UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      DC 20549





**FORM
      10-Q**





x
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934





For
      the
      Quarterly Period Ended March 31, 2008





OR





o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934





For
                the transition period fromto





Commission
                file number0-19214





**UNION
      NATIONAL FINANCIAL CORPORATION**


(Exact
      Name of Registrant as Specified in its Charter)





Pennsylvania
            
            23-2415179(State
                or Other Jurisdiction of
            
            (I.R.S.
                Employer Identification Number)Incorporation
                or Organization)





570
                Lausch LaneSuite
                300Lancaster,
                Pennsylvania
            
            17601(Address
                of Principal Executive Offices)
            
            (Zip
                Code)





(717)
      492-2222


(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.





Yes x  No o





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting company.
      See
      definition of “accelerated filer, large accelerated filer and smaller reporting
      company” in Rule 12b-2 of the Exchange Act. (Check One):





Large
      accelerated filer o Accelerated filer o Non-accelerated filer x Smaller
      reporting company o





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act).




Yes o  No x





Indicate
      the number of shares outstanding of each of the issuer’s classes of common
      stock, as of the latest practicable date.





2,547,987
      shares of $.25 (par) common stock were outstanding as of May 6,
      2008.





UNION
      NATIONAL FINANCIAL CORPORATION


FORM
      10-Q


INDEX





PAGE NO.**PART
                I–FINANCIAL
                INFORMATION**Item
                1 -
            Financial
                Statements (Unaudited)Consolidated
                Statements of Financial Condition
            1Consolidated
                Statements of Income
            2
                -
                3Consolidated
                Statements of Comprehensive Income (Loss)
            3Consolidated
                Statements of Cash Flows
            4
                -
                5Notes
                to Consolidated Financial Statements
            6
                -
                13Item
                2 -
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            14-24Item
                3 -
            Quantitative
                and Qualitative Disclosures about Market Risk
            25Item
                4 -
            Controls
                and Procedures
            26Item
                4T -
            Controls
                and Procedures
            26**PART
                II–OTHER
                INFORMATION**Item
                1 -
            Legal
                Proceedings
            27Item
                1A -
            Risk
                Factors
            27Item
                2 -
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            27Item
                3 -
            Defaults
                upon Senior Securities
            27Item
                4 -
            Submission
                of Matters to a Vote of Security Holders
            27Item
                5 -
            Other
                Information
            27Item
                6 -
            Exhibits
            27Signature
                Page
            
            28Exhibit
                31.1 -
            Certification
                of Principal Executive Officer Pursuant to Exchange Act Rules
                13a-14(a)/15d-14(a) as added by Section 302 of the Sarbanes-Oxley
                Act of
                2002
            29Exhibit
                31.2 -
            Certification
                of Principal Financial Officer Pursuant to Exchange Act Rules
                13a-14(a)/15d-14(a) as added by Section 302 of the Sarbanes-Oxley
                Act of
                2002
            30Exhibit
                32 -
            Certification
                of Principal Executive Officer and Principal Financial Officer Pursuant
                to
                18 U.S.C. Section 1350 as Added by Section 906 of the Sarbanes-Oxley
                Act
                of 2002
            31





*Unless
      the context otherwise requires, the terms “Union National,” “we,” “us,” and
“our” refer to Union National Financial Corporation and its consolidated
      subsidiary.*





**PART
      I – FINANCIAL INFORMATION**





**ITEM
      1 – FINANCIAL STATEMENTS**





**Union
      National Financial Corporation**


**Consolidated
      Statements of Financial Condition (Unaudited)**


(Dollars
      in thousands, except per share data)





3/31/2008
            
            12/31/2007**ASSETS**Cash
                and Due from Banks
            
            $
            16,550
            
            $
            16,700Interest-Bearing
                Deposits in Other Banks
            
            
            209
            
            
            227Federal
                Funds Sold
            
            
            22,342
            
            
            20,955Total
                Cash and Cash Equivalents
            
            
            39,101
            
            
            37,882Investment
                Securities Available-for-Sale
            
            
            68,283
            
            
            74,176Loans
                and Leases, Net of Unearned Income
            
            
            366,852
            
            
            364,337Less:
                Allowance for Loans and Leases Losses
            
            
            (3,742
            )
            
            (3,675
            )Net
                Loans and Leases
            
            
            363,110
            
            
            360,662Premises
                and Equipment, Net
            
            
            8,822
            
            
            9,038Restricted
                Investment in Bank Stocks
            
            
            3,114
            
            
            3,652Bank-Owned
                Life Insurance
            
            
            10,776
            
            
            10,669Other
                Assets
            
            
            5,735
            
            
            5,697TOTAL
                ASSETS
            
            $
            498,941
            
            $
            501,776**LIABILITIES**Deposits:Noninterest-Bearing
            
            $
            54,141
            
            $
            46,624Interest-Bearing
            
            
            336,760
            
            
            329,687Total
                Deposits
            
            
            390,901
            
            
            376,311Short-Term
                Borrowings
            
            
            -
            
            
            6,629Long-Term
                Debt
            
            
            58,711
            
            
            68,816Junior
                Subordinated Debentures
            
            
            17,341
            
            
            17,341Other
                Liabilities
            
            
            3,445
            
            
            3,879TOTAL
                LIABILITIES
            
            
            470,398
            
            
            472,976**STOCKHOLDERS'
                EQUITY**Common
                Stock, par value $.25 per share Shares authorized - 20,000,000; Issued
                -
                2,966,176 and 2,964,738 at March 31, 2008 and December 31, 2007,
                respectively; Outstanding - 2,547,987 and 2,546,549 at March 31,
                2008 and
                December 31, 2007, respectively
            
            
            741
            
            
            741Surplus
            
            
            13,326
            
            
            13,313Retained
                Earnings
            
            
            23,403
            
            
            23,063Accumulated
                Other Comprehensive (Loss) Income
            
            
            (598
            )
            
            12Treasury
                Stock, 418,189 shares, at cost
            
            
            (8,329
            )
            
            (8,329
            )TOTAL
                STOCKHOLDERS' EQUITY
            
            
            28,543
            
            
            28,800TOTAL
                LIABILITIES and STOCKHOLDERS' EQUITY
            
            $
            498,941
            
            $
            501,776





See
      notes
      to consolidated financial statements.


1


**Union
      National Financial Corporation**


**Consolidated
      Statements of Income (Unaudited)**


(Dollars
      in thousands, except per share data)





Three Months Ended March 31,2008
            
            2007**INTEREST
                INCOME**Interest
                and Fees on Loans and Leases
            
            $
            6,361
            
            $
            6,455Investment
                Securities:Taxable
                Interest
            
            
            788
            
            
            917Tax-Exempt
                Interest
            
            
            -
            
            
            217Dividends
            
            
            43
            
            
            85Other
            
            
            145
            
            
            16Total
                Interest Income
            
            
            7,337
            
            
            7,690**INTEREST
                EXPENSE**Deposits
            
            
            2,796
            
            
            2,412Short-Term
                Borrowings
            
            
            61
            
            
            107Long-Term
                Debt
            
            
            746
            
            
            1,079Junior
                Subordinated Debentures
            
            
            300
            
            
            318Total
                Interest Expense
            
            
            3,903
            
            
            3,916Net
                Interest Income
            
            
            3,434
            
            
            3,774**PROVISION
                for LOAN and LEASE LOSSES**
            
            
            140
            
            
            207Net
                Interest Income after Provision for Loan & Lease
                Losses
            
            
            3,294
            
            
            3,567**OTHER
                OPERATING INCOME**Income
                from Fiduciary Activities
            
            
            80
            
            
            67Service
                Charges on Deposit Accounts
            
            
            453
            
            
            399Other
                Service Charges, Commissions, Fees
            
            
            259
            
            
            236Alternative
                Investment Sales Commissions
            
            
            198
            
            
            199Net
                Investment Securities Gains (Losses)
            
            
            191
            
            
            (519
            )Mortgage
                Banking/Brokerage Activities
            
            
            14
            
            
            786Title
                Insurance/Settlement Income
            
            
            -
            
            
            123Earnings
                from Bank-Owned Life Insurance
            
            
            107
            
            
            103Other
                Income
            
            
            110
            
            
            200Total
                Other Operating Income
            
            
            1,412
            
            
            1,594**OTHER
                OPERATING EXPENSES**Salaries
                and Wages
            
            
            1,518
            
            
            2,188Retirement
                Plan and Other Employee Benefits
            
            
            401
            
            
            600Net
                Occupancy
            
            
            510
            
            
            545Furniture
                and Equipment
            
            
            247
            
            
            260Professional
                Fees
            
            
            260
            
            
            373Data
                Processing Services
            
            
            228
            
            
            216Pennsylvania
                Shares Tax
            
            
            100
            
            
            62Advertising
                and Marketing
            
            
            47
            
            
            224ATM
                Processing
            
            
            75
            
            
            87Minority
                Interests in Earnings of Subsidiaries
            
            
            -
            
            
            71Restructuring
                Charge
            
            
            -
            
            
            536Other
                Expenses
            
            
            800
            
            
            695Total
                Other Operating Expenses
            
            
            4,186
            
            
            5,857Income
                (Loss) Before Income Taxes (Benefit)
            
            
            520
            
            
            (696
            )**PROVISION
                for (BENEFIT from) INCOME TAXES**
            
            
            107
            
            
            (340
            )**NET
                INCOME (LOSS)**
            
            $
            413
            
            $
            (356
            )





See
      notes
      to consolidated financial statements.


2


**Union
      National Financial Corporation**


**Consolidated
      Statements of Income (Unaudited) – Continued**





Three Months Ended March 31,2008
            
            2007**PER
                SHARE INFORMATION**Net
                Income (Loss)–Basic
            
            $
            0.16
            
            $
            (0.14
            )Net
                Income (Loss)–Assuming Dilution
            
            
            0.16
            
            
            (0.14
            )Cash
                Dividends
            
            
            -
            
            
            0.10





**Union
      National Financial Corporation**


**Consolidated
      Statements of Comprehensive Income (Loss) (Unaudited)**


(Dollars
      in thousands)





Three Months Ended March 31,2008
            
            2007**Net
                Income (Loss)**
            
            $
            413
            
            $
            (356
            )**Other
                Comprehensive Income (Loss):**Unrealized
                Holding Gains (Losses) on Available-for-Sale Investment Securities
                Arising
                During the Period, Net of Tax (Benefit) of $(249) and $46 in 2008
                and
                2007, respectively
            
            
            (484
            )
            
            90Reclassification
                Adjustment for (Gains) Losses included in Net Income (Loss), Net
                of (Tax)
                Benefit of ($65) and $176 in 2008 and 2007, respectively
            
            
            (126
            )
            
            343Unrealized
                Gains on Cash Flow Hedges, Net of Tax of $0 and $1 in 2008 and 2007,
                respectively
            
            
            -
            
            
            2Reclassification
                Adjustment for Hedging Losses included in Net Income (Loss), Net
                of (Tax)
                Benefit of $0 and $12 in 2008 and 2007, respectively
            
            
            -
            
            
            24**Total
                Other Comprehensive Income (Loss)**
            
            
            (610
            )
            
            459**TOTAL
                COMPREHENSIVE INCOME (LOSS)**
            
            $
            (197
            )
            $
            103




See
      notes
      to consolidated financial statements.


3


**Union
      National Financial Corporation**


**Consolidated
      Statements of Cash Flows (Unaudited)** ****


(Dollars
      in thousands)





Three Months Ended March 31,2008
            
            2007**CASH
                FLOWS from OPERATING ACTIVITIES**Net
                Income (Loss)
            
            $
            413
            
            $
            (356
            )Adjustments
                to Reconcile Net Income (Loss) to NetCash
                Provided by Operating Activities:Depreciation
                and Amortization
            
            
            280
            
            
            357Provision
                for Loan and Lease Losses
            
            
            140
            
            
            207Restructuring
                Charge, Net of Related (Cash Payments)
            
            
            (84
            )
            
            536Stock-Based
                Compensation Expense
            
            
            -
            
            
            36Net
                Accretion of Investment Securities’ Discounts
            
            
            (70
            )
            
            (7
            )Net
                Investment Securities (Gains) Losses
            
            
            (191
            )
            
            519Provision
                for Deferred Income Taxes
            
            
            374
            
            
            -Increase
                (Decrease) in Minority Interest in Consolidated
                Subsidiaries
            
            
            (1
            )
            
            62Earnings
                from Bank-Owned Life Insurance
            
            
            (107
            )
            
            (103
            )Gains
                on Loans Sold
            
            
            -
            
            
            (580
            )Net
                Gain on Sale of Foreclosed Real Estate
            
            
            -
            
            
            (126
            )Proceeds
                from Sales of Loans
            
            
            -
            
            
            21,188Loans
                Originated for Sale
            
            
            -
            
            
            (20,723
            )Decrease
                in Accrued Interest Receivable
            
            
            181
            
            
            226Increase
                in Other Assets
            
            
            (302
            )
            
            (564
            )Decrease
                in Other Liabilities
            
            
            (422
            )
            
            (269
            )Net
                Cash Provided by Operating Activities
            
            
            211
            
            
            403**CASH
                FLOWS from INVESTING ACTIVITIES**Proceeds
                from Sales of Available-for-Sale Securities
            
            
            17,975
            
            
            63,826Proceeds
                from Maturities of Available-for-Sale Securities
            
            
            20,859
            
            
            2,995Purchases
                of Available-for-Sale Securities
            
            
            (33,605
            )
            
            (3,626
            )Net
                Sales of Restricted Investments in Bank Stocks
            
            
            538
            
            
            2,131Proceeds
                from Sale of Foreclosed Real Estate
            
            
            -
            
            
            312Net
                Loans and Leases Made to Customers
            
            
            (2,588
            )
            
            (9,578
            )Purchases
                of Premises, Equipment and Software
            
            
            (40
            )
            
            (319
            )Net
                Cash Provided by Investing Activities
            
            
            3,139
            
            
            55,741**CASH
                FLOWS from FINANCING ACTIVITIES**Net
                Increase (Decrease) in Demand Deposits and Savings
                Accounts
            
            
            8,570
            
            
            (220
            )Net
                Increase (Decrease) in Time Deposits
            
            
            6,020
            
            
            (7,784
            )Net
                Decrease in Short-Term Borrowings
            
            
            (6,629
            )
            
            (2,321
            )Proceeds
                from Issuance of Long-Term Debt
            
            
            -
            
            
            4,254Payments
                on Long-Term Debt
            
            
            (10,105
            )
            
            (53,009
            )Acquisition
                of Treasury Stock
            
            
            -
            
            
            (2
            )Issuance
                of Common Stock
            
            
            13
            
            
            55Cash
                Dividends Paid
            
            
            -
            
            
            (252
            )Net
                Cash Used in Financing Activities
            
            
            (2,131
            )
            
            (59,279
            )**Net
                Increase (Decrease) in Cash and Cash Equivalents**
            
            
            1,219
            
            
            (3,135
            )CASH
                and CASH EQUIVALENTS - Beginning of Period
            
            
            37,882
            
            
            15,462**CASH
                and CASH EQUIVALENTS - End of Period**
            
            $
            39,101
            
            $
            12,327





See
      notes
      to consolidated financial statements.


4


**Union
      National Financial Corporation**


**Consolidated
      Statements of Cash Flows (Unaudited) - Continued**


(Dollars
      in thousands)





Three Months Ended March 31,2008
            
            2007**Supplemental
                Disclosures of Cash Flow Information**Cash
                Payments (Refunds) for:Interest
            
            $
            4,330
            
            $
            4,167Income
                Taxes
            
            
            -
            
            
            (200
            )





See
      notes
      to consolidated financial statements.


5




**Union
      National Financial Corporation**


**Notes
      to Consolidated Financial Statements (Unaudited)**





***1.
      Basis of Presentation***





The
      consolidated financial statements for 2008 and 2007 include the accounts of
      Union National Financial Corporation (“Union National”), its subsidiary Union
      National Community Bank (the “Bank”), and Bank subsidiary Union National
      Insurance Agency. The consolidated financial statements for 2007 also include
      the accounts of the Bank subsidiary Home Team Financial, LLC and its subsidiary
      TA of Lancaster, LLC (together, “Home Team”), which ceased operations in October
      2007. All material intercompany accounts and transactions have been eliminated
      in consolidation. Union National’s trust subsidiaries, Union National Capital
      Trust I and Union National Capital Trust II, which were established for the
      purpose of issuing $11,000,000 of trust capital securities during 2003 and
      2004,
      are not consolidated.





Certain
      information and footnote disclosures normally included in consolidated financial
      statements prepared in accordance with generally accepted accounting principles
      in the United States of America (“GAAP”) have been condensed or omitted pursuant
      to the rules and regulations of the Securities and Exchange Commission (“SEC”).
      We believe the information presented is not misleading and the disclosures
      are
      adequate. In our opinion, the consolidated financial statements contain all
      adjustments (consisting only of normal recurring accruals and adjustments)
      necessary to present fairly our financial position as of March 31, 2008 and
      December 31, 2007, and the results of operations and cash flows for the
      three-month periods ended March 31, 2008 and 2007. The results of operations
      for
      interim periods are not necessarily indicative of operating results expected
      for
      the full year. These interim consolidated financial statements should be read
      in
      conjunction with the audited financial statements and notes thereto included
      in
      Union National’s Annual Report on Form 10-K for the year ended December 31,
      2007, and with Union National’s Forms 8-K, that were filed during 2008 with the
      SEC.





***2.
      Use of Estimates***





The
      process of preparing consolidated financial statements in conformity with GAAP
      requires the use of estimates and assumptions that affect the reported amounts
      of certain types of assets, liabilities, revenues and expenses. Accordingly,
      actual results may differ from estimated amounts. Material estimates that are
      particularly susceptible to significant change in the near term relate to the
      determination of the allowance for loan and lease losses, and the assessment
      of
      other-than-temporary impairment of investment securities.





***3.
      Earnings per Share***





Basic
      earnings (loss) per share is computed by dividing net income (loss) by the
      weighted-average number of common shares outstanding during the three months
      ended March 31, 2008 and 2007, as follows:





Three
                Months Ended March 31,2008
            
            2007Net
                Income (Loss):
            
            $
            413,000
            
            $
            (356,000
            )Weighted-average
                number of common shares outstanding
            
            
            2,547,144
            
            
            2,525,845Basic
                and diluted earnings (loss) per share
            
            $
            0.16
            
            $
            (0.14
            )





Diluted
      earnings (loss) per share reflects the potential dilution that could occur
      if
      options to issue stock were exercised. For both periods, there were no
      outstanding stock options which, if exercised, would have a dilutive effect.
      Accordingly, the diluted earnings (loss) per share for each period was the
      same
      as the basic earnings (loss) per share.





Stock
      options outstanding which had no intrinsic value, and therefore, would not
      be
      included in a diluted earnings (loss) per share computation, were 108,731 and
      206,488 as of March 31, 2008 and 2007, respectively.


6


***4.
      Share-Based Payments***





Union
      National had three stock option plans outstanding during the three months ended
      March 31, 2008 and 2007: (i) the Employee Stock Purchase Plan (“ESPP”); (ii) the
      Employee Stock Incentive Plan (“SIP”); and (iii) the Independent Directors’
Stock Option Plan (“IDSOP”). None of these plans had remaining options available
      for grant as of March 31, 2008. It is Union National’s policy to issue new
      shares upon the exercise of stock options.





Options
      granted under the ESPP have a five-year term and could be exercised at 85%
      of
      the fair market value of the stock on the date of exercise. The ESPP options
      expire immediately upon the earlier of the date of termination of employment,
      or
      March 1, 2008. Options granted under the SIP are incentive stock options with
      terms up to 10 years and option prices equal to the fair value of the shares
      on
      the date of the grant. SIP options vest over six months, become exercisable
      nine
      months after the grant date, and generally lapse 90 days after termination
      of
      employment. The IDSOP consists of non-qualified stock options with terms up
      to
      10 years. These options have exercise prices equal to the fair value of the
      shares on the date of the grant and expire one year after departure from the
      board of directors.





In
      accordance with Statement of Financial Accounting Standards No. 123(R),
“Share-Based Payments”, as adopted by Union National in 2006, compensation
      expense is recognized for share-based awards based upon an assessment of the
      grant date fair value. The fair value of each option is estimated on the date
      of
      grant using the Black-Scholes option-pricing model. Union National recognizes
      stock compensation expense for share-based awards on a straight-line basis
      over
      the vesting period of the award.





No
      options were granted or vested during the three months ended March 31, 2008.
      The
      per-share weighted-average fair value of the 31,900 stock options granted during
      the three months ended March 31, 2007 (7,200 of which were forfeited during
      the
      second quarter of 2007 due to employee terminations) was $3.41 computed using
      the following assumptions:





Expected Dividend Yield:
            3.45%
            
            Expected Life (Years):
            8.0Risk-Free Interest Rate:
            5.02%
            
            Expected Volatility:
            17.11%





Union National’s share-based compensation
      expense was $0 and $36,000 for the three months ended March 31, 2008 and 2007,
      respectively.





Stock
      option transactions for the three months ended March 31, 2008, are summarized
      below:





Stock
              Options
            
            Weighted-Average
              Exercise PriceOptions
                Outstanding at December 31, 2007(Prices
                range from $9.31 to $22.14)
            
            
            124,439
            
            $
            18.32Options
                Granted
            
            
            -
            
            
            -Options
                Exercised (under the ESPP)
            
            
            (650
            )
            
            8.69Options
                Forfeited
            
            
            (12,033
            )
            
            18.45Options
                Expired
            
            
            (3,025
            )
            
            8.93Options
                Outstanding at March 31, 2008(Prices
                range from $11.52 to $22.14)
            
            
            108,731
            
            $
            18.52




The
      following table presents information regarding options outstanding (all
      exercisable) as of March 31, 2008:




Number
                of options
            
            
            108,731Weighted-average
                contractual remaining term
            
            
            5.1 YearsWeighted-average
                exercise price
            
            $
            18.52Aggregate
                intrinsic value
            
            $
            -0-





During
      the three months ended March 31, 2008 and 2007, Union National received proceeds
      of $6,000 and $1,000, respectively, for the exercise of options with an
      intrinsic value of $1,000 and $0, respectively. Intrinsic value represents
      the
      amount by which the market price of the stock on the measurement date exceeded
      the exercise price of the option.


7


***5.
      Guarantees***





Union
      National does not issue any guarantees that would require liability recognition
      or disclosure, other than its standby letters of credit. Standby letters of
      credit written are conditional commitments issued by Union National to guarantee
      the performance of a customer to a third party. Generally, all letters of
      credit, when issued, have expiration dates within one year. The credit risk
      involved in issuing letters of credit is essentially the same as that involved
      in extending loan facilities to customers. Union National generally holds
      collateral and/or personal guarantees supporting these commitments. Union
      National had $5,907,000 and $6,239,000 of standby letters of credit outstanding
      as of March 31, 2008 and December 31, 2007, respectively. Management believes
      that the proceeds obtained through a liquidation of collateral and the
      enforcement of guarantees would be sufficient to cover the potential amount
      of
      future payments required under the corresponding standby letters of credit.
      The
      current amount of the liability as of March 31, 2008 and December 31, 2007,
      for
      Bank guarantees under standby letters of credit issued is not considered to
      be
      material.





***6.
      Residential Mortgage Business Venture***





Effective
      October 31, 2007, Union National management decided to cease operations at
      Home
      Team, a residential mortgage brokerage subsidiary of the Bank, due to a
      weakening housing market and the related reduction in brokered residential
      mortgage loan volume. Accordingly, the first quarter 2008 consolidated operating
      results reflected no mortgage brokerage and title insurance income, and no
      operating expenses, related to Home Team. The first quarter 2007 consolidated
      operating results included $765,000 of mortgage brokerage income, $123,000
      of
      title insurance/settlement income, and $728,000 of operating expenses related
      to
      Home Team.





***7.
      Restructuring and De-Leveraging Initiatives***





In
      the
      first quarter of 2007, management completed the first stage of an evaluation
      of
      the Bank’s operations in order to establish more appropriate and efficient
      staffing levels. The resulting restructuring charges incurred during the first
      quarter of 2007, consisting of severance and related costs, totaled $536,000
      ($354,000 after tax or $0.14 per share).





In
      January 2007, Union National decided to de-leverage its Balance Sheet in order
      to strengthen the Bank’s capital position, enhance its income tax effectiveness,
      facilitate its future core banking growth strategies for loans and deposits,
      and
      improve its interest rate profile. Consequently, Union National reduced the
      size
      of its available-for-sale securities portfolio by $64,345,000 and reduced its
      restricted investment in FHLB stock by $2,039,000, realizing pre-tax losses
      on
      the sale of the securities of $519,000. The sales proceeds were used to pay
      down
      $48,755,000 of FHLB debt and $6,550,000 of other short-term borrowings, with
      related pre-tax debt prepayment penalties of $31,000 included in Other Expenses.
      In aggregate, the first quarter 2007 de-leveraging activities adversely impacted
      after-tax earnings $363,000 or $0.14 per share.





In
      January 2008, Union National prepaid an additional $10,105,000 of FHLB advances
      outstanding, reducing total FHLB borrowings outstanding to $58,711,000 with
      a
      weighted average interest rate of 4.95%. Debt prepayment penalties included
      in
      first quarter 2008 Other Expenses related to this FHLB debt reduction were
      $12,000. Additionally, effective March 31, 2008, Union National terminated
      and
      repaid its remaining short-term borrowing agreements without
      penalty.




***8.
      Other-Than-Temporary Impairment of Investment
      Securities***





In
      order
      to determine whether unrealized losses in the market value of investment
      securities are other than temporary, management regularly reviews the entire
      portfolio of investment securities for possible impairment, analyzing factors
      including but not limited to the underlying creditworthiness of the issuing
      organization, the length of time for which the market value had been less than
      cost, independent analysts’ opinions about circumstances that could affect the
      performance of the investment, and management’s intention and ability to hold
      the securities to the earlier of recovery of losses or maturity.





During 2007,
      management had recorded $800,000 in other-than-temporary impairment charges
      related to declines in the value of three available-for-sale corporate debt
      investment securities with an original amortized cost of $3,000,000. Scheduled
      income payments on the securities received through the first quarter of 2008
      were fully applied to principal, further reducing the combined book value of
      the
      three investments to $2,054,000 as of March 31, 2008.


8


The
      Corporation ’ s
      combined market valuation of the three securities as of March 31, 2008 reflects
      additional unrealized losses, versus carrying value, of $1,104,000. A
      corresponding after-tax reduction of stockholders ’ equity
      of $729,000 was recorded as of March 31, 2008 as an other comprehensive loss.
      Management used market pricing as of March 31, 2008 based upon quoted prices
      in
      limited trading activity of the issuances. The temporarily reduced market prices
      were not a result of a default in the underlying issuers. The three securities
      remain rated as investment grade as of March 31, 2008, as they have been since
      the time of purchase. Management determined the first quarter 2008 additional
      declines in market value to be recorded and treated as temporary based upon
      the
      following considerations:





·
            The
                financial condition and near-term prospects of the issuers do not
                reflect
                any defaults or other specific events which may have influenced the
                operations of the issuers, such as changes in technology that may
                have
                impaired the earnings potential of the investments, or the discontinuance
                of a segment of the business that may affect the future earnings
                potential. The three investment securities were current, as of March
                31,
                2008, for scheduled investment interest payments since
                issuance.


·
            The
                reduced market value of the securities was based upon limited trading
                activity in the first quarter 2008; therefore, the recent unrealized
                losses have been for a very short period of time (less than three
                months).


·
            Management
                has both the ability and intention to hold the securities until a
                reasonable recovery towards the carrying
                value.





***9.
      Split Dollar Life Insurance Postretirement Benefits***





Effective
      January 1, 2008 , Union National adopted the provisions of Emerging Issues
      Task
      Force (“EITF”) Issue No. 06-4, “Accounting for Deferred Compensation and
      Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance
      Arrangements” (“EITF 06-4”). EITF 06-4 requires the recognition of a liability
      related to the postretirement benefits covered by an endorsement split-dollar
      life insurance arrangement, and the liability for the future death benefit
      should be recognized by following the guidance in SFAS No. 106 or Accounting
      Principles Board Opinion No. 12, as appropriate. Union National has certain
      split-dollar life insurance arrangements as part of the Corporation’s bank-owned
      life insurance program, and recognized its liability and related compensation
      expense in accordance with SFAS No. 106. In adopting EITF 06-4, Union National
      recorded a cumulative effect adjustment to the balance of retained earnings
      of
      $73,000 as of January 1, 2008, and $4,000 of related net periodic postretirement
      benefit expense for the quarter ended March 31, 2008.





***10.
      Memorandum of Understanding***





On
      June
      20, 2007, the Bank entered into a Memorandum of Understanding (“MOU”) with the
      Comptroller of the Currency (“OCC”). Specifically, the MOU requires the Bank to
      (1) implement a three-year strategic plan in accordance with specific guidelines
      set forth in the MOU, (2) develop and implement a three-year capital plan,
      in
      accordance with specific guidelines set forth in the MOU, including a dividend
      policy for the payment of dividends provided the Bank is in compliance with
      the
      capital plan, and applicable laws and regulations, (3) review and revise a
      written program to improve the Bank’s loan portfolio management, (4) review and
      revise the Bank’s funds management reports to ensure that they reflect current
      and projected funding needs, (5) develop and implement a risk based audit
      program to determine weaknesses or deficiencies in the Bank’s consumer
      compliance program, (6) ensure the Bank’s interest rate risk (“IRR”) measurement
      tool or model conforms to OCC guidelines and, if necessary, develop an action
      plan to address the need for a more acceptable IRR measurement model, and (7)
      furnish written quarterly progress reports to the OCC detailing the form and
      manner of actions taken to comply with the MOU. Each provision of the MOU is
      subject to OCC approval, non-objection and/or review.





Included
      in the response to the MOU, Union National has established target capital rates
      for the Bank of 8% for Tier I Capital to Average Total Assets, 9% for Tier
      I
      Capital to Risk-Based Assets, and 12% for Total Capital to Risk-Based Assets.
      The OCC has accepted management’s capital targets and established June 30, 2008
      as the target achievement date. Union National expects to meet these capital
      targets by further reducing borrowings and liabilities, generating capital
      from
      net earnings, and if necessary, a capital infusion.





Through
      the first quarter of 2008, management has fully complied with the terms of
      the
      MOU and has sent to the OCC the documentation and progress reports as required
      under the MOU.


9


***11.
      Fair Value Measurement of Assets and Liabilities***





Effective
      January 1, 2008, Union National adopted SFAS No. 157, "Fair Value Measurements"
      for financial assets and financial liabilities. In accordance with Financial
      Accounting Standards Board Staff Position (FSP) No. 157-2, “Effective Date of
      FASB Statement No. 157,” Union National will delay application of SFAS No. 157
      for non-financial assets and non-financial liabilities, until January 1, 2009.
      SFAS 157 defines fair value, establishes a framework for measuring fair value
      in
      generally accepted accounting principles, and expands disclosures about fair
      value measurements.





SFAS
      157
      defines fair value as the price that would be received to sell an asset or
      paid
      to transfer a liability in an orderly transaction between market participants.
      A
      fair value measurement assumes that the transaction to sell the asset or
      transfer the liability occurs in the principal market for the asset or liability
      or, in the absence of a principal market, the most advantageous market for
      the
      asset or liability. The price in the principal (or most advantageous) market
      used to measure the fair value of the asset or liability shall not be adjusted
      for transaction costs. An orderly transaction is a transaction that assumes
      exposure to the market for a period prior to the measurement date to allow
      for
      marketing activities that are usual and customary for transactions involving
      such assets and liabilities; it is not a forced transaction. Market participants
      are buyers and sellers in the principal market that are (i) independent, (ii)
      knowledgeable, (iii) able to transact, and (iv) willing to
      transact.





SFAS
      requires the use of valuation techniques that are consistent with the market
      approach, the income approach and/or the cost approach. The market approach
      uses
      prices and other relevant information generated by market transactions involving
      identical or comparable assets and liabilities. The income approach uses
      valuation techniques to convert future amounts such as cash flows or earnings,
      to a single present amount on a discounted basis. The cost approach is based
      on
      the amount that currently would be required to replace the service capacity
      of
      an asset (replacement cost). Valuation techniques should be consistently
      applied. Inputs to valuation techniques refer to the assumptions that market
      participants would use in pricing the asset or liability. Inputs may be
      observable, meaning those that reflect the assumptions market participants
      would
      use in pricing the asset or liability developed based on market data obtained
      from independent sources, or unobservable, meaning those that reflect the
      reporting entity’s own assumptions about the assumptions market participants
      would use in pricing the asset or liability based upon the best information
      available in the circumstances. In that regard, SFAS 157 establishes a fair
      value hierarchy for valuation inputs that gives the highest priority to quoted
      prices in active markets for identical assets or liabilities and the lowest
      priority to unobservable inputs. The fair value hierarchy is as
      follows:





**Level
                1 Inputs -**
            Unadjusted
                quoted prices in active markets that are accessible at the measurement
                date for identical, unrestricted assets or liabilities;**Level
                2 Inputs -**
            Quoted
                prices in markets that are not active, or inputs that are observable
                either directly or indirectly, for substantially the full term of
                the
                asset or liability;**Level
                3 Inputs -**
            Prices
                or valuation techniques that require inputs that are both significant
                to
                the fair value measurement and unobservable (i.e., supported by little
                or
                no market activity).





A
      description of the valuation methodologies used for instruments measured at
      fair
      value, as well as the general classification of such instruments pursuant to
      the
      valuation hierarchy, is set forth below. These valuation methodologies were
      applied to all of Union National’s financial assets and financial liabilities
      carried at fair value effective January 1, 2008.





*Securities
      Available for Sale*





Securities
      classified as available for sale are generally reported at fair value utilizing
      Level 2 inputs. For these securities,
      we obtain fair value measurements from an independent pricing service. The
      fair
      value measurements consider
      observable data that may include dealer quotes, market spreads, cash flows,
      the
      U.S. Treasury yield curve, live
      trading levels, trade execution data, market consensus prepayment speeds, credit
      information and the bond’s terms
      and
      conditions, among other things.


10


Level
      3
      inputs are for investment security positions that are not traded in active
      markets or are subject to transfer restrictions,
      and/or where valuations are adjusted to reflect illiquidity and/or
      non-transferability. Such adjustments are generally based on available market
      evidence. In the absence of such evidence, management’s best estimate is used.
      Management’s best estimate consists of both internal and external support on
      certain Level 3 investments.


Internal
      cash flow models using a present value formula along with indicative exit
      pricing obtained from broker/dealers
      were used to support certain Level 3 investments. Subsequent to inception,
      management only changes
      Level 3 inputs and assumptions when corroborated by evidence such as
      transactions in similar instruments,
      completed or pending third-party transactions in the underlying investment
      or
      comparable entities, subsequent
      rounds of financing, recapitalizations and other transactions across the capital
      structure, offerings in the equity or debt markets, and changes in financial
      ratios or cash flows.





*Impaired
      Loans*





Certain
      impaired loans are reported at the fair value of the underlying collateral
      if
      repayment is expected solely from
      the
      collateral. Collateral values are estimated using Level 3 inputs based upon
      customized discounting criteria.





The
      following table summarizes financial assets and financial liabilities measured
      at fair value on a recurring basis as of March 31, 2008, segregated by the
      level
      of the valuation inputs within the fair value hierarchy utilized to measure
      fair
      value:





Dollars
                in Thousands
            
            Level 1
              Inputs
            
            Level 2
              Inputs
            
            Level 3
              Inputs
            
            Total
              Fair ValueInvestment
                Securities Available-For-Sale
            
            $
            -
            
            $
            67,333
            
            $
            950
            
            $
            68,283Impaired
                Loans
            
            
            
            
            
            
            
            $
            6,655
            
            $
            6,655





The
      following is a reconciliation of the beginning and ending balances of recurring
      fair value measurements of certain available-for sale securities using
      significant unobservable (Level 3) inputs:





Available-For Sale
              SecuritiesBeginning Balance at
                December 31, 2007
            
            $
            2,172Payments
                received and applied to principal
            
            
            (118
            )Total
                realized and unrealized gains (losses)Included
                in net income
            
            
            -Included
                in other comprehensive income (loss)
            
            
            (1,104
            )Ending
                Balance at March 31, 2008
            
            $
            950





The
      following is a reconciliation of the beginning and ending balances of recurring
      fair value measurements of impaired loans using significant unobservable (Level
      3) inputs:





Impaired LoansBeginning
                Balance at December 31, 2007
            
            $
            2,636Loans
                    added to impaired classification in the first quarter of
                    2008
            
            
            4,125Payments
                received and applied to principal
            
            
            (51
            )Charge-offs
                of impaired loans
            
            
            (55
            )Ending
                Balance at March 31, 2008
            
            $
            6,655





The
      valuation allowance on impaired loans was $418,000 at March 31, 2008 as compared
      to $380,000 at December 31, 2007. During the three-month period ended March
      31,
      2008, an additional provision for loan and lease losses of $38,000 was made
      for
      impaired loans.


11


Certain
      financial assets and financial liabilities are measured at fair value on a
      nonrecurring basis; that is, the instruments are not measured at fair value
      on
      an ongoing basis, but are subject to fair value adjustments in certain
      circumstances (for example, when there is evidence of impairment). Financial
      assets and financial liabilities measured at fair value on a non-recurring
      basis
      were not significant as of March 31, 2008.





Effective
      January 1, 2008, Union National adopted the provisions of SFAS No. 159, "The
      Fair Value Option for Financial Assets and Financial Liabilities-Including
      an
      amendment of FASB Statement No. 115" ("SFAS 159"). SFAS 159 expands the use
      of
      fair value accounting but does not affect existing standards which require
      assets and liabilities to be carried at fair value. Under SFAS 159, a company
      may elect to use fair value to measure accounts and loans receivable,
      available-for-sale and held-to-maturity securities, accounts payable,
      guarantees, issued debt and other eligible financial instruments. SFAS 159
      permits Union National to measure eligible items at fair value at specified
      election dates. Unrealized gains and losses on items for which the fair value
      measurement option has been elected are reported in earnings at each subsequent
      reporting date. The fair value option (i) may be applied instrument by
      instrument, with certain exceptions, thus Union National may record identical
      assets and liabilities at fair value or by another measurement basis permitted
      under generally accepted accounting principles, (ii) is irrevocable (unless
      a
      new election date occurs) and (iii) is applied only to entire instruments and
      not to portions of instruments. Adoption of SFAS 159 on January 1, 2008, did
      not
      have a significant impact on Union National’s consolidated financial
      statements.





***12.
      Recent Accounting Pronouncements***





On
      January 1, 2008, Union National adopted SFAS
      No.
      157, "Fair Value Measurements." SFAS No. 157 defines fair value, establishes
      a
      framework for measuring fair value in generally accepted accounting principles,
      and expands disclosures about fair value measurements (See Note 11 - *Fair
      Value Measurements of Assets and Liabilities* ).





On
      January 1, 2008, Union National adopted the provisions of the Emerging Issues
      Task Force (“EITF”) Issue No. 06-4, “Accounting for Deferred Compensation and
      Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance
      Arrangements” (“EITF 06-4”). EITF 06-4 requires the recognition of a liability
      related to the postretirement benefits covered by an endorsement split-dollar
      life insurance arrangement. Union National has split-dollar life insurance
      arrangements and has recorded the impact the adoption of the standard had on
      the
      Consolidated Statements of Income and the Consolidated Statement of Financial
      Condition (See Note 9 - *Split
      Dollar Life Insurance Postretirement Benefits* ).




On
      January 1, 2008, Union National adopted the provisions of SFAS No. 159, "The
      Fair Value Option for Financial Assets and Financial Liabilities-Including
      an
      amendment of FASB Statement No. 115" ("SFAS 159"). SFAS 159 expands the use
      of
      fair value accounting but does not affect existing standards which require
      assets and liabilities to be carried at fair value. Under SFAS 159, Union
      National may elect to use fair value to measure accounts and loans receivable,
      available-for-sale and held-to-maturity securities, accounts payable,
      guarantees, issued debt and other eligible financial instruments. (See Note
      11 - *Fair
      Value Measurements of Assets and Liabilities* ).





In
      June
      2007, the Emerging Issues Task Force (EITF) reached a consensus on Issue
      No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based
      Payment Awards” (“EITF 06-11”). EITF 06-11 states that an entity should
      recognize a realized tax benefit associated with dividends on nonvested equity
      shares, nonvested equity share units and outstanding equity share options
      charged to retained earnings as an increase in additional paid in
      capital. The amount recognized in additional paid in capital should be
      included in the pool of excess tax benefits available to absorb potential future
      tax deficiencies on share-based payment awards. EITF 06-11 should be
      applied prospectively to income tax benefits of dividends on equity-classified
      share-based payment awards that are declared in fiscal years beginning after
      December 15, 2007. The
      adoption of EITF 06-11 did not have a significant impact on Union National’s
      consolidated financial position and results of operations.


12


In
      December 2007, the FASB issued SFAS No. No. 141 (R) “Business Combinations”
(“SFAS 141(R)”). SFAS 141(R) establishes principles and requirements for how the
      acquirer of a business recognizes and measures in its financial statements
      the
      identifiable assets acquired, the liabilities assumed, and any noncontrolling
      interest in the acquiree. SFAS 141(R) also provides guidance for recognizing
      and
      measuring the goodwill acquired in the business combination and determines
      what
      information to disclose to enable users of the financial statements to evaluate
      the nature and financial effects of the business combination. The guidance
      will
      become effective as of the beginning of a company’s fiscal year beginning after
      December 15, 2008. SFAS 141(R) will impact the Company’s accounting for business
      combinations beginning January 1, 2009.





In
      December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in
      Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS 160”). SFAS
      160 establishes accounting and reporting standards for the noncontrolling
      interest in a subsidiary and for the deconsolidation of a subsidiary. The
      guidance will become effective as of the beginning of a company’s fiscal year
      beginning after December 15, 2008. Management does not believe that SFAS 160
      will have a material impact on
      Union
      National’s consolidated financial position and results of
      operations.





The
      SEC
      has issued Staff Accounting Bulletin No. 109, "Written Loan Commitments Recorded
      at Fair Value Through Earnings" (“SAB 109”), which expresses the views of the
      staff regarding written loan commitments that are accounted for at fair value
      through earnings under generally accepted accounting principles. To make the
      staff's views consistent with current authoritative accounting guidance, the
      SAB
      revises and rescinds portions of SAB No. 105, "Application of Accounting
      Principles to Loan Commitments."  Specifically, the SAB revises the
      SEC staff's views on incorporating expected net future cash flows related to
      loan servicing activities in the fair value measurement of a written loan
      commitment. The SAB retains the staff's views on incorporating expected net
      future cash flows related to internally-developed intangible assets in the
      fair
      value measurement of a written loan commitment. The staff expects registrants
      to
      apply the views in Question 1 of SAB 109 on a prospective basis to derivative
      loan commitments issued or modified in fiscal quarters beginning after December
      15, 2007. Adoption and consideration of SAB 109 did not have a significant
      impact on
      Union
      National’s consolidated financial position and results of
      operations.





The
      SEC
      has issued Staff Accounting Bulletin No. 110 (“SAB 110”), which amends and
      replaces Question 6 of Section D.2 of Topic 14, “Share-Based Payment,” of the
      Staff Accounting Bulletin series. Question 6 of Section D.2 of Topic 14
      expresses the views of the staff regarding the use of the “simplified” method in
      developing an estimate of expected term of “plain vanilla” share options and
      allows usage of the “simplified” method for share option grants prior to
      December 31, 2007. SAB 110 allows public companies which do not have
      historically sufficient experience to provide a reasonable estimate to continue
      use of the “simplified” method for estimating the expected term of “plain
      vanilla” share option grants after December 31, 2007. Adoption and
      consideration of SAB 110 did not have a significant impact on Union National’s
      consolidated financial statements.





In
      February 2008, the FASB issued FASB Staff Position (FSP) FAS 140-3, “Accounting
      for Transfers of Financial Assets and Repurchase Financing Transactions.” This
      FSP addresses the issue of whether or not these transactions should be viewed
      as
      two separate transactions or as one "linked" transaction. The FSP includes
      a
      "rebuttable presumption" that presumes linkage of the two transactions unless
      the presumption can be overcome by meeting certain criteria. The FSP will be
      effective for fiscal years beginning after November 15, 2008 and will apply
      only
      to original transfers made after that date; early adoption will not be allowed.
      Management is currently evaluating the potential impact the new pronouncement
      will have on its consolidated financial statements.





In
      March
      2008, the FASB issued Statement No. 161, “Disclosures about Derivative
      Instruments and Hedging Activities—an amendment of FASB Statement No. 133”
(Statement 161).  Statement 161 requires entities that utilize
      derivative instruments to provide qualitative disclosures about their objectives
      and strategies for using such instruments, as well as any details of
      credit-risk-related contingent features contained within
      derivatives.  Statement 161 also requires entities to disclose
      additional information about the amounts and location of derivatives located
      within the financial statements, how the provisions of SFAS 133 has been
      applied, and the impact that hedges have on an entity’s financial position,
      financial performance, and cash flows.  Statement 161 is effective for
      fiscal years and interim periods beginning after November 15, 2008, with early
      application encouraged.  Management is currently evaluating the
      potential impact the new pronouncement will have on its consolidated financial
      statements.


13




**ITEM
      2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF OPERATIONS**





Management’s
      discussion and analysis represents an overview of the results of operations
      and
      financial condition, and highlights the significant changes in the results
      of
      operations and financial condition, as presented in the accompanying
      consolidated financial statements for Union National Financial Corporation
      (“Union National”), a bank holding company, and its wholly-owned subsidiary,
      Union National Community Bank (the “Bank”) for the three-month periods ended
      March 31, 2008 and 2007. Union National’s consolidated financial condition and
      results of operations consist primarily of the Bank’s financial condition and
      results of operations. Union National’s trust subsidiaries, Union National
      Capital Trust I and Union National Capital Trust II, were established for the
      purpose of issuing $11,000,000 of trust capital securities during 2003 and
      2004.
      Home Team Financial, LLC, a subsidiary of the Bank, and its subsidiary, TA
      of
      Lancaster, LLC (together, “Home Team”) began operations in July 2005, and ceased
      operations in October 2007. Home Team operated a mortgage banking and brokerage
      business and also offered title insurance and settlement services.





This
      discussion should be read in conjunction with the financial tables, statistics,
      and the audited financial statements and notes thereto included in Union
      National’s Annual Report on Form 10-K for the year ended December 31, 2007, and
      with Union National’s Forms 8-K, that were filed during 2008 with the SEC. The
      results of operations for interim periods are not necessarily indicative of
      operating results expected for the full year.





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 information concerning possible or assumed
      future results of operations of Union National, the Bank or the combined
      company. When we use words such as “believes,” “expects,” “anticipates” or
      similar expressions, we are making forward-looking statements.





Stockholders
      should note that many factors, some of which are discussed elsewhere in this
      document, the Annual
      Report on Form 10-K for the year ended December 31, 2007, Union
      National ’ s
      Forms
      8-K ,
      and in
      the documents that are incorporated by reference, could affect the future
      financial results of Union National, the Bank or the combined company and could
      cause those results to differ materially from those expressed in the
      forward-looking statements contained or incorporated by reference in this
      document. These factors include but are not limited to the
      following:





•
            Operating,
                legal and regulatory risks;


•
            Economic,
                political and competitive forces;


•
            Rapidly
                changing technology; 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.





Union
      National undertakes no obligation to publicly revise or update these
      forward-looking statements to reflect events or circumstances that arise after
      the date of this report. Readers should carefully review the risk factors
      described in the Annual Report and other documents that we periodically file
      with the Securities and Exchange Commission, including Union National’s Annual
      Report on Form 10-K for the year ended December 31, 2007 .





***Critical
      Accounting Policies***





The
      reporting of our financial condition and results of operations is impacted
      by
      the application of accounting policies by management, some of which are
      particularly sensitive and require significant judgments, estimates and
      assumptions to be made in matters that are inherently uncertain.





The
      provision for loan and lease losses and the level of the allowance for loan
      and
      lease losses involve significant estimates by management in evaluating the
      adequacy of the allowance for loan losses based on our past loan loss
      experience, known and inherent risks in the portfolio, adverse situations that
      may affect the borrower’s ability to repay (including the timing of future
      payments), the estimated value of any underlying collateral, composition of
      the
      loan portfolio, current economic conditions and other relevant factors. (Loans
      and lease financing receivables are, throughout the remainder of Management’s
      Discussion and Analysis, collectively referred to as “loans”). While we use
      available information to make such evaluations, future adjustments to the
      allowance and the provision for loan and lease losses may be necessary if
      economic conditions or loan credit quality differ substantially from the
      assumptions we used in making the evaluation.


14


Investments
      are carried at fair value with any unrealized gains, as well as losses that
      we
      consider to be temporary, reported net of tax as an adjustment to stockholders’
equity. If we determine that impairment in the value of an investment security
      is “other than temporary,” the related loss is recorded in the consolidated
      income statement. In order to determine whether such unrealized losses are
      other
      than temporary, management regularly reviews investment securities for possible
      impairment, analyzing factors including but not limited to the underlying
      creditworthiness of the issuing organization, the length of time for which
      the
      market value has been less than cost, and independent analysts’ opinions about
      circumstances that could affect the performance of the investment. After
      considering such factors, it is a matter of judgment on the part of management
      to make the determination of whether or not a decline in market value is other
      than temporary.





***Results
      of Operations*** ******





**Overview**





Net
      income was $413,000 or $0.16 diluted earnings per share for the quarter ended
      March 31, 2008, as compared to a net loss of $356,000 or $0.14 diluted loss
      per
      share for the quarter ended March 31, 2007. The reduction in interest rates
      that
      began in the latter half of 2007, and continued more rapidly in the first
      quarter of 2008, contributed to a decline in the Corporation’s net interest
      margin to
      3.06%
      for the first quarter of 2008 from 3.61% in the first quarter of 2007 and 3.24%
      during the fourth quarter of 2007. The reduction in net interest margin resulted
      in a decrease in first quarter net interest income from $3,774,000 in 2007
      to
      $3,434,000 in 2008. Non-interest revenue was reduced in the first quarter of
      2008 due to the closure in the fourth quarter of 2007 of Union National’s
      mortgage brokerage subsidiary, Home Team.





The
      reductions in net interest income and other operating income were offset by
      substantial savings in the Corporation’s operating and restructuring expenses,
      which decreased 28.5% from $5,857,000 in the first quarter of 2007 to $4,186,000
      in the first quarter of 2008.





The
      provision for loan losses in the first quarter of 2008 was $140,000, as compared
      to $207,000 in the first quarter of 2007. The first quarter 2008 provision
      exceeded net charge-offs of $73,000 for the period, as the Corporation increased
      its allowance for loan and lease losses to $3,742,000 or 1.02% of total loans
      and leases as of March 31, 2008.





The
      Corporation realized gains on sales of investment securities of $191,000 in
      the
      first quarter of 2008 as compared to realized losses on sales of investment
      securities of $519,000 in the first quarter of 2007. The significant losses
      in
      2007 related to securities sold as part of the first quarter 2007 de-leveraging
      activities as previously discussed in Note 7 to the consolidated financial
      statements.





Net
      income (loss) as a percent of average stockholders' equity, (return on average
      equity or “ROE”), and net income (loss) as a percent of average realized
      stockholders’ equity, which excludes the impact of accumulated other
      comprehensive income (loss), were as follows on an annualized
      basis:





Three Months Ended March 31,2008
            
            2007ROE
            
            
            5.79
            %
            
            (5.00
            )%ROE
                (Realized Equity)
            
            
            5.79
            %
            
            (4.87
            )%





Accumulated
      other comprehensive income (loss) consists primarily of the amount of net
      unrealized gains (losses) on available-for-sale investment securities, net
      of
      tax.





**Outlook**





The
      economy in the Bank’s market in 2008 may be negatively impacted by recent
      national economic events and overall national economic trends including the
      lessening of certain borrowers' financial strength, a decline in the housing
      market and residential mortgage activity, and rapidly declining interest rates.
      We are monitoring these general and specific trends closely. We are closely
      monitoring our commercial and consumer credit relationships, and investment
      holdings collateralized by residential mortgages, which are potentially impacted
      by the health of the housing market.


15


We
      are
      also closely monitoring and managing the decline in interest rates that began
      at
      the end of 2007 and accelerated in the first quarter of 2008. We regularly
      assess our interest rate sensitivity, and have taken measures to reduce our
      core
      funding costs to mitigate the potential negative impacts of these significant
      rate shifts on our core net interest income.





Despite
      these challenging economic conditions, we expect continued modest growth in
      loans and deposits for 2008, driven largely by our continued emphasis on our
      core banking business including expanding existing customer relationships,
      developing new business relationships, and promoting our retail deposit products
      through marketing and pricing initiatives. We expect generally a slight
      reduction in net interest income as savings in funding costs from interest
      rate
      reductions and de-leveraging debt reductions are more than offset by interest
      income decreases due to interest rate reductions on earning assets and decreased
      investment holdings from de-leveraging. We expect continued growth in certain
      core other operating income categories, including deposit servicing and
      alternative investment sales. With the closure of our Home Team subsidiary
      in
      2007, we expect overall other operating income and operating expenses to
      decrease in 2008 compared to 2007 due to the substantial elimination of mortgage
      brokerage income and costs. Further, we expect additional operating expense
      savings from efficiencies due to the 2007 restructuring activities.





On
      June
      20, 2007, the Bank entered into a Memorandum of Understanding ("MOU") with
      the
      Comptroller of the


Currency
      ("OCC"), as previously described in Note 10 to the consolidated financial
      statements. We believe that the MOU will have no material impact on our
      operating results or financial condition and that the MOU will not constrain
      our
      business. We believe we have already made substantial progress in satisfying
      the
      MOU, and have complied with the terms of the MOU through the first quarter
      of
      2008. We are committed to addressing and resolving the issues in the
      MOU.





**Net
      Interest Income/Funding Sources**





Net
      interest income is the amount by which interest income on loans and investments
      exceeds interest incurred on deposits and borrowings. Net interest income is
      our
      primary source of revenue. The amount of net interest income is affected by
      changes in interest rates and by changes in the volume and mix of
      interest-sensitive assets and liabilities. Net interest income and corresponding
      yields are presented in the discussion and analysis below on a
      taxable-equivalent basis. Income from tax-exempt assets, primarily loans to
      or
      securities issued by state and local governments, is adjusted by an amount
      equivalent to the federal income taxes which would have been paid if the income
      received on these assets was taxable at the statutory rate of 34%.





In
      January 2007, we decided to de-leverage our Balance Sheet to strengthen our
      equity position, enhance our income tax effectiveness, and facilitate our future
      core banking growth strategies for loans and deposits. We reduced the size
      of
      our available-for-sale securities portfolio by $64,345,000 and reduced our
      restricted investment in FHLB stock by $2,039,000, using most of the sales
      proceeds to pay down $48,755,000 of FHLB debt and $6,550,000 of other short-term
      borrowings.





We
      have
      planned for, and have already executed, additional cost-effective de-leveraging
      activities in 2008 using low-interest yielding short-term earning assets to
      reduce higher cost long-term borrowings. In January 2008, the Bank liquidated
      Federal Funds Sold to prepay a total of $10,105,000 of FHLB advances
      outstanding, reducing total FHLB borrowings outstanding to $58,711,000.
      Additionally, effective March 31, 2008, Union National terminated and repaid
      its
      remaining short-term borrowing agreements. Also, through March 31, 2008, Union
      National called $5,958,000 of brokered CD’s, without penalty, and has the option
      to call an additional $10,440,000 of brokered CD’s through July 2008. The
      brokered CD’s called through March 31, 2008 had a fixed weighted average
      interest cost of 4.65%, and the remaining brokered CD’s with options to call
      through July 2008 have a fixed weighted average interest cost of
      5.06%.





During
      2004 and 2003, we obtained net funding of $11,000,000 from the issuance of
      junior subordinated debentures to trust subsidiaries that then issued trust
      capital securities. In October 2004, $3,000,000 of net funding was obtained
      through the issuance of debentures that are at a fixed rate of 5.28% for an
      initial period of approximately three years and then at an annual coupon rate,
      reset quarterly, based on three-month LIBOR plus 2.00%. The coupon rate remained
      at 5.28% through December 31, 2007 but reset to 5.09% as of March 31, 2008.
      In
      December 2003, $8,000,000 of net funding was obtained through the issuance
      of
      floating-rate debentures that provide for quarterly distributions at a variable
      annual coupon rate that is reset quarterly, based on three-month London
      Interbank Offered Rate (“LIBOR”) plus 2.85%. The coupon rate was 7.83% and 6.10%
      at December 31, 2007 and March 31, 2008, respectively. On July 28, 2006, the
      Bank issued $6,000,000 of subordinated debentures with a five-year initial
      fixed
      rate of 7.17%, and then an annual coupon rate, reset quarterly, based on
      three-month LIBOR plus 1.65%. All of the above debentures are callable at our
      option five years after issuance.


16


The
      terms
      and amounts of the FHLB borrowings, brokered CDs, and the issuance of the junior
      subordinated debentures, when combined with our overall balance sheet structure,
      maintain Union National within its interest rate risk policies. For the three
      months ended March 31, 2008, the previously discussed decline in Union
      National’s taxable-equivalent net interest margin resulting primarily from the
      recent reduction in interest rates contributed to a decline in the Corporation’s
      net interest margin and a decrease in first quarter net interest income from
      $3,774,000 in 2007 to $3,434,000 in 2008.





Although
      the effective interest rate impact on earning assets and funding sources can
      be
      reasonably estimated at current interest rate levels, the options selected
      by
      customers, and the future mix of the loan, investment and deposit products
      in
      the Bank's portfolios, may significantly change the estimates used in the
      simulation models. In addition, our net interest income may be impacted by
      further interest rate actions of the Federal Reserve Bank.





**Provision
      for Loan Losses**





The
      provision for loan and lease losses is an estimated expense charged to earnings
      to provide for losses attributable to uncollectible loans and leases, based
      on
      our analysis of the adequacy of the allowance for loan and lease losses. The
      provision was $140,000 for the three months ended March 31, 2008, as compared
      to
      $207,000 for the three months ended March 31, 2007. During the first quarter
      of
      2008, we had net charge-offs of $73,000 (primarily related to losses on leases
      and consumer loans) as compared to net charge-offs of $89,000 during the first
      quarter of 2007. We may need to make future adjustments to the allowance, and
      the provision for loan and lease losses, if economic conditions or loan credit
      quality differ substantially from the assumptions we used in making our
      evaluation of the level of the allowance for loan losses as compared to the
      balance of outstanding loans. See additional discussion on *Loans,
      Credit Quality and Credit Risk* ,
      and the *Allowance
      for Loan Losses* in the
      Financial Condition section of this Management Discussion and
      Analysis.





**Other
      Operating Income**





Other
      Operating Income decreased by $182,000 or 11.4% during the first quarter of
      2008
      versus the first quarter of 2007. The decrease was a result of net increases
      (decreases) in the following components of Other Operating Income:





Income
                from Fiduciary Activities
            
            $
            13,000Service
                Charges on Deposit Accounts
            
            
            54,000Other
                Service Charges, Commissions, and Fees
            
            
            23,000Alternative
                Investment Sales Commissions
            
            
            (1,000
            )Net
                Investment Securities Gains (Losses)
            
            
            710,000Mortgage
                Banking/Brokerage Activities
            
            
            (772,000
            )Title
                Insurance/Settlement Income
            
            
            (123,000
            )Earnings
                from Bank-Owned Life Insurance
            
            
            4,000Other
            
            
            (90,000
            )Total
                Decrease in Other Operating Income
            
            $
            (182,000
            )




The
      increase in net investment securities gains (losses) reflects first quarter
      2007
      losses related to the de-leveraging transaction of $519,000, as previously
      described in Note 7 to the consolidated financial statements, compared to
      realized securities gains of $191,000 during the first quarter of 2008. The
      reduction in Mortgage Banking/Brokerage Activities and Title
      Insurance/Settlement income reflects the cessation of operations of Home Team
      in
      October of 2007 as previously described in Note 6 of the consolidated financial
      statements.


17


**Other
      Operating Expenses**





Other
      Operating Expenses decreased by $1,671,000 or 28.5% during the first quarter
      of
      2008 versus the first quarter of 2007. Increases (decreases) in the components
      of Other Operating Expenses when comparing the three-month period ended March
      31, 2008 and 2007 are as follows:





Salaries
                and Wages
            
            $
            (670,000
            )Employee
                Benefit Costs
            
            
            (199,000
            )Net
                Occupancy
            
            
            (35,000
            )Furniture
                & Equipment
            
            
            (13,000
            )Professional
                Fees
            
            
            (113,000
            )Data
                Processing Services
            
            
            12,000Pennsylvania
                Shares Tax
            
            
            38,000Advertising
                and Marketing
            
            
            (177,000
            )ATM
                Processing
            
            
            (12,000
            )Minority
                Interest in Earnings of Subsidiaries
            
            
            (71,000
            )Restructuring
                Charge
            
            
            (536,000
            )Other
                Expenses
            
            
            105,000Total
                Decrease in Other Operating Expenses
            
            $
            (1,671,000
            )




The
      decrease in Salaries and Wages, and Employee Benefit Costs, reflect the positive
      impact realized from the staff restructuring, as well as and the cessation
      of
      operations of Home Team during the fourth quarter of 2007. Professional fees
      decreased primarily due to the 2007 expenses including fees for a nonrecurring
      profit improvement consulting engagement. Advertising and Marketing costs were
      higher in 2007 due to branding costs related to the Gold Café launch and
      marketing charges related to the now closed Home Team. Minority Interest in
      Earnings of Subsidiaries reflects the impact of the Home Team shutdown during
      the fourth quarter of 2007. The Restructuring Charge, as previously described
      in
      Note 7 to the consolidated financial statements, consisted of staff
      reorganization severance and related costs incurred in the first quarter of
      2007.





**Income
      Taxes**





The
      expense from income taxes was $107,000 for the three months ended March 31,
      2008, as compared to a benefit of $340,000 the same period of last year. The
      effective tax rate as of March 31, 2008 was 20.6%. Generally, our effective
      tax
      rate is below the statutory rate due to tax-exempt earnings on loans,
      investments, and bank-owned life insurance, and the impact of tax credits.
      The
      realization of deferred tax assets is dependent on future earnings. As
      a
      result of Union National’s adoption of FIN 48 and FIN 48-1 effective January 1,
      2007, no significant income tax uncertainties were identified, therefore, Union
      National recognized no adjustment for unrecognized income tax benefits for
      the
      periods ended March 31, 2008 and 2007. We
      currently anticipate that future earnings will be adequate to fully utilize
      deferred tax assets.





***Financial
      Condition***





**Investment
      Securities**





As
      of
      March 31, 2008 and December 31, 2007, all of our investment securities are
      classified as available for sale. Securities classified as available for sale
      are those debt securities that we intend to hold for an indefinite period of
      time, but not necessarily to maturity, and marketable equity securities. We
      possess the ability and intent to hold securities with temporary impairment
      to
      maturity or recovery; however, we recognize that the investment portfolio serves
      other functions including an ultimate source of liquidity and a tool to manage
      interest rate risk. In order to acknowledge these functions, we have designated
      our entire portfolio of investment securities as being available for sale.
      Any
      decision to sell a security classified as available for sale would be based
      on
      various factors, including significant movements in interest rates, changes
      in
      maturity mix of our assets and liabilities, liquidity needs, regulatory capital
      considerations, changes in the creditworthiness of the issuing entity, and
      other
      similar factors. Changes in unrealized gains or losses on available-for-sale
      securities, net of taxes, are recorded as Other Comprehensive Income (Loss),
      a
      component of Stockholders' Equity.


18


We
      purchase certain types of mortgage-backed securities to better position our
      investment portfolio for a subsequent increase or decrease in interest rates,
      as
      aligned with our interest rate risk position. These securities may be purchased
      at premiums or discounts, with short-, mid-, or long-term average expected
      lives
      or maturities. Overall yields on these securities will increase or decrease
      based on changes in prepayment speeds and subsequent cash flow reinvestments.
      The weighted-average yield on mortgage-backed securities was 4.52% and 4.95%
      at
      March 31, 2008 and December 31, 2007, respectively. Cash flows from these
      securities and changes in market interest rates are considered in our net
      interest income simulation model. See other sections of Management’s Discussion
      and Analysis titled *Liquidity* and *Market
      Risk - Interest Rate Risk* for
      further discussion.




As
      of
      March 31, 2008 and December 31, 2007, Union National had a portfolio of
      investment securities as follows:





March 31, 2008
            
            December 31, 2007Market Value
                of Debt Securities
            
            $
            67,857,000
            
            $
            73,729,000Market
                Value of Equity Securities
            
            
            426,000
            
            
            447,000Total
                Market Value of Investment Securities
            
            $
            68,283,000
            
            $
            74,176,000





Equity
      securities held are comprised primarily of common stock holdings in other
      financial institutions, and the market values include aggregate unrealized
      gains
      of $67,000 and $88,000 as of March 31, 2008 and December 31, 2007,
      respectively.





Debt
      securities include government agencies, mortgage-backed securities,
      collateralized mortgage obligations and corporate securities. The market value
      of these debt securities included aggregated pre-tax unrealized losses of
      $974,000 and $70,000 as of March 31, 2008 and December 31, 2007, respectively,
      that amounted to 1.4% and 0.1% of the amortized cost basis of the debt
      securities as of March 31, 2008 and December 31, 2007,
      respectively.





As
      of
      March 31, 2008, $67,333,000 or 98.6% of the fair value of total investment
      securities were measured using Level 2 inputs as defined by SFAS 157, and
      $950,000 or 1.4% were measured using Level 3 inputs as defined by SFAS 157
      (please see definitions and related discussion in Note 11 to the consolidated
      financial statements).





The
      fair
      value of Level 3 investment securities decreased from $2,172,000 at December
      31,
      2007 to $950,000 at March 31, 2008. $118,000 of the decrease in value related
      to
      interest payments received, which were fully applied to principal, during the
      first quarter of 2008. The remaining $1,104,000 of the decrease in value between
      December 31, 2007 and March 31, 2008 were unrealized losses which management
      determined to be temporary (with a corresponding after-tax reduction of
      stockholders’ equity of $729,000 recorded as an other comprehensive loss). The
      reduction in stockholders’ equity did not materially impact the company’s
      capital position, as net income from the first quarter substantially offset
      the
      impact of the other comprehensive losses. Additionally, because the securities
      have a higher degree of illiquidity, they are not viewed by management as a
      primary and relied upon source of Union National’s liquidity and funds
      management processes.





The
      Level
      3 securities are three corporate debt obligations (see related discussion in
      Note 8 of the consolidated financial statements) with underlying positions
      being
      primarily trust preferred instruments. Management’s valuation and assessment of
      these Level 3 investments was based primarily upon indicative exit pricing
      and
      analyses obtained from broker/dealers who are market makers for these specific
      types of securities. Additional support for the valuation included internal
      assessments of cash flow, and internal analyses of investment performance and
      ratings. The temporarily reduced market prices as of March 31, 2008 were not
      a
      result of a default in the underlying issuers. The three securities remain
      rated
      as investment grade as of March 31, 2008, as they have been since the time
      of
      purchase, and all three securities were current, as of March 31, 2008, for
      scheduled investment interest payments since origination. Management determined
      the first quarter 2008 declines in market value to be recorded and treated
      as
      temporary based upon the following considerations:





·
            The
                financial condition and near-term prospects of the issuers do not
                reflect
                any defaults or other specific events which may have influenced the
                operations of the issuers, such as changes in technology that may
                have
                impaired the earnings potential of the investments, or the discontinuance
                of a segment of the business that may affect the future earnings
                potential.


·
            The
                reduced market value of the securities was based upon limited trading
                activity in the first quarter 2008 as the securities reflect a higher
                degree of illiquidity.


·
            The
                recent unrealized losses have been for a very short period of time
                (less
                than three months).


·
            Management
                has both the ability and intention to hold the securities until a
                reasonable recovery towards the carrying
                value.


19





**Loans,
      Credit Quality and Credit Risk**





Other
      than as described herein, we do not believe there are any trends, events or
      uncertainties that are reasonably expected to have a material impact on future
      results of operations, liquidity or capital resources. Further, based on known
      information, we believe that the effects of current and past economic conditions
      and other unfavorable business conditions may impact certain borrowers’
abilities to comply with their repayment terms. We continue to closely monitor
      these borrowers' financial strength. At March 31, 2008, total nonperforming
      loans amounted to $2,977,000, or 0.8% of net loans, as compared to a level
      of
      $3,039,000, or 0.8%, at December 31, 2007. Historically, the percentage of
      nonperforming loans to net loans as for the five-year period ending December
      31,
      2007, was an average of 0.7%.





Schedule
      of Nonperforming Assets (dollars in thousands):





March 31, 2008
            
            December 31, 2007Nonaccruing
                Loans
            
            $
            2,869
            
            $
            2,919Accruing
                Loans-90
                days or more past due
            
            
            108
            
            
            120Total
                Nonperforming Loans
            
            
            2,977
            
            
            3,039Foreclosed
                Real Estate
            
            
            -
            
            
            -Repossessed
                Assets
            
            
            -
            
            
            50Foreclosed
                Purchased Loans
            
            
            138
            
            
            106Total
                Nonperforming Assets
            
            $
            3,115
            
            $
            3,195Nonperforming
                Loans as a % of Net Loans
            
            
            0.8
            %
            
            0.8
            %Allowance
                for Loan Losses as a % of Nonperforming Loans
            
            
            126
            %
            
            121
            %





As
      of
      March 31, 2008, Union National had impaired loans totaling $6,655,000 or 1.8%
      of
      total loans and leases (before the allowance for loan and lease losses), a
      net
      increase of $4,019,000 as compared to December 31, 2007, when the total value
      of
      impaired loans was $2,636,000 or 0.7% of total loans and leases. The increase
      in
      impaired loans relates to certain larger commercial credits which were rated
      as
      classified as of December 31, 2007; however, during the first quarter,
      management determined that the loans further met the criteria as impaired.
      Union
      National considers a loan or lease to be impaired when, based upon current
      information and events, it is probable that all interest and principal payments
      due according to the contractual terms of the loan or lease agreement will
      not
      be collected. An insignificant delay or shortfall in the amounts of payments
      would not cause a loan or lease to be considered impaired. Management determines
      the significance of payment delays and payment shortfalls on a case-by-case
      basis, taking into consideration all of the circumstances surrounding the loan
      or lease and the borrower, including the length of the delay, the reasons for
      the delay, the borrower’s prior payment record and the amount of the shortfall
      in relation to the principal and interest owed. Larger groups of small-balance
      loans, such as residential mortgages and consumer installment loans, are
      collectively evaluated for impairment. Accordingly, Union National does not
      separately identify individual consumer and residential loans for impairment
      disclosures unless such loans are the subject of a restructuring agreement.
      As
      previously discussed in Note 11 to the consolidated financial statements, Union
      National determines the fair value of impaired loans on a loan-by-loan basis
      based primarily upon the fair value of the underlying collateral using Level
      3
      inputs comprised of customized collateral value discounting
      analyses.





**Allowance
      for Loan Losses**





We
      maintain the allowance for loan losses at a level that we believe adequate
      to
      absorb estimated probable loan losses. We are responsible for the adequacy
      of
      the allowance for loan losses, which is formally reviewed on a quarterly
      basis.


The
      allowance is increased by provisions charged to operating expense and reduced
      by
      net charge-offs. Our evaluation of the adequacy of the allowance is based on
      our
      past loan loss experience, known and inherent risks in the portfolio, adverse
      situations that may affect the borrower's ability to repay (including the timing
      of future payments), the estimated value of any underlying collateral,
      composition of the loan portfolio, current economic conditions and other
      relevant factors. While we use available information to make such evaluations,
      future adjustments to the allowance may be necessary if economic conditions
      differ substantially from the assumptions we used in making the evaluation.


20


In
      addition, various regulatory agencies, as an integral part of their examination
      process, review the Bank's allowance for loan losses. Such agencies may require
      us to recognize additions to the allowance based on their judgment of
      information available to them at the time of their examination. We determined
      that no adjustment to the allowance for loan losses was necessary as a result
      of
      the Office of the Comptroller of the Currency’s (“OCC”) most recent examination.





We
      believe, based on information currently available, that the current allowance
      for loan and lease losses of $3,742,000 is adequate to meet potential loan
      and
      lease losses. An analysis of Allowance for Loan Losses follows:





Three
                Months Ended March 31,(Dollars
                in thousands)
            
            
            2008
            
            
            2007Average
                Total Loans Outstanding (Net of Unearned Income)
            
            $
            365,637
            
            $
            345,870Allowance
                for Loan Losses, Beginning of Period
            
            $
            3,675
            
            $
            3,070Loans
                Charged Off During Period
            
            
            81
            
            
            89Recoveries
                of Loans Previously Charged Off
            
            
            (8
            )
            
            -Net
                Loans Charged Off (Recovered)
            
            
            73
            
            
            89Addition
                to Provision for Loan Losses Charged to Operations
            
            
            140
            
            
            207Allowance
                for Loan Losses, End of Period
            
            $
            3,742
            
            $
            3,188Ratio
                of Net Loans Charged Off (Recovered) to Average Loans Outstanding
                (Annualized)
            
            
            0.08
            %
            
            0.10
            %Ratio
                of Allowance for Loan Losses to Net Loans at End of Period
            
            
            1.02
            %
            
            0.90
            %





The
      portion of the allowance for loan and lease losses which related to Level 3
      valued impaired loans was $418,000 at March 31, 2008 as compared to $380,000
      at
      December 31, 2007. During the three-month period ended March 31, 2008, an
      additional provision for loan and lease losses of $38,000 was made for impaired
      loans.





**Liquidity**





Our
      objective is to maintain adequate liquidity to meet funding needs at a
      reasonable cost and to provide contingency plans to meet unanticipated funding
      needs or a loss of funding sources, while minimizing interest rate risk.
      Adequate liquidity provides resources for credit needs of borrowers, for
      depositor withdrawals and for funding corporate operations. Sources of liquidity
      are as follows:





·
            A
                growing core retail deposit base;


·
            Proceeds
                from the sale or maturity of investment
                securities;


·
            Payments
                received on loans and mortgage-backed securities; and,


·
            Overnight
                correspondent bank borrowings on various credit lines, and borrowing
                capacity available from the FHLB.





We
      believe that our core deposits are fairly stable even in periods of changing
      interest rates like we are currently experiencing. Liquidity and funds
      management is governed by policies and is measured on a monthly basis. These
      measurements indicate that liquidity generally remains stable and exceeds our
      minimum defined levels of adequacy. Other than the trends of continued
      competitive pressures and volatile interest rates, there are no known demands,
      commitments, events or uncertainties that will result in, or that are reasonably
      likely to result in, liquidity increasing or decreasing in any material way.
      We
      have obtained funding through FHLB advances and through the use of brokered
      CDs,
      as well as the issuance of junior subordinated debentures. These items are
      described under Interest Income/Funding Sources, above.





21





**Off-Balance
      Sheet Commitments**





In
      the
      normal course of business, we are party to financial instruments with
      off-balance sheet risk to meet the financing needs of our customers. These
      financial instruments include commitments to extend credit and standby letters
      of credit. Total commitments to extend credit amounted to $113,945,000 at March
      31, 2008 as compared to $111,503,000 at December 31, 2007. Total standby letters
      of credit amounted to $5,907,000 at March 31, 2008 as compared to $6,239,000
      at
      December 31, 2007.





In
      addition, in the conduct of business operations, we routinely enter into
      contracts for services. These contracts may require payment for services to
      be
      provided in the future and may also contain penalty clauses for the early
      termination of the contracts. In January 2007, the contract with our core data
      processor was renegotiated. Formerly, the majority of this contract expired
      in
      November 2007; however, the contract renegotiation resulted in a new maturity
      date of November 2013. Any early termination will require the payment of a
      substantial penalty. The renegotiation and extension of this contract resulted
      in annual savings of approximately $100,000 in data processing and ATM
      processing expenses as compared to the costs we would have incurred without
      the
      renegotiation. There has been no material change in contracts for services
      since
      December 31, 2007 through March 31, 2008.





**Stockholders'
      Equity**





Union
      National and the Bank maintain capital ratios that are above the minimum total
      capital levels required by federal regulatory authorities.





On
      June
      20, 2007, the Bank entered into an MOU with the OCC as previously described
      in
      Note 10 of the consolidated financial statements. Included in the MOU is a
      requirement that the Bank develop and implement a three-year capital plan,
      in
      accordance with specific guidelines set forth in the MOU, including a dividend
      policy for the payment of dividends provided the Bank is in compliance with
      the
      capital plan, and applicable laws and regulations. In response to the MOU,
      Union
      National Community Bank has established target capital rates of 8% for Tier
      I
      Capital to Average Total Assets, 9% for Tier I Capital to Risk-Based Assets,
      and
      12% for Total Capital to Risk-Based Assets. The OCC has accepted management’s
      capital targets and established June 30, 2008 as the target achievement date.
      Union National expects to meet these capital targets by further reducing
      borrowings, generating capital from net earnings, and if necessary, a capital
      infusion.





Except
      as
      discussed above, there are no other known trends or uncertainties, including
      regulatory matters that are expected to have a material adverse impact on the
      capital resources of Union National for 2008.





Union
      National is subject to restrictions on the payment of dividends to its
      stockholders pursuant to the Pennsylvania Business Corporation Law of 1988,
      as
      amended (the BCL).  The BCL operates generally to preclude dividend
      payments if the effect thereof would render us insolvent.  Our payment of
      dividends is contingent upon our ability to obtain funding in the form of
      dividends from the Bank.  Payment of dividends to Union National by the
      Bank is subject to the restrictions set forth in the National Bank Act. 
Generally, the National Bank Act would permit the Bank to declare dividends
      in
      2008 of approximately $884,000, plus an amount equal to the net profits of
      the
      Bank in 2008 up to the date of any such dividend declaration.





Union
      National and the Bank are subject to various regulatory capital requirements
      administered by the federal banking agencies. Failure to meet the minimum
      capital requirements can initiate certain mandatory and possibly additional
      discretionary actions by regulators that, if undertaken, could have a direct
      material effect on our financial statements. Under capital adequacy guidelines
      and the regulatory framework for prompt corrective action, Union National and
      the bank must meet specific capital guidelines that involve quantitative
      measures of their assets, liabilities and certain off-balance sheet items as
      calculated under regulatory accounting practices. The capital amounts and
      classification are also subject to qualitative judgments by the regulators
      about
      components, risk weightings and other factors.




Quantitative
      measures established by regulation to ensure capital adequacy require Union
      National and the Bank to maintain minimum amounts and ratios (set forth below)
      of Tier 1 capital to average assets and of total capital (as defined in the
      regulations) to risk-weighted assets.


22




As
      of
      March 31, 2008 and December 31, 2007, Union National and the Bank met all
      capital adequacy requirements to which they are subject, and the Bank is
      considered “well-capitalized” under the regulatory framework for prompt
      corrective action. There are no conditions or events since that notification
      that management believes have changed the Bank’s category.




Union
      National and the Bank maintained the following regulatory capital levels and
      leverage and risk-based capital ratios as of: March 31, 2008, and December
      31,
      2007, as follows (dollars in thousands):




March
                31, 2008
            
            December
                31, 2007Amount
            
            %
            
            Amount
            
            %**Union
                National Financial Corporation**Leverage
                Ratio:Tier
                I Capital to Average Total Assets
            
            $
            38,842
            
            
            7.91
            %
            $
            38,370
            
            
            7.79
            %Minimum
                Required for Capital Adequacy Purposes
            
            
            19,633
            
            
            4.00
            
            
            19,705
            
            
            4.00Risk-based
                Capital Ratios:Tier
                I Capital Ratio –Actual
            
            
            38,842
            
            
            9.16
            
            
            38,370
            
            
            9.08Minimum
                Required for Capital Adequacy Purposes
            
            
            16,963
            
            
            4.00
            
            
            16,905
            
            
            4.00Total
                Capital Ratio –Actual
            
            
            49,900
            
            
            11.77
            
            
            49,487
            
            
            11.71Minimum
                Required for Capital Adequacy Purposes
            
            
            33,927
            
            
            8.00
            
            
            33,810
            
            
            8.00





March
                31, 2008
            
            December
                31, 2007Amount
            
            %
            
            Amount
            
            %**Union
                National Community Bank**Leverage
                Ratio:Tier
                I Capital to Average Total Assets
            
            $
            38,987
            
            
            7.96
            %
            $
            38,633
            
            
            7.84
            %Minimum
                Required for Capital Adequacy Purposes
            
            
            19,597
            
            
            4.00
            
            
            19,705
            
            
            4.00To
                Be Well-Capitalized Under Prompt Corrective Action
                Provisions
            
            
            24,497
            
            
            5.00
            
            
            24,631
            
            
            5.00Risk-based
                Capital Ratios:Tier
                I Capital Ratio –Actual
            
            
            38,987
            
            
            9.22
            
            
            38,633
            
            
            9.17Minimum
                Required for Capital Adequacy Purposes
            
            
            16,908
            
            
            4.00
            
            
            16,845
            
            
            4.00To
                Be Well-Capitalized Under Prompt Corrective Action
                Provisions
            
            
            25,362
            
            
            6.00
            
            
            25,268
            
            
            6.00Total
                Capital Ratio –Actual
            
            
            48,729
            
            
            11.53
            
            
            48,308
            
            
            11.47Minimum
                Required for Capital Adequacy Purposes
            
            
            33,816
            
            
            8.00
            
            
            33,691
            
            
            8.00To
                Be Well-Capitalized Under Prompt Corrective Action
                Provisions
            
            
            42,270
            
            
            10.00
            
            
            42,114
            
            
            10.00





Additionally,
      banking regulations limit the amount of investments, loans, extensions of credit
      and advances the Bank can make to Union National at any time to 10% of the
      Bank’s total regulatory capital. At March 31, 2008, this limitation amounted to
      approximately $4,873,000. These regulations also require that any such
      investment, loan, extension of credit or advance be secured by securities having
      a market value in excess of the amount thereof.





Included
      in Tier 1 regulatory cap ital
      of
      Union National is $9,714,000 of trust capital securities issued through Union
      National Capital Trust I and Union National Capital Trust II, wholly-owned
      subsidiaries of Union National. The balance of the trust capital securities,
      $1,286,000, is included in Tier II regulatory capital of Union National
      Financial Corporation above. Additionally, included in Tier II regulatory
      capital of the Bank and Union National Financial Corporation is $6,000,000
      of
      junior subordinated debentures issued by the Bank. These securities would become
      callable if the Federal Reserve makes a determination that trust capital
      securities can no longer be considered in regulatory capital.


23





***Regulatory
      Activity***





From
      time
      to time, various types of federal and state legislation have been proposed
      that
      could result in additional regulation of, and restrictions on, the business
      of
      Union National and the Bank. As a consequence of the extensive regulation of
      commercial banking activities in the United States, Union National's and the
      Bank's business is particularly susceptible to being affected by federal and
      state legislation and regulations that may increase the cost of doing business.
      Specifically, Union National is susceptible to changes in tax law that may
      increase the cost of doing business or impact Union National’s ability to
      realize the value of deferred tax assets.





On
      June
      20, 2007, the Bank entered into an MOU with the OCC as previously described
      in
      Note 10 of the consolidated financial statements. Management has fully complied
      with the terms of the MOU and has sent to the OCC the documentation and progress
      reports as required under the MOU to be submitted through the end of the first
      quarter of 2008. We believe that the MOU will have no material impact on our
      operating results or financial condition and that the MOU will not constrain
      our
      business. We believe we have already made substantial progress in satisfying
      the
      MOU, and we are committed to addressing and resolving the issues.





The
      Sarbanes-Oxley Act, enacted in July 2002, represents a comprehensive revision
      of
      laws affecting corporate governance, accounting obligations and corporate
      reporting. Many of the provisions of this act had already been implemented
      by
      Union National, and Union National has complied with the provisions of Section
      404 of the Sarbanes-Oxley Act as required during 2007, including providing
      a
      report on our internal control over financial reporting as of December 31,
      2007.
      To support our report on the internal control over financial reporting, we
      used
      contracted, independent internal audit services to identify, document and test
      key controls over the financial reporting process.





The
      Federal Deposit Insurance Reform Act of 2005 (“the Act”) allows eligible insured
      depository institutions to share in a one-time assessment credit, which was
      approximately $228,000 for the Bank. Through the year ended December 31, 2007,
      the Bank used $150,000 of this credit. An additional $52,000 of this credit
      was
      used in the first quarter of 2008, and the Bank has $26,000 remaining to offset
      assessments estimated at $300,000 for the remainder of 2008.





The
      last
      Community Reinvestment Act performance evaluation by the OCC resulted in a
      “satisfactory” rating of the Bank’s record of meeting the credit needs of its
      entire community.


24


**ITEM
      3**–**QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**





***Market
      Risk - Interest Rate Risk***





As
      a
      financial institution, our primary component of market risk is interest rate
      volatility. Fluctuations in interest rates will ultimately impact the level
      of
      income and expense recorded on a large portion of our assets and liabilities.
      The nature of our current operations is such that we are not subject to foreign
      currency exchange or commodity price risk. We do not own any trading assets.





The
      objectives of interest rate risk management are to maintain or increase net
      interest income over a broad range of market interest rate movements. The Asset
      and Liability Management Committee is responsible for managing interest rate
      risk using policies approved by Union National’s Board of Directors. We manage
      interest rate risk by changing the mix or repricing characteristics of our
      investment securities portfolio and borrowings from the FHLB and by the
      promotion or development of specific loan and deposit products. We retain an
      outside consulting group to assist in monitoring our interest rate risk using
      a
      net interest income simulation model on a quarterly basis. The simulation model
      measures the sensitivity of future net interest income to hypothetical changes
      in market interest rates.





In
      an
      effort to assess market risk, we utilize a simulation model to determine the
      effect of gradual increases or decreases in market interest rates on net
      interest income and net income. The aforementioned assumptions are revised
      based
      on defined scenarios of assumed speed and direction changes of market interest
      rates. These assumptions are inherently uncertain due to the timing, magnitude
      and frequency of rate changes and changes in market conditions, as well as
      management strategies, among other factors. Because it is difficult to
      accurately quantify into assumptions the reaction of depositors and borrowers
      to
      market interest rate changes, the actual net interest income and net income
      results may differ from simulated results. While assumptions are developed
      based
      upon current economic and local market conditions, management cannot make any
      assurances as to the predictive nature of these assumptions.





The
      simulation model assumes a hypothetical gradual shift in market interest rates
      over a twelve-month period. This is based on a review of historical changes
      in
      market interest rates and the level and curve of current interest rates. The
      simulated results represent the hypothetical effects to our net interest income
      and net income. Projections for loan and deposit growth were ignored in the
      simulation model. The simulation model includes all of our earning assets and
      interest-bearing liabilities and assumes a parallel and prorated shift in
      interest rates over a twelve-month period. The results of the simulation model
      could change significantly if there was not a parallel shift in interest rates,
      therefore causing a change in the assumed shape of the interest rate yield
      curve.





The
      simulation model currently indicates that a hypothetical two-percent general
      decline in prevailing market interest rates over a one-year period would cause
      the Bank's net interest income over the next twelve months to decrease less
      than
      8% as compared to the constant rate scenario. In addition, a hypothetical
      two-percent general rise in rates would cause the Bank's net interest income
      over the next twelve months to increase less than 5%. These computations do
      not
      contemplate any actions management or the Asset Liability Management Committee
      could undertake in response to changes in market conditions or market interest
      rates.




We
      are
      managing our interest rate risk position in 2008 by the following:





·
            Managing
                the use of adjustable- and floating-rate loans, and hybrid loans
                with
                initial fixed-rates converting to variable-rates, in comparison to
                totally
                fixed-rate loans for new or refinanced commercial and agricultural
                loans;


·
            Repositioning
                of our investment security portfolio mix by purchasing lower-risk
                shorter
                term U.S. government agencies, and seasoned, shorter duration
                mortgage-back securities, to maintain liquidity and minimize significant
                changes in value due to declining interest rates;


·
            Managing
                and expanding the Bank's core retail deposit base including deposits
                obtained in our commercial cash management programs, premium money
                market
                accounts, and retail time deposits;


·
            De-leveraging
                with sales of investment securities and repayment of FHLB advances
                and
                other borrowings.





The
      above
      strategies and actions impact interest rate risk and are all included in our
      quarterly simulation models in order to determine future asset and liability
      management strategies.


25


**ITEM
      4**–**CONTROLS AND PROCEDURES**





***Evaluation
      of Disclosure Controls and Procedures***





Union
      National maintains controls and procedures designed to ensure that information
      required to be disclosed in the reports that the company files or submits under
      the Securities Exchange Act of 1934 is recorded, processed, summarized and
      reported within the time periods specified in the rules and forms of the
      Securities and Exchange Commission. Based upon their evaluation of those
      controls and procedures as of March 31, 2008, Union National’s Chief Executive
      Officer and Chief Financial Officer concluded that the disclosure controls
      and
      procedures were adequate.





***Changes
      in Internal Controls***





During
      the three months ended March 31, 2008, there were no changes in our internal
      controls over financial reporting that have materially affected, or are
      reasonable likely to materially affect, these controls.





**ITEM
      4T**–**CONTROLS AND PROCEDURES**





The
      information set forth in Item 4 is incorporated herein by
      reference.


26


**PART
      II - OTHER INFORMATION**





**ITEM
      1 - LEGAL PROCEEDINGS**





Management
      is not aware of any litigation that would have a material adverse effect on
      the
      consolidated financial position of Union National. There are no proceedings
      pending other than the ordinary routine litigation incident to the business
      of
      Union National and its subsidiary, Union National Community Bank. Other than
      the
      MOU with the OCC and the effects thereof, as discussed earlier on pages 9 and
      23
      of this report, no material proceedings are pending or are known to be
      threatened or contemplated against Union National and the Bank by government
      authorities.





**ITEM
      1A**–**RISK FACTORS**





During
      the three months ended March 31, 2008, and through the date of this report,
      there have been no known material changes to the risk factors described in
      our
      Annual Report on Form 10-K for the year ended December 31, 2007.





**ITEM
      2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS**





None





**ITEM
      3**–**DEFAULTS UPON SENIOR SECURITIES**





None





**ITEM
      4**–**SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**





None





**ITEM
      5**–**OTHER INFORMATION**





None





**ITEM
      6 - EXHIBITS**





(a)
            ExhibitsExhibit
                No. 31.1-Certification of Principal Executive Officer Pursuant to Exchange
                Act
                Rules 13a-14(a)/15d-14(a) as added by Section 302 of the Sarbanes-Oxley
                Act of 2002Exhibit
                No. 31.2 - Certification of Principal Financial Officer Pursuant
                to
                Exchange Act Rules 13a-14(a)/15d-14(a) as added by Section 302 of
                the
                Sarbanes-Oxley Act of 2002Exhibit
                No. 32-Certification of Principal Executive Officer and Principal Financial
                Officer Pursuant to 18 U.S.C. Section 1350 as Added by 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.





**Union
                National Financial Corporation**(Registrant)By
            /s/
                Mark D. GainerMark
                D. GainerChairman,
                CEO and President(Principal
                Executive Officer)Date:
                May 9, 2008By
            /s/
                Michael D. PeduzziMichael
                D. PeduzziSenior
                Vice President and Chief Financial Officer(Principal
                Financial and Accounting Officer)Date:
                May 9, 2008


28