**UNITED
STATES**
**SECURITIES
AND EXCHANGE COMMISSION**
**Washington,
D.C. 20549**

___________________

**Form
10-Q**
__________________

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

**for
the quarterly period ended March 31, 2005**

**Or**

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

for the
transition period from ___________ to __________

Commission
file number 0-15237

___________________

**HARLEYSVILLE
NATIONAL CORPORATION**
(Exact
name of registrant as specified in its charter)

___________________


**Pennsylvania**
    
    **23-2210237****(State
      or other jurisdiction**
      **of
      incorporation or organization)**
    
    **(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)**

___________________

Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
YesxNo ̈

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

Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 26,243,722shares of
Common Stock, $1.00 par value, outstanding on May 4, 2005.-1-
**HARLEYSVILLE
      NATIONAL CORPORATION****INDEX
      TO FORM 10-Q REPORT**PAGEPart
      I. Financial InformationItem
      1. Financial Statements:Consolidated
      Balance Sheets at March 31, 2005 and December 31, 2004
    3Consolidated
      Statements of Income for the Three Months Ended March 31, 2005 and
      2004
    4Consolidated
      Statements of Shareholders’ Equity for the Three Months Ended March 31,
      2005 and 2004
    5Consolidated
      Statements of Cash Flows for the Three Months Ended March 31, 2005 and
      2004
    6Notes
      to Consolidated Financial Statements
    7Item
      2. Management's Discussion and Analysis of Financial Condition and Results
      of Operations
    13Item
      3. Quantitative and Qualitative Disclosures about Market
    Risk
    24Item
      4. Controls and Procedures
    24Part
      II. Other Information
    24Item
      1. Legal Proceedings
    24Item
      2. Unregistered Sales of Equity Securities and Use of Proceeds
    24Item
      3. Defaults Upon Senior Securities
    25Item
      4. Submission of Matters to a Vote of Security Holders
    25Item
      5. Other Information
    25Item
      6. Exhibits
    26Signatures
    28Certifications
    31-34

-2-
PART
      1. FINANCIAL INFORMATIONHARLEYSVILLE
      NATIONAL CORPORATION AND SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETS(Unaudited)(Dollars
      in thousands)
    
    
    March
      31, 2005
    
    
    December
      31, 2004**Assets**Cash
      and due from banks
    
    $
    52,731
    
    $
    50,699Federal
      funds sold and securities purchased under agreements to
    resell
    
    
    42,000
    
    
    52,000Interest-bearing
      deposits in banks
    
    
    2,936
    
    
    4,291Total
      cash and cash equivalents
    
    
    97,667
    
    
    106,990Residential
      mortgage loans held for sale
    
    
    2,898
    
    
    1,236Investment
      securities available for sale
    
    
    843,427
    
    
    874,732Investment
      securities held to maturity
    
    
    63,952
    
    
    68,831(market
      value $64,310 and $69,704, respectively)Total
      loans and leases
    
    
    1,862,743
    
    
    1,844,566Less:
      Allowance for loan losses
    
    
    (18,724
    )
    
    (18,455
    )Net
      loans
    
    
    1,844,019
    
    
    1,826,111Premises
      and equipment, net
    
    
    27,003
    
    
    26,963Accrued
      interest receivable
    
    
    12,958
    
    
    12,089Net
      assets in foreclosure
    
    
    411
    
    
    370Goodwill
    
    
    32,548
    
    
    32,548Intangible
      assets, net
    
    
    4,243
    
    
    4,168Bank-owned
      life insurance
    
    
    52,593
    
    
    52,109Other
      assets
    
    
    20,853
    
    
    18,368Total
      assets
    
    $
    3,002,572
    
    $
    3,024,515**Liabilities
      and Shareholders' Equity**Deposits:Noninterest-bearing
    
    $
    332,525
    
    $
    333,516Interest-bearing:Checking
      accounts
    
    
    352,132
    
    
    305,584Money
      market accounts
    
    
    679,872
    
    
    713,039Savings
    
    
    222,553
    
    
    223,039Time,
      under $100,000
    
    
    523,782
    
    
    508,010Time,
      $100,000 or greater
    
    
    126,703
    
    
    129,375Total
      deposits
    
    
    2,237,567
    
    
    2,212,563Federal
      funds purchased and securities sold under agreements to
      repurchase
    
    
    137,936
    
    
    142,445Other
      short-term borrowings
    
    
    1,675
    
    
    47,213Long-term
      borrowings
    
    
    272,750
    
    
    272,750Accrued
      interest payable
    
    
    27,998
    
    
    26,613Subordinated
      debt
    
    
    25,774
    
    
    25,774Other
      liabilities
    
    
    30,148
    
    
    26,625Total
      liabilities
    
    
    2,733,848
    
    
    2,753,983Shareholders'
      Equity:Series
      preferred stock, par value $1 per share;Authorized
      8,000,000 shares, none issued
    
    
    -
    
    
    -Common
      stock, par value $1 per share; authorized 75,000,000Shares;
      issued 27,413,811 shares at March 31, 2005 and27,319,988
      shares at December 31, 2004
    
    
    27,414
    
    
    27,320Additional
      paid in capital
    
    
    162,370
    
    
    160,039Retained
      earnings
    
    
    104,172
    
    
    99,730Accumulated
      other comprehensive income (loss)
    
    
    (4,299
    )
    
    1,243Treasury
      stock, at cost: 1,173,234 shares at March 31, 2005 and1,042,734
      shares at December 31, 2004
    
    
    (20,933
    )
    
    (17,800
    )Total
      shareholders' equity
    
    
    268,724
    
    
    270,532Total
      liabilities and shareholders' equity
    
    $
    3,002,572
    
    $
    3,024,515
See
accompanying notes to consolidated financial statements.
-3-
HARLEYSVILLE
      NATIONAL CORPORATION AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF INCOME(Unaudited)Three
      Months Ended(Dollars
      in thousands, except weighted average number of common
    
    March
      31,Shares
      and per share information)
    
    2005
    
    2004**Interest
      Income:**Loans,
      including fees
    
    $
    25,537
    
    $
    19,496Lease
      financing
    
    
    649
    
    
    1,305Investment
      securities:Taxable
    
    
    6,054
    
    
    5,521Exempt
      from federal taxes
    
    
    2,763
    
    
    2,763Federal
      funds sold and securities purchased under agreements to
    resell
    
    
    245
    
    
    74Deposits
      in banks
    
    
    24
    
    
    14Total
      interest income
    
    
    35,272
    
    
    29,173**Interest
      Expense:**Savings
      deposits
    
    
    4,280
    
    
    1,727Time,
      under $100,000
    
    
    4,434
    
    
    4,324Time,
      $100,000 or greater
    
    
    873
    
    
    790Short-term
      borrowings
    
    
    814
    
    
    116Long-term
      borrowings
    
    
    3,201
    
    
    1,986Total
      interest expense
    
    
    13,602
    
    
    8,943Net
      interest income
    
    
    21,670
    
    
    20,230Provision
      for loan losses
    
    
    750
    
    
    489Net
      interest income after provision for loan losses
    
    
    20,920
    
    
    19,741**Noninterest
      Income:**Service
      charges
    
    
    1,957
    
    
    1,925Gain
      on sales in investment securities, net
    
    
    923
    
    
    900Trust,
      investment services and advisory income
    
    
    1,929
    
    
    1,121Bank-owned
      life insurance income
    
    
    493
    
    
    611Other
      income
    
    
    1,641
    
    
    1,226Total
      noninterest income
    
    
    6,943
    
    
    5,783Net
      interest income after provision for loan losses andnoninterest
      income
    
    
    27,863
    
    
    25,524**Noninterest
      Expense:**Salaries,
      wages and employee benefits
    
    
    9,500
    
    
    8,277Occupancy
    
    
    1,391
    
    
    1,084Furniture
      and equipment
    
    
    1,373
    
    
    1,258Other
      expense
    
    
    3,239
    
    
    3,198Total
      noninterest expense
    
    
    15,503
    
    
    13,817Income
      before income tax expense
    
    
    12,360
    
    
    11,707Income
      tax expense
    
    
    3,195
    
    
    2,800Net
      income
    
    $
    9,165
    
    $
    8,907Net
      income per share information:Basic
    
    $
    0.35
    
    $
    0.35Diluted
    
    $
    0.34
    
    $
    0.34Cash
      dividends per share
    
    $
    0.18
    
    $
    0.16Weighted
      average number of common shares:Basic
    
    
    26,247,137
    
    
    25,128,032Diluted
    
    
    26,967,759
    
    
    26,033,205
See
accompanying notes to consolidated financial statements.
-4-

HARLEYSVILLE
NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
(Dollars
and share information in thousands)


Three
      Months Ended March 31, 2005Common
      Stock
    
    
    Treasury
      Stock
    
    
    
    
    
    Additional
    
    
    
    
    
    Accumulated
      OtherNumber
      of
    
    
    Number
      of
    
    
    Par
    
    
    Paid
    
    
    Retained
    
    
    Comprehensive
    
    
    Treasury
    
    
    
    
    
    ComprehensiveShares
    
    
    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
    )
    $
    270,532Issuance
      of stock for stock options and
      tax
      benefits
    
    
    94
    
    
    -
    
    
    94
    
    
    2,331
    
    
    -
    
    
    -
    
    
    -
    
    
    2,425Net
      income
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    9,165
    
    
    -
    
    
    -
    
    
    9,165
    
    $
    9,165Other
      comprehensive loss, net of reclassifications and tax
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (5,542
    )
    
    -
    
    
    (5,542
    )
    
    (5,542
    )Purchases
      of treasury stock
    
    
    -
    
    
    (131
    )
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (3,133
    )
    
    (3,133
    )Cash
      dividends
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (4,723
    )
    
    -
    
    
    -
    
    
    (4,723
    )Comprehensive
      income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    3,623Balance,
      March 31, 2005
    
    
    27,414
    
    
    (1,174
    )
    $
    27,414
    
    $
    162,370
    
    $
    104,172
    
    $
    (4,299
    )
    $
    (20,933
    )
    $
    268,724




Three
      Months Ended March 31, 2004AccumulatedCommon
      Stock
    
    Treasury
      Stock
    
    
    
    Additional
    
    
    
    OtherNumber
      of
    
    Number
      of
    
    Par
    
    Paid
    
    Retained
    
    Comprehensive
    
    Treasury
    
    
    
    ComprehensiveShares
    
    Shares
    
    Value
    
    In
      Capital
    
    Earnings
    
    Income
    
    Stock
    
    Total
    
    IncomeBalance,
      January 1, 2004
    
    
    24,668
    
    
    (823
    )
    $
    24,668
    
    $
    98,646
    
    $
    109,502
    
    $
    8,098
    
    $
    (13,861
    )
    $
    227,053Issuance
      of stock for stock options and
      tax
      benefits
    
    
    144
    
    
    -
    
    
    144
    
    
    2,182
    
    
    -
    
    
    -
    
    
    -
    
    
    2,326Net
      income
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    8,907
    
    
    -
    
    
    -
    
    
    8,907
    
    $
    8,907Other
      comprehensive income, net of reclassifications and tax
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    3,752
    
    
    -
    
    
    3,752
    
    
    3,752Cash
      dividends
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (4,074
    )
    
    -
    
    
    -
    
    
    (4,074
    )Comprehensive
      income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    12,659Balance,
      March 31, 2004
    
    
    24,812
    
    
    (823
    )
    $
    24,812
    
    $
    100,828
    
    $
    114,335
    
    $
    11,850
    
    $
    (13,861
    )
    $
    237,964See
      accompanying notes to consolidated financial
statements.





-5-HARLEYSVILLE
      NATIONAL CORPORATION AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWS(Unaudited)Three
      Months Ended(Dollars
      in thousands)
    
    March
      31,2005
    
    
    2004**Operating
      Activities:**Net
      income
    
    $
    9,165
    
    $
    8,907Adjustments
      to reconcile net income toNet
      cash provided by operating activities:Provision
      for loan losses
    
    
    750
    
    
    489Depreciation
      and amortization
    
    
    883
    
    
    875Net
      amortization of investment securities discounts/premiums
    
    
    1,448
    
    
    974Deferred
      income benefit
    
    
    (896
    )
    
    (733
    )Gains
      on sales of investment securities, net
    
    
    (923
    )
    
    (900
    )Net
      increase in accrued interest receivable
    
    
    (869
    )
    
    (188
    )Net
      increase in accrued interest payable
    
    
    1,385
    
    
    1,419Net
      (increase) decrease in other assets
    
    
    204
    
    
    (2,748
    )Net
      increase in other liabilities
    
    
    4,722
    
    
    4,360Net
      cash provided by operating activities
    
    
    15,869
    
    
    12,455**Investing
      Activities:**Proceeds
      from sales of investment securities available for sale
    
    
    124,955
    
    
    593,295Proceeds,
      maturity or calls of investment securities held to
maturity
    
    
    4,872
    
    
    1,000Proceeds,
      maturity or calls of investment securities available for
    sale
    
    
    33,800
    
    
    55,727Purchases
      of investment securities available for sale
    
    
    (136,586
    )
    
    (668,269
    )Net
      increase in loans
    
    
    (20,427
    )
    
    (20,790
    )Net
      increase in premises and equipment
    
    
    (914
    )
    
    (1,526
    )Net
      increase in bank-owned life insurance
    
    
    (484
    )
    
    (612
    )Proceeds
      from sales of other real estate
    
    
    66
    
    
    769Net
      cash provided by (used) in investing activities
    
    
    5,282
    
    
    (40,406
    )**Financing
      Activities:**Net
      increase (decrease) in deposits
    
    
    25,004
    
    
    (10,559
    )Increase
      (decrease) in federal funds purchased and securities sold
      under
      agreements to repurchase
    
    
    (4,509
    )
    
    3,267Decrease
      in short-term borrowings
    
    
    (45,538
    )
    
    —Advances
      of long-term subordinated debt
    
    
    —
    
    
    20,619Cash
      dividends
    
    
    (4,723
    )
    
    (4,074
    )Repurchase
      of common stock
    
    
    (3,133
    )
    
    —Proceeds
      from the exercise of stock options
    
    
    2,425
    
    
    2,326Net
      cash provided by (used in) financing activities
    
    
    (30,474
    )
    
    11,579Net
      decrease in cash and cash equivalents
    
    
    (9,323
    )
    
    (16,372
    )Cash
      and cash equivalents at beginning of period
    
    
    106,990
    
    
    94,856Cash
      and cash equivalents at end of the period
    
    $
    97,667
    
    $
    78,484Cash
      paid during the period for:Interest
    
    $
    12,328
    
    $
    7,524Income
      taxes
    
    $
    2,052
    
    $
    —Supplemental
      disclosure of noncash investing and financing activities:Transfer
      of assets from loans to other real estate owned
    
    $
    138
    
    $
    257See
      accompanying notes to consolidated financial statements.


-6-**HARLEYSVILLE
NATIONAL CORPORATION AND SUBSIDIARIES**
**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**

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

*Principles
of Consolidation and Basis of Presentation*

In the
opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the consolidated financial position of
Harleysville National Corporation (the Corporation) and its wholly owned
subsidiaries - Harleysville National Bank (the Bank), HNC Financial Company and
HNC Reinsurance Company, as of March 31, 2005, the results of its operations for
the three month periods, ended March 31, 2005 and 2004 and the cash flows for
the three month periods, ended March 31, 2005 and 2004. Certain prior period
amounts have been reclassified to conform to current year presentation. All
significant intercompany accounts and transactions have been eliminated in
consolidation. We recommend that you read these unaudited consolidated financial
statements in conjunction with the audited consolidated financial statements of
the Corporation and the accompanying notes in the Corporation's 2004 Annual
Report on Form 10-K. The results of operations for the three month periods ended
March 31, 2005 and 2004 are not necessarily indicative of the results to be
expected for the full year.

The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities as of the dates of the
balance sheets and revenues and expenditures for the periods presented. Actual
results could differ from those estimates.

*Intangible
Assets*

Amortization
and valuation adjustments of core deposit intangibles and other intangible
assets was $9,000 and $211,000 for the three months ended March 31, 2005 and
2004, respectively.

*Stock
Based Compensation*

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

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

The
Corporation has four shareholder approved fixed stock option plans that allow
the Corporation to grant options up to an aggregate of 3,444,772 shares of
common stock to key employees and directors. At March 31, 2005,
2,242,732****stock options had been granted under the stock
option plans. The options have a term of ten years when issued and typically
vest over a five-year period. The exercise price of each option is the market
price of the Corporation’s stock on the date of grant. Additionally, at March
31, 2005, the Corporation has an additional 297,787 granted stock options, which
were converted into the Corporation’s options as a result of the Millennium Bank
acquisition. The options have a term of ten years and are exercisable at prices
ranging from $10.20 to $15.22, at March 31, 2005, except for 32,844
non-qualified stock options, which are performance based and exercisable at
$12.94 per share after December 31, 2006.

The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants at March 31, 2005 and March 31, 2004, respectively:
dividend yield of 2.83% and 2.37%; expected volatility of 29.38% and 28.89%;
risk-free interest rate of 4.06% and 3.55%; and an expected life of 7.06 years
and 7.20 years. The options converted as a result of the Millennium Bank
acquisition have been excluded from the valuation since they have been included
in goodwill under the purchase method of accounting.

-7-**Note
1****-
Summary of Significant Accounting Policies (Continued)**

The
following table illustrates the effect on net income and earnings per share if
the Corporation had applied the fair value recognition provisions of SFAS No.
123 to stock-based employee compensation:

Three
      Months Ended(Dollars
      in thousands, except per share amounts)
    
    March
      31,2005
    
    2004Net
      IncomeAs
      reported
    
    $
    9,165
    
    $
    8,907Less:
      Stock-based compensation cost determinedunder
      fair value method for all awards
    
    
    200
    
    
    320*Proforma*
    
    $
    8,965
    
    $
    8,587Earnings
      per share (Basic)(1)As
      reported
    
    $
    .35
    
    $
    .35*Proforma*
    
    $
    .34
    
    $
    .34Earnings
      per share (Diluted)(1)As
      reported
    
    $
    .34
    
    $
    .34*Proforma*
    
    $
    .33
    
    $
    .33
(1)
    Restated
      for five percent stock dividend paid on September 15,
  2004.

On
December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123 (revised 2004), “Share-Based Payment” (FAS 123(R)). FAS 123(R) replaces
FAS No. 123, “Accounting for Stock-Based Compensation” and supersedes APB
Opinion No. 25, “Accounting for Stock Issued to Employees.” FAS 123(R)
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services and addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity’s equity instruments or
that may be settled by the issuance of those equity instruments. FAS 123(R)
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. Under FAS 123(R), all
forms of share-based payments to employees, including employee stock options,
will be treated the same as other forms of compensation by recognizing the
related cost in the income statement. The expense of the award will generally be
measured at fair value at the grant date. Current accounting guidance requires
that the expense relating to so-called fixed plan employee stock options only be
disclosed in the footnotes to the financial statements. FAS 123(R) will
eliminate the ability to account for share-based compensation transactions using
APB Opinion No. 25. In April 2005, the Securities and Exchange Commission
adopted a new rule amending Regulation S-X to amend the date for compliance with
FAS 123(R). Under FAS 123(R), registrants would have been required to apply the
provisions of FAS 123(R) as of the first interim or annual reporting period that
begins after June 15, 2005, or after December 15, 2005 for small business
issuers. The Commission’s new rule allows registrants to implement FAS 123(R) at
the beginning of their next fiscal year that begins after June 15, 2005, or
after December 15, 2005 for small business issuers. The Corporation is currently
evaluating this statement and its effects on its results of operations.

For
additional information on other significant accounting policies, see Note 1 of
the Consolidated Financial Statements of the Corporation’s 2004 Annual Report on
Form 10-K.

**Note
2 - Acquisition**

On April
30, 2004, the Corporation completed its acquisition of Millennium Bank which was
merged with and into Harleysville National Bank. Millennium Bank was based in
Malvern, Pennsylvania with four banking offices, specializing in commercial
lending and client relationship banking along with the wealth management unit,
Cumberland Advisors, Inc. Millennium Bank’s results of operations are included
in the Corporation’s results beginning April 30, 2004 through March 31,
2005.

The
aggregate purchase price was $52.8 million in cash and stock which included $5.5
million in expenses associated with the acquisition.The
Corporation acquired 100% of the outstanding shares of Millennium Bank.
Millennium Bank shares of 1,511,624 were exchanged at a conversion ratio of
..6256 (.65688 restated*) for 945,672 (992,956 restated*) common shares of the
Corporation’s common stock and Millennium Bank shares of 1,008,050 were
exchanged for cash consideration of $16.1 million. Millennium Bank options of
302,250 were cashed out for consideration of $2.3 million and options of 453,325
were exchanged at a conversion ratio of .6256 (.65688 restated*) to acquire
283,601 shares (297,787 restated*) of the Corporation’s common stock (252,321
(264,943 restated*) options at an exercise price of $10.71 to $15.98 ($10.20 to
$15.22 restated*) and 31,280 (32,844 restated*) performance based options at an
exercise price of $13.59 ($12.94 restated*)).

* -
Restated for stock five percent stock dividend paid on September 15,
2004.

-8-
**Note
3 - Trust Preferred Securities**

On
March 25, 2004, HNC Statutory Trust II (Trust II), a Delaware statutory
trust subsidiary of the Corporation, issued $20.0 million of floating rate
(three-month LIBOR plus a margin of 2.70%) trust preferred securities, which
represent undivided beneficial interests in the assets of Trust II on
March 25, 2004. Trust II issued mandatory redeemable preferred stock to
investors and loaned the proceeds to the Corporation. Trust II holds, as its
sole asset, a subordinated debenture in the amount of $20.6 million issued
by the Corporation on March 25, 2004. Trust II qualifies as a variable
interest entity under FASB Interpretation 46 (FIN 46), “Consolidation of
Variable Interest Entities.” The trust preferred securities must be redeemed
upon maturity of the subordinate debentures on April 6, 2034. The
Corporation may redeem the debentures prior to their stated maturity upon the
occurrence of specified special events or at the specified optional redemption
dates. The Corporation may redeem the debentures, in whole or in part, at any
time, within 90 days following the occurrence and continuation of a tax
event, an investment company event or a capital treatment event as set forth in
the indentures relating to the trust preferred securities and in each case
subject to regulatory approval if required. The Corporation also may redeem the
debentures, in whole or in part, at the stated optional redemption date of
April 7, 2009 and quarterly thereafter, subject to regulatory approval if
required. The special and optional redemption price is equal to 100% of the
principal amount of the debentures being redeemed plus accrued and unpaid
interest on the debentures to the redemption date.

On
February 22, 2001, the Corporation issued $5.0 million of 10.2% junior
subordinate deferrable interest debentures (the debentures) to Harleysville
Statutory Trust I (Trust I), a Connecticut business trust, in which the
Corporation owns all of the common equity. Management has determined that Trust
I qualifies as a variable interest entity under FIN 46, as revised. Trust I
issued mandatorily redeemable preferred stock to investors and loaned the
proceeds to the Corporation. The trust preferred securities must be redeemed
upon maturity of the subordinate debentures on February 22, 2031. The
Corporation may redeem the debentures prior to their stated maturity upon the
occurrence of specified special events or at the specified optional redemption
dates. The Corporation may redeem the debentures, in whole but not in part, at
any time, within 90 days following the occurrence and continuation of a tax
event, an investment company event or a capital treatment event as set forth in
the indentures relating to the trust preferred securities and in each case
subject to regulatory approval if required. If the special redemption date is
before February 22, 2011, the special redemption price is the greater of
(i) 100% of the principal amount of the debentures, plus accrued and unpaid
interest on the debentures to the special redemption date, or (ii) as
determined by a quotation agent, the sum of (a) the present value of the
principal amount of the debentures at 105.10% of the principal amount and the
present value of interest payable from the special redemption date to
February 22, 2011, each discounted to the special redemption date on a
semi-annual basis, plus (b) accrued and unpaid interest on the debentures
to the special redemption date. If the special redemption date is on
February 22, 2011, the redemption price is 105.10% of the principal amount,
and declines annually to 100.00% on February 22, 2021 and thereafter, plus
accrued and unpaid interest on the debentures to the redemption date. The
Corporation also may redeem the debt securities, in whole or in part, at the
stated optional redemption date of February 22, 2011 and semi-annually
thereafter, subject to regulatory approval if required. The redemption price on
February 22, 2011 is equal to 105.10% of the principal amount, and declines
annually to 100.00% on February 22, 2021 and thereafter, plus accrued and
unpaid interest on the debentures to the redemption date.

The
Corporation’s obligations under the debentures and related documents, taken
together, constitute a full and unconditional guarantee by the Corporation of
Trust I’s and Trust II’s obligations under the trust preferred
securities.

**Note
4 -****Pension Plan**

The
Corporation has a non-contributory defined benefit pension plan covering
substantially all employees. The plan’s benefits are based on years of service
and the employee’s average compensation during any five consecutive years within
the 10-year period preceding retirement.


Net
periodic defined benefit pension expense for the three months ended March 31,
2005 and 2004 included the following components:

Three
      Months EndedMarch
      31,(Dollars
      in thousands)
    
    
    2005
    
    
    2004Service
      cost
    
    $
    263
    
    $
    218Interest
      cost
    
    
    161
    
    
    141Expected
      return on plan assets
    
    
    (131
    )
    
    (119
    )Amortization
      of prior service cost
    
    
    —
    
    
    (26
    )Amortization
      of unrecognized net actuarial loss
    
    
    23
    
    
    20Net
      periodic benefit expense
    
    $
    316
    
    $
    234

The
Corporation has contributed $1.0 million to its pension plan in 2005.
-9-**Note
5 - Stock Dividend/Split**

On
September 15, 2004, the Corporation paid a five percent stock dividend to
shareholders of record as of August 30, 2004. On September 15, 2003, the
Corporation paid a five-for-four stock split to shareholders of record as of
September 2, 2003. All prior period amounts were restated to reflect these stock
dividends/splits.

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

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

Three
      Months EndedMarch
      31,(Dollars
      in thousands, except number of shares and per share data)
    
    
    2005
    
    
    2004**Basic
      earnings per share**Net
      income available to common shareholders
    
    $
    9,165
    
    $
    8,907Weighted
      average common shares outstanding
    
    
    26,247,137
    
    
    25,128,032Basic
      earnings per share
    
    $
    .35
    
    $
    .35**Diluted
      earnings per share**Net
      income available to common shareholders
      and
      assumed conversions
    
    $
    9,165
    
    $
    8,907Weighted
      average common shares outstanding
    
    
    26,247,137
    
    
    25,128,032Dilutive
      potential common shares(1),
      (2)
    
    
    720,622
    
    
    905,173Total
      diluted weighted average common shares outstanding
    
    
    26,967,759
    
    
    26,033,205Diluted
      earnings per share
    
    $
    .34
    
    $
    .34
(1)
    Includes
      incremental shares from assumed conversions of stock
    options.
(2)
    For
      the three months ended March 31, 2005 and March 31, 2004, options to
      purchase 346,301 shares of common stock at an average price of $28.27 per
      share and 219,450 common shares at an average price of $29.29 per share,
      respectively, have been excluded in the computation of diluted earnings
      per share because the options’ exercise price was greater than the average
      market price of the common stock.

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

The
Corporation follows SFAS No. 130, “Reporting Comprehensive Income”, which
establishes standards to provide prominent disclosure of comprehensive income
items. The components of other comprehensive income are as follows:

Comprehensive
      Income(Dollars
      in thousands)
    
    
    Before
      tax
    
    
    Tax
      Benefit
    
    
    Net
      of taxThree
      months ended March 31, 2005
    
    
    Amount
    
    
    (Expense
    )
    
    amountNet
      unrealized losses on available for sale securities:Net
      unrealized holding losses arising during period
    
    $
    (7,695
    )
    $
    2,693
    
    $
    (5,002
    )Less
      reclassification adjustment for net gains realized in net
      income
    
    
    923
    
    
    (323
    )
    
    600Net
      unrealized losses
    
    
    (8,618
    )
    
    3,016
    
    
    (5,602
    )Change
      in fair value of derivatives used for cash flow hedges
    
    
    378
    
    
    (132
    )
    
    246Unrealized
      loss on termination of cash flow hedge
    
    
    (286
    )
    
    100
    
    
    (186
    )Other
      comprehensive loss, net
    
    $
    (8,526
    )
    $
    2,984
    
    $
    (5,542
    )(Dollars
      in thousands)
    
    
    Before
      tax
    
    
    Tax
    
    
    Net
      of taxThree
      months ended March 31, 2004
    
    
    amount
    
    
    (Expense
    )
    
    amountNet
      unrealized gains on available for sale securities:Net
      unrealized holding gains arising during period
    
    $
    6,603
    
    $
    (2,311
    )
    $
    4,292Less
      reclassification adjustment for net gains realized in net
      income
    
    
    900
    
    
    (315
    )
    
    585Net
      unrealized gains
    
    
    5,703
    
    
    (1,996
    )
    
    3,707Change
      in minimum pension liability
    
    
    —
    
    
    161
    
    
    161Change
      in fair value of derivatives used for cash flow hedges
    
    
    (178
    )
    
    62
    
    
    (116
    )Other
      comprehensive income, net
    
    $
    5,525
    
    $
    (1,773
    )
    $
    3,752
****
-10-
****
**Note
8 - Financial Instruments with Off-Balance Sheet Risk**

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

The
Bank’s exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for commitments to extend credit and standby letters
of credit is represented by the contractual or notional amounts of those
instruments. The Bank uses the same stringent credit policies in extending these
commitments as they do for recorded financial instruments and controls exposure
to loss through credit approval and monitoring procedures.

The
approximate contract amounts are as follows:

*Total
      Amount Committed at***Commitments**
    
    March
      31, 2005
    December
      31, 2004(Dollars
      in thousands)Financial
      instruments whose contract amounts represent credit risk:Commitments
      to extend credit
    $688,335
    $660,238Standby
      letters of credit and financial guarantees written
    18,676
    17,217Financial
      instruments whose notional or contract amounts exceed the amount of credit
      risk:Interest
      rate swap agreements
    20,000
    45,000

The
interest rate swaps have the effect of converting the rates on money market
deposit accounts to a more fixed-rate cost of funds. This strategy will cause
the Bank to recognize, in a rising rate environment, a larger interest rate
spread than it otherwise would have without the swaps in effect. During the
first quarter of 2005, the Corporation terminated a swap with a notional value
of $25.0 million. The loss related to the termination of this swap is $202,000,
net of tax, which will be amortized through October 2006. The loss will be
recorded into net interest income from accumulated other comprehensive income.
For the three months ended March 31, 2005, the Corporation recorded a loss of
$15,000, net of tax, related to this swap.

The Bank
also had commitments with customers to extend mortgage loans at a specified rate
at March 31, 2005 and December 31, 2004 of $5.2 million and $5.1 million,
respectively and commitments to sell mortgage loans at a specified rate at March
31, 2005 and December 31, 2004 of $1.4 million and $2.2 million, respectively.
The commitments are accounted for as a derivative and recorded at fair value.
The Bank estimates the fair value of these commitments by comparing the
secondary market price at the reporting date to the price specified in the
contract to extend or sell the loan initiated at the time of the loan
commitment. At March 31, 2005, the commitments had a negative fair value of
$7,000 which was recorded as a reduction of other income. At December 31, 2004,
the commitments had a positive fair value of $5,000 which was recorded as other
income.

During
December 2004 and January 2005, the Bank sold lease financing receivables of
$10.5 million. Of these leases, $1.2 million were sold with full recourse
and the remaining leases were sold subject to recourse with a maximum exposure
of ten percent of the outstanding receivable. The total recourse exposure
related to the sold leases is $2.0 million. During the first quarter of
2005, the Corporation recorded a recourse liability of $216,000. This estimate
was based on our historic loss as experienced on lease financing receivables.
After the first anniversary of the sale agreement, and on a quarterly basis
thereafter, upon written request by the Bank, the purchaser will review the
portfolio performance and may reduce the total exposure to an amount equal to
ten percent of the outstanding net book value.

**Note
9 - Recent Accounting Pronouncements**

In March
2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset
Retirement Obligations” (FIN 47). FIN 47 clarifies that an entity must recognize
a liability for the fair value of a conditional asset retirement obligation when
incurred if the liability’s fair value can be reasonably estimated. This
Interpretation also defines when an entity would have sufficient information to
reasonably estimate the fair value of an asset retirement obligation. FIN 47 is
effective no later than the end of fiscal years ending after December 15, 2005
(December 31, 2005, for calendar-year enterprises), although early adoption is
encouraged. FIN 47 is not expected to have a material impact on the
Corporation’s financial position or results of operations.
-11-**Note
9 - Recent Accounting Pronouncements (Continued)**

In March
2005, the Federal Reserve Board adopted a final rule that allows the continued
limited inclusion of outstanding and prospective issuances of trust preferred
securities in tier 1 capital of bank holding companies. Under the final rule,
trust preferred securities and other restricted core capital elements will be
subject to stricter quantitative limits. The Board’s final rule limits
restricted core capital elements to 25% of all core capital elements, net of
goodwill less any associated deferred tax liability. Amounts of restricted core
capital elements in excess of these limits generally may be included in tier 2
capital. The final rule provides a five-year transition period ending March 31,
2009, for application of the quantitative limits. In addition, the requirement
for trust preferred securities to include a call option has been eliminated, and
standards for the junior subordinated debt underlying trust preferred securities
eligible for tier 1 capital treatment have been clarified. Management has
evaluated the effects of the rule and does not anticipate a material impact on
its capital ratios upon implementation.

In March
2004, the Emerging Issues Task Force (EITF) issued a Consensus on Issue 03-1
requiring that the provisions of EITF 03-1, “The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments”, be applied for reporting
periods beginning after June 15, 2004 to investments accounted for under SFAS
No. 115 and 124. EITF 03-1 establishes a three-step approach for determining
whether an investment is considered impaired, whether that impairment is
other-than-temporary, and the measurement of an impairment loss. In September
2004, the FASB issued a proposed Staff Position, EITF Issue 03-1-a,
“Implementation Guidance for the Application of Paragraph 16 of EITF
03-1*”*(EITF
03-1-a). EITF 03-1-a would provide implementation guidance with respect to debt
securities that are impaired solely due to interest rates and/or sector spreads
and analyzed for other-than-temporary impairment under paragraph 16 of EITF
03-1. In September 2004, the FASB issued a Staff Position, EITF Issue 03-1-1,
“Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1”**(EITF
03-1-1). EITF 03-1-1 delays the effective date for the measurement and
recognition guidance contained in paragraphs 10-20 of EITF 03-1. The delay of
the effective date will be superseded concurrent with the final issuance of EITF
03-1-a. Upon final issuance, the Corporation will determine the impact that this
EITF will have on its financial statements.
-12-
**MANAGEMENT'S
DISCUSSION AND ANALYSIS OF**
**RESULTS
OF OPERATIONS AND FINANCIAL CONDITION**

The
following is management’s discussion and analysis of the significant changes in
the results of operations, capital resources and liquidity presented in its
accompanying consolidated financial statements for the Corporation, the Bank,
HNC Financial Company and HNC Reinsurance Company. The Corporation’s
consolidated financial condition and results of operations consist almost
entirely of the Bank’s financial condition and results of operations. Current
performance does not guarantee, and may not be indicative, of similar
performance in the future. These are unaudited financial statements and, as
such, are subject to year-end audit review.

In
addition to historical information, this Form 10-Q contains forward-looking
statements. We have made forward-looking statements in this document, and in
documents that we incorporate by reference, that are subject to risks and
uncertainties. Forward-looking statements include the information concerning
possible or assumed future results of operations of the Corporation and its
subsidiaries. When we use words such as “believes,” “expects,” “anticipates,” or
similar expressions, we are making forward-looking statements.

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


*operating,
legal and regulatory risks;

*economic,
political and competitive forces affecting our banking,
securities,
asset management and credit services businesses and;

*the risk
that our analyses of these risks and forces could be incorrect
and/or that the strategies
developed to address them could be unsuccessful.

**Critical
Accounting Estimates**

The
accounting and reporting policies of the Corporation and its subsidiaries
conform to accounting principles generally accepted in the United States and
general practices with the financial services industry. The Corporation’s
significant accounting policies are described in Note 1 of the consolidated
financial statements in this Form 10-Q and inthe
Corporation’s 2004 Annual Report on Form 10-Kand are
essential in understanding Management’s Discussion and Analysis of Results of
Operations and Financial Condition. In applying accounting policies and
preparing the consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amount of assets and
liabilities as of the dates of the balance sheets and revenues and expenditures
for the periods presented. Therefore, actual results could differ significantly
from those estimates. Judgments and assumptions required by management, which
have, or could have a material impact on the Corporation’s financial condition
or results of operations are considered critical accounting estimates. The
following is a summary of the policies the Corporation recognizes as involving
critical accounting estimates: Allowance for Loan Loss, Goodwill and Other
Intangible Asset Impairment, Stock-Based Compensation, Unrealized Gains and
Losses on Debt Securities Available for Sale, and Deferred Taxes.

Allowance
for Loan Losses: The Corporation maintains an allowance for loan losses at a
level management believes is sufficient to absorb estimated probable credit
losses. Management’s determination of the adequacy of the allowance is based on
periodic evaluations of the loan portfolio and other relevant factors. However,
this evaluation is inherently subjective as it requires significant estimates by
management. Consideration is given to a variety of factors in establishing these
estimates including current and anticipated economic conditions, diversification
of the loan portfolio, delinquency statistics, results of internal loan reviews,
borrowers’ perceived financial and management strengths, the adequacy of
underlying collateral, the dependence on collateral, or the strength of the
present value of future cash flows and other relevant factors. These factors may
be susceptible to significant change. To the extent actual outcomes differ from
management estimates, additional provisions for loan losses may be required
which may adversely affect the Corporation’s results of operations in the
future.

Goodwill
and Other Intangible Asset Impairment: Goodwill and other intangible assets are
reviewed for potential impairment on an annual basis, or more often if events or
circumstances indicate that there may be impairment, in accordance with SFAS
No. 142, “Goodwill and Other Intangible Assets.” Goodwill is tested for
impairment at the reporting unit level and an impairment loss is recorded to the
extent that the carrying amount of goodwill exceeds its implied fair value. The
Corporation employs general industry practices in evaluating the fair value of
its goodwill and other intangible assets. The Corporation calculates the fair
value using a combination of the following valuations: deposit premiums based on
market deals, current stock pricing tracking as a multiple of book value,
discounted cash flow of earnings with a terminal value and market multiple of
earnings. No assurance can be given that future impairment tests will not result
in a charge to earnings.

-13-Stock-based
Compensation: Under SFAS No. 123 “Accounting for Stock-Based Compensation”
(FAS 123), companies have a choice whether to adopt the fair value based
method of accounting for stock-based compensation or remain with the intrinsic
value based method prescribed under APB Opinion No. 25, “Account for Stock
Issued to Employees” (APB 25) but provide pro-forma disclosure as if the
fair value based method was applied. The Corporation chose the intrinsic value
based method under APB 25 and provides pro-forma disclosure required under
FAS 123. In preparing the pro-forma disclosure, the Corporation estimates
the fair value of employee stock options using a pricing model which takes into
consideration the exercise price and expected life of the options, the current
price of the underlying stock and its expected volatility, the expected
dividends on the stock and the current risk-free interest rate for the expected
life of the option. The Corporation’s estimate of the fair value of a stock
option is based on expectations derived from historical experience and may not
necessarily equate to its market value when fully vested. In December 2004,
the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment”
(FAS 123(R)). Under FAS 123(R), all forms of share-based payments to
employees, including employee stock options, will be treated the same as other
forms of compensation by recognizing the related cost in the income statement.
Registrants
are required to implement FAS 123(R) at the beginning of their next fiscal year
that begins after June 15, 2005, or after December 15, 2005 for small business
issuers, per the Securities and Exchange Commission’s rule issued in April 2005
amending the FAS 123(R) compliance date.

Unrealized
Gains and Losses on Debt Securities Available for Sale: The Corporation receives
estimated fair values of debt securities from independent valuation services and
brokers. In developing these fair values, the valuation services and brokers use
estimates of cash flows based on historical performance of similar instruments
in similar rate environments. Debt securities available for sale are mostly
comprised of mortgage-backed securities.

Deferred
Taxes: The Corporation recognizes deferred tax assets and liabilities for the
future effects of temporary differences, net operating loss carryforwards, and
tax credits. Deferred tax assets are subject to management’s judgment based upon
available evidence that future realizations are likely. If management determines
that the Corporation may not be able to realize some or all of the net deferred
tax asset in the future, a charge to income tax expense may be required to
reduce the value of the net deferred tax asset to the expected realizable
value.

The
Corporation has not substantively changed its application of the foregoing
policies, and there have been no material changes in assumptions or estimation
techniques used as compared to prior periods.

**Financial
Overview**

The
Corporation earned $9.2 million in the first quarter of 2005, a 2.9% increase
over first quarter 2004 earnings of $8.9 million. Earnings for the first quarter
of 2005 as compared to the first quarter of 2004 reflected increases in loan
interest income and trust and investment services income partially offset by
increases in interest expense on deposits and salaries and benefits expense.

First
quarter 2005 diluted earnings per share of $.34 and basic earnings per share of
$.35 remained level with the earnings during the first quarter of 2004.

The financial results for the first
quarter of 2005 include the impact of operations from the acquisition of
Millennium Bank effective April 30, 2004 and the related issuance by the
Corporation of 946,000 (993,000 restated for stock dividend) common shares, as
well as the issuance of 1,295,000 shares for a 5% stock dividend payable
September 15, 2004. All share and per share information have been restated to
reflect this stock dividend.

The
Corporation’s consolidated total assets were $3.0 billion at March 31, 2005, an
18.1% increase above the March 31, 2004 level of $2.54 billion. Of this
increase, 11.0% or $279.8 million, was due to loan growth and 9.1% or $231.3
million, was attributable to the acquisition of Millennium Bank partially offset
by a net decrease in cash and investments of 2.5% or $63.0 million. Total assets
at March 31, 2005 decreased $21.9 million from $3.02 billion at December 31,
2004. The decrease in assets was primarily due to a $36.2 million decrease in
investment securities partially offset by $19.6 million growth in loans.

For the
three months ended March 31, 2005, the annualized return on average
shareholders’ equity and the annualized return on average assets were 13.69% and
1.25%, respectively. For the same period in 2004, the annualized return on
average shareholders’ equity was 15.33% and the annualized return on average
assets was 1.43%. The decrease in the annualized return on average shareholders’
equity during 2005 was primarily due to the increase in equity in the Millennium
Bank acquisition.

Nonperforming
assets (nonaccruing loans, net assets in foreclosure and loans past due 90 days
or more and still accruing interest) were .19% of total assets at March 31,
2005, compared to .20% at December 31, 2004 and .21% at March 31, 2004. The
ratio of the allowance for loan losses to nonperforming loans was 362.1% at
March 31, 2005, compared to 324.6% at December 31, 2004 and 341.3% at March 31,
2004. The annualized net loans charged-off to average loans was 0.11% during the
first quarter of 2005, compared to 0.22% during the first quarter of 2004.
-14-**Results
of Operations**

Net
income is affected by five major elements: (1) net interest income, or the
difference between interest income earned on loans and investments and interest
expense paid on deposits and borrowed funds; (2) the provision for loan losses,
or the amount added to the allowance for loan losses to provide reserves for
inherent losses on loans; (3) noninterest income, which is made up primarily of
certain fees, trust income and gains and losses from sales of securities; (4)
noninterest expense, which consists primarily of salaries, employee benefits and
other operating expenses; and (5) income taxes. Each of these major elements
will be reviewed in more detail in the following discussion.

On April
30, 2004, the Corporation completed the acquisition of Millennium Bank, Malvern,
PA. Millennium Bank was merged into Harleysville National Bank. This transaction
was accounted for in accordance with SFAS No. 141 “Business Combinations.”
Millennium Bank’s shareholders received 946,000 (993,000 restated for stock
dividend) of the Corporation’s common stock and $16.1 million in exchange for
all outstanding common shares. Millennium Bank option holders received $2.3
million and options to acquire 284,000 shares (298,000 restated for stock
dividend) of the Corporation’s common stock in exchange for all outstanding
options.

**Net
Interest Income**

Net
interest income on a tax equivalent basis in the first quarter of 2005 increased
$1.2 million, or 5.3% over the same period in 2004. This increase was primarily
the result of loan growth partially offset by a higher level of borrowings and
higher deposit rates.

The rate
volume variance analysis in the table below, which is computed on a
tax-equivalent basis (tax rate of 35%), analyzes changes in net interest income
for the three months ended March 31, 2005 compared to March 31, 2004 by their
volume and rate components. The change attributable to both volume and rate has
been allocated proportionately.

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

Three
      Months EndedMarch
      31, 2005 compared to(Dollars
      in thousands)
    March
      31, 2004Total
    Due
      to change in:Change
    Volume
    RateIncrease
      (decrease) in interest income:Investment
      securities *
    $
      311
    $
      5
    $
      306Federal
      funds sold and deposits in banks
    181
    12
    169Loans
      *
    5,348
    5,909
    (561)Total
    5,840
    5,926
    (86)Increase
      (decrease) in interest expense:Savings
      deposits
    2,553
    422
    2,131Time
      deposits
    193
    (185)
    378Borrowed
      funds
    1,913
    1,755
    158Total
    4,659
    1,992
    2,667Net
      increase (decrease) in interest income
    $1,181
    $3,934
    $(2,753)*Tax
      equivalent basis using a tax rate of 35%
-15-The table
below presents the major asset and liability categories on an average basis for
the periods presented, along with interest income and expense, and key rates and
yields.

**Table
2—****Average
Balance Sheets and Interest Rates****3⁄4****Fully
Taxable-Equivalent Basis**

(Dollars
      in thousands)
    
    Three
      Months Ended March 31,
    
    Three
      Months Ended March 31,2005
    
    2004Average
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    Average**Assets**
    
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateEarning
      assets:Investment
      securities:Taxable
      investments
    
    $
    652,314
    
    $
    6,054
    
    
    3.76
    %
    $
    677,371
    
    $
    5,521
    
    
    3.26
    %Nontaxable
      investments (1)
    
    
    258,667
    
    
    4,132
    
    
    6.48
    
    
    232,943
    
    
    4,354
    
    
    7.48Total
      investment securities
    
    
    910,981
    
    
    10,186
    
    
    4.53
    
    
    910,314
    
    
    9,875
    
    
    4.34Federal
      funds sold and deposits in banks
    
    
    45,428
    
    
    269
    
    
    2.40
    
    
    40,381
    
    
    88
    
    
    0.87Loans
      (1) (2)
    
    
    1,845,408
    
    
    26,431
    
    
    5.81
    
    
    1,414,802
    
    
    21,083
    
    
    5.96Total
      earning assets
    
    
    2,801,817
    
    
    36,886
    
    
    5.34
    
    
    2,365,497
    
    
    31,046
    
    
    5.25Noninterest-earning
      assets
    
    
    174,544
    
    
    
    
    
    
    
    
    131,588Total
      assets
    
    $
    2,976,361
    
    
    
    
    
    
    
    $
    2,497,085**Liabilities
      and Shareholders' Equity**Interest-bearing
      liabilities:Interest-bearing
      deposits:Savings
    
    $
    1,236,536
    
    
    4,280
    
    
    1.40
    
    $
    1,020,795
    
    
    1,727
    
    
    0.68Time
    
    
    638,136
    
    
    5,307
    
    
    3.37
    
    
    659,877
    
    
    5,114
    
    
    3.11Total
      interest-bearing deposits
    
    
    1,874,672
    
    
    9,587
    
    
    2.07
    
    
    1,680,672
    
    
    6,841
    
    
    1.64Borrowed
      funds
    
    
    453,897
    
    
    4,015
    
    
    3.59
    
    
    251,278
    
    
    2,102
    
    
    3.35Total
      interest bearing liabilities
    
    
    2,328,569
    
    
    13,602
    
    
    2.37
    
    
    1,931,950
    
    
    8,943
    
    
    1.86Noninterest-bearing
      liabilities:Demand
      deposits
    
    
    321,912
    
    
    
    
    
    
    
    
    280,809Other
      liabilities
    
    
    54,349
    
    
    
    
    
    
    
    
    51,940Total
      noninterest-bearing liabilities
    
    
    376,261
    
    
    
    
    
    
    
    
    332,749Total
      liabilities
    
    
    2,704,830
    
    
    
    
    
    
    
    
    2,264,699Shareholders'
      equity
    
    
    271,531
    
    
    
    
    
    
    
    
    232,386Total
      liabilities and shareholders' equity
    
    $
    2,976,361
    
    
    
    
    
    
    
    $
    2,497,085Net
      interest spread
    
    
    
    
    
    
    
    
    2.97
    
    
    
    
    
    
    
    
    3.39Effect
      of noninterest-bearing sources
    
    
    
    
    
    
    
    
    0.40
    
    
    
    
    
    
    
    
    .34Net
      interest income/margin on earning assets
    
    
    
    
    $
    23,284
    
    
    3.37
    %
    
    
    
    $
    22,103
    
    
    3.73
    %Less
      tax equivalent adjustment
    
    
    
    
    
    1,614
    
    
    
    
    
    
    
    
    1,873Net
      interest income
    
    
    
    
    $
    21,670
    
    
    
    
    
    
    
    $
    20,230

(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.

Interest
income on a tax equivalent basis in the first quarter of 2005 increased $5.8
million, or 18.8% over the same period in 2004. This increase was primarily due
to an increase in average loans of $430.6 million, or 30.4% partially offset by
a 15 basis point reduction in the average rate earned on loans. Loans totaling
$157.1 million were acquired in the acquisition of Millennium Bank which
contributed to the increase in average loans. Interest expense increased $4.7
million during the first quarter of 2005 versus the comparable period in 2004
mainly due to an increase in average borrowings and higher deposit rates.
Average borrowings increased $202.6 million primarily to support loan growth and
the Millennium Bank acquisition. The rate paid on average deposits during the
first quarter of 2005 of 2.07% was 43 basis points higher compared to the same
period in 2004 primarily due to an increase in average higher-rate money market
accounts of $170.8 million.
-16-**Net
Interest Margin**

The net
interest margin for the first quarter of 2005 was 3.37%, compared to 3.73% for
the first quarter of 2004, the decline being primarily due to higher funding
costs, particularly increased volumes in higher-rate money market accounts and
lower loan yields.  Although the net margin has declined, net interest
income has increased primarily as a result of higher loan volume. The net
interest margin increased 3 basis points over the fourth quarter of 2004 after
declines during the previous four quarters.

During
the first quarter of 2005, the Corporation continued to manage its balance sheet
in an effort to position it for the longer term and potentially higher rates.
The Corporation continued to sell securities that exhibit extension risk in a
rising rate environment and purchased securities with more stable cash flows in
such a rate environment. As a result, the balance sheet is better positioned to
minimize market risk from rising rates.

**Interest
Rate Sensitivity Analysis**

In the
normal course of conducting business activities, the Corporation is exposed to
market risk, principally interest rate risk through the operations of its
banking subsidiary. Interest rate risk arises from market driven fluctuations in
interest rates that affect cash flows, income, expense and value of financial
instruments.

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

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

The
Corporation had two interest-rate swaps with a notional value totaling $20.0
million and a positive fair value of $658,000 at March 31, 2005. During the
first quarter of 2005, the Corporation terminated a swap with a notional value
of $25.0 million. The loss related to the termination of this swap is $202,000,
net of tax, which will be amortized through October 2006. For the three months
ended March 31, 2005, the Corporation recorded a loss of $15,000, net of tax,
related to this swap.

The
Corporation uses three principal reports to measure interest rate risk:
asset/liability simulation reports; gap analysis reports; and net interest
margin reports. Management also simulates possible economic conditions and
interest rate scenarios in order to quantify the impact on net interest income.
The effect that changing interest rates have on the Corporation’s net interest
income is simulated by increasing and decreasing interest rates. This simulation
is known as rate shocking. The results of the March 31, 2005 net interest income
rate shock simulations show that the Corporation is within guidelines set by the
Corporation’s Asset/Liability Policy when rates are shocked up 300 basis points,
but is outside of guidelines when rates are shocked down 200 or more basis
points.

The
report below forecasts changes in the Corporation’s market value of equity under
alternative interest rate environments as of March 31, 2005. The market value of
equity is defined as the net present value of the Corporation’s existing assets
and liabilities. The Corporation is within guidelines set by the Corporation’s
Asset/Liability Policy for the percentage change in the market value of
equity.

**Table
3—Market Value of Equity**

Change
      in
    
    
    
    
    
    Asset/LiabilityMarket
      Value
    
    
    Market
      Value
    
    
    Percentage
    
    
    Approved(Dollars
      in thousands)
    
    
    of
      Equity
    
    
    of
      Equity
    
    
    Change
    
    
    Percent
      Change+300
      Basis Points
    
    $
    351,166
    
    $
    (74,370
    )
    
    -17.48
    %
    
    +/-
      35
    %+200
      Basis Points
    
    
    379,871
    
    
    (45,665
    )
    
    -10.73
    
    
    +/-
      25+100
      Basis Points
    
    
    409,273
    
    
    (16,263
    )
    
    -3.82
    
    
    +/-
      15Flat
      Rate
    
    
    425,536
    
    
    -
    
    
    0.00-100
      Basis Points
    
    
    417,637
    
    
    (7,899
    )
    
    -1.86
    
    
    +/-
      15-200
      Basis Points
    
    
    399,156
    
    
    (26,380
    )
    
    -6.20
    
    
    +/-
      25-300
      Basis Points
    
    
    367,581
    
    
    (57,955
    )
    
    -13.62
    
    
    +/-
      35


-17-
In the
event the Corporation should experience a mismatch in its desired gap ranges or
an excessive decline in their market value of equity resulting from changes in
interest rates, it has a number of options that it could use to remedy the
mismatch. The Corporation could restructure its investment portfolios through
the sale or purchase of securities with more favorable repricing attributes. It
could also emphasize growth in loan products with appropriate maturities or
repricing attributes, or attract deposits or obtain borrowings with desired
maturities.

**Provision
for Loan Losses**

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

While
management considers the allowance for loan losses to be adequate based on
information currently available, future additions to the allowance may be
necessary due to changes in economic conditions or management’s assumptions as
to future delinquencies, recoveries and losses and management’s intent with
regard to the disposition of loans. In addition, the Office of the Comptroller
of the Currency (the OCC), as an integral part of their examination process,
periodically reviews the Bank’s allowance for loan losses. The OCC may require
the Bank to recognize additions to the allowance for loan losses based on their
judgments about information available to them at the time of their
examination.

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

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

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

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

The
historic loss model includes an imprecision component (soft factors) that
reflects management’s belief that there were additional inherent credit losses
based on loss attributes not adequately captured in the lagging indicators.
Furthermore, given that past performance indicators may not adequately capture
current risk levels, allowing for a real-time adjustment enhances the validity
of the loss recognition process. There are many credit risk management reports
that are synthesized by credit management staff to assess the direction of
credit risk and its instant affect on losses. These reports include the
exception tracking reports, the credit bureau score distribution report, the
debt to income summary, etc. These are a few of the many reports that drive the
judgmental component. It is important to continue to use experiential data to
confirm risk as measurable losses will continue to manifest themselves at higher
than normal levels even after the economic cycle has begun an upward swing and
lagging indicators begin to show improvement. The judgmental component is
allocated to the specific segments of the portfolio based on the historic loss
component.
-18-For the
first quarter of 2005, the provision for loan losses was $750,000, compared to
$489,000 for the same period in 2004. The increase in the provision for the
first quarter of 2005 compared to the first quarter of 2004 was primarily due to
inherent risk related to loan growth and an increase in nonperforming loans of
$348,000. Nonperforming assets, including nonaccrual loans, net assets in
foreclosure and loans 90 days or more past due was .19% of total assets at March
31, 2005, compared to .20% at December 31, 2004, and .21% at March 31, 2004. The
ratio of the allowance for loan losses to nonperforming loans (nonaccruing loans
and loans 90 days or more past due) was 362.1% at March 31, 2005, compared to
324.6% at December 31, 2004 and 341.3% at March 31, 2004. The increase in the
ratio at March 31, 2005 compared to December 31, 2004 was primarily due to a
$410,000 commercial real estate loan which was no longer classified as
non-performing at March 31, 2005 as a result of payments made. Net loans charged
off were $481,000 for the quarter ended March 31, 2005 compared to $778,000 for
the quarter ending March 31, 2004.

A summary
of the activity in the allowance for loan losses is as follows:

**Table
4—Allowance for Loans Losses**

Three
      Months EndedMarch
      31,(Dollars
      in thousands)
    
    
    2005
    
    
    2004Average
      loans
    
    $
    1,845,408
    
    $
    1,414,802Allowance,
      beginning of period
    
    
    18,455
    
    
    16,753Loans
      charged off:Commercial
      and industrial
    
    
    133
    
    
    166Consumer
    
    
    457
    
    
    490Real
      estate
    
    
    20
    
    
    56Lease
      financing
    
    
    6
    
    
    240Total
      loans charged off
    
    
    616
    
    
    952Recoveries:Commercial
      and industrial
    
    
    4
    
    
    —Consumer
    
    
    90
    
    
    132Real
      estate
    
    
    16
    
    
    5Lease
      financing
    
    
    25
    
    
    37Total
      recoveries
    
    
    135
    
    
    174Net
      loans charged off
    
    
    481
    
    
    778Provision
      for loan losses
    
    
    750
    
    
    489Allowance,
      end of period
    
    $
    18,724
    
    $
    16,464Ratio
      of net charge offs to averageloans
      outstanding (annualized)
    
    
    0.11
    %
    
    0.22
    %

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

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

March
      31, 2005
    December
      31,
      2004Percent
      of
    
    
    
    
    
    Percent
      of(Dollars
      in thousands)
    
    
    Amount
    
    
    Reserve
    
    
    Amount
    
    
    ReserveReal
      estate
    
    $
    5,034
    
    
    27
    %
    $
    4,923
    
    
    27
    %Commercialand
      industrial
    
    
    7,705
    
    
    41
    %
    
    7,456
    
    
    40
    %Consumer
    
    
    5,482
    
    
    29
    %
    
    5,515
    
    
    30
    %Lease
      financing
    
    
    503
    
    
    3
    %
    
    561
    
    
    3
    %Total
    
    $
    18,724
    
    
    100
    %
    $
    18,455
    
    
    100
    %
-19-**Table
6—****Nonperforming
Assets**

(Dollars
      in thousands)
    
    
    March
      31,
      2005
    
    
    December
      31,
      2004
    
    
    March
      31,
      2004Nonaccrual
      loans
    
    $
    4,572
    
    $
    4,705
    
    $
    3,645Loans
      90 days or more past due
    
    
    599
    
    
    981
    
    
    1,178Total
      nonperforming loans
    
    
    5,171
    
    
    5,686
    
    
    4,823Net
      assets in foreclosure
    
    
    411
    
    
    370
    
    
    423Total
      nonperforming assets
    
    $
    5,582
    
    $
    6,056
    
    $
    5,246Allowance
      for loan losses to nonperforming loans
    
    
    362.1
    %
    
    324.6
    %
    
    341.4
    %Nonperforming
      loans to total net loans
    
    
    0.28
    %
    
    0.31
    %
    
    0.34
    %Allowance
      for loan and lease losses to total loans
    
    
    1.00
    %
    
    1.00
    %
    
    1.15
    %Nonperforming
      assets to total assets
    
    
    0.19
    %
    
    0.20
    %
    
    0.21
    %

Nonaccruing
loans at March 31, 2005 of $4.6 million, decreased $133,000 from the December
31, 2004 level of $4.7 million, and increased $927,000 from the March 31, 2004
level of $3.6 million. The increase in nonaccruing loans at March 31, 2005,
compared to March 31, 2004 was primarily the result of an increase in
nonaccruing commercial real estate loans of $1.3 million partially offset by a
decrease in residential real estate loans of $554,000.

Net
assets in foreclosure were $411,000 as of March 31, 2005 compared to $370,000 at
December 31, 2004. During the first quarter of 2005, transfers from loans to
assets in foreclosure were $138,000, disposals on foreclosed properties were
$66,000 and charge offs of $31,000 were recorded. Efforts to liquidate assets
acquired in foreclosure are proceeding as quickly as potential buyers can be
located and legal constraints permit. Foreclosed assets are carried at the lower
of cost (lesser of carrying value of asset or fair value at date of acquisition)
or estimated fair value.

Loans
past due 90 days or more and still accruing interest are loans that are
generally well secured and are in the process of collection. As of March 31,
2005, loans past due 90 days or more and still accruing interest were $599,000
compared to $981,000, as of December 31, 2004, and $1.2 million as of March 31,
2004. The decrease in loans past due 90 days or more at March 31, 2005, compared
to December 31, 2004 and March 31, 2004, was mainly due to a lower level of real
estate loans past due 90 days or more as a result of payments made.

**Table
7—Impaired Loans**

(Dollars
      in thousands)
    
    
    March
      31, 2005
    
    
    Dec.
      31, 2004
    
    
    March
      31, 2004Impaired
      Loans
    
    $
    1,276
    
    $
    2,144
    
    
    2,022Average
      year-to-date impaired loans
    
    $
    1,278
    
    $
    1,795
    
    $
    1,816Impaired
      loans with specific loss allowances
    
    $
    1,276
    
    $
    2,144
    
    $
    2,022Loss
      allowances reserved on impaired loans
    
    $
    138
    
    $
    243
    
    $
    219Year-to-date
      income recognized on impaired loans
    
    $
    15
    
    $
    2
    
    $
    —

The
Bank’s policy for interest income recognition on nonaccrual loans is to
recognize income under the cash basis when the loans are both current and the
collateral on the loan is sufficient to cover the outstanding obligation to the
Bank. The Bank will not recognize income if these factors do not
exist.

**Noninterest
Income**

For the
three months ending March 31, 2005, noninterest income of $6.9 million increased
$1.2 million, or 20.1%, from $5.8 million for the same period in 2004. The
increase in noninterest income is primarily the result of increases of $808,000
in trust and investment advisory fees, $225,000 in income from reinsurance
activities and $226,000 in gains related to the auto leasing portfolio,
partially offset by $223,000 in losses related to the equipment leasing
portfolio.
-20-The
Corporation recorded net security gains of $923,000 in the first three months of
2005 and $900,000 in the comparable period of 2004. The net security gains
during the three months ended March 31, 2005 were primarily the result of the
sale of equity securities. During the comparable period in 2004, the Corporation
sold investment securities available for sale to fund the purchase of other
securities in an effort to reduce the interest rate risk and market risk within
different interest rate environments.

Income
from the Wealth Management and Private Banking Division increased $808,000 from
$1.1 million at March 31, 2004 to $1.9 million at March 31, 2005, a 72.1%
increase from the prior year. This increase was primarily attributable to the
Cumberland subsidiary acquired with the Millennium Bank acquisition and growth
in assets under management.

The
Corporation’s bank owned life insurance (BOLI) income decreased $118,000 or
19.3% during the first quarter of 2005, compared to the same period in 2004. The
reduction is due to lower yields on the insurance contracts partially offset by
higher amounts of BOLI insurance. BOLI involves the purchase of life insurance
by the Corporation on a chosen group of employees. The Corporation is the owner
and beneficiary of the policies. This pool of insurance, due to tax advantages
to the Bank, is profitable to the Corporation. This profitability is used to
offset a portion of future employee benefit cost increases.

Other
income for the first quarter of 2005 increased $415,000 or 33.8%, compared to
the same period in 2004. This increase was primarily associated with increases
of $225,000 in income from reinsurance activities, $226,000 in gains related to
the auto leasing portfolio and $103,000 in ATM fees partially offset by $223,000
in losses related to the equipment leasing portfolio.

**Noninterest
Expense**

During
the first quarter of 2005, noninterest expense of $15.5 million increased $1.7
million, or 12.2% from $13.8 million in the first quarter of 2004. The increase
in noninterest expense was mainly due to a $1.2 million increase in salaries and
benefits, primarily related to the acquisition of Millennium Bank and higher
healthcare costs.

Occupancy
expense increased $307,000 or 28.3% in the first quarter of 2005. This increase
was primarily due to the Millennium acquisition and a new branch opening during
the second quarter of 2004.

Other
expenses for the first quarter of 2005 remained level compared to same period in
2004. Deferred compensation expense for directors and employees increased
$168,000 and advertising expense increased $223,000. Offsetting these variances
were higher loan origination expense deferrals amounting to $457,000 related to
a higher deferred cost per loan.

**Federal
Income Taxes**

The
effective income tax rate for the quarter ended March 31, 2005 was 25.0% versus
the statutory rate of 35%. The Corporation’s effective rate is lower than the
statutory tax rate primarily as a result of tax-exempt income earned from state
and municipal securities and loans and bank-owned life insurance. The effective
income tax rate for the first quarter of 2004 was 23.9%.

**Balance
Sheet Analysis**

Total
assets decreased $21.9 million to $3.0 billion at March 31, 2005 from $3.02
billion at December 31, 2004. The decrease in assets was primarily due to a
$36.2 million decrease in investment securities partially offset by $19.6
million growth in loans.

The
balance of investment securities available for sale at March 31, 2005 of $843.4
million decreased $31.3 million compared to the December 31, 2004 balance of
$874.7 million. The decrease was primarily the result of sales of
mortgage-backed securities and a decrease in the market value of investment
securities of $8.6 million during the first three months of 2005. Investment
securities held to maturity decreased $4.9 million. Loans grew by $19.6 million
to $1.85 billion at March 31, 2005 from $1.83 billion at December 31, 2004. This
growth was primarily due to an increase in commercial loans.

Total
deposits increased $25.0 million to $2.24 billion at March 31, 2005 from $2.21
billion at December 31, 2004. Core deposits increased $11.9 million and
certificates of deposits increased $13.1 million.

Borrowings
decreased $50.0 million during the first three months of 2005. The decrease was
the result of reductions of $45.0 million in short-term Federal Home Loan Bank
borrowings and $4.5 million in fed funds purchased and securities sold under
agreement to repurchase.
-21-**Capital**

Capital
formation is important to the Corporation's well being and future growth.
Capital for the period ending March 31, 2005 was $268.7 million, a decrease of
$1.8 million over the end of 2004. The decrease was primarily the result of a
decrease in accumulated other comprehensive income and dividends paid to the
shareholders partially offset by the retention of the Corporation's earnings.
Management believes that the Corporation's current capital and liquidity
positions are adequate to support its operations. Management is not aware of any
recommendations by any regulatory authority, which, if it were to be
implemented, would have a material effect on the Corporation's
capital.

**Table
8—Regulatory Capital**

(Dollars
      in thousands)
    
    
    
    
    
    
    
    For
      Capital
      Adequacy
      Purposes
    To
      Be Well
      Capitalized
      Under
      Prompt
      Corrective
      Action
      ProgramAs
      of March 31, 2005
    
    
    Actual
      Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioTotal
      Capital (to risk weighted assets):Corporation
    
    $
    283,538
    
    
    12.27
    %
    $
    184,819
    
    
    8.00
    %
    $
    231,024
    
    
    -Harleysville
      National Bank
    
    
    244,921
    
    
    10.70
    %
    
    183,049
    
    
    8.00
    %
    
    228,811
    
    
    10
    %Tier
      1 Capital (to risk weighted assets):Corporation
    
    
    264,420
    
    
    11.45
    %
    
    92,409
    
    
    4.00
    %
    
    138,614
    
    
    -Harleysville
      National Bank
    
    
    226,097
    
    
    9.88
    %
    
    91,524
    
    
    4.00
    %
    
    137,286
    
    
    6
    %Tier
      1 Capital (to average assets):Corporation
    
    
    264,420
    
    
    8.99
    %
    
    117,710
    
    
    4.00
    %
    
    147,138
    
    
    -Harleysville
      National Bank
    
    
    226,097
    
    
    7.78
    %
    
    116,213
    
    
    4.00
    %
    
    145,266
    
    
    5
    %

(Dollars
      in thousands)
    
    
    
    
    
    
    
    For
      Capital
      Adequacy
      Purposes
    To
      Be Well
      Capitalized
      Under
      Prompt
      Corrective
      Action
      ProgramAs
      of December 31, 2004
    
    
    Actual
      Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioTotal
      Capital (to risk weighted assets):Corporation
    
    $
    280,055
    
    
    12.21
    %
    $
    183,436
    
    
    8.00
    %
    $
    229,295
    
    
    —Harleysville
      National Bank
    
    
    240,695
    
    
    10.60
    %
    
    181,647
    
    
    8.00
    %
    
    227,059
    
    
    10
    %Tier
      1 Capital (to risk weighted assets):Corporation
    
    
    260,480
    
    
    11.36
    %
    
    91,718
    
    
    4.00
    %
    
    137,577
    
    
    —Harleysville
      National Bank
    
    
    222,140
    
    
    9.78
    %
    
    90,823
    
    
    4.00
    %
    
    136,235
    
    
    6
    %Tier
      1 Capital (to average assets):Corporation
    
    
    260,480
    
    
    8.91
    %
    
    116,950
    
    
    4.00
    %
    
    146,187
    
    
    —Harleysville
      National Bank
    
    
    222,140
    
    
    7.70
    %
    
    115,439
    
    
    4.00
    %
    
    144,299
    
    
    5
    %


Pursuant
to the federal regulators’ risk-based capital adequacy guidelines, the
components of capital are called Tier 1 and Tier 2 capital. For the Corporation,
Tier 1 capital is the shareholders’ equity and Tier 2 capital is the allowance
for loan losses. The minimum for the Tier 1 ratio is 4.0% and the total capital
ratio (Tier 1 plus Tier 2 capital divided by risk-adjusted assets) minimum is
8.0%. At March 31, 2005, the Corporation’s Tier 1 risk-adjusted capital ratio
was 11.45%**,**and the
total risk-adjusted capital ratio was 12.27%, both well above the regulatory
requirements. The risk-based capital ratios of the Bank also exceeded regulatory
requirements at March 31, 2005.

The
leverage ratio consists of Tier 1 capital divided by quarterly average total
assets, excluding intangible assets. Banking organizations are expected to have
ratios of at least 4% and 5%, depending upon their particular condition and
growth plans. Higher leverage ratios could be required by the particular
circumstances or risk profile of a given banking organization. The Corporation’s
leverage ratios were 8.99% at March 31, 2005 and 8.91% at December 31,
2004.

The
year-to-date March 31, 2005 cash dividend per share of $.18 was 12.5% higher
than the cash dividend for the same period in 2004 of $.16. The dividend payout
ratio for the first three months of 2005 was 52.9%, compared to 47.1% for the
same period in 2004. Activity in both the Corporation’s dividend reinvestment
and stock purchase plan did not have a material impact on capital during the
first three months of 2005.
-22-**Liquidity**

Liquidity
is a measure of the ability of the Bank to meet its needs and obligations on a
timely basis. For a bank, liquidity provides the means to meet the day-to-day
demands of deposit customers and the needs of borrowing customers. Generally,
the Bank arranges its mix of cash, money market investments, investment
securities and loans in order to match the volatility, seasonality, interest
sensitivity and growth trends of its deposit funds. The liquidity measurement is
based on the asset/liability model’s projection of potential sources and uses of
funds for the next 120 days. The resulting projections as of March 31, 2005 show
the potential sources of funds exceeding the potential uses of funds. The
Corporation has external sources of funds which can be drawn upon when funds are
required. The primary source of external liquidity is an available line of
credit with the FHLB. As of March 31, 2005, the Bank had borrowings outstanding
with the FHLB of $282.8 million ($10.0 million in federal funds purchased and
$272.8 million in long-term borrowings), other federal funds purchased of $36.0
million and pledged investment securities available for sale of $364.7 million.
At March 31, 2005, the Bank had unused lines of credit at the FHLB of $420.2
million, unused federal funds lines of credit of $79.0 million and unpledged
investment securities available for sale of $406.9 million.

**Other
Information**

Pending
Legislation

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

Effects
of Inflation

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


Effect
of Government Monetary Policies

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

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


Environmental
Regulations

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

Branching

The
Corporation is currently planning to open a new location in South Whitehall
Township, Lehigh County during the third quarter of 2005. The location will
house a retail branch as well as a Millennium Wealth Management office. We also
plan to open a new retail branch in Warminster Township, Bucks County during
2005. The Corporation continues to evaluate potential new branch sites that are
contiguous to our current service area and will expand the Bank’s market area
and market share of loans and deposits.
-23-**Item
3**-**Qualitative
and Quantitative Disclosures About Market Risk**

In the
normal course of conducting business activities, the Corporation is exposed to
market risk, principally interest risk, through the operations of its banking
subsidiary. Interest rate risk arises from market driven fluctuations in
interest rates that affect cash flows, income, expense and values of financial
instruments. The Asset/Liability Committee, using policies and procedures
approved by the Bank’s Boards of Directors, is responsible for managing the rate
sensitivity position.

No
material changes in market risk strategy occurred during the current period. A
detailed discussion of market risk is provided on page 17 of this Form
10-Q.

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

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

Our
management evaluated, with the participation of our Chief Executive Officer and
Chief Financial Officer, the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) or 15(d)-15(e) under the
Securities Exchange Act of 1934) as of the end of the period covered by this
report. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures are
designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized, and reported within the time periods specified
in the SEC’s rules and regulations and are operating in an effective manner.

**(ii)
Changes in Internal Controls**

In
connection with the ongoing review of the Corporation’s internal controls over
financial reporting as defined in rule 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934, as amended, and in response to the material
weakness identified in the Annual Report on Form 10-K for the fiscal year end
December 31, 2004, the Corporation has remediated a significant number of access
control issues relative to general ledger, deposits, loans, the Bank’s Automated
Clearing House, and central information files through the adjustment of menu
options and/or access rights. Additional control procedures and related
documentation requirements have also been implemented. The Corporation continues
to implement access control remediation procedures. The Corporation has
initiated a Company-wide project to develop new access menus for all employees
to further strengthen access controls. Upon completion of the project, the new
access menu controls will be tested for effectiveness.


**PART
II. OTHER INFORMATION**
**Item
1.****Legal
Proceedings**

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

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

The
Corporation has a stock repurchase program that permits the repurchase of up to
five percent of its outstanding common stock. The repurchased shares will be
used for general corporate purposes. The following table presents the repurchase
activity of the stock repurchase program during the first quarter of 2005 (all
share information has been restated retroactively for the effect of stock
dividends and splits):
Total
      Number of Common Shares Purchased
    
    
    Weighted
      Average Price Paid Per Share
    
    
    Total
      Number of Shares Purchased as Part of Publicly Announced
    Plans
    
    
    Maximum
      Number of Shares that may yet be Purchased under the Plans(1)January
      1-31, 2005
    
    
    62,500
    
    $
    24.32
    
    
    62,500
    
    
    126,067February
      1-28, 2005
    
    
    42,000
    
    
    24.04
    
    
    42,000
    
    
    84,067March
      1-31, 2005
    
    
    26,000
    
    
    23.19
    
    
    26,000
    
    
    58,067Total
    
    
    130,500
    
    $
    24.01
    
    
    130,500
(1) On
December 14, 2000, the Board of Directors authorized a program to purchase up to
1,249,000 shares (restated for stock dividends and splits) of its common
stock.


-24-
**Item
3.****Defaults
Upon Senior Securities**

Not
applicable

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

(a)
    The
      2005 Annual Meeting of Shareholders was held at 9:30 a.m., on Tuesday,
      April 12, 2005 at Presidential Caterers, 2910 DeKalb Pike, Norristown,
      Pennsylvania 19401.

(b),(c)
One matter was voted upon as follows:
1.
    Three
      directors were elected, as below:

ElectedTerm
Expires
Gregg J.
Wagner2009
James A.
Wimmer2009
William
M. Yocum2009

The
results of the voting for the directors are as follows:

Gregg J.
WagnerFor19,513,346
Against632,650
Abstain0

James A.
WimmerFor19,535,353
Against610,643
Abstain0

William
M. YocumFor19,461,816
Against684,180
Abstain0


Directors
whose term continued after the meeting:Term
Expires
Walter E.
Daller, Jr.2006
Thomas C.
Leamer2006
Harold A.
Herr2007
Stephanie
S. Mitchell2007
Demetra M.
Takes                                                                                                       
2008
Walter
R. Bateman, II2008
Lee Ann
B.
Bergey2008

Vincent
P. Small, Jr. whose term was to expire in 2007, notified the Corporation on
April 11, 2005, that he was resigning as a director effective April 13,
2005.

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

(a)
    None
      to report.

(b)
    There
      were no material changes in the manner shareholders may recommend nominees
      to the Registrant’s Board of Directors.
-25-
**Item
6.****Exhibits**


(a)
Exhibits:

The following
exhibits are being filed as part of this Report:


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

(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)
    Amendment
      to Employment Agreement by and among David R. Kotok, Millennium Bank,
      Cumberland Advisors, Inc., Harleysville National Corporation and
      Harleysville National Bank and Trust Company dated October 15, 2003
      (incorporated by reference to Appendix ”A” to the proxy
      statement/prospectus on the Corporation’s Registration Statement
      No. 333-111709 on Form S-4, as filed on January 5,
      2004.)(10.2)
    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.)(10.3)
    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.)(10.4)
    Supplemental
      Executive Retirement Plan. (Incorporated by reference to Exhibit 10.3
      of Registrant’sAnnual Report in Form 10-K for the year ended December 31, 1997,
      filed with the Commission on March 27, 1998.)(10.5)
    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.)(10.6)
    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.)(10.7)
    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.)(10.8)
    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.)(10.9)
    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.)(10.10)
    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.)(10.11)
    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.)(10.12)
    Supplemental
      Executive Retirement Benefit Agreement dated February 23, 2004
      between Michael B. High, Executive Vice President and 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.)(10.13)
    Employment
      Agreement effective April 1, 2005 between Michael B. High, the
      current Executive Vice President, Chief Operating Officer and Chief
      Financial 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.)(10.14)
    Amendment
      to Supplemental Executive Retirement Benefit Agreement dated March 14,
      2005 by and among Harleysville Management Services, LLC and Michael B.
      High, the current Executive Vice President, Chief Operating Officer and
      Chief Financial Officer of the Corporation. (Incorporated by reference to
      Registrant’s Current Report on Form 8-K, filed with the Commission on
      March 14, 2005.)(10.15)
    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.)(10.16)
    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.)(10.17)
    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).-26-

(10.18)
    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.)(10.19)
    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.)(10.20)
    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.)(10.21)
    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.)(10.22)
    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.)(10.23)
    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.)(10.24)
    Employment
      Agreement effective January 1, 2005 between Gregg J. Wagner, the
      current 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.)(10.25)
    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.)(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(31.2)
    Certification
      of the Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002(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(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

-27-


**SIGNATURES**

Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.



**HARLEYSVILLE
NATIONAL CORPORATION**




Date: May
6,
2005                               /s/
Gregg J. Wagner____________________
Gregg J.
Wagner, President, Chief Executive Officer and Director
(Principal executive officer)



Date: May 6,
2005                                    
/s/ Michael B.
High___________________________________
Michael
B. High, Executive Vice President, Chief Operating Officer
and Chief Financial Officer(Principal
financial and accountingofficer)

-28-**EXHIBIT
INDEX**

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

(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)
    Amendment
      to Employment Agreement by and among David R. Kotok, Millennium Bank,
      Cumberland Advisors, Inc., Harleysville National Corporation and
      Harleysville National Bank and Trust Company dated October 15, 2003
      (incorporated by reference to Appendix ”A” to the proxy
      statement/prospectus on the Corporation’s Registration Statement
      No. 333-111709 on Form S-4, as filed on January 5,
      2004.)(10.2)
    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.)(10.3)
    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.)(10.4)
    Supplemental
      Executive Retirement Plan. (Incorporated by reference to Exhibit 10.3
      of Registrant’sAnnual Report in Form 10-K for the year ended December 31, 1997,
      filed with the Commission on March 27, 1998.)(10.5)
    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.)(10.6)
    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.)(10.7)
    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.)(10.8)
    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.)(10.9)
    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.)(10.10)
    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.)(10.11)
    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.)(10.12)
    Supplemental
      Executive Retirement Benefit Agreement dated February 23, 2004
      between Michael B. High, Executive Vice President and 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.)(10.13)
    Employment
      Agreement effective April 1, 2005 between Michael B. High, the
      current Executive Vice President, Chief Operating Officer and Chief
      Financial 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.)(10.14)
    Amendment
      to Supplemental Executive Retirement Benefit Agreement dated March 14,
      2005 by and among Harleysville Management Services, LLC and Michael B.
      High, the current Executive Vice President, Chief Operating Officer and
      Chief Financial Officer of the Corporation. (Incorporated by reference to
      Registrant’s Current Report on Form 8-K, filed with the Commission on
      March 14, 2005.)(10.15)
    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.)(10.16)
    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.)(10.17)
    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).


-29-

(10.18)
    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.)(10.19)
    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.)(10.20)
    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.)(10.21)
    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.)(10.22)
    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.)(10.23)
    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.)(10.24)
    Employment
      Agreement effective January 1, 2005 between Gregg J. Wagner, the
      current 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.)(10.25)
    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.)(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(31.2)
    Certification
      of the Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002(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(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

-30-