries as of December 31, 2003 and 2002, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Harleysville National Corporation as of
December 31, 2003 and 2002, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2003, in
conformity with accounting principles generally accepted in the United States of America.

|                                                                                                                                |  | 
|------------------------------------------------------------------------------------------------------------------------------- |  | 
|/s/GRANT THORNTON LLP                                                                                                           |  | 
|Philadelphia, Pennsylvania
January 9, 2004                                                                                      |  | 
|Suite 3100
Two Commerce Square
2001 Market Street
Philadelphia, PA 19103-7080 T215.561-4200 F215.561.1066 Wwww.grantthorton.com |  | 
|Grant Thornton LLP
US Member of Grant Thornton International                                                                    |  | 

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Item 1. History and Business

Harleysville National Corporation, a Pennsylvania corporation (the Corporation), was incorporated in June, 1982. On January 1, 1983, the Corporation became
the parent bank holding company of Harleysville National Bank and Trust Company (HNB), established in 1909, a wholly owned subsidiary of the Corporation. On February 13, 1991, the Corporation
acquired all of the outstanding common stock of Citizens National Bank (CNB), established in 1903. On June 1, 1992, the Corporation acquired all of the outstanding stock of Summit Hill Trust
Company (Summit Hill). On September 25, 1992, Summit Hill merged into CNB and is now operating as a branch office of CNB. On July 1, 1994 the Corporation acquired all of the outstanding
stock of Security National Bank (SNB), established in 1988. On March 1, 1996, the Corporation acquired all of the outstanding common stock of Farmers & Merchants Bank (F & M).
F & M was merged into CNB and is now operating as a branch office of CNB. On March 17, 1997, the HNC Financial Company was incorporated as a Delaware Corporation. HNC Financial Company's
principal business function is to expand the investment opportunities of the Corporation. On January 20, 1999, the Corporation acquired all of the outstanding stock of Northern Lehigh
Bancorp, Inc., parent company of Citizens National Bank of Slatington. Citizens National Bank of Slatington was merged into CNB. On April 28, 2000, the Corporation acquired all of the
outstanding common stock of Citizens Bank and Trust Company of Palmerton (CB & T). CB & T was merged into CNB. On March 30, 2001, HNC Reinsurance Company was incorporated as an
Arizona Corporation. HNC Reinsurance Company functions as a reinsurer of consumer loan credit life and accident and health insurance. The Corporation is primarily a bank holding company that provides
financial services through its three bank subsidiaries. Since commencing operations, the Corporation's business has consisted primarily of managing HNB, CNB and SNB (collectively the Banks), and its
principal source of income has been dividends paid by the Banks. The Corporation is registered as a bank holding company under the Bank Holding Company Act of 1956.

The
Banks are national banking associations under the supervision of the Office of the Comptroller of the Currency. The Corporation's and HNB's legal headquarters are located at 483 Main
Street, Harleysville, Pennsylvania 19438. CNB's legal headquarters is located at 13-15 West Ridge Street, Lansford, Pennsylvania 18232. SNB's legal headquarters is located at One Security
Plaza, Pottstown, Pennsylvania 19464. HNC Financial Company's legal headquarters is located at 2751 Centerville Road, Suite 3164, Wilmington, Delaware 19808. HNC Reinsurance
Company's legal headquarters is located at 101 North First Avenue, Suite 2460, Phoenix, AZ 85003.

On
October 15, 2003, the Corporation and HNB entered into an agreement and plan of merger with Millennium Bank whereby Millennium Bank will be merged into and with HNB. The
transaction is expected to be consummated in the second quarter of 2004 providing all necessary shareholder and regulatory approvals are met.

As
of December 31, 2003, the Corporation had total assets of $2,510,939,000, total shareholders' equity of $227,053,000 and total deposits of $1,979,081,000.

The
Banks engage in the full-service commercial banking and trust business, including accepting time and demand deposits, making secured and unsecured commercial and consumer
loans, financing commercial transactions, making construction and mortgage loans and performing corporate pension and personal investment and trust services. Their deposits are insured by the Federal
Deposit Insurance Corporation to the extent provided by law. The Banks have 40 branch offices located in Montgomery, Bucks, Chester, Berks, Carbon, Wayne, Monroe, Lehigh, Northampton and Schuylkill
counties, Pennsylvania, 22 of which are owned by the Banks and 18 of which are leased from third parties.

The
Banks enjoy a stable base of core deposits and are leading community banks in their service areas. The Banks believe they have gained their position as a result of a
customer-oriented philosophy and a strong commitment to service. Senior management has made the development of a sales orientation throughout the Banks one of their highest priorities and emphasizes
this objective with

58

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extensive
training and sales incentive programs. The Banks maintain close contact with the local business community to monitor commercial lending needs and believe they respond to customer requests
quickly and with flexibility. Management believes these competitive strengths are reflected in the Corporation's results of operations.

As
of December 31, 2003, the Corporation and the Banks employed approximately 623 full-time equivalent employees. The Corporation provides a variety of employment
benefits and considers its relationships with its employees to be satisfactory.

Effective
March 29, 2004, the charters of Citizens National Bank and Security National Bank will be combined into the charter of Harleysville National Bank. In combining the three
banks, the Corporation reorganized internally to improve efficiencies and productivity, thus realizing cost savings. Streamlined operations will enable our employees to be more responsive to our
customers. Our customers will be able to bank at any one of our 41 offices throughout 10 counties in Eastern Pennsylvania, no matter where they live or travel in the area.

Competition

The Banks compete actively with other eastern Pennsylvania financial institutions, many larger than the Banks, as well as with financial and
non-financial institutions headquartered elsewhere.
The Banks are generally competitive with all competing institutions in their service areas with respect to interest rates paid on time and savings deposits, service charges on deposit accounts,
interest rates charged on loans, and fees and charges for trust services. At December 31, 2003, HNB's legal lending limit to a single customer was $22,295,000 and CNB's and SNB's legal lending
limits to a single customer were $5,911,000 and $2,815,000, respectively. Many of the institutions with which the Banks compete are able to lend significantly more than these amounts to a single
customer.

Supervision and RegulationThe Registrant

In November, 1999, the Gramm-Leach-Bliley Financial Modernization Act of 1999 (Modernization Act) became law. The Modernization Act allows bank holding companies
meeting management, capital and Community Reinvestment Act standards to engage in a substantially broader range of nonbanking activities than was permissible before enactment, including underwriting
insurance and making merchant banking investments in commercial and financial companies. It allows insurers and other financial services companies to acquire banks, removes various restrictions that
currently apply to bank holding company ownership of securities firms and mutual fund advisory companies, and establishes the overall regulatory structure applicable to bank holding companies that
also engage in insurance and securities operations. The Corporation currently believes it meets the requirements for the broader range of activities that will be permitted by the Modernization Act.

The
Modernization Act also modified law related to financial privacy and community reinvestment. The privacy provisions generally prohibit financial institutions, including the
Corporation, from disclosing nonpublic financial information to nonaffiliated third parties unless customers have the opportunity to "opt out" of the disclosure.

Pending Legislation

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

59

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Effects of Inflation

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

Effect of Government Monetary Policies

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

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

Environmental Regulations

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

Supervision and RegulationBanks

The operations of the Banks are subject to federal and state statutes applicable to banks chartered under the banking laws of the United States, to members of the
Federal Reserve and to banks whose deposits are insured by the FDIC. The Banks' operations are also subject to regulations of the OCC, the Federal Reserve and the FDIC. The primary supervisory
authority of the Banks is the OCC, who regularly examines the Banks. The OCC has authority to prevent a national bank from engaging in unsafe or unsound practices in conducting its business.

Federal
and state banking laws and regulations govern, among other things, the scope of a bank's business, the investments a bank may make, the reserves against deposits a bank must
maintain, loans a bank makes and collateral it takes, the activities of a bank with respect to mergers and consolidations and the establishment of branches.

As
a subsidiary bank of a bank holding company, the Banks are subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to the bank holding company
or its subsidiaries, or investments in the stock or other securities as collateral for loans. The Federal Reserve Act and Federal Reserve regulations also place certain limitations and reporting
requirements on extensions of credit by a bank to principal shareholders of its parent holding company, among others,

60

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and
to related interests of such principal shareholders. In addition, such legislation and regulations may affect the terms upon which any person becoming a principal shareholder of a holding company
may obtain credit from banks with which the subsidiary bank maintains a correspondent relationship.

Under
the Federal Deposit Insurance Act, the OCC possesses the power to prohibit institutions regulated by it (such as the Banks) from engaging in any activity that would be an unsafe
and unsound banking practice or would otherwise be in violation of the law.

Under
the Community Reinvestment Act of 1977, the OCC is required to assess the record of all financial institutions regulated by it to determine if these institutions are meeting the
credit needs of the community, including low and moderate income neighborhoods, which they serve and to take this record into account in its evaluation of any application made by any of such
institutions for, among other things, approval of a branch or other deposit facility, office relocation, a merger or an acquisition of bank shares. The Financial Institutions Reform, Recovery and
Enforcement Act of 1989 amended the CRA to require, among other things, that the OCC make publicly available the evaluation of a bank's record of meeting the credit needs of its entire community,
including low and moderate income neighborhoods. This evaluation will include a descriptive rating like "outstanding," "satisfactory," "needs to improve" or "substantial noncompliance" and a statement
describing the basis for the rating. These ratings are publicly disclosed.

Under
the Bank Secrecy Act, banks and other financial institutions are required to report to the Internal Revenue Service currency transactions of more than $10,000 or multiple
transactions of which a bank is aware in any one day that aggregate in excess of $10,000. Civil and criminal penalties are provided under the Bank Secrecy Act for failure to file a required
report, for failure to supply information required by the Bank Secrecy Act or for filing a false or fraudulent report.

The
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) requires that institutions be classified, based on their risk-based capital ratios into one of five
defined categories, as illustrated below: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.

|                               |  | Total
Risk
Based
Ratio |   | Tier 1
Risk
Based
Ratio |   | Tier 1
Leverage
Ratio |    | Under a
Capital
Order or
Directive
|------------------------------ |  | ---------------------- | - | ----------------------- | - | --------------------- | -- | ----------------------------------
|Capital Category               |  |                        |   |                         |   |                       |    |                                   
|Well capitalized               |  | M10.0                  | % | M6.0                    | % | M5.0                  | %  | NO                                
|Adequately capitalized         |  | M8.0                   | % | M4.0                    | % | M4.0                  | %* |                                   
|Undercapitalized               |  | <8.0                   | % | <4.0                    | % | <4.0                  | %* |                                   
|Significantly undercapitalized |  | <6.0                   | % | <3.0                    | % | <3.0                  | %  |                                   
|Critically undercapitalized    |  |                        |   |                         |   | <2.0                  | %  |                                   

---

*
3.0 for those banks having the highest available regulatory rating.

In
the event an institution's capital deteriorates to the undercapitalized category or below, FDICIA prescribes an increasing amount of regulatory intervention, including: the
institution of a capital restoration plan and a guarantee of the plan by a parent institution; and the placement of a hold on increases in assets, number of branches or lines of business. If capital
has reached the significantly or critically undercapitalized levels, further material restrictions can be imposed, including restrictions on interest payable on accounts, dismissal of management and,
in critically undercapitalized situations, appointment of a receiver. For well capitalized institutions, FDICIA provides authority for regulatory intervention where the institution is deemed to be
engaging in unsafe or unsound practices or receives a less than satisfactory examination report rating for asset quality, management, earnings or liquidity. All but well capitalized institutions are
prohibited from accepting brokered deposits without prior

61

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regulatory
approval. Under FDICIA, financial institutions are subject to increased regulatory scrutiny and must comply with certain operational, managerial and compensation standards to be developed
by Federal Reserve Board regulations. FDICIA also requires the regulators to issue new rules establishing certain minimum standards to which an institution must adhere including standards requiring a
minimum ratio of classified assets to capital, minimum earnings necessary to absorb losses and minimum ratio of market value to book value for publicly held institutions. Additional regulations are
required to be developed relating to internal controls, loan documentation, credit underwriting, interest rate exposure, asset growth and excessive compensation, fees and benefits.

Annual
full-scope, on site regulatory examinations are required for all the FDIC-insured institutions except institutions with assets under $100 million
which are well capitalized, well-managed and not subject to a recent change in control, in which case, the examination period is every 18 months. Banks with total assets of
$500 million or more, as of the beginning of fiscal year 1993, are required to submit to their supervising federal and state banking agencies a publicly available annual audit report. The
independent accountants of such banks are required to attest to the accuracy of management's report regarding the internal control structure of the bank. In addition, such banks also are required to
have an independent audit committee composed of outside directors who are independent of management, to review with management and the independent accountants, the reports that must be submitted to
the bank regulatory agencies. If the independent accountants resign or are dismissed, written notification must be given to the Banks' supervising government banking agencies. These accounting and
reporting reforms do not apply to an institution such as a bank with total assets at the beginning of its fiscal year of less than $500 million, such as CNB or SNB.

FDICIA
also requires that banking agencies reintroduce loan-to-value ratio regulations which were previously repealed by the 1982 Act.
Loan-to-values limit the amount of money a financial institution may lend to a borrower, when the loan is secured by real estate, to no more than a percentage, set by
regulation, of the value of the real estate.

A
separate subtitle within FDICIA, called the "Bank Enterprise Act of 1991," requires "truth-in-savings" on consumer deposit accounts so that consumers can make
meaningful comparisons between the competing claims of banks with regard to deposit accounts and products. Under this provision, a bank is required to provide information to depositors concerning the
terms of their deposit accounts, and in particular, to disclose the annual percentage yield. The operational cost of complying with the Truth-In-Savings law had no material
impact on liquidity, capital resources or reported results of operations.

While
the overall impact of fully implementing all provisions of the FDICIA cannot be accurately calculated, Management believes that full implementation of the FDICIA had no material
impact on liquidity, capital resources or reported results of operation in future periods.

From
time to time, various types of federal and state legislation have been proposed that could result in additional regulation of, and restriction on, the business of the Banks. It
cannot be predicted whether any such legislation will be adopted or, if adopted, how such legislation would affect the business of the Banks. As a consequence of the extensive regulation of commercial
banking activities in the United States, the Banks' business is particularly susceptible to being affected by federal legislation and regulations that may increase the costs of doing business.

Item 2. Properties

The principal executive offices of the Corporation and of HNB are located in Harleysville, Pennsylvania in a two-story office building owned by HNB,
built in 1929. HNB also owns the buildings in which twelve of its branches are located and leases space for the other eleven branches from unaffiliated third parties under leases expiring at various
times through 2036. The principal executive offices of CNB are located in Lansford, Pennsylvania in a two-story office building owned by CNB.

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Citizens
owns nine of the buildings where its branches are located and leases two branches. The principal executive offices of SNB are located in Pottstown, Pennsylvania, in a building leased by SNB.
SNB leases five branches, and owns its Pottstown Center branch. HNC Investment Company leases an office in Wilmington, Delaware. HNC Reinsurance Company leases an office in Phoenix, Arizona.

|Office                |  | Office Location                                  |  | Owned/Leased
|--------------------- |  | ------------------------------------------------ |  | ------------
|Harleysville          |  | 483 Main Street, Harleysville, PA                |  | Owned       
|Skippack              |  | Route 73, Skippack, PA                           |  | Owned       
|Limerick              |  | Ridge Pike, Limerick, PA                         |  | Owned       
|North Penn            |  | Welsh & North Wales Rd., North Wales, PA         |  | Owned       
|Gilbertsville         |  | Gilbertsville Shopping Center, Gilbertsville, PA |  | Leased      
|Hatfield              |  | Snyder Square, Hatfield, PA                      |  | Leased      
|North Broad           |  | North Broad Street, Lansdale, PA                 |  | Owned       
|Marketplace           |  | Marketplace Shopping Center, Lansdale, PA        |  | Leased      
|Normandy Farms        |  | Morris Road, Blue Bell, PA                       |  | Leased      
|Horsham               |  | Babylon Business Center, Horsham, PA             |  | Leased      
|Meadowood             |  | Route 73, Worcester, PA                          |  | Leased      
|Collegeville          |  | 364 Main Street, Collegeville, PA                |  | Owned       
|Sellersville          |  | 209 North Main Street, Sellersville, PA          |  | Owned       
|Trainers Corner       |  | Trainers Corner Center, Quakertown, PA           |  | Leased      
|Quakertown Main       |  | 224 West Broad Street, Quakertown, PA            |  | Owned       
|Spring House          |  | 1017-1031 N. Bethlehem Pike, Spring House, PA    |  | Owned       
|Red Hill              |  | 400 Main Street, Red Hill, PA                    |  | Owned       
|Doylestown            |  | 500 East State Road, Doylestown, PA              |  | Leased      
|Audubon               |  | 2624 Egypt Road, Audubon, PA                     |  | Owned*      
|Chalfont              |  | 251 West Butler Avenue, Chalfont, PA             |  | Leased      
|Royersford            |  | 440 W. Linfield-Trappe Road, Royersford, PA      |  | Owned*      
|Souderton             |  | 702 Route 113, Souderton, PA                     |  | Leased      
|Foulkeways            |  | 1120 Meetinghouse Road, Gwynedd, PA              |  | Leased      
|Lansford              |  | 13-15 West Ridge Street, Lansford, PA            |  | Owned       
|Summit Hill           |  | 2 East Ludlow Street, Summit Hill, PA            |  | Owned       
|Lehighton             |  | 904 Blakeslee Blvd, Lehighton, PA                |  | Owned       
|Honesdale             |  | 1001 Main Street, Honesdale, PA                  |  | Owned       
|McAdoo                |  | 25 North Kennedy Drive, McAdoo, PA               |  | Owned       
|Slatington            |  | 502 Main Street, Slatington, PA                  |  | Owned       
|Slatington Handi-Bank |  | 705 Main Street, Slatington, PA                  |  | Owned       
|Lehigh Township       |  | 4421 Lehigh Drive, Walnutport, PA                |  | Owned       
|Palmerton             |  | 372 Delaware Avenue, Palmerton, PA               |  | Owned       
|Kresgeville           |  | Route 209, Kresgeville, PA                       |  | Leased      
|Allentown             |  | 1602-1604 Allen Street, Allenton, PA             |  | Leased      
|Pottstown             |  | One Security Plaza, Pottstown, PA                |  | Leased      
|Pottstown             |  | 1450 East High Street, Pottstown, PA             |  | Leased      
|Pottstown             |  | 930 North Charlotte Street, Pottstown, PA        |  | Leased      
|Pottstown             |  | Rt. 100 and Shoemaker Road, Pottstown, PA        |  | Owned*      
|Boyertown             |  | Rt. 100 and Baus Road, Boyertown, PA             |  | Leased      
|Douglassville         |  | 1191 Ben Franklin Parkway, Douglassville, PA     |  | Leased      

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* Branch buildings are owned by the Banks and the land is leased.

In
management's opinion, all of the above properties are in good condition and are adequate for the Registrant's and the Banks' purposes.

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Item 3.    Legal Proceedings

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

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

No matter was submitted during the fourth quarter of 2003 to a vote of holders of the Corporation's Common Stock.

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

None.

Item 9A.    Controls and Procedures

Within the ninety days prior to the filing of this report, the Corporation's management, under the supervision and with the participation of the Corporation's
Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Corporation's disclosure controls and procedures, as defined in Rule 13a-14c under
the Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Corporation's disclosure controls and procedures were
adequate. There were no significant changes (including corrective actions with regard to significant or material weaknesses) in the Corporation's internal controls or in other factors subsequent to
the date of the evaluation that could significantly affect those controls.

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Item 10.    Executive Officers of Registrant

The following listing sets forth the name, age (as of February 12, 2004) and principal position regarding the Executive Officers of the Corporation

|Name                 |  | Age |  | Position                                                                                                                                   
|-------------------- |  | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------
|Walter E. Daller, Jr |  | 64  |  | Chairman of the Board, President and Chief Executive Officer of the Corporation.                                                           
|Demetra M. Takes     |  | 53  |  | President and Chief Executive Officer of Harleysville since 1999, prior position was President and Chief Operating Officer of Harleysville.
|Thomas D. Oleksa     |  | 50  |  | President and Chief Executive Officer of Citizens National Bank.                                                                           
|Fred C. Reim, Jr     |  | 60  |  | President and Chief Executive Officer of Security National Bank since 1998, prior position was Senior Vice President of Harleysville.      
|Gregg J. Wagner      |  | 43  |  | Executive Vice President and Chief Financial Officer since 2000, prior position was Senior Vice President of Finance.                      
|Mikkalya W. Murray   |  | 48  |  | Executive Vice President and Chief Credit Officer since 2000, prior position was Senior Vice President of Loan Administration.             
|Clay T. Henry        |  | 43  |  | Executive Vice President of Trust and Investment Services since 2004, prior position was Senior Vice President.                            

The rules of the Securities and Exchange Commission require that the corporation disclose late filings of reports of stock ownership (and changes in stock ownership) by its directors and
executive officers. To the best of the Corporation's knowledge, there were no late filings of reports of stock ownership by its directors and executive officers.

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Exhibits

|Exhibit
No. |  | Description of Exhibits                                                                                                                                                                                                                                                                                                                                                                   
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3.1)       |  | Harleysville National Corporation Articles of Incorporation, as amended. (Incorporated by reference to Exhibit 3(a) to the Corporation's Registration Statement No. 333-111709 on Form S-4, as filed on
January 5, 2004.)                                                                                                                                                                 
|(3.2)       |  | Harleysville National Corporation By-laws. (Incorporated by reference to Exhibit 3(b) to the Corporation's Registration Statement No. 333-111709 on Form S-4, as filed on January 5, 2004.)                                                                                                                                                                                               
|(10.1)      |  | Harleysville National Corporation 1993 Stock Incentive Plan. (Incorporated by Reference to Exhibit 4.3 of Registrant's Registration Statement No. 33-57790 on Form S-8, filed with the Commission on October 1,
 1993.)                                                                                                                                                                   
|(10.2)      |  | Harleysville National Corporation Stock Bonus Plan. (Incorporated by Reference to Exhibit 99A of Registrant's Registration Statement No. 33-17813 on Form S-8, filed with the Commission on December 13,
1996.)                                                                                                                                                                           
|(10.3)      |  | Supplemental Executive Retirement Plan. (Incorporated by Reference to Exhibit 10.3 of Registrant's Annual Report in Form 10-K for the year ended December 31, 1997, filed with the Commission on March 27,
 1998.)                                                                                                                                                                        
|(10.4)      |  | Walter E. Daller, Jr., Chairman, President and Chief Executive Officer's employment agreement. (Incorporated by Reference to Registrant's Registration Statement on Form 8-K, filed with the Commission on March 25,
 1999.)                                                                                                                                                              
|(10.5)      |  | Demetra M. Takes, President and Chief Executive Officer of Harleysville employment agreement. (Incorporated by Reference to Registrant's Registration Statement on Form 8-K, filed with the Commission on March 25,
1999.)                                                                                                                                                                
|(10.6)      |  | Vernon L. Hunsberger, Senior Vice President/CFO and Cashier's employment agreement. (Incorporated by Reference to Registrant's Registration Statement on Form 8-K, filed with the Commission on March 25,
1999.)                                                                                                                                                                          
|(10.7)      |  | Harleysville National Corporation 1998 Stock Incentive Plan. (Incorporated by Reference to Registrant's Registration Statement No. 333-79971 on Form S-8 filed with the Commission on June 4, 1999.)                                                                                                                                                                                      
|(10.8)      |  | Harleysville National Corporation 1998 Independent Directors Stock Option Plan. (Incorporated by Reference to Registrant's Registration Statement No. 333-79973 on Form S-8 filed with the Commission on
June 4, 1999.)                                                                                                                                                                   
|(10.9)      |  | Agreement and Plan of Merger dated as of October 15, 2004, by and among Harleysville National Corporation, Harleysville National Bank and Trust Company and Millennium Bank, as amended February 2, 2004.
(Incorporated by reference to Appendix A to the proxy statement/prospectus on the Corporation's Registration Statement No. 333-111709 on Form S-4, as filed on January 5, 2004.)
|(10.10)     |  | Employment Agreement by and among Harleysville National Corporation, Harleysville National Bank and Trust Company and David E. Sparks, dated as of October 15, 2003 (incorporated by reference to Appendix A to the
proxy statement/prospectus on the Corporation's Registration Statement No. 333-111709 on Form S-4, as filed on January 5, 2004.)                                      
|            |  |                                                                                                                                                                                                                                                                                                                                                                                           

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|(10.11) |  | Amendment to Employment Agreement by and among David R. Kotok, Millennium Bank, Cumberland Advisors, Inc., Harleysville National Corporation and Harleysville National Bank and Trust Company dated October 15, 2003
(incorporated by reference to Appendix A to the proxy statement/prospectus on the Corporation's Registration Statement No. 333-111709 on Form S-4, as filed on January 5, 2004.)
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(13)    |  | Excerpts from the Corporation's 2003 Annual Report to Shareholders.                                                                                                                                                                                                                                                                                                                                  
|(14)    |  | Code of Ethics                                                                                                                                                                                                                                                                                                                                                                                       
|(21)    |  | Subsidiaries of Registrant.                                                                                                                                                                                                                                                                                                                                                                          
|(23)    |  | Consent of Grant Thornton LLP, Independent Certified Public Accountants.                                                                                                                                                                                                                                                                                                                             
|(31.1)  |  | Certification pursuant to Section 302. Walter E. Daller, Jr., Chairman, President and Chief Executive Officer.                                                                                                                                                                                                                                                                                       
|(31.2)  |  | Certification pursuant to Section 302. Gregg J. Wagner, Executive Vice President and Chief Financial Officer.                                                                                                                                                                                                                                                                                        
|(32.1)  |  | Certification pursuant to Section 906.                                                                                                                                                                                                                                                                                                                                                               
|(32.2)  |  | Certification pursuant to Section 906.                                                                                                                                                                                                                                                                                                                                                               

(b)    Report on Form 8-K.

On
October 14, 2003, the Registrant filed a Form 8-K containing the third quarter of 2003 earnings press release.

On
October 16, 2003, the Registrant filed a Form 8-K announcing its definitive agreement to acquire Millennium Bank signed on October 15, 2003.

On
November 20, 2003, the Registrant filed a Form 8-K announcing that on November 17, 2003 the Registrant declared a dividend of 16 cents per share and a special dividend of 3
cents per share, payable December 15, 2003.

On
December 1, 2003, the Registrant filed a Form 8-K announcing that the Registrant's audit committee amended and restated its charter.

On
December 24, 2003, the Registrant filed a Form 8-K announcing that the Registrant received approval of the OCC to combine the charters of its subsidiary banks, Security National Bank
and Citizens National Bank into its largest subsidiary bank, Harleysville National Bank and Trust Company, as of March 26, 2004.

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SIGNATURES

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

| |  | HARLEYSVILLE NATIONAL CORPORATION
| |  | ---------------------------------
| |  | By:                              

Date:
February 25, 2004

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

|Signature                                     |  | Title                                                                                                   |  | Date             
|--------------------------------------------- |  | ------------------------------------------------------------------------------------------------------- |  | -----------------
|                                              |  |                                                                                                         |  |                  
|/s/WALTER R. BATEMAN IIWalter R. Bateman II   |  | Director                                                                                                |  | February 25, 2004
|/s/LEEANN BERGEYLeeAnn Bergey                 |  | Director                                                                                                |  | February 25, 2004
|/s/WALTER E. DALLER, JR.Walter E. Daller, Jr. |  | Chairman of the Board,
President and Chief Executive
Officer and Director
(Principal Executive Officer) |  | February 25, 2004
|/s/HAROLD A. HERRHarold A. Herr               |  | Director                                                                                                |  | February 25, 2004
|/s/GREGG J. WAGNERGregg J. Wagner             |  | Treasurer (Principal Financial and Accounting Officer)                                                  |  | February 25, 2004
|/s/STEPHANIE S. MITCHELLStephanie S. Mitchell |  | Director                                                                                                |  | February 25, 2004
|/s/THOMAS C. LEAMERThomas C. Leamer           |  | Director                                                                                                |  | February 25, 2004
|/s/JAMES A. WIMMERJames A. Wimmer             |  | Director                                                                                                |  | February 25, 2004
|/s/WILLIAM M. YOCUMWilliam M. Yocum           |  | Director                                                                                                |  | February 25, 2004

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EXHIBIT INDEX

|       |  | Exhibit                                                                                                       
|------ |  | --------------------------------------------------------------------------------------------------------------
|(13)   |  | Excerpts from the Corporation's 2003 Annual Report to Shareholders                                            
|(14)   |  | Code of Ethics                                                                                                
|(21)   |  | Subsidiaries of Registrant.                                                                                   
|(23)   |  | Consent of Grant Thornton LLP, Independent Certified Public Accountants.                                      
|(31.1) |  | Certification pursuant to Section 302. Walter E. Daller, Jr., Chairman, President and Chief Executive Officer.
|(31.2) |  | Certification pursuant to Section 302. Gregg J. Wagner, Executive Vice President and Chief Financial Officer. 
|(32.1) |  | Certification pursuant to Section 906.                                                                        
|(32.2) |  | Certification pursuant to Section 906.                                                                        

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