**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**Washington,      D.C. 20549**

**Form      10-Q**

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

**for      the quarterly period ended June 30, 2006**

**Or      **

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

**HARLEYSVILLE      NATIONAL CORPORATION**

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

**483      Main Street**

**Harleysville,      Pennsylvania 19438**

**(Address      of principal executive office and zip code)**

**(215)      256-8851**

**(Registrant’s      telephone number, including area code)**

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| **HARLEYSVILLE                NATIONAL CORPORATION**                                                                                                                                                 |                                        |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------|
|                                                                                                                                                                                                 |                                        |
|                                                                                                                                                                                                 |                                        |
| **INDEX                TO FORM 10-Q REPORT**                                                                                                                                                         |                                        |
|                                                                                                                                                                                                 |                                        |
|                                                                                                                                                                                                 | PAGE                                        |
|                                                                                                                                                                                                 |                                        |
| Part                I. Financial Information                                                                                                                                                         |                                        |
|                                                                                                                                                                                                 |                                        |
|     Item                1.                Financial Statements:                                                                                                                  |                                        |
|                                                                                                                                                                                                 |                                        |
|         Consolidated                Balance Sheets at June 30, 2006 (unaudited) and December 31,                2005                                         |     3                   |
|                                                                                                                                                                                                 |                                        |
|         Consolidated                Statements of Income for the Three and Six Months Ended June 30,                2006 and                2005 (unaudited) |     4    |
|                                                                                                                                                                                                 |                                        |
|         Consolidated                Statements of Shareholders’ Equity for the Six Months Ended June 30, 2006                and 2005 (unaudited)      |     5                   |
|                                                                                                                                                                                                 |                                        |
|         Consolidated                Statements of Cash Flows for the Six Months Ended June 30, 2006 and                2005                (unaudited)       |     6                   |
|                                                                                                                                                                                                 |                                        |
|         Notes                to Consolidated Financial Statements                                                                                            |     7                   |
|                                                                                                                                                                                                 |                                        |
|     Item                2.                Management's Discussion and Analysis of Financial Condition and Results                of                Operations                    |     17                  |
|                                                                                                                                                                                                 |                                        |
|     Item                3.                Quantitative and Qualitative Disclosures about Market Risk                                                                             |     29                  |
|                                                                                                                                                                                                 |                                        |
|     Item                4.                Controls and Procedures                                                                                                                |     30                  |
|                                                                                                                                                                                                 |                                        |
| Part                II. Other Information                                                                                                                                                            |     31                  |
|                                                                                                                                                                                                 |                                        |
|     Item                1.                Legal Proceedings                                                                                                                      |     31                  |
|                                                                                                                                                                                                 |                                        |
|     Item                1A. Risk Factors                                                                                                                                         |     31                  |
|                                                                                                                                                                                                 |                                        |
|     Item                2.                Unregistered Sales of Equity Securities and Use of Proceeds                                                   |     31                  |
|                                                                                                                                                                                                 |                                        |
|     Item                3.                Defaults Upon Senior Securities                                                                                                        |     31                  |
|                                                                                                                                                                                                 |                                        |
|     Item                4.                Submission of Matters to a Vote of Security Holders                                                                                    |     32                  |
|                                                                                                                                                                                                 |                                        |
|     Item                5.                Other Information                                                                                                                      |     32                  |
|                                                                                                                                                                                                 |                                        |
|     Item                6.                Exhibits                                                                                                                               |     32                  |
|                                                                                                                                                                                                 |                                        |
| Signatures                                                                                                                                                                                           |     33                  |

----

| PART                1. FINANCIAL INFORMATION                                                                          |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|
| HARLEYSVILLE                NATIONAL CORPORATION AND SUBSIDIARIES                                                     |
| CONSOLIDATED                BALANCE SHEETS                                                                            |
|                                                                                                                  |
| (Dollars                in thousands)                                                                                 |   |   | June                30, 2006 |   |   | December                31, 2005 |   |
|                                                                                                                  |   |   | (Unaudited)  |   |   |   |   |
| **Assets**                                                                                                            |   |   |   |   |   |   |   |
| Cash                and due from banks                                                                                |   | $ | 60,635 |   | $ | 57,756 |   |
| Federal                funds sold and securities purchased under agreements to                resell                  |   |   | 30,000 |   |   | 35,000 |   |
| Interest-bearing                deposits in banks                                                                     |   |   | 3,458 |   |   | 2,455 |   |
|    Total                cash                and cash equivalents                                       |   |   | 94,093 |   |   | 95,211 |   |
| Residential                mortgage loans held for sale                                                               |   |   | 1,959 |   |   | 2,028 |   |
| Investment                securities available for sale                                                               |   |   | 866,019 |   |   | 841,653 |   |
| Investment                securities held to maturity (market                value $59,182 and $59,753, respectively) |   |   | 59,526 |   |   | 59,555 |   |
| Loans                and leases                                                                                       |   |   | 2,030,666 |   |   | 1,983,465 |   |
| Less:                Allowance for loan losses                                                                        |   |   | (20,617 | ) |   | (19,865 | ) |
|     Net                loans                                                                      |   |   | 2,010,049 |   |   | 1,963,600 |   |
| Premises                and equipment, net                                                                            |   |   | 31,503 |   |   | 27,570 |   |
| Accrued                interest receivable                                                                            |   |   | 14,126 |   |   | 13,282 |   |
| Goodwill                                                                                                              |   |   | 46,009 |   |   | 31,552 |   |
| Intangible                assets, net                                                                                 |   |   | 3,936 |   |   | 4,031 |   |
| Bank-owned                life insurance                                                                              |   |   | 60,535 |   |   | 59,334 |   |
| Other                assets                                                                                           |   |   | 29,263 |   |   | 19,543 |   |
|     Total                assets                                                                   |   | $ | 3,217,018 |   | $ | 3,117,359 |   |
| **Liabilities                and Shareholders' Equity**                                                               |   |   |   |   |   |   |   |
| Deposits:                                                                                                             |   |   |   |   |   |   |   |
|                    Noninterest-bearing                                                                 |   | $ | 356,043 |   | $ | 363,440 |   |
|                    Interest-bearing:                                                                   |   |   |   |   |   |   |   |
|     Checking                accounts                                                              |   |   | 419,312 |   |   | 387,374 |   |
|     Money                market accounts                                                          |   |   | 664,392 |   |   | 667,952 |   |
|     Savings                                                                                       |   |   | 175,071 |   |   | 190,033 |   |
|     Time                deposits                                                                  |   |   | 864,840 |   |   | 756,658 |   |
|         Total                deposits                                         |   |   | 2,479,658 |   |   | 2,365,457 |   |
| Federal                funds purchased and securities sold under agreements to                repurchase              |   |   | 106,785 |   |   | 88,118 |   |
| Other                short-term borrowings                                                                            |   |   | 2,015 |   |   | 1,752 |   |
| Long-term                borrowings                                                                                   |   |   | 257,750 |   |   | 297,750 |   |
| Accrued                interest payable                                                                               |   |   | 30,198 |   |   | 28,276 |   |
| Subordinated                debt                                                                                      |   |   | 51,548 |   |   | 51,548 |   |
| Other                liabilities                                                                                      |   |   | 11,327 |   |   | 11,226 |   |
|         Total                liabilities                                      |   |   | 2,939,281 |   |   | 2,844,127 |   |
| 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 27,646,057 shares at June 30, 2006                and    |   |   |   |   |   |   |   |
|                      27,500,407 shares at December 31, 2005                                  |   |   | 27,646 |   |   | 27,500 |   |
|                    Additional paid in capital                                                          |   |   | 169,507 |   |   | 167,418 |   |
|                    Retained earnings                                                                   |   |   | 96,064 |   |   | 88,285 |   |
|                    Accumulated other comprehensive loss                                                |   |   | (14,954 | ) |   | (8,618 | ) |
|                    Treasury stock, at cost: 25,279 shares at June 30, 2006 and                         |   |   |   |   |   |   |   |
|                      64,700 shares at December 31, 2005                                      |   |   | (526 | ) |   | (1,353 | ) |
|     Total                shareholders' equity                                                     |   |   | 277,737 |   |   | 273,232 |   |
|     Total                liabilities and shareholders' equity                                     |   | $ | 3,217,018 |   | $ | 3,117,359 |   |

----

| HARLEYSVILLE                NATIONAL CORPORATION AND SUBSIDIARIESCONSOLIDATED                STATEMENTS OF INCOME(Unaudited) |
|------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                         |   | Three                Months Ended  | Six                Months Ended |
|                                                                                                                         |   | June                30,  | June                30, |
| (Dollars                in thousands, except per share information)                                                          |   |   | 2006 |   |   | 2005 |   |   | 2006 |   |   | 2005 |   |
|                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Interest                Income:**                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                and leases, including fees                                                                              |   | $ | 33,170 |   | $ | 28,036 |   | $ | 64,966 |   | $ | 54,222 |   |
| Investment                securities:                                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                    Taxable                                                                                    |   |   | 7,552 |   |   | 5,630 |   |   | 14,874 |   |   | 11,684 |   |
|                    Exempt from federal taxes                                                                  |   |   | 2,646 |   |   | 2,916 |   |   | 5,199 |   |   | 5,679 |   |
| Federal                funds sold and securities purchased under agreements to                resell                         |   |   | 807 |   |   | 290 |   |   | 1,181 |   |   | 535 |   |
| Deposits                in banks                                                                                             |   |   | 48 |   |   | 17 |   |   | 99 |   |   | 41 |   |
|     Total                interest income                                                                 |   |   | 44,223 |   |   | 36,889 |   |   | 86,319 |   |   | 72,161 |   |
|                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Interest                Expense:**                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Savings                and money market deposits                                                                             |   |   | 8,918 |   |   | 5,039 |   |   | 16,431 |   |   | 9,319 |   |
| Time                deposits                                                                                                 |   |   | 8,965 |   |   | 5,660 |   |   | 16,609 |   |   | 10,967 |   |
| Short-term                borrowings                                                                                         |   |   | 1,084 |   |   | 1,040 |   |   | 2,504 |   |   | 1,854 |   |
| Long-term                borrowings                                                                                          |   |   | 3,980 |   |   | 3,303 |   |   | 8,028 |   |   | 6,504 |   |
|     Total                interest expense                                                                |   |   | 22,947 |   |   | 15,042 |   |   | 43,572 |   |   | 28,644 |   |
|                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                interest income                                                                                           |   |   | 21,276 |   |   | 21,847 |   |   | 42,747 |   |   | 43,517 |   |
| Provision                for loan losses                                                                                     |   |   | 900 |   |   | 650 |   |   | 2,100 |   |   | 1,400 |   |
| Net                interest income after provision for loan losses                                                           |   |   | 20,376 |   |   | 21,197 |   |   | 40,647 |   |   | 42,117 |   |
|                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Noninterest                Income:**                                                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Service                charges                                                                                               |   |   | 2,026 |   |   | 2,044 |   |   | 3,916 |   |   | 4,001 |   |
| Gain                on sales in investment securities, net                                                                   |   |   | - |   |   | 226 |   |   | - |   |   | 1,149 |   |
| Gain                on sale of credit card portfolio                                                                         |   |   | 1,444 |   |   | - |   |   | 1,444 |   |   | - |   |
| Gain                on sale of branch                                                                                        |   |   | - |   |   | 690 |   |   | - |   |   | 690 |   |
| Wealth                management income                                                                                      |   |   | 3,378 |   |   | 2,051 |   |   | 7,852 |   |   | 3,980 |   |
| Bank-owned                life insurance income                                                                              |   |   | 601 |   |   | 645 |   |   | 1,201 |   |   | 1,138 |   |
| Income                on life insurance                                                                                      |   |   | - |   |   | 177 |   |   | - |   |   | 177 |   |
| Other                income                                                                                                  |   |   | 2,571 |   |   | 1,919 |   |   | 4,540 |   |   | 3,560 |   |
|     Total                noninterest income                                                              |   |   | 10,020 |   |   | 7,752 |   |   | 18,953 |   |   | 14,695 |   |
|     Net                interest income after provision for loan losses and                               |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                         noninterest income                                           |   |   | 30,396 |   |   | 28,949 |   |   | 59,600 |   |   | 56,812 |   |
|                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Noninterest                Expense:**                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries,                wages and employee benefits                                                                         |   |   | 10,854 |   |   | 10,180 |   |   | 21,373 |   |   | 19,680 |   |
| Occupancy                                                                                                                    |   |   | 1,401 |   |   | 1,243 |   |   | 2,899 |   |   | 2,634 |   |
| Furniture                and equipment                                                                                       |   |   | 900 |   |   | 1,151 |   |   | 1,791 |   |   | 2,321 |   |
| Marketing                                                                                                                    |   |   | 523 |   |   | 851 |   |   | 929 |   |   | 1,401 |   |
| Other                expense                                                                                                 |   |   | 4,097 |   |   | 3,468 |   |   | 7,908 |   |   | 6,360 |   |
|     Total                noninterest expense                                                             |   |   | 17,775 |   |   | 16,893 |   |   | 34,900 |   |   | 32,396 |   |
|                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income                before income tax expense                                                                              |   |   | 12,621 |   |   | 12,056 |   |   | 24,700 |   |   | 24,416 |   |
| Income                tax expense                                                                                            |   |   | 3,336 |   |   | 2,366 |   |   | 6,464 |   |   | 5,561 |   |
| Net                income                                                                                                    |   | $ | 9,285 |   | $ | 9,690 |   | $ | 18,236 |   | $ | 18,855 |   |
|                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                income per share information:                                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                     Basic                                                                                |   | $ | 0.33 |   | $ | 0.35 |   | $ | 0.66 |   | $ | 0.68 |   |
|                     Diluted                                                                              |   | $ | 0.33 |   | $ | 0.35 |   | $ | 0.65 |   | $ | 0.67 |   |
| Cash                dividends per share                                                                                      |   | $ | 0.19 |   | $ | 0.17 |   | $ | 0.38 |   | $ | 0.34 |   |
| Weighted                average number of common shares:                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                     Basic                                                                                |   |   | 27,555,945 |   |   | 27,552,322 |   |   | 27,527,269 |   |   | 27,555,887 |   |
|                     Diluted                                                                              |   |   | 27,953,890 |   |   | 28,113,870 |   |   | 27,970,337 |   |   | 28,163,990 |   |
|                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |

----

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

| Six                Months Ended June 30, 2005                                                                     |
|-------------------------------------------------------------------------------------------------------------------|
|                                                                                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |  |   |   |   |   |   |   |   |   |   |   |
|                                                                                                              |   |   | Common                Stock  |   |   | Treasury                Stock |   |   |   |   |   |   |   |   |   |   |   | Accumulated |   |   |   |   |   |   |   |   |   |   |
|                                                                                                              |   |   | Number                of  |   |   | Number                of |   |   | Par |   |   | AdditionalPaid |   |   | Retained |   |   | OtherComprehensive |   |   | Treasury |   |   |   |   |   | Comprehensive |   |
|                                                                                                                   |   |   | Shares  |   |   | Shares |   |   | Value |   |   | In                Capital |   |   | Earnings |   |   | Income                (Loss | ) |   | Stock |   |   | Total |   |   | Income                (Loss | ) |
|                                                                                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance,                January 1, 2005                                                                           |   |   | 27,320 |   |   | (1,043 | ) | $ | 27,320 |   | $ | 160,039 |   | $ | 99,730 |   | $ | 1,243 |   | $ | (17,800 | ) | $ | 270,532 |   |   |   |   |
| Issuance                of stock for stock options, net                     of tax benefits   |   |   | 142 |   |   | 22 |   |   | 142 |   |   | 2,534 |   |   | - |   |   | - |   |   | 393 |   |   | 3,069 |   |   |   |   |
| Issuance                of stock for stock awards                                                                 |   |   | - |   |   | - |   |   | - |   |   | 5 |   |   | - |   |   | - |   |   | - |   |   | 5 |   |   |   |   |
| Net                income                                                                                         |   |   | -- |   |   | - |   |   | - |   |   | - |   |   | 18,855 |   |   | - |   |   | - |   |   | 18,855 |   | $ | 18,855 |   |
| Other                comprehensive loss, net of                     reclassifications and tax |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | (2,701 | ) |   | - |   |   | (2,701 | ) |   | (2,701 | ) |
| Purchases                of treasury stock                                                                        |   |   | - |   |   | (208 | ) |   | - |   |   | - |   |   | - |   |   | - |   |   | (4,828 | ) |   | (4,828 | ) |   |   |   |
| Cash                dividends                                                                                     |   |   | - |   |   | - |   |   | - |   |   | - |   |   | (9,448 | ) |   | - |   |   | - |   |   | (9,448 | ) |   |   |   |
| Comprehensive                income                                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | $ | 16,154 |   |
| Balance,                June 30, 2005                                                                             |   |   | 27,462 |   |   | (1,229 | ) | $ | 27,462 |   | $ | 162,578 |   | $ | 109,137 |   | $ | (1,458 | ) | $ | (22,235 | ) | $ | 275,484 |   |   |   |   |
|                                                                                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                              |
|                                                                                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| See                accompanying notes to consolidated financial                statements.                        |

----

| HARLEYSVILLE                NATIONAL CORPORATION AND SUBSIDIARIES                                                                                                              |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| CONSOLIDATED                STATEMENTS OF CASH FLOWS                                                                                                                           |
| (Unaudited)                                                                                                                                                                    |
|                                                                                                                                                                           |   |   |
| (Dollars                in thousands)                                                                                                                                          |   | Six                  Months Ended June                  30, |
|                                                                                                                                                                           |   |   | 2006 |   |   | 2005 |   |
| **Operating                Activities:**                                                                                                                                       |   |   |   |   |   |   |   |
|                   Net income                                                                                                                                         |   | $ | 18,236 |   | $ | 18,855 |   |
|                   Adjustments to reconcile net income to net cash provided by operating                activities:                                                   |   |   |  |   |   |   |   |
|       Provision                for loan losses                                                                                                   |   |   | 2,100 |   |   | 1,400 |   |
|                      Depreciation and amortization                                                                                                    |   |   | 2,156 |   |   | 1,567 |   |
|                      Net amortization of investment securities                discounts/premiums                                                      |   |   | 1,876 |   |   | 3,020 |   |
|                      Deferred income tax benefit                                                                                                      |   |   | (2,163 | ) |   | (1,727 | ) |
|                      Gains on sales of investment securities, net                                                                                     |   |   | — |   |   | (1,149 | ) |
|                      Gain on sale of credit card portfolio                                                                                            |   |   | (1,444 | ) |   | — |   |
|                      Gain on sale of branch                                                                                                           |   |   | — |   |   | (690 | ) |
|                      Gain on sale of bank subsidiary                                                                                                  |   |   | — |   |   | (287 | ) |
|                      Bank-owned life insurance income                                                                                                 |   |   | (1,201 | ) |   | (1,138 | ) |
|                      Stock based compensation expense                                                                                                 |   |   | 249 |   |   | — |   |
|                      Net increase in accrued interest receivable                                                                                      |   |   | (844 | ) |   | (448 | ) |
|                      Net increase in accrued interest payable                                                                                         |   |   | 1,922 |   |   | 1,321 |   |
|                      Net decrease in other assets                                                                                                     |   |   | 1,410 |   |   | 149 |   |
|                      Net decrease in other liabilities                                                                                                |   |   | (5,368 | ) |   | (5,384 | ) |
|                      Other, net                                                                                                                       |   |   | (2 | ) |   | (9 | ) |
|     Net                cash provided by operating activities                                                                                               |   |   | 16,927 |   |   | 15,480 |   |
| **Investing                Activities:**                                                                                                                                       |   |   |   |   |   |   |   |
|                      Proceeds from sales of investment securities available for                sale                                                   |   |   | — |   |   | 182,390 |   |
|                      Proceeds from maturity or calls of investment securities held to                maturity                                         |   |   | — |   |   | 5,156 |   |
|                      Proceeds from maturity or calls of investment securities available                for                sale                        |   |   | 81,754 |   |   | 83,132 |   |
|                      Purchases of investment securities available for sale                                                                            |   |   | (118,189 | ) |   | (227,466 | ) |
|                      Net increase in loans                                                                                                            |   |   | (63,808 | ) |   | (52,202 | ) |
|                      Net cash paid due to acquisition, net of cash acquired                                                                           |   |   | (14,525 | ) |   | — |   |
|                      Net proceeds from sale of credit card portfolio                                                                                  |   |   | 16,705 |   |   | — |   |
|                      Net cash paid in sale of branch                                                                                                  |   |   | — |   |   | (7,431 | ) |
|                      Net cash received from sale of bank subsidiary                                                                                   |   |   | — |   |   | 1,931 |   |
|                      Purchases of premises and equipment                                                                                              |   |   | (5,512 | ) |   | (1,573 | ) |
|                      Proceeds from sales of premises and equipment                                                                                    |   |   | 16 |   |   | 35 |   |
|                      Proceeds from sales of other real estate                                                                                         |   |   | 32 |   |   | 76 |   |
|     Net                cash provided used in investing activities                                                                                          |   |   | (103,527 | ) |   | (15,952 | ) |
| **Financing                Activities:**                                                                                                                                       |   |   |   |   |   |   |   |
|                   Net increase in deposits                                                                                                                           |   |   | 114,201 |   |   | 24,319 |   |
|                   Increase in federal funds purchased and securities sold under agreements                to                     repurchase |   |   | 18,667 |   |   | 44,664 |   |
|                   Increase (decrease) in short-term borrowings                                                                                                       |   |   | 263 |   |   | (45,635 | ) |
|                   Advances of long-term borrowings                                                                                                                   |   |   | 10,000 |   |   | — |   |
|                   Repayments of long-term borrowings                                                                                                                 |   |   | (50,000 | ) |   | — |   |
|                   Cash dividends                                                                                                                                     |   |   | (10,457 | ) |   | (9,448 | ) |
|                   Repurchase of common stock                                                                                                                         |   |   | (1,916 | ) |   | (4,828 | ) |
|                   Proceeds from the exercise of stock options                                                                                                        |   |   | 4,121 |   |   | 3,069 |   |
|                   Excess tax benefits from stock based compensation                                                                                                  |   |   | 603 |   |   | — |   |
|                      Net cash provided by financing activities                                                                                        |   |   | 85,482 |   |   | 12,141 |   |
|                   Net increase (decrease) in cash and cash equivalents                                                                                               |   |   | (1,118 | ) |   | 11,669 |   |
|                   Cash and cash equivalents at beginning of period                                                                                                   |   |   | 95,211 |   |   | 106,990 |   |
|                   Cash and cash equivalents at end of the period                                                                                                     |   | $ | 94,093 |   | $ | 118,659 |   |
|                                                                                                                                                                           |   |   |   |   |   |   |   |
|                      Cash paid during the period for:                                                                                                 |   |   |   |   |   |   |   |
|                         Interest                                                                                                       |   | $ | 41,697 |   | $ | 27,522 |   |
|                         Income taxes                                                                                                   |   | $ | 8,410 |   | $ | 9,993 |   |
|                      Supplemental disclosure of noncash investing and financing                activities:                                            |   |   |   |   |   |   |   |
|                         Transfer of assets from loans to net assets in foreclosure                                                     |   | $ | 91 |   | $ | 203 |   |
|                                                                                                                                                                           |
| See                accompanying notes to consolidated financial statements.                                                                                                    |   |   |   |   |   |   |   |

----

**HARLEYSVILLE      NATIONAL CORPORATION AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**Note      1**
**-      Summary of Significant Accounting Policies**

*Principles      of Consolidation and Basis of Presentation*

*Goodwill      and Other Intangible Assets*

*Stock      Based Compensation*

*pro      forma*

----

**Note      1**
**-      Summary of Significant Accounting Policies - Continued**

**Note      2 - Dispositions / Acquisition **

----

**Note      2 - Dispositions / Acquisition - Continued**

**Note      3 -**
**      Pension Plan**

|                                                                |   | Six                Months Ended June, 30  |
|----------------------------------------------------------------|--------|------------------------------------------------|
| (Dollars                in thousands)                          |   |                                           | 2006 |   |   | 2005 |   |
|                                                           |   |                                           |   |   |   |   |   |
| Service                cost                                    |   | $                                              | 521 |   | $ | 526 |   |
| Interest                cost                                   |   |                                           | 327 |   |   | 321 |   |
| Expected                return on plan assets                  |   |                                           | (276 | ) |   | (262 | ) |
| Amortization                of unrecognized net actuarial loss |   |                                           | 59 |   |   | 46 |   |
| Net                periodic benefit expense                    |   | $                                              | 631 |   | $ | 631 |   |

**Note      4 - Stock Dividend/Split**

**Note      5 **
**Stock      Based Compensation**

** **

*pro      forma*

----

**Note      5 **
**Stock      Based Compensation - Continued**

| (Dollars                in thousands, except per share amounts)                                                                                                                                                                              |   |                               | Three                Months Ended |   |   | Six                Months Ended |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|-----------------------------------|--------|--------|---------------------------------|--------|
|                                                                                                                                                                                                                                         |   | June                30, 2005  |
| Net                income                                                                                                                                                                                                                    |   |                               |                              |   |   |                            |   |
|                   As reported                                                                                                                                                                                                      |   | $                                  | 9,690                             |   | $      | 18,855                          |   |
|                   Stock-based compensation expense included in     reported                net                income, net of related tax effects                                                               |   |                               | -                                 |   |   | -                               |   |
|                   Stock-based compensation expense determined     under                fair value based method for all awards,    net                of                related tax effects |   |                               | (203                              | )      |   | (403                            | )      |
|                    *Pro                forma*                                                                                                                                                                                 |   | $                                  | 9,487                             |   | $      | 18,452                          |   |
|                                                                                                                                                                                                                                         |   |                               |                              |   |   |                            |   |
| Earnings                per share (Basic)                                                                                                                                                                                                    |   |                               |                              |   |   |                            |   |
|                    As reported                                                                                                                                                                                                |   | $                                  | .35                               |   | $      | .68                             |   |
|                    *Pro                forma*                                                                                                                                                                                 |   | $                                  | .34                               |   | $      | .67                             |   |
|                                                                                                                                                                                                                                         |   |                               |                              |   |   |                            |   |
| Earnings                per share (Diluted)                                                                                                                                                                                                  |   |                               |                              |   |   |                            |   |
| As                reported                                                                                                                                                                                                                   |   | $                                  | .35                               |   | $      | .67                             |   |
|  *Pro                forma*                                                                                                                                                                                                             |   | $                                  | .34                               |   | $      | .66                             |   |
|                                                                                                                                                                                                                                         |   |                               |                              |   |   |                            |   |

| **Options**                                   |   |   | **Shares** |   |   | **Weighted-Average                Exercise Price** |   |   | **Weighted-Average                Remaining Contractual Term** |   |   | **Aggregate****Intrinsic                Value****(in                thousands** | **)**  |
|-----------------------------------------------|--------|--------|------------|--------|--------|----------------------------------------------------|--------|--------|----------------------------------------------------------------|--------|--------|---------------------------------------------------------------------------------|--------|
| Outstanding                at January 1, 2006 |   |   | 1,571,799  |   | $      | 14.99                                              |   |   |                                                           |   |   |                                                                            |   |
| Granted                                       |   |   | 12,000     |   |   | 19.10                                              |   |   |                                                           |   |   |                                                                            |   |
| Exercises                                     |   |   | (276,074   | )      |   | 9.98                                               |   |   |                                                           |   |   |                                                                            |   |
| Forfeited                                     |   |   | (1,650     | )      |   | 24.07                                              |   |   |                                                           |   |   |                                                                            |   |
|                                          |   |   |       |   |   |                                               |   |   |                                                           |   |   |                                                                            |   |
| Outstanding                at June 30, 2006   |   |   | 1,306,075  |   | $      | 16.07                                              |   |   | 5.83                                                           |   | $      | 8,631                                                                           |   |
|                                          |   |   |       |   |   |                                               |   |   |                                                           |   |   |                                                                            |   |
| Exercisable                at June 30, 2006   |   |   | 1,081,028  |   | $      | 14.52                                              |   |   | 5.21                                                           |   | $      | 8,609                                                                           |   |
|                                          |   |   |       |   |   |                                               |   |   |                                                           |   |   |                                                                            |   |

----

**Note      5 **
**Stock      Based Compensation - Continued**

| **Nonvested                Shares**         |   |   | **Shares** |   |   | **Weighted-Average****Grant-Date                Fair Value** |   |
|---------------------------------------------|--------|--------|------------|--------|--------|--------------------------------------------------------------|--------|
|                                        |   |   |       |   |   |                                                         |   |
| Nonvested                at January 1, 2006 |   |   | 218,717    |   | $      | 6.56                                                         |   |
|                                        |   |   |       |   |   |                                                         |   |
| Granted                                     |   |   | 12,000     |   |   | 5.29                                                         |   |
|                                        |   |   |       |   |   |                                                         |   |
| Vested                                      |   |   | (4,545     | )      |   | 6.17                                                         |   |
|                                        |   |   |       |   |   |                                                         |   |
| Forfeited                                   |   |   | (1,125     | )      |   | 6.43                                                         |   |
|                                        |   |   |       |   |   |                                                         |   |
| Nonvested                at June 30, 2006   |   |   | 225,047    |   | $      | 6.50                                                         |   |

**Note      6 **
**Earnings      Per Share**

|                                                                                                  |   |                Three                Months EndedJune                  30, |       | Six                Months EndedJune                30 |
|--------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------|------------|-------------------------------------------------------|
|                                                                                             |   |                                                                           |       |                                                  |   |   |   |   |   |   |   |   |   |
| (Dollars                in thousands, except per share data)                                     |   |                                                                           | 2006       |                                                  |   | 2005 |   |   | 2006 |   |   | 2005 |   |
|                                                                                             |   |                                                                           |       |                                                  |   |   |   |   |   |   |   |   |   |
| **Basic                earnings per share**                                                      |   |                                                                           |       |                                                  |   |   |   |   |   |   |   |   |   |
| Net                income available to common shareholders                                       |   | $                                                                              | 9,285      |                                                  | $ | 9,690 |   | $ | 18,236 |   | $ | 18,855 |   |
| Weighted                average common shares outstanding                                        |   |                                                                           | 27,555,945 |                                                  |   | 27,552,322 |   |   | 27,527,269 |   |   | 27,555,887 |   |
| Basic                earnings per share                                                          |   | $                                                                              | .33        |                                                  | $ | .35 |   | $ | .66 |   | $ | .68 |   |
|                                                                                             |   |                                                                           |       |                                                  |   |   |   |   |   |   |   |   |   |
| **Diluted                earnings per share**                                                    |   |                                                                           |       |                                                  |   |   |   |   |   |   |   |   |   |
| Net                income available to common shareholdersand                assumed conversions |   | $                                                                              | 9,285      |                                                  | $ | 9,690 |   | $ | 18,236 |   | $ | 18,855 |   |
| Weighted                average common shares outstanding                                        |   |                                                                           | 27,555,945 |                                                  |   | 27,552,322 |   |   | 27,527,269 |   |   | 27,555,887 |   |
| Dilutive                potential common shares (1),                (2)                          |   |                                                                           | 397,945    |                                                  |   | 561,548 |   |   | 443,068 |   |   | 608,103 |   |
| Total                diluted weighted average common shares outstanding                          |   |                                                                           | 27,953,890 |                                                  |   | 28,113,870 |   |   | 27,970,337 |   |   | 28,163,990 |   |
| Diluted                earnings per share                                                        |   | $                                                                              | .33        |                                                  | $ | .35 |   | $ | .65 |   | $ | .67 |   |
|                                                                                             |   |                                                                           |       |                                                  |   |   |   |   |   |   |   |   |   |

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

| (2)   | Antidilutive                options have been excluded in the computation of diluted earnings                per                share because the options’ exercise prices were greater than the average                market price of the common stock. For the three and six months ended                June                30, 2006, there were 465,084 antidilutive options at an average price                of                $25.53 and 462,984 antidilutive options at an average price of $25.56,                respectively. For the three and six months ended June 30, 2005, there                were                354,675 antidilutive options at an average price of                $26.92. |
|-----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**Note      7**
**Comprehensive      Income**

| Comprehensive                Income                                                                                    |
|------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| (Dollars                in thousands)                                                                                  |   |   | Before                tax |   |   | Tax                Benefit |   |   | Net                of tax |   |
| Six                months ended June 30, 2006                                                                          |   |   | Amount |   |   | (Expense) |   |   | Amount |   |
| Net                unrealized losses on available for sale securities:                                                 |   |   |   |   |   |   |   |   |   |   |
|                    Net unrealized holding losses arising during period                                  |   | $ | (10,223 | ) | $ | 3,578 |   | $ | (6,645 | ) |
|                    Less reclassification adjustment for net gains realized in net                income |   |   | - |   |   | - |   |   | - |   |
|                    Net unrealized losses                                                                |   |   | (10,223 | ) |   | 3,578 |   |   | (6,645 | ) |
|                    Change in fair value of derivatives used for cash flow                hedges         |   |   | 384 |   |   | (134 | ) |   | 250 |   |
|                    Amortization of unrealized loss on termination of cash flow                hedge     |   |   | 91 |   |   | (32 | ) |   | 59 |   |
|                   Other comprehensive income, net                                                            |   | $ | (9,748 | ) | $ | 3,412 |   | $ | (6,336 | ) |
|                                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| (Dollars                in thousands)                                                                                  |   |   | Before                tax |   |   | Tax                Benefit |   |   | Net                of tax |   |
| Six                months ended June 30, 2005                                                                          |   |   | Amount |   |   | (Expense) |   |   | Amount |   |
| Net                unrealized losses on available for sale securities:                                                 |   |   |   |   |   |   |   |   |   |   |
| Net                unrealized holding losses arising during period                                                     |   | $ | (3,132 | ) | $ | 1,096 |   | $ | (2,036 | ) |
| Less                reclassification adjustment for net gains realized in net                income                    |   |   | 1,149 |   |   | (402 | ) |   | 747 |   |
| Net                unrealized losses                                                                                   |   |   | (4,281 | ) |   | 1,498 |   |   | (2,783 | ) |
| Change                in fair value of derivatives used for cash flow hedges                                           |   |   | 367 |   |   | (128 | ) |   | 239 |   |
| Unrealized                loss on termination of cash flow hedge                                                       |   |   | (242 | ) |   | 85 |   |   | (157 | ) |
| Other                comprehensive loss, net                                                                           |   | $ | (4,156 | ) | $ | 1,455 |   | $ | (2,701 | ) |

**Note      8 - Segment Information**

----

**Note      8 - Segment Information - Continued**

| **(Dollars                in thousands)**                  |
|------------------------------------------------------------|
|                                                       |   |   | **Community****Banking**  |   |   | **Wealth****Management** |   |   | **All                Other** |   |   | **Consolidated                Totals** |   |
| Three                Months Ended June 30, 2006            |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                interest income (expense)               |   | $ | 21,666 |   | $ | 125 |   | $ | (515 | ) | $ | 21,276 |   |
| Provision                for loan losses                   |   |   | 900 |   |   | - |   |   | - |   |   | 900 |   |
| Noninterest                income                          |   |   | 6,299 |   |   | 3,507 |   |   | 214 |   |   | 10,020 |   |
| Noninterest                expense                         |   |   | 14,217 |   |   | 3,176 |   |   | 382 |   |   | 17,775 |   |
| Income                (loss) before income taxes (benefit) |   |   | 12,848 |   |   | 456 |   |   | (683 | ) |   | 12,621 |   |
| Income                taxes (benefit)                      |   |   | 3,365 |   |   | 194 |   |   | (223 | ) |   | 3,336 |   |
| Net                income (loss)                           |   | $ | 9,483 |   | $ | 262 |   | $ | (460 | ) | $ | 9,285 |   |
|                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Three                Months Ended June 30, 2005            |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                interest income                         |   | $ | 21,827 |   | $ | 145 |   | $ | (125 | ) | $ | 21,847 |   |
| Provision                for loan losses                   |   |   | 650 |   |   | - |   |   | - |   |   | 650 |   |
| Noninterest                income                          |   |   | 5,496 |   |   | 2,057 |   |   | 199 |   |   | 7,752 |   |
| Noninterest                expense                         |   |   | 14,631 |   |   | 2,240 |   |   | 22 |   |   | 16,893 |   |
| Income                (loss) before income taxes (benefit) |   |   | 12,042 |   |   | (38 | ) |   | 52 |   |   | 12,056 |   |
| Income                taxes (benefit)                      |   |   | 2,572 |   |   | (24 | ) |   | (182 | ) |   | 2,366 |   |
| Net                income (loss)                           |   | $ | 9,470 |   | $ | (14 | ) | $ | 234 |   | $ | 9,690 |   |
|                                                       |
|                                                       |   |   | **Community****Banking**  |   |   | **Wealth****Management** |   |   | **All                Other** |   |   | **Consolidated                Totals** |   |
| Six                Months Ended June 30, 2006              |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                interest income (expense)               |   | $ | 43,435 |   | $ | 265 |   | $ | (953 | ) | $ | 42,747 |   |
| Provision                for loan losses                   |   |   | 2,100 |   |   | - |   |   | - |   |   | 2,100 |   |
| Noninterest                income                          |   |   | 10,470 |   |   | 8,094 |   |   | 389 |   |   | 18,953 |   |
| Noninterest                expense                         |   |   | 27,897 |   |   | 6,425 |   |   | 578 |   |   | 34,900 |   |
| Income                (loss) before income taxes (benefit) |   |   | 23,908 |   |   | 1,934 |   |   | (1,142 | ) |   | 24,700 |   |
| Income                taxes (benefit)                      |   |   | 6,123 |   |   | 810 |   |   | (469 | ) |   | 6,464 |   |
| Net                income (loss)                           |   | $ | 17,785 |   | $ | 1,124 |   | $ | (673 | ) | $ | 18,236 |   |
|                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Assets                                                     |   | $ | 3,180,459 |   | $ | 3,143 |   | $ | 33,416 |   | $ | 3,217,018 |   |
|                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Six                Months Ended June 30, 2005              |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                interest income                         |   | $ | 43,259 |   | $ | 317 |   | $ | (59 | ) | $ | 43,517 |   |
| Provision                for loan losses                   |   |   | 1,400 |   |   | - |   |   | - |   |   | 1,400 |   |
| Noninterest                income                          |   |   | 9,428 |   |   | 3,990 |   |   | 1,277 |   |   | 14,695 |   |
| Noninterest                expense                         |   |   | 27,832 |   |   | 4,432 |   |   | 132 |   |   | 32,396 |   |
| Income                (loss) before income taxes (benefit) |   |   | 23,455 |   |   | (125 | ) |   | 1,086 |   |   | 24,416 |   |
| Income                taxes (benefit)                      |   |   | 5,352 |   |   | (43 | ) |   | 252 |   |   | 5,561 |   |
| Net                income (loss)                           |   | $ | 18,103 |   | $ | (82 | ) | $ | 834 |   | $ | 18,855 |   |
|                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Assets                                                     |   | $ | 2,963,715 |   | $ | - |   | $ | 37,336 |   | $ | 3,001,051 |   |

----

**Note      9 - Financial Instruments with Off-Balance Sheet Risk**

|                                                                                                                                    |     | *Total                Amount Committed at* |
|-----------------------------------------------------------------------------------------------------------------------------------------|----------|--------------------------------------------|
| **Commitments**                                                                                                                         |     | June                30, 2006               | December                31, 2005 |
| (Dollars                in thousands)                                                                                                   |
|                                                                                                                                    |     |                                       |
| Financial                instruments whose contract amounts represent credit risk:                                                      |     |                                       |
| Commitments                to extend credit                                                                                             | $693,957 | $722,034                                   |
| Standby                letters of credit and financial guarantees written                                                               | 26,398   | 21,661                                     |
| Financial                instruments whose notional or contract amounts exceed the amount                of credit                risk: |     |                                       |
| Interest                rate swap agreements                                                                                            | 57,100   | 22,100                                     |

----

**Note      10 - Recent Accounting Pronouncements **

,      “Accounting      for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109.”FIN No. 48 clarifies the accounting for uncertainty in income      taxes      recognized in an      enterprise's financial statements in accordance with SFAS No. 109, “Accounting      for Income Taxes.” FIN No. 48 prescribes a recognition threshold and measurement      attribute for the financial statement recognition and measurement of a tax      position taken or expected to be taken in a tax return. FIN No. 48 also provides      guidance on de-recognition, classification, interest and penalties, accounting      in interim periods, disclosure, and transition. FIN No. 48 will apply to fiscal      years beginning after December 15, 2006, with earlier adoption permitted. The      Corporation is in the process of assessing the impact of the adoption of this      statement on the Corporation’s financial results.

* *

----

**Note      10 - Recent Accounting Pronouncements - Continued**

**Note      11- Subsequent Event **

----

**Item      2.**
**MANAGEMENT'S      DISCUSSION AND ANALYSIS OF**

**RESULTS      OF OPERATIONS AND FINANCIAL CONDITION**

**Critical      Accounting Estimates **

----

*pro      forma*

**Financial      Overview**

----

**Results      of Operations**

**Net      Interest Income **

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

|                                                                                       |   | Three                Months Ended         | Six                Months Ended          |
|---------------------------------------------------------------------------------------|--------|------------------------------------------------|------------------------------------------|
|                                                                                       |   | June                30, 2006 compared to  | June                30, 2006 compared to |
| (Dollars                in thousands)                                                 |   | June                30, 2005                   | June                30, 2005             |
|                                                                                  |   |                                           |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                       |   |                                           | Total                                    |   | Due                to change in: |   | Total |   | Due                to change in: |
|                                                                                  |   |                                           | Change                                   |   |   | Volume |   |   | Rate |   |   | Change |   |   | Volume |   |   | Rate |   |
|                                                                                  |   |                                           |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Increase                in interest income:                                           |   |                                           |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment                securities *                                                |   | $                                              | 1,473                                    |   | $ | 324 |   | $ | 1,149 |   | $ | 2,386 |   | $ | 613 |   | $ | 1,773 |   |
| Federal                funds sold and deposits in banks                               |   |                                           | 548                                      |   |   | 238 |   |   | 310 |   |   | 704 |   |   | 139 |   |   | 565 |   |
| Loans                *                                                                |   |                                           | 5,141                                    |   |   | 2,009 |   |   | 3,132 |   |   | 10,794 |   |   | 4,149 |   |   | 6,645 |   |
| Total                                                                                 |   |                                           | 7,162                                    |   |   | 2,571 |   |   | 4,591 |   |   | 13,884 |   |   | 4,901 |   |   | 8,983 |   |
|                                                                                  |   |                                           |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Increase                (decrease) in interest expense:                               |   |                                           |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                   Savings and money market deposits                         |   |                                           | 3,879                                    |   |   | 102 |   |   | 3,777 |   |   | 7,112 |   |   | 67 |   |   | 7,045 |   |
|                   Time deposits                                             |   |                                           | 3,305                                    |   |   | 1,989 |   |   | 1,316 |   |   | 5,642 |   |   | 3,326 |   |   | 2,316 |   |
|                   Borrowed funds                                            |   |                                           | 721                                      |   |   | (181 | ) |   | 902 |   |   | 2,174 |   |   | 158 |   |   | 2,016 |   |
|     Total                                                         |   |                                           | 7,905                                    |   |   | 1,910 |   |   | 5,995 |   |   | 14,928 |   |   | 3,551 |   |   | 11,377 |   |
|                                                                                  |   |                                           |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                increase (decrease) in net interest income                         |   | $                                              | (743                                     | ) | $ | 661 |   | $ | (1,404 | ) | $ | (1,044 | ) | $ | 1,350 |   | $ | (2,394 | ) |
|                     *Tax equivalent basis using a tax rate of 35% |   |                                           |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

----

**Table      2—**
**Average      Balance Sheets and Interest Rates**
**¾**
**Fully      Taxable-Equivalent Basis**

| (Dollars                in thousands)                                                                     |   | Three                Months Ended June 30, |      | Three                Months Ended June 30, |
|-----------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|-----------|--------------------------------------------|
|                                                                                                      |   | 2006                                       |      | 2005                                       |
|                                                                                                      |   |                                       |      |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                      |   |                                       | Average   |                                       |   |   |   |   | Average |   |   |   | Average |   |   |   |   |   | Average |   |
| **Assets**                                                                                                |   |                                       | Balance   |                                       |   | Interest |   |   | Rate |   |   |   | Balance |   |   | Interest |   |   | Rate |   |
| Earning                assets:                                                                            |   |                                       |      |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                   Investment securities:                                                        |   |                                       |      |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                     Taxable investments                                               |   | $                                          | 673,545   |                                       | $ | 7,552 |   |   | 4.50 | % |   | $ | 628,696 |   | $ | 5,630 |   |   | 3.59 | % |
|                     Nontaxable investments (1)                                        |   |                                       | 255,457   |                                       |   | 3,904 |   |   | 6.13 |   |   |   | 271,761 |   |   | 4,353 |   |   | 6.42 |   |
|     Total                investment securities                                        |   |                                       | 929,002   |                                       |   | 11,456 |   |   | 4.95 |   |   |   | 900,457 |   |   | 9,983 |   |   | 4.45 |   |
|                     Federal funds sold and deposits in banks                          |   |                                       | 70,163    |                                       |   | 855 |   |   | 4.89 |   |   |   | 44,347 |   |   | 307 |   |   | 2.78 |   |
|                     Loans (1)                (2)                                      |   |                                       | 2,006,723 |                                       |   | 33,426 |   |   | 6.68 |   |   |   | 1,879,028 |   |   | 28,285 |   |   | 6.04 |   |
|     Total                earning assets                                               |   |                                       | 3,005,888 |                                       |   | 45,737 |   |   | 6.10 |   |   |   | 2,823,832 |   |   | 38,575 |   |   | 5.48 |   |
|                     Noninterest-earning assets                                        |   |                                       | 212,593   |                                       |   |  |   |   |   |   |   |   | 182,244 |   |   |   |   |   |   |   |
|         Total                assets                               |   | $                                          | 3,218,481 |                                       |   |   |   |   |   |   |   | $ | 3,006,076 |   |   |   |   |   |   |   |
|                                                                                                      |   |                                       |      |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities                and Shareholders' Equity**                                                   |   |                                       |      |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                   Interest-bearing liabilities:                                                 |   |                                       |      |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                     Interest-bearing deposits:                                        |   |                                       |      |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                     Savings and money market                                          |   | $                                          | 1,257,838 |                                       |   | 8,918 |   |   | 2.84 |   |   | $ | 1,233,472 |   |   | 5,039 |   |   | 1.64 |   |
|                     Time                                                              |   |                                       | 858,961   |                                       |   | 8,965 |   |   | 4.19 |   |   |   | 653,903 |   |   | 5,660 |   |   | 3.47 |   |
|     Total                interest-bearing deposits                                    |   |                                       | 2,116,799 |                                       |   | 17,883 |   |   | 3.39 |   |   |   | 1,887,375 |   |   | 10,699 |   |   | 2.27 |   |
|                     Borrowed funds                                                    |   |                                       | 438,745   |                                       |   | 5,064 |   |   | 4.63 |   |   |   | 457,129 |   |   | 4,343 |   |   | 3.81 |   |
|     Total                interest bearing liabilities                                 |   |                                       | 2,555,544 |                                       |   | 22,947 |   |   | 3.60 |   |   |   | 2,344,504 |   |   | 15,042 |   |   | 2.57 |   |
|                     Noninterest-bearing liabilities:                                  |   |                                       |      |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                       Demand deposits                                       |   |                                       | 342,654   |                                       |   |   |   |   |   |   |   |   | 339,234 |   |   |   |   |   |   |   |
|                       Other liabilities                                     |   |                                       | 43,219    |                                       |   |   |   |   |   |   |   |   | 50,603 |   |   |   |   |   |   |   |
|                       Total noninterest-bearing liabilities                 |   |                                       | 385,873   |                                       |   |   |   |   |   |   |   |   | 389,837 |   |   |   |   |   |   |   |
|         Total                liabilities                          |   |                                       | 2,941,417 |                                       |   |   |   |   |   |   |   |   | 2,734,341 |   |   |   |   |   |   |   |
|                     Shareholders' equity                                              |   |                                       | 277,064   |                                       |   |   |   |   |   |   |   |   | 271,735 |   |   |   |   |   |   |   |
|         Total                liabilities and shareholders' equity |   | $                                          | 3,218,481 |                                       |   |   |   |   |   |   |   | $ | 3,006,076 |   |   |   |   |   |   |   |
|                     Net interest spread                                               |   |                                       |      |                                       |   |   |   |   | 2.50 |   |   |   |   |   |   |   |   |   | 2.91 |   |
|                     Effect of noninterest-bearing sources                             |   |                                       |      |                                       |   |   |   |   | 0.54 |   |   |   |   |   |   |   |   |   | .43 |   |
|                     Net interest income/margin on earning assets                      |   |                                       |      |                                       | $ | 22,790 |   |   | 3.04 | % |   |   |   |   | $ | 23,533 |   |   | 3.34 | % |
|                                                                                                      |   |                                       |      |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                     Less tax equivalent adjustment                                    |   |                                       |      |                                       |   | 1,514 |   |   |   |   |   |   |   |   |   | 1,686 |   |   |   |   |
|                     Net interest income                                               |   |                                       |      |                                       | $ | 21,276 |   |   |   |   |   |   |   |   | $ | 21,847 |   |   |   |   |

----

| (Dollars                in thousands)                                                                     |   | Six                Months Ended June 30, |          | Six                Months Ended June 30, |
|-----------------------------------------------------------------------------------------------------------|--------|------------------------------------------|---------------|------------------------------------------|
|                                                                                                      |   | 2006                                     |          | 2005                                     |
|                                                                                                      |   |                                     |          |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                           |   |                                     | Average  |                                     |   |   |   |   | Average |   |   |   | Average |   |   |   |   |   | Average |   |
| **Assets**                                                                                                |   |                                     | Balance       |                                     |   | Interest |   |   | Rate |   |   |   | Balance |   |   | Interest |   |   | Rate |   |
| Earning                assets:                                                                            |   |                                     |          |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                   Investment securities:                                                        |   |                                     |          |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                     Taxable investments                                               |   | $                                        | 681,829       |                                     | $ | 14,874 |   |   | 4.40 | % |   | $ | 640,440 |   | $ | 11,684 |   |   | 3.68 | % |
|                     Nontaxable investments (1)                                        |   |                                     | 251,084       |                                     |   | 7,681 |   |   | 6.17 |   |   |   | 265,250 |   |   | 8,485 |   |   | 6.45 |   |
|     Total                investment securities                                        |   |                                     | 932,913       |                                     |   | 22,555 |   |   | 4.88 |   |   |   | 905,690 |   |   | 20,169 |   |   | 4.49 |   |
|                     Federal funds sold and deposits in banks                          |   |                                     | 54,119        |                                     |   | 1,280 |   |   | 4.77 |   |   |   | 44,885 |   |   | 576 |   |   | 2.59 |   |
|                     Loans (1)                (2)                                      |   |                                     | 1,997,801     |                                     |   | 65,510 |   |   | 6.61 |   |   |   | 1,862,311 |   |   | 54,716 |   |   | 5.92 |   |
|     Total                earning assets                                               |   |                                     | 2,984,833     |                                     |   | 89,345 |   |   | 6.04 |   |   |   | 2,812,886 |   |   | 75,461 |   |   | 5.41 |   |
|                     Noninterest-earning assets                                        |   |                                     | 206,561       |                                     |   |  |   |   |   |   |   |   | 178,416 |   |   |   |   |   |   |   |
|         Total                assets                               |   | $                                        | 3,191,394     |                                     |   |   |   |   |   |   |   | $ | 2,991,302 |   |   |   |   |   |   |   |
|                                                                                                      |   |                                     |          |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities                and Shareholders' Equity**                                                   |   |                                     |          |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                   Interest-bearing liabilities:                                                 |   |                                     |          |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                     Interest-bearing deposits:                                        |   |                                     |          |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                     Savings and money market                                          |   | $                                        | 1,243,715     |                                     |   | 16,431 |   |   | 2.66 |   |   | $ | 1,234,995 |   |   | 9,319 |   |   | 1.52 |   |
|                     Time                                                              |   |                                     | 822,309       |                                     |   | 16,609 |   |   | 4.07 |   |   |   | 646,064 |   |   | 10,967 |   |   | 3.42 |   |
|     Total                interest-bearing deposits                                    |   |                                     | 2,066,024     |                                     |   | 33,040 |   |   | 3.22 |   |   |   | 1,881,059 |   |   | 20,286 |   |   | 2.17 |   |
|                     Borrowed funds                                                    |   |                                     | 464,039       |                                     |   | 10,532 |   |   | 4.58 |   |   |   | 455,522 |   |   | 8,358 |   |   | 3.70 |   |
|     Total                interest bearing liabilities                                 |   |                                     | 2,530,063     |                                     |   | 43,572 |   |   | 3.47 |   |   |   | 2,336,581 |   |   | 28,644 |   |   | 2.47 |   |
|                     Noninterest-bearing liabilities:                                  |   |                                     |          |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                       Demand deposits                                       |   |                                     | 340,672       |                                     |   |   |   |   |   |   |   |   | 330,621 |   |   |   |   |   |   |   |
|                       Other liabilities                                     |   |                                     | 43,183        |                                     |   |   |   |   |   |   |   |   | 52,464 |   |   |   |   |   |   |   |
|     Total                noninterest-bearing liabilities                              |   |                                     | 383,855       |                                     |   |   |   |   |   |   |   |   | 383,085 |   |   |   |   |   |   |   |
|         Total                liabilities                          |   |                                     | 2,913,918     |                                     |   |   |   |   |   |   |   |   | 2,719,666 |   |   |   |   |   |   |   |
|                   Shareholders' equity                                                          |   |                                     | 277,476       |                                     |   |   |   |   |   |   |   |   | 271,636 |   |   |   |   |   |   |   |
|         Total                liabilities and shareholders' equity |   | $                                        | 3,191,394     |                                     |   |   |   |   |   |   |   | $ | 2,991,302 |   |   |   |   |   |   |   |
|                   Net interest spread                                                           |   |                                     |          |                                     |   |   |   |   | 2.57 |   |   |   |   |   |   |   |   |   | 2.94 |   |
|                   Effect of noninterest-bearing sources                                         |   |                                     |          |                                     |   |   |   |   | 0.52 |   |   |   |   |   |   |   |   |   | .42 |   |
|                   Net interest income/margin on earning assets                                  |   |                                     |          |                                     | $ | 45,773 |   |   | 3.09 | % |   |   |   |   | $ | 46,817 |   |   | 3.36 | % |
|                                                                                                      |   |                                     |          |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                   Less tax equivalent adjustment                                                |   |                                     |          |                                     |   | 3,026 |   |   |   |   |   |   |   |   |   | 3,300 |   |   |   |   |
|                   Net interest income                                                           |   |                                     |          |                                     | $ | 42,747 |   |   |   |   |   |   |   |   | $ | 43,517 |   |   |   |   |

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

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

----

**Net      Interest Margin**

**Interest      Rate Sensitivity Analysis **

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**Table      3—Market Value of Equity**

|                                  |   |   |                              |   |   | Change                in   |   |   |       |   |   | Asset/Liability               |   |
|---------------------------------------|--------|--------|-----------------------------------|--------|--------|--------------------------------------|--------|--------|------------|--------|--------|-------------------------------|--------|
|                                  |   |   | Market                Value  |   |   | Market                Value          |   |   | Percentage |   |   | Approved                      |   |
| (Dollars                in thousands) |   |   | of                Equity          |   |   | of                Equity             |   |   | Change     |   |   | Percent                Change |   |
|                                  |   |   |                              |   |   |                                 |   |   |       |   |   |                          |   |
| +300                Basis Points      |   | $      | 378,262                           |   | $      | (99,109                              | )      |   | -20.76     | %      |   | +/-                35         | %      |
| +200                Basis Points      |   |   | 414,359                           |   |   | (63,012                              | )      |   | -13.20     |   |   | +/-                25         |   |
| +100                Basis Points      |   |   | 446,556                           |   |   | (30,815                              | )      |   | -6.46      |   |   | +/-                15         |   |
| Flat                Rate              |   |   | 477,371                           |   |   | -                                    |   |   | 0.00       |   |   |                          |   |
| -100                Basis Points      |   |   | 484,401                           |   |   | 7,030                                |   |   | 1.47       |   |   | +/-                15         |   |
| -200                Basis Points      |   |   | 472,547                           |   |   | (4,824                               | )      |   | -1.01      |   |   | +/-                25         |   |
| -300                Basis Points      |   |   | 449,685                           |   |   | (27,686                              | )      |   | -5.80      |   |   | +/-                35         |   |

**Provision      for Loan Losses **

----

**Table      4—Allowance for Loans Losses**

|                                                                                        |   | Six                Months Ended  |
|----------------------------------------------------------------------------------------|--------|---------------------------------------|
|                                                                                        |   | June                30,          |
| (Dollars                in thousands)                                                  |   |                                  | 2006 |   |   | 2005 |   |
|                                                                                   |   |                                  |   |   |   |   |   |
| Average                loans                                                           |   | $                                     | 1,997,801 |   | $ | 1,862,311 |   |
|                                                                                   |   |                                  |   |   |   |   |   |
| Allowance,                beginning of period                                          |   |                                  | 19,865 |   |   | 18,455 |   |
| Loans                charged off:                                                      |   |                                  |   |   |   |   |   |
|     Commercial                and                industrial        |   |                                  | 451 |   |   | 229 |   |
|     Consumer                                                       |   |                                  | 920 |   |   | 922 |   |
|     Real                estate                                     |   |                                  | 482 |   |   | 117 |   |
|     Lease                financing                                 |   |                                  | 18 |   |   | 31 |   |
|         Total                loans charged off |   |                                  | 1,871 |   |   | 1,299 |   |
| Recoveries:                                                                            |   |                                  |   |   |   |   |   |
|     Commercial                and                industrial        |   |                                  | 46 |   |   | 13 |   |
|     Consumer                                                       |   |                                  | 314 |   |   | 207 |   |
|     Real                estate                                     |   |                                  | 82 |   |   | 80 |   |
|     Lease                financing                                 |   |                                  | 81 |   |   | 34 |   |
|         Total                recoveries        |   |                                  | 523 |   |   | 334 |   |
| Net                loans charged off                                                   |   |                                  | 1,348 |   |   | 965 |   |
| Provision                for loan losses                                               |   |                                  | 2,100 |   |   | 1,400 |   |
| Allowance,                end of period                                                |   | $                                     | 20,617 |   | $ | 18,890 |   |
| Ratio                of net charge offs to average                                     |   |                                  |   |   |   |   |   |
|                     loans outstanding (annualized)                 |   |                                  | 0.14 | % |   | 0.10 | % |
|                                                                                   |   |                                  |   |   |   |   |   |

----

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

|                                            |   | June                30, 2006  | December                31, 2005 |
|--------------------------------------------|--------|------------------------------------|----------------------------------|
|                                       |   |                               |                             |   |   | Percent                of  |   |   |   |   |   | Percent                of |   |
| (Dollars                in thousands)      |   |                               | Amount                           |   |   | Reserve |   |   | Amount |   |   | Reserve |   |
|                                       |   |                               |                             |   |   |   |   |   |   |   |   |   |   |
| Real                estate                 |   | $                                  | 7,537                            |   |   | 37 | % | $ | 6,422 |   |   | 32 | % |
| Commercial                                 |   |                               |                             |   |   |   |   |   |   |   |   |   |   |
|                   and industrial |   |                               | 8,775                            |   |   | 43 | % |   | 8,534 |   |   | 43 | % |
| Consumer                                   |   |                               | 4,203                            |   |   | 20 | % |   | 4,596 |   |   | 23 | % |
| Lease                financing             |   |                               | 102                              |   |   | - | % |   | 313 |   |   | 2 | % |
|     Total              |   | $                                  | 20,617                           |   |   | 100 | % | $ | 19,865 |   |   | 100 | % |

**Table      6—**
**Nonperforming      Assets**

| (Dollars                in thousands)                             |   |   | June                30, 2006 |   |   | December                31, 2005 |   |   | June                30, 2005 |   |
|-------------------------------------------------------------------|--------|--------|------------------------------|--------|--------|----------------------------------|--------|--------|------------------------------|--------|
|                                                              |   |   |                         |   |   |                             |   |   |                         |   |
| Nonaccrual                loans                                   |   | $      | 10,164                       |   | $      | 7,493                            |   | $      | 3,531                        |   |
| Loans                90 days or more past due                     |   |   | 1,279                        |   |   | 846                              |   |   | 679                          |   |
| Total                nonperforming loans                          |   |   | 11,443                       |   |   | 8,339                            |   |   | 4,210                        |   |
| Net                assets in foreclosure                          |   |   | 64                           |   |   | 29                               |   |   | 459                          |   |
| Total                nonperforming assets                         |   | $      | 11,507                       |   | $      | 8,368                            |   | $      | 4,669                        |   |
|                                                              |   |   |                         |   |   |                             |   |   |                         |   |
| Allowance                for loan losses to nonperforming loans   |   |   | 180.2                        | %      |   | 238.2                            | %      |   | 448.7                        | %      |
| Nonperforming                loans to total net loans             |   |   | 0.57                         | %      |   | 0.42                             | %      |   | 0.22                         | %      |
| Allowance                for loan and lease losses to total loans |   |   | 1.02                         | %      |   | 1.00                             | %      |   | 1.00                         | %      |
| Nonperforming                assets to total assets               |   |   | 0.36                         | %      |   | 0.27                             | %      |   | 0.15                         | %      |

**Table      7—Impaired Loans**

| (Dollars                in thousands)                           |   |   | June                30, 2006 |   |   | Dec.                31, 2005 |   |   | June                30, 2005 |   |
|-----------------------------------------------------------------|--------|--------|------------------------------|--------|--------|------------------------------|--------|--------|------------------------------|--------|
|                                                            |   |   |                         |   |   |                         |   |   |                         |   |
| Impaired                Loans                                   |   | $      | 2,907                        |   | $      | 3,317                        |   | $      | 1,278                        |   |
|                                                            |   |   |                         |   |   |                         |   |   |                              |   |
| Average                year-to-date impaired loans              |   | $      | 3,112                        |   | $      | 1,542                        |   | $      | 1,256                        |   |
|                                                            |   |   |                         |   |   |                         |   |   |                              |   |
| Impaired                loans with specific loss allowances     |   | $      | 2,907                        |   | $      | 3,317                        |   | $      | 1,278                        |   |
|                                                            |   |   |                         |   |   |                         |   |   |                         |   |
| Loss                allowances reserved on impaired loans       |   | $      | 335                          |   | $      | 675                          |   | $      | 145                          |   |
|                                                            |   |   |                         |   |   |                         |   |   |                         |   |
| Year-to-date                income recognized on impaired loans |   | $      | 27                           |   | $      | 33                           |   | $      | 19                           |   |

----

**Noninterest      Income**

**Noninterest      Expense**

**Federal      Income Taxes**

**Balance      Sheet Analysis**

----

**Capital**

**Table      8—Regulatory Capital**

|   (Dollars                in thousands)        |   |   |         |   |   |   |   |  For                CapitalAdequacy                Purposes | To                Be Well CapitalizedUnder                Prompt CorrectiveAction                Program |
|----------------------------------------------------------|--------|--------|--------------|--------|--------|--------|--------|------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
|  As                of June 30, 2006                 |   |   | ActualAmount |   |   | Ratio  |   |                                                             | Amount                                                                                                   |   |   | Ratio |   |   | Amount |   |   | Ratio |   |
|                                                     |   |   |         |   |   |   |   |                                                             |                                                                                                     |   |   |   |   |   |   |   |   |   |   |
| Total                Capital (to risk weighted assets):  |   |   |         |   |   |   |   |                                                             |                                                                                                     |   |   |   |   |   |   |   |   |   |   |
| Corporation                                              |   | $      | 316,041      |   |   | 12.44  | %      | $                                                                | 203,301                                                                                                  |   |   | 8.00 | % | $ | 254,126 |   |   | - |   |
| Harleysville                National Bank                |   |   | 269,488      |   |   | 10.67  | %      |                                                             | 202,101                                                                                                  |   |   | 8.00 | % |   | 252,627 |   |   | 10 | % |
| Tier                1 Capital (to risk weighted assets): |   |   |         |   |   |   |   |                                                             |                                                                                                     |   |   |   |   |   |   |   |   |   |   |
| Corporation                                              |   |   | 295,324      |   |   | 11.62  | %      |                                                             | 101,651                                                                                                  |   |   | 4.00 | % |   | 152,476 |   |   | - |   |
| Harleysville                National Bank                |   |   | 248,771      |   |   | 9.85   | %      |                                                             | 101,051                                                                                                  |   |   | 4.00 | % |   | 151,576 |   |   | 6 | % |
| Tier                1 Capital (to average assets):       |   |   |         |   |   |   |   |                                                             |                                                                                                     |   |   |   |   |   |   |   |   |   |   |
| Corporation                                              |   |   | 295,324      |   |   | 9.31   | %      |                                                             | 126,865                                                                                                  |   |   | 4.00 | % |   | 158,551 |   |   | - |   |
| Harleysville                National Bank                |   |   | 248,771      |   |   | 7.93   | %      |                                                             | 125,533                                                                                                  |   |   | 4.00 | % |   | 156,916 |   |   | 5 | % |

|   (Dollars                in thousands)        |   |   |         |   |   |   |   |  For                CapitalAdequacy                Purposes | To                Be Well CapitalizedUnder                Prompt CorrectiveAction                Program |
|----------------------------------------------------------|--------|--------|--------------|--------|--------|--------|--------|------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
|  As                of December 31, 2005             |   |   | ActualAmount |   |   | Ratio  |   |                                                             | Amount                                                                                                   |   |   | Ratio |   |   | Amount |   |   | Ratio |   |
|                                                     |   |   |         |   |   |   |   |                                                             |                                                                                                     |   |   |   |   |   |   |   |   |   |   |
| Total                Capital (to risk weighted assets):  |   |   |         |   |   |   |   |                                                             |                                                                                                     |   |   |   |   |   |   |   |   |   |   |
| Corporation                                              |   | $      | 318,911      |   |   | 12.98  | %      | $                                                                | 196,563                                                                                                  |   |   | 8.00 | % | $ | 245,703 |   |   | - |   |
| Harleysville                National Bank                |   |   | 259,883      |   |   | 10.64  | %      |                                                             | 195,390                                                                                                  |   |   | 8.00 | % |   | 244,238 |   |   | 10 | % |
| Tier                1 Capital (to risk weighted assets): |   |   |         |   |   |   |   |                                                             |                                                                                                     |   |   |   |   |   |   |   |   |   |   |
| Corporation                                              |   |   | 298,946      |   |   | 12.17  | %      |                                                             | 98,281                                                                                                   |   |   | 4.00 | % |   | 147,422 |   |   | - |   |
| Harleysville                National Bank                |   |   | 239,918      |   |   | 9.82   | %      |                                                             | 97,695                                                                                                   |   |   | 4.00 | % |   | 146,543 |   |   | 6 | % |
| Tier                1 Capital (to average assets):       |   |   |         |   |   |   |   |                                                             |                                                                                                     |   |   |   |   |   |   |   |   |   |   |
| Corporation                                              |   |   | 298,946      |   |   | 9.69   | %      |                                                             | 123,408                                                                                                  |   |   | 4.00 | % |   | 154,260 |   |   | - |   |
| Harleysville                National Bank                |   |   | 239,918      |   |   | 7.86   | %      |                                                             | 122,154                                                                                                  |   |   | 4.00 | % |   | 152,693 |   |   | 5 | % |

**,**

----

**Liquidity**

**Recent      Federal Deposit Insurance Corporation (FDIC) Rules**

----

**Other      Information**

**Item      3**
**Qualitative      and Quantitative Disclosures About Market Risk**

----

**Item      4**
**Controls      and Procedures**

**(i)      Management’s Report on Disclosure Controls**

**(ii)      Changes in Internal Controls**

----

**PART      II. OTHER INFORMATION**

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

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

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

|                            |   |   | Total                Number of Common Shares Purchased  |   |   | Weighted                Average Price Paid Per Share |   |   | Total                Number of Shares Purchased as Part of Publicly Announced                Plans(1 | )      |   | Maximum                Number of Shares that may yet be Purchased under the Plans(1 | )      |
|---------------------------------|--------|--------|--------------------------------------------------------------|--------|--------|------------------------------------------------------|--------|--------|------------------------------------------------------------------------------------------------------|--------|--------|-------------------------------------------------------------------------------------|--------|
|                            |   |   |                                                         |   |   |                                                 |   |   |                                                                                                 |   |   |                                                                                |   |
| April                1-30, 2006 |   |   | 66,219                                                       |   | $      | 20.81                                                |   |   | 66,219                                                                                               |   |   | 996,820                                                                             |   |
| May                1-31, 2006   |   |   | -                                                            |   |   | -                                                    |   |   | -                                                                                                    |   |   | 996,820                                                                             |   |
| June                1-30, 2006  |   |   | -                                                            |   |   | -                                                    |   |   | -                                                                                                    |   |   | 996,820                                                                             |   |
| Total                           |   |   | 66,219                                                       |   | $      | 20.81                                                |   |   | 66,219                                                                                               |   |   |                                                                                |   |

| (1)   | On                December 14, 2000, the Board of Directors authorized a program to                purchase                up to 1,311,450 shares (restated for stock dividends and splits),                or 5%,                of its outstanding common stock.                This repurchase plan was completed during the second quarter of 2005.                On                May 12, 2005, the Board of Directors authorized a plan to purchase                up to                1,349,250 shares (restated for five percent stock dividend paid on                September 15, 2005) or 4.9%, of its outstanding common                stock. |
|-----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Item      3.**
**Defaults      Upon Senior Securities**

----

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

| (a)   | The                2006 Annual Meeting of Shareholders was held at 9:30 a.m., on Tuesday,                April 25, 2006 at Presidential Caterers, 2910 DeKalb Pike, Norristown,                Pennsylvania 19401. |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 1.   | Two                directors were elected, as below: |
|----------------|------------------------------------------------------|

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

| (a)   | None                to report. |
|-----------------|--------------------------------|

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

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

----

**SIGNATURES**

**HARLEYSVILLE      NATIONAL CORPORATION**

----

**EXHIBIT      INDEX**

**Exhibit      No**
**Description      of Exhibits**

| (2.1)    | Purchase                Agreement, dated as of November 15, 2005, by and among Harleysville                National Bank and Trust Company, Cornerstone Financial Consultants,                Ltd.,                Cornerstone Advisors Asset Management, Inc., Cornerstone Institutional                Investors, Inc., Cornerstone Management Resources, Inc., John R.                Yaissle,                Malcolm L. Cowen, II, and Thomas J. Scalici. The schedules and exhibits                to                the Purchase Agreement are listed at the end of the Purchase Agreement                but                have been omitted from the exhibit to Form 10-K. The Registrant agrees                to                supplementally furnish a copy of any omitted schedule or exhibit                to the                Securities and Exchange Commission upon request. (Incorporated by                reference to Exhibit 2.1 of the Registrant’s Annual Report on Form 10-K                for the year ended December 31, 2005, filed with the Commission on                March                15, 2006.)  |
|---------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3.1)    | Harleysville                National Corporation Amended and Restated Articles of Incorporation.                (Incorporated by reference to Exhibit 3.1 to the Corporation’s                Registration Statement No. 333-111709 on Form S-4, as filed on                January 5, 2004.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| (3.2)    | Harleysville                National Corporation Amended and Restated By-laws. (Incorporated                by                reference to Exhibit 3.1 to the Corporation’s Current Report on Form 8-K,                filed with the Commission on February 14, 2005.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| (10.1)   | Harleysville                National Corporation 1993 Stock Incentive Plan. (Incorporated by                reference                to Exhibit 4.3 of Registrant’s Registration Statement                No. 33-69784 on Form S-8, filed with the Commission on                October 1, 1993.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (10.2)   | Harleysville                National Corporation Stock Bonus Plan. (Incorporated by reference                to                Exhibit 99A of Registrant’s Registration Statement No. 333-17813                on Form S-8, filed with the Commission on December 13,                1996.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| (10.3)   | Supplemental                Executive Retirement Plan. (Incorporated by reference to Exhibit 10.3                of Registrant’s                Annual Report in Form 10-K for the year ended December 31, 1997,                filed with the Commission on March 27, 1998.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (10.4)   | Walter E.                Daller, Jr., Chairman and former President and Chief Executive                Officer’s Employment Agreement. (Incorporated by reference to Registrant’s                Current Report on Form 8-K, filed with the Commission on                March 25, 1999.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (10.5)   | Consulting                Agreement and General Release dated November 12, 2004 between                Walter E. Daller, Jr., Harleysville National Corporation and                Harleysville National Bank and Trust Company. (Incorporated by reference                to Registrant’s Current Report on Form 8-K, filed with the Commission                on November 16, 2004.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| (10.6)   | Amendment                to Supplemental Executive Retirement Benefit Agreement dated March                14,                2005 by and among Harleysville Management Services, LLC and Walter                E.                Daller, Jr. (Incorporated by reference to Registrant’s Current Report on                Form 8-K, filed with the Commission on March 14, 2005.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (10.7)   | Employment                Agreement dated October 26, 1998 by and among Harleysville National                Corporation, Harleysville National Bank and Trust Company and                Demetra M. Takes, President and Chief Executive Officer of                Harleysville National Bank and Trust Company. (Incorporated by reference                to Registrant’s Current Report on Form 8-K, filed with the Commission                on March 25, 1999.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (10.8)   | Amendment                to Supplemental Executive Retirement Benefit Agreement dated March                14,                2005 by and among Harleysville Management Services, LLC and Demetra                M.                Takes, President and Chief Executive Officer of Harleysville National                Bank                and Trust Company. (Incorporated by reference to Registrant’s Current                Report on Form 8-K, filed with the Commission on March 14,                2005.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (10.9)   | Harleysville                National Corporation 1998 Stock Incentive Plan. (Incorporated by                reference                to Registrant’s Registration Statement No. 333-79971 on                Form S-8, filed with the Commission on June 4,                1999.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| (10.10)  | Harleysville                National Corporation 1998 Independent Directors Stock Option Plan.                (Incorporated by reference to Registrant’s Registration Statement                No. 333-79973 on Form S-8, filed with the Commission on                June 4, 1999.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (10.11)  | Supplemental                Executive Retirement Benefit Agreement dated February 23, 2004                between Michael B. High, Executive Vice President and former Chief                Financial Officer, and Harleysville Management Services, LLC.                (Incorporated by reference to Registrant’s Quarterly Report on                Form 10-Q, filed with the Commission on May 10,                2004.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (10.12)  | Employment                Agreement effective April 1, 2005 between Michael B. High,                Executive Vice President and Chief Operating Officer of the Corporation,                and Harleysville Management Services, LLC. (Incorporated by reference                to Registrant’s Current Report on Form 8-K, filed with the Commission                on November 16, 2004.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (10.13)  | Amendment                to Supplemental Executive Retirement Benefit Agreement dated March                14,                2005 by and among Harleysville Management Services, LLC and Michael                B.                High, Executive Vice President and Chief Operating Officer of the                Corporation. (Incorporated by reference to Registrant’s Current Report on                Form 8-K, filed with the Commission on March 14, 2005.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (10.14)  | Employment                Agreement dated March 9, 2004 between Mikkalya Murray, Executive Vice                President and Harleysville Management Services, LLC. (Incorporated by                reference to Registrant’s Quarterly Report on Form 10-Q, filed with                the Commission on May 10, 2004.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

----

| (10.15)  | Amendment                to Supplemental Executive Retirement Benefit Agreement dated March                14,                2005 by and among Harleysville Management Services, LLC and Mikkalya                Murray, Executive Vice President. (Incorporated by reference to                Registrant’s Current Report on Form 8-K, filed with the Commission on                March 14, 2005.)                                                                                                |
|---------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (10.16)  | Harleysville                National Corporation 2004 Omnibus Stock Incentive Plan. (Incorporated                by                reference to Exhibit 4 of Registrant’s Registration Statement No.                333-116183 on Form S-8, filed with the Commission on June 4,                2004).                                                                                                                                                                                                |
| (10.17)  | Employment                Agreement dated August 23, 2004 between James F.                McGowan, Jr., Executive Vice President & Chief Credit Officer and                Harleysville Management Services, LLC. (Incorporated by reference to                Registrant’s Current Report on Form 8-K, filed with the Commission on                August 25, 2004.)                                                                                               |
| (10.18)  | Supplemental                Executive Retirement Benefit Agreement dated August 23, 2004 between                James F. McGowan, Jr., Executive Vice President & Chief                Credit Officer, and Harleysville Management Services, LLC.                (Incorporated by reference to Registrant’s Current Report on                Form 8-K, filed with the Commission on August 25,                2004.)                                                |
| (10.19)  | Amendment                to Supplemental Executive Retirement Benefit Agreement dated March                14,                2005 by and among Harleysville Management Services, LLC and James                F.                McGowan, Jr., Executive Vice President & Chief Credit Officer.                (Incorporated by reference to Registrant’s Current Report on Form 8-K,                filed with the Commission on March 14, 2005.)                                                |
| (10.20)  | Employment                Agreement dated September 27, 2004 between John Eisele, Executive                Vice President & President of Millennium Wealth Management and Private                Banking, and Harleysville Management Services, LLC. (Incorporated by                reference to Registrant’s Current Report on Form 8-K, filed with the                Commission on September 29, 2004.)                                                                   |
| (10.21)  | Supplemental                Executive Retirement Benefit Agreement dated September 27, 2004                between John Eisele, Executive Vice President & President of                Millennium Wealth Management and Private Banking, and Harleysville                Management Services, LLC. (Incorporated by reference to Registrant’s                Current Report on Form 8-K, filed with the Commission on                September 29, 2004.)                     |
| (10.22)  | Amendment                to Supplemental Executive Retirement Benefit Agreement dated March                14,                2005 by and among Harleysville Management Services, LLC and John                Eisele,                Executive Vice President & President of Millennium Wealth Management                and Private Banking. (Incorporated by reference to Registrant’s Current                Report on Form 8-K, filed with the Commission on March 14,                2005.)  |
| (10.23)  | Employment                Agreement effective January 1, 2005 between Gregg J. Wagner,                President and Chief Executive Officer of the Corporation, and Harleysville                Management Services, LLC. (Incorporated by reference to Registrant’s                Current Report on Form 8-K, filed with the Commission on                November 16, 2004.)                                                                                              |
| (10.24)  | Amendment                to Supplemental Executive Retirement Benefit Agreement dated March                14,                2005 by and among Harleysville Management Services, LLC and Gregg                J.                Wagner, the current President and Chief Executive Officer of the                Corporation. (Incorporated by reference to Registrant’s Current Report on                Form 8-K, filed with the Commission on March 14, 2005.)                                     |
| (10.25)  | Employment                Agreement dated May 18, 2005, between George S. Rapp, Senior Vice                President and Chief Financial Officer, and Harleysville Management                Services, LLC. (Incorporated by reference to Registrant’s Current Report                on Form 8-K, filed with the Commission on May 20, 2005.)                                                                                                                                                         |
| (10.26)  | Stock                Purchase Agreement dated June 30, 2005, between David R. Kotok &                Associates, Inc., Harleysville National Corporation and Harleysville                National Bank and Trust Company. (Incorporated by reference to                Registrant’s Current Report on Form 8-K, filed with the Commission on July                1, 2005.)                                                                                                                        |
| (10.27)  | Amended                and Restated Declaration of Trust for HNC Statutory Trust III by                and among                Wilmington Trust Company, as Institutional Trustee and Delaware Trustee,                Harleysville National Corporation, as Sponsor, and the Administrators                named therein, dated as of September 28, 2005.                                                                                                                                                 |
| (10.28)  | Indenture                between Harleysville National Corporation, as Issuer, and Wilmington                Trust                Company, as Trustee, for Fixed/Floating Rate Junior Subordinated                Debt                Securities, dated as of September 28, 2005.                                                                                                                                                                                                                           |
| (10.29)  | Guarantee                Agreement between Harleysville National Corporation and Wilmington                Trust                Company, dated as of September 28, 2005.                                                                                                                                                                                                                                                                                                                                    |
| (10.30)  | Employment                Agreement effective July 12, 2006 between Lewis C. Cyr, Chief Lending                Officer of the Corporation, and Harleysville Management                Services, LLC. (Incorporated by reference to Registrant’s Current                Report on Form 8-K, filed with the Commission on July 12,                2006.)                                                                                                                                      |
| (11)     | Computation                of Earnings per Common Share, incorporated by reference to Note 6                of the                Consolidated Financial Statements of this Report on Form                10-Q.                                                                                                                                                                                                                                                                                             |
| (31.1)   | Certification                of the Chief Executive Officer pursuant to Section 302 of the                Sarbanes-Oxley Act of 2002, filed herewith.                                                                                                                                                                                                                                                                                                                                             |
| (31.2)   | Certification                of the Chief Financial Officer pursuant to Section 302 of the                Sarbanes-Oxley Act of 2002, filed herewith.                                                                                                                                                                                                                                                                                                                                             |
| (32.1)   | Certification                of the Chief Executive Officer pursuant to 18 U.S.C.                Section 1350, as adopted pursuant to Section 906 of the                Sarbanes-Oxley Act of 2002, furnished herewith.                                                                                                                                                                                                                                                                 |
| (32.2)   | Certification                of the Chief Financial Officer pursuant to 18 U.S.C.                Section 1350, as adopted pursuant to Section 906 of the                Sarbanes-Oxley Act of 2002, furnished herewith.                                                                                                                                                                                                                                                                 |