================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K

(Mark One)
[X]   Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
      Act of 1934

                  For the fiscal year ended: September 30, 2008

                                       or

[ ]   Transition report pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934

                 For the transition period from ______ to ______

                         Commission File Number: 0-29709

                   HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
--------------------------------------------------------------------------------
             (Exact name of Registrant as specified in its charter)

               Pennsylvania                              23-3028464
-------------------------------------------   ----------------------------------
      (State or Other Jurisdiction of                 (I.R.S. Employer
      Incorporation or Organization)               Identification Number)

271 Main Street, Harleysville, Pennsylvania                 19438
-------------------------------------------   ----------------------------------
 (Address of Principal Executive Offices)                (Zip Code)

Registrant's telephone number, including area code: (215) 256-8828

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

                                                   Name of each exchange on
          Title of each class                          which registered
-------------------------------------------   ----------------------------------
  Common Stock, $.01 par value per share         The Nasdaq Stock Market, LLC

Indicate by check mark if the  registrant is a well-known  seasoned  issuer,  as
defined in Rule 405 of the Securities Act.
                                                                  YES [ ] NO [X]

Indicate  by  check  mark if the  registrant  is not  required  to file  reports
pursuant to Section 13 or Section 15(d) of the Act.
                                                                  YES [ ] NO [X]

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 and (2) has been subject to such filing requirements for
the past 90 days.                                                 YES [X] NO [ ]

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

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
the definitions of "large accelerated  filer,"  "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer                       [ ]  Accelerated filer         [ ]
Non-accelerated filer                         [ ]  Smaller reporting company [X]
(Do not check if a smaller reporting company)

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Act).                                           YES [ ] NO [X]

The aggregate market value of the 3,065,419  shares of the  Registrant's  Common
Stock held by non-affiliates (3,579,044 shares outstanding,  less 513,625 shares
held by affiliates), based upon the closing price of $13.50 for the Common Stock
on March 31, 2008,  as reported by the Nasdaq Stock  Market,  was  approximately
$41.4  million.  Shares of  Common  Stock  held by each  executive  officer  and
director and by each person who owns 5% or more of the outstanding  Common Stock
have  been  excluded  since  such  persons  may  be  deemed   affiliates.   This
determination of affiliate status is not necessarily a conclusive  determination
for other purposes.

Number of shares of Common Stock outstanding as of December 17, 2008: 3,579,044

                       DOCUMENTS INCORPORATED BY REFERENCE

Set forth below are the documents  incorporated by reference and the part of the
Form 10-K into which the document is incorporated:

Portions  of the  definitive  Proxy  Statement  for the 2009  Annual  Meeting of
Stockholders  are  incorporated  by reference into Part III, Items 10-14 of this
Form 10-K.

================================================================================

<PAGE>

                   HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
                         2008 ANNUAL REPORT ON FORM 10-K

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                              Page
                                                                                              ----
<S>           <C>                                                                             <C>
                                              PART I

Item  1.      Business ....................................................................     1

Item 1A.      Risk Factors ................................................................    25

Item 1B.      Unresolved Staff Comments ...................................................    28

Item 2.       Properties ..................................................................    29

Item 3.       Legal Proceedings ...........................................................    29

Item 4.       Submission of Matters to a Vote of Security Holders .........................    29

                                             PART II

Item 5.       Market for the Registrant's Common Equity, Related Stockholder Matters and
                 Issuer Purchases of Equity Securities ....................................    30

Item 6.       Selected Financial Data .....................................................    31

Item 7.       Management's Discussion and Analysis of Financial Condition and Results of
                 Operations ...............................................................    32

Item 7A.      Quantitative and Qualitative Disclosures about Market Risk ..................    40

Item 8.       Financial Statements and Supplementary Data .................................    43

Item 9.       Changes in and Disagreements with Accountants on Accounting and Financial
                 Disclosure ...............................................................    70

Item 9A(T).   Controls and Procedures .....................................................    70

Item 9B.      Other Information ...........................................................    71

                                            PART III

Item 10.      Directors, Executive Officers and Corporate Governance ......................    72

Item 11.      Executive Compensation ......................................................    72

Item 12.      Security Ownership of Certain Beneficial Owners and Management and Related
                 Stockholder Matters ......................................................    72

Item 13.      Certain Relationships and Related Transactions, and Director Independence ...    73

Item 14.      Principal Accounting Fees and Services ......................................    73

                                             PART IV

Item 15.      Exhibits and Financial Statement Schedules ..................................    74

SIGNATURES ................................................................................    75
</TABLE>

                                        i

<PAGE>

                           Forward-Looking Statements

      This  Annual  Report  on  Form  10-K  contains   certain  forward  looking
statements  (as  defined  in  the  Securities  Exchange  Act  of  1934  and  the
regulations hereunder).  Forward looking statements are not historical facts but
instead  represent only the beliefs,  expectations  or opinions of  Harleysville
Savings Financial  Corporation and its management  regarding future events, many
of which, by their nature, are inherently uncertain.  Forward looking statements
may  be  identified  by  the  use  of  such  words  as:   "believe",   "expect",
"anticipate",  "intend",  "plan",  "estimate",  or words of similar meaning,  or
future or conditional terms such as "will", "would",  "should",  "could", "may",
"likely", "probably", or "possibly." Forward looking statements include, but are
not  limited  to,  financial  projections  and  estimates  and their  underlying
assumptions;  statements  regarding  plans,  objectives  and  expectations  with
respect to future operations,  products and services;  and statements  regarding
future performance.  Such statements are subject to certain risks, uncertainties
and assumption,  many of which are difficult to predict and generally are beyond
the control of Harleysville  Savings  Financial  Corporation and its management,
that could cause actual results to differ materially from those expressed in, or
implied or projected by,  forward  looking  statements.  The following  factors,
among  others,  could  cause  actual  results  to  differ  materially  from  the
anticipated  results or other  expectations  expressed  in the  forward  looking
statements:  (1)  economic  and  competitive  conditions  which could affect the
volume of loan  originations,  deposit  flows and real  estate  values;  (2) the
levels of  non-interest  income and expense and the amount of loan  losses;  (3)
competitive pressure among depository institutions increasing significantly; (4)
changes in the interest rate environment  causing reduced interest margins;  (5)
general  economic  conditions,  either  nationally  or in the  markets  in which
Harleysville Savings Financial  Corporation is or will be doing business,  being
less favorable than expected;(6) political and social unrest,  including acts of
war or  terrorism;  or (7)  legislation  or changes in  regulatory  requirements
adversely  affecting  the  business  in  which  Harleysville  Savings  Financial
Corporation  will  be  engaged.   Harleysville  Savings  Financial   Corporation
undertakes no obligation to update these forward  looking  statements to reflect
events or circumstances  that occur after the date on which such statements were
made.

      As used in this report,  unless the context otherwise requires,  the terms
"we,"  "us,"  or  the  "Company"   refer  to  Harleysville   Savings   Financial
Corporation,  a  Pennsylvania  corporation,  and the term the  "Bank"  refers to
Harleysville  Savings  Bank, a  Pennsylvania  chartered  savings bank and wholly
owned  subsidiary  of the  Company.  In addition,  unless the context  otherwise
requires,  references to the operations of the Company include the operations of
the Bank.

                                     PART I

Item 1.  Business.
-----------------

General

      Harleysville Savings Financial  Corporation is a Pennsylvania  corporation
headquartered in Harleysville, Pennsylvania. The Company became the bank holding
company for  Harleysville  Savings Bank in connection  with the holding  company
reorganization  of the Bank in February 2000 (the  "Reorganization").  In August
1987, the Bank's predecessor, Harleysville Savings Association, converted to the
stock  form  of  organization.   The  Bank,  whose  predecessor  was  originally
incorporated in 1915, converted from a Pennsylvania chartered, permanent reserve
fund savings association to a Pennsylvania  chartered stock savings bank in June
1991.  The Bank operates  from six  full-service  offices  located in Montgomery
County, Pennsylvania. The Bank's primary market area includes Montgomery County,
which has the third largest  population and the second highest per capita income
in the Commonwealth of Pennsylvania,  and, to a lesser extent,  Bucks County. As
of September 30, 2008, the Company had $825.7 million of total assets, $425.5

                                        1

<PAGE>

million of deposits and $47.2  million of  stockholders'  equity.  The Company's
stockholders' equity constituted 5.72% of total assets as of September 30, 2008.

      The Bank's  primary  business  consists of  attracting  deposits  from the
general public and business  customers through a variety of deposit programs and
investing  such  deposits   principally  in  first  mortgage  loans  secured  by
residential  properties  in the  Bank's  primary  market  area.  The  Bank  also
originates  a variety of consumer  loans,  predominately  home equity  loans and
lines of credit also secured by  residential  properties  in the Bank's  primary
lending  area.  The  Bank is also  engaged  in the  general  commercial  banking
business,  and provides a full range of  commercial  loans and  commercial  real
estate loans to customers in the Bank's primary market area. The Bank serves its
customers through its full-service  branch network as well as through remote ATM
locations, the internet and telephone banking.

      Deposits with the Bank are insured to the maximum  extent  provided by law
through the Deposit Insurance Fund administered by the Federal Deposit Insurance
Corporation  ("FDIC").  The Bank is subject  to  examination  and  comprehensive
regulation   by  the   FDIC  and  the   Pennsylvania   Department   of   Banking
("Department").  It is also a member of the Federal Home Loan Bank of Pittsburgh
("FHLB  of  Pittsburgh"  or  "FHLB"),  which  is one of  the 12  regional  banks
comprising the Federal Home Loan Bank System ("FHLB  System").  The Bank is also
subject to regulations  of the Board of Governors of the Federal  Reserve System
("Federal Reserve Board") governing  reserves required to be maintained  against
deposits and certain other matters.

      The Company's  principal executive offices are located at 271 Main Street,
Harleysville, Pennsylvania 19438 and its telephone number is (800) 243-8700.

Competition

      The Company faces significant competition in attracting deposits. Its most
direct  competition for deposits has historically come from commercial banks and
other  savings  institutions  located  in its market  area.  The  Company  faces
additional  significant  competition  for investors'  funds from other financial
intermediaries.  The  Company  competes  for  deposits  principally  by offering
depositors a variety of deposit programs, convenient branch locations, hours and
other  services.  The Company does not rely upon any individual  group or entity
for a material portion of its deposits.

      The Company's  competition  for real estate loans comes  principally  from
mortgage banking  companies,  other savings  institutions,  commercial banks and
credit unions.  The Bank competes for loan  originations  primarily  through the
interest rates and loan fees it charges,  the efficiency and quality of services
it provides borrowers,  referrals from real estate brokers and builders, and the
variety of its products.  Factors which affect  competition  include the general
and local economic  conditions,  current  interest rate levels and volatility in
the mortgage markets.

      The Financial  Institutions  Reform,  Recovery and Enforcement Act of 1989
("FIRREA")  eliminated many of the  distinctions  between  commercial  banks and
savings institutions and holding companies and allowed bank holding companies to
acquire savings  institutions.  FIRREA has generally  resulted in an increase in
the  competition  encountered  by savings  institutions  and has  resulted  in a
decrease in both the number of savings  institutions  and the aggregate  size of
the savings industry.

Lending Activities

      Loan Portfolio Composition.  The Company's loan portfolio is predominantly
comprised  of loans  secured by first  mortgages  on  single-family  residential
properties. As of September 30, 2008, first mortgage

                                        2

<PAGE>

loans  on  residential   properties,   including  loans  on  single-family   and
multi-family  residential  properties and construction loans on such properties,
amounted to $344.5 million or 71.1% of the Company's total loan portfolio. Loans
on  the  Company's  residential  properties  are  primarily  long-term  and  are
conventional (i.e., not insured or guaranteed by a federal agency).

      As of  September  30,  2008,  loans  secured  by  commercial  real  estate
comprised  $44.4 million or 9.2% of the total loan  portfolio.  Consumer  loans,
including installment home equity loans, home equity lines of credit, automobile
loans, loans on savings accounts and education loans,  constituted $94.3 million
or 19.6% of the total loan portfolio as of September 30, 2008.

      The following  table sets forth the  composition  of our loan portfolio by
type of loan at the dates indicated.

<TABLE>
<CAPTION>
                                                                           As of September 30,
                                      ---------------------------------------------------------------------------------------------
                                             2008               2007               2006               2005               2004
                                      -----------------  -----------------  -----------------  -----------------  -----------------
                                       Amount   Percent   Amount   Percent   Amount   Percent   Amount   Percent   Amount   Percent
                                      --------  -------  --------  -------  --------  -------  --------  -------  --------  -------
                                                                         (Dollars in Thousands)
<S>                                   <C>       <C>      <C>       <C>      <C>       <C>      <C>       <C>      <C>       <C>
Residential:
         Single-family                 333,757     68.8% $302,271     71.3% $283,595     72.2% $268,546     71.9% $256,523     74.0%
         Multi-family                    2,392      0.5     2,589      0.6     2,933      0.7     2,893      0.8       914      0.3
         Construction                    8,346      1.7     6,093      1.4     6,987      1.8     7,640      2.0     7,971      2.3
Lot loans                                1,167      0.2       483      0.1       626      0.2       801      0.2       576      0.2
Commercial                              44,407      9.2    15,314      3.6       920      0.2       702      0.2       641      0.2
                                      --------  -------  --------  -------  --------  -------  --------           --------  -------

         Total real estate loans       390,069     80.4%  326,750     77.0%  295,061     75.1%  280,582     75.1%  266,625     76.9%
                                      --------  -------  --------  -------  --------  -------  --------           --------  -------

Consumer loans:
Installment equity loans                66,280     13.7%   74,218     17.5%   70,515     17.9%   59,724     16.0%   46,257     13.3%
   Line of credit loans                 26,103      5.5    21,385      5.1    25,500      6.6    31,580      8.6    32,329      9.4
   Savings account loans                   955      0.2       977      0.2     1,003      0.3       921      0.2       811      0.2
   Automobile and other loans            1,000      0.2       903      0.2       812      0.2       772      0.2       732      0.2
                                      --------  -------  --------  -------  --------  -------  --------  -------  --------  -------
         Total consumer loans           94,338     19.6%   97,483     23.0%   97,830     24.9%   92,997     24.9%   80,129     23.1%
                                      --------  -------  --------  -------  --------  -------  --------  -------  --------  -------
         Total loans receivable        484,407    100.0%  424,233    100.0%  392,891    100.0%  373,579    100.0%  346,754    100.0%
                                      --------  -------  --------  -------  --------  -------  --------  =======  --------  -------

Less:
   Loans in process                     (5,109)            (2,794)            (4,941)            (4,934)            (5,238)
   Deferred loan fees                     (452)              (453)              (544)              (671)              (955)
   Allowance for loan losses            (1,988)            (1,933)            (1,956)            (1,968)            (1,977)
                                      --------           --------           --------           --------           --------
      Total loans receivable net      $476,858           $419,053           $385,450           $366,066           $338,584
                                      ========           ========           ========           ========           ========
</TABLE>

                                        3

<PAGE>

      Contractual   Maturities.   The  following   table  sets  forth  scheduled
contractual  maturities of the loan and mortgage-backed  securities portfolio of
the Company as of September 30, 2008 by categories of loans and securities.  The
principal  balance  of the  loan is set  forth  in the  period  in  which  it is
scheduled to mature. This table does not reflect loans in process or unamortized
premiums, discounts and fees.

<TABLE>
<CAPTION>
                                                 Principal Repayments Contractually Due in Year(s) Ended September 30,
                             Principal Balance   ----------------------------------------------------------------------
                              at September 30,                             2011-       2014-       2018-      2023-and
                                    2008           2009        2010        2013        2017        2022      Thereafter
                             -----------------   --------    --------    --------    --------    --------    ----------
                                                                   (In Thousands)
<S>                          <C>                 <C>         <C>         <C>         <C>         <C>         <C>
Residential real estate
   loans:
   Single-family                 $ 333,757       $  5,006    $  5,340    $ 18,023    $ 41,052    $ 58,741    $  205,595
   Multi-family                      2,392             36          38         129         294         421         1,474
   Construction                      8,346            125         134         451       1,027       1,469         5,140
Lot loans                            1,167             63          69         236         529         271            --
Mortgage-backed Securities         214,691          3,220       3,650      12,023      27,051      38,000       130,747
Commercial                          44,407          1,599       1,732       6,084      14,077      20,916            --
Consumer and other loans            94,338         11,604      12,453      43,183      21,226       5,873            --
                                 ---------       --------    --------    --------    --------    --------    ----------
      Total(1)                   $ 699,098       $ 21,653    $ 23,416    $ 80,129    $105,256    $125,688    $  342,956
                                 =========       ========    ========    ========    ========    ========    ==========
</TABLE>

----------
(1)   With  respect to the $677.4  million  of loans with  principal  maturities
      contractually  due after  September  30, 2009,  $661.5  million have fixed
      rates of interest and $15.9 million have  adjustable or floating  rates of
      interest.

      Contractual  principal  maturities of loans do not necessarily reflect the
actual term of the Company's loan portfolio.  The average life of mortgage loans
is substantially  less than their  contractual terms because of loan prepayments
and because of enforcement of  due-on-sale  clauses,  which give the Company the
right to declare a loan  immediately  due and payable in the event,  among other
things,  that the borrower  sells the real property  subject to the mortgage and
the loan is not  repaid.  The average  life of mortgage  loans tends to increase
when current mortgage loan rates substantially exceed rates on existing mortgage
loans  and,   conversely,   decrease  when  rates  on  existing  mortgage  loans
substantially exceed current mortgage loan rates.

      Interest rates charged by the Company on loans are affected principally by
the  demand  for such  loans  and the  supply  of funds  available  for  lending
purposes.  These factors are, in turn, affected by general economic  conditions,
monetary  policies  of the federal  government,  including  the Federal  Reserve
Board,  legislative tax policies and government  budgetary matters. The interest
rates charged by the Company are competitive with those of other local financial
institutions.

      Origination,  Purchase and Sale of Loans. Although the Company has general
authority to originate,  purchase and sell loans secured by real estate  located
throughout the United States,  the Company's  lending  activities are focused in
its assessment area of Montgomery County,  Pennsylvania and surrounding suburban
counties.

      The Company accepts loan applications through its branch network, and also
accepts  mortgage  applications  from  mortgage  brokers who are approved by the
Board of Directors to do business with the Company.  The Company  generally does
not engage in the  purchase of whole  loans.  The Company did engage in the sale
and the  acquisition of  participations  of commercial  loans on a limited basis
during fiscal year 2008.

      During the years ended  September  30, 2008 and 2007,  the Company did not
sell any loans.

      The Company's total loan originations  increased by $21.7 million or 17.7%
in fiscal 2008 and  increased by $14.6  million or 13.6% in fiscal 2007.  Of the
$143.6 million and $121.9 million of total loans

                                        4

<PAGE>

originated in fiscal 2008 and 2007, respectively, $9.4 million and $5.7 million,
respectively,  were  loans  originated  to fund  multi-family  and  construction
properties,  and $67.9 million and $58.6  million,  respectively,  were loans to
acquire residential property.  During this period, the Company's originations of
consumer loans amounted to $66.3 million and $57.7 million or 46.2% and 47.3% of
total loan originations  during fiscal 2008 and 2007,  respectively.  Management
intends to continue to emphasize  origination  of consumer  loans which may have
adjustable  rates, and generally have shorter terms than residential real estate
loans.

      The following table shows total loans  originated,  sold and repaid during
the periods indicated.

<TABLE>
<CAPTION>
                                                                Year Ended September 30,
                                                                ------------------------
                                                                  2008            2007
                                                                ---------      ---------
                                                                     (In Thousands)
<S>                                                             <C>            <C>
Real estate loan originations:
   Residential:
   Single-family                                                $  67,873      $  58,562
   Multi-family                                                        --             --
   Construction                                                     9,395          5,719
   Lot loans                                                           --             --
   Commercial                                                      31,764         23,823
                                                                ---------      ---------
      Total real estate loan originations                         109,032         88,104
Consumer loan originations(1)                                      34,584         33,831
                                                                ---------      ---------
      Total loan originations                                     143,616        121,935
Purchases of mortgage-backed securities                            61,835         20,939
                                                                ---------      ---------
      Total loan originations, and purchases                      205,451        142,874

Principal loan and mortgage-backed securities repayments          134,885        135,763
Sales of loans and mortgage-backed securities                       1,268             --
                                                                ---------      ---------
      Total principal repayments and sales                        136,153        135,763
                                                                ---------      ---------
         Net increase in loans and mortgage-backed securities   $  69,298      $   7,111
                                                                =========      =========
</TABLE>

----------
(1)   Includes  installment  home equity  loans,  home  equity  lines of credit,
      vehicle loans, secured and unsecured personal loans and lines of credit.

      Loan Underwriting Policies.  Each loan application received by the Company
is underwritten to the standards of the Company's written underwriting  policies
as adopted by the Company's Board of Directors. The Company's Board of Directors
has granted loan  approval  authority to several  officers and  employees of the
Company,  provided  that the loan meets the  guidelines  set out in its  written
underwriting  policies.  Individual  approval  authority  of  $500,000  has been
granted to the Company's Chief Executive Officer,  the Company's Chief Financial
Officer,  and the Company's Chief Lending Officer.  Joint approval  authority of
$1.0  million  has been  granted to a  combination  of at least two of the above
named individuals.  Individual lending authority of $250,000 has been granted to
the Bank's Assistant Vice President/Loan  Administration  Manager, the Assistant
Vice President/Loan Customer Service Manager and to the Bank's Consumer Loan and
Residential Mortgage Underwriter,  employed by the Company.  Additional consumer
loan  lending  authority  of  $50,000  has been  granted  to  several  delegated
underwriters,  employed  by the  Bank.  Loans  with  policy  exceptions  require
approval by the next highest approval authority. Loans over $1.0 million must be
approved by the Company's Senior Loan Committee or the Board of Directors.

      In the  exercise  of any loan  approval  authority,  the  officers  of the
Company will take into account the risk  associated with the extension of credit
to a single  borrower,  borrowing  entity,  or  affiliation.  The Company has an
aggregate loans to one borrower limit of 15% of the Company's unimpaired capital
and unimpaired surplus in accordance with federal regulations.  At September 30,
2008, the largest aggregate amount of loans

                                        5

<PAGE>

outstanding to any borrower, including related entities, was $2.6 million, which
did not exceed the Company's loan to one borrower limitation.

      Single Family Residential Real Estate Lending. The Company is permitted to
lend up to 97%, provided that the borrower obtains private mortgage insurance on
loans that exceed 80% of the appraised value or sales price,  whichever is less,
of the  security  property.  The Company  will  generally  lend up to 95% of the
lesser  of  the  appraised   value  or  the  sale  price  for  the  purchase  of
single-family,  owner-occupied  dwellings which conform to the secondary  market
underwriting  standards.  Refinancings  are  limited to 90% or less.  Loans over
$417,000  and  other   non-conforming   loans,   secured  by  1-4   residential,
owner-occupied dwellings, are limited to 90% of the lesser of the purchase price
or appraised value. The purchase of non-owner  occupied,  1-4 unit dwellings may
be financed to 80% of the lower of the  appraisal or sale price;  a refinance is
limited to 80% of the  appraised  value if the  borrower's  FICO score is 680 or
higher.

      All appraisals and other property  valuations are performed by independent
fee  appraisers  approved  by  the  Company's  Senior  Loan  Committee.  On  all
amortizing  real estate loans,  the Company  requires  borrowers to obtain title
insurance,  insuring  the Company has a valid first lien on the  mortgaged  real
estate.  Borrowers must also obtain and maintain a hazard insurance policy prior
to  closing  and,  when  the real  estate  is  located  in a flood  hazard  area
designated by the Federal Emergency  Management Agency, a flood insurance policy
is required. Generally, borrowers advance funds on a monthly basis together with
payment of principal and interest into a mortgage  escrow account from which the
Company  makes  disbursements  for items such as real estate taxes and insurance
premiums as they fall due.

      The  Company  presently  originates   fixed-rate  loans  on  single-family
residential  properties  pursuant  to  underwriting  standards  consistent  with
secondary market guidelines, and which may or may not be sold into the secondary
mortgage market as conditions warrant.  Adjustable rate mortgages  ("ARMs"),  as
well as non-conforming and jumbo fixed-rate loans in amounts up to $2.0 million,
are  held  in the  portfolio.  It is the  Company's  policy  to  originate  both
fixed-rate  loans and ARMs for terms up to 30 years.  As of September  30, 2008,
$341.1 million or 48.9% and $2.4 million or 0.3% of the Company's total loan and
mortgage-backed  securities  portfolio  consisted  of  single-family  (including
construction  loans) and multi-family  residential  loans,  respectively.  As of
September 30, 2008, approximately $547.0 million or 90.4% of the Company's total
mortgage loans and mortgage-backed securities portfolio consisted of fixed-rate,
single-family residential mortgage loans. As of such date, $57.8 million or 9.6%
of the total mortgage loan portfolio consisted of adjustable-rate  single-family
residential mortgage loans and mortgage-backed securities. Most of the Company's
residential mortgage loans include "due on sale" clauses.

      During the years ended September 30, 2008 and 2007, the Company originated
$13.0 million and $4.6 million of ARM mortgages,  respectively. ARMs represented
20.3% and 8.6% of the Company's  total mortgage loan portfolio  originations  in
fiscal 2008 and 2007, respectively. The ARM mortgages offered by the Company are
originated with initial  adjustment  periods  varying from one to 10 years,  and
provide for initial  rates of interest  below the rates which would prevail were
the index used for repricing applied initially. The Company expects to emphasize
the  origination  of ARMs as market  conditions  permit,  in order to reduce the
impact of rising interest rates in the market place.  Such loans,  however,  may
not adjust as rapidly as changes in the Company's cost of funds.

      Multi-family  Residential Real Estate Lending.  Harleysville  Savings Bank
originates  mortgage loans secured by multifamily  dwelling  units. At September
30, 2008, $2.4 million, or 0.3% of our total loan and mortgage-backed securities
portfolio consisted of loans secured by multifamily residential real estate. The
majority  of our  multifamily  residential  real  estate  loans are  secured  by
apartment  buildings located in the Bank's local market area. The interest rates
for our multifamily  residential  real estate loans generally adjust at five- to
ten-year intervals, with the rate to be negotiated at the end of such term or to
automatically convert to

                                        6

<PAGE>

a floating  interest rate.  These loans  generally have a five-year term with an
amortization  period of no more than twenty years.  At September  30, 2008,  the
largest such loan had a balance of $529,000. At that date, we had no multifamily
residential real estate loans that were delinquent in excess of 30 days.

      Construction  Loans.  The Company offers  fixed-rate  and  adjustable-rate
construction loans on residential properties. Residential construction loans are
originated for individuals  who are building their primary  residence as well as
to selected local builders for  construction of single-family  dwellings.  As of
September 30, 2008,  $8.3 million or 1.2% of the total loan and  mortgage-backed
securities portfolio consisted of construction loans.

      Construction  loans to homeowners are usually made in connection  with the
permanent  financing on the property.  The permanent loans have amortizing terms
up to 30 years,  following the initial  construction phase during which time the
borrower pays interest on the funds  advanced.  These loans are  reclassified as
permanent  mortgage loans when the residences  securing the loans are completed.
The Company will make construction/permanent loans up to a maximum of 90% of the
fair  market  value  of the  completed  project.  The  rate on the  loan  during
construction  is the same rate as the Company will charge on the permanent  loan
on the completed project.  Advances are made on a percentage of completion basis
with the Company's receipt of a satisfactory inspection report of the project.

      Historically, the Company has been active in on-your-lot home construction
lending and intends to continue to emphasize such lending. Although construction
lending is generally  considered to involve a higher degree of risk of loss than
long-term financing on improved,  occupied real estate, the Company historically
has not experienced any significant problems.

      The Company also offers mortgage loans on undeveloped single lots held for
residential construction.  These loans are generally fixed-rate loans with terms
not exceeding 15 years; they are not a significant part of the Company's lending
activities.   Additionally,   the  Bank  has  not  been  active  in  residential
subdivision  lending  and  has  no   acquisition/development  of  loans  in  the
portfolio.

      Commercial  Real  Estate  Loans.   Harleysville  Savings  Bank  originates
mortgage loans for the  acquisition  and  refinancing of commercial  real estate
properties.  At September 30, 2008,  $44.4 million,  or 6.4% of the Bank's total
loan and  mortgage-backed  securities  portfolio  consisted of loans  secured by
commercial real estate properties,  owner occupied  commercial real estate loans
and  non-owner  occupied  commercial  real  estate  loans.  The  majority of our
commercial  real  estate  loans are secured by office  buildings,  manufacturing
facilities,  distribution/warehouse  facilities,  and retail centers,  which are
generally  located  in our  local  market  area.  The  interest  rates  for  our
commercial  real estate loans generally  adjust at one- to five-year  intervals,
and  are  typically  renegotiated  at the end of such  period  or  automatically
converted to a floating interest rate. The loans generally have a five-year term
with an  amortization  period of no greater than twenty five years. At September
30, 2008, the largest such loan had a balance of $2.6 million.

      Harleysville  Savings Bank generally requires appraisals of the properties
securing   commercial  real  estate  loans.   Appraisals  are  performed  by  an
independent appraiser designated by Harleysville Savings Bank and all appraisals
are reviewed by management.  Harleysville Savings Bank considers the quality and
location of the real estate,  the credit of the  borrower,  the cash flow of the
project and the quality of  management  involved  with the property  when making
decisions on commercial real estate loans.

      Loan-to-value  ratios on our  commercial  real estate loans are  generally
limited to 80% of the appraised  value of the secured  property.  As part of the
criteria for  underwriting  commercial real estate loans, we generally  impose a
debt service coverage ratio (the ratio of net operating income before payment of
debt

                                        7

<PAGE>

service  compared  to debt  service) of not less than  1.2-to-1.  It is also our
general  practice  to obtain  personal  guarantees  from the  principals  of our
corporate borrowers on commercial real estate loans.

      Loans secured by commercial real estate typically have higher balances and
are more  difficult to evaluate and monitor  and,  therefore,  involve a greater
degree of credit risk than other types of loans. If the estimate of value proves
to be  inaccurate,  the property  may not provide us with full  repayment in the
event of default  and  foreclosure.  Because  payments  on these loans are often
dependent  on the  successful  development,  operation,  and  management  of the
properties,  repayment of these loans may be affected by adverse  conditions  in
the real  estate  market or the  economy.  Harleysville  Savings  Bank  seeks to
minimize  these risks by limiting the maximum  loan-to-value  ratio and strictly
scrutinizing  the  financial  condition  of the  borrower,  the  quality  of the
collateral  and the management of the property  securing the loan.  Harleysville
Savings Bank also generally  obtains loan  guarantees from  financially  capable
parties based on a review of personal financial statements.

      Commercial lending generally involves greater credit risk than residential
mortgage or consumer  lending,  and involves risks that are different from those
associated with commercial real estate lending. Although commercial loans may be
collateralized  by  equipment  or other  business  assets,  the  liquidation  of
collateral  in the event of a borrower  default may  represent  an  insufficient
source of repayment because equipment and other business assets may, among other
things,  be  obsolete  or  of  limited  use.  Accordingly,  the  repayment  of a
commercial  loan depends  primarily on the  creditworthiness  and projected cash
flow of the borrower (and any  guarantors),  while  liquidation of collateral is
considered a secondary source of repayment.

      Consumer and Other Loans. The Company actively  originates  consumer loans
to provide a wider range of financial  services to its  customers and to improve
the interest rate sensitivity of its  interest-earning  assets.  Originations of
consumer  loans as a percent of total loan  originations  amounted  to 46.2% and
47.3% during fiscal 2008 and 2007,  respectively.  The shorter-term and normally
higher  interest  rates on such loans help the Company to maintain a  profitable
spread  between  its  average  loan yield and its cost of funds.  The  Company's
consumer  loan  department  offers a variety  of loans,  including  home  equity
installment loans and lines of credit,  vehicle loans,  personal loans and lines
of credit.  Loans  secured by deposit  accounts  at the Company are also made to
depositors in an amount up to 90% of their account  balances with terms of up to
15 years.

      Home equity loans and lines of credit continue to be a popular product and
represented  $92.4 million or 13.4% of the loan and  mortgage-backed  securities
portfolio at  September  30, 2008.  After  taking into  account  first  mortgage
balances,  the  Company  will  lend  up to 80% of the  value  of  owner-occupied
property  on fixed rate terms up to 15 years.  This amount may be raised to 100%
when  considering  other  factors,  such as excellent  credit history and income
stability.  At September 30, 2008, the Company had outstanding 3,022 home equity
loans of which 1,800 were installment equity loans and 1,222 were line of credit
loans. As of such date, the Company had an outstanding balance on line of credit
loans of approximately  $26.1 million and there was approximately  $41.3 million
of unused credit available on such loans.

      Consumer loans generally involve more risk of collectibility than mortgage
loans because of the type and nature of the  collateral  and, in certain  cases,
the absence of collateral. As continued payments are dependent on the borrower's
continuing financial  stability,  these loans may be more likely to be adversely
affected  by job loss,  divorce,  personal  bankruptcy  or by  adverse  economic
conditions.

      Loan Fee and  Servicing  Income.  The Company  receives  fees both for the
origination  of loans and for  making  commitments  to  originate  and  purchase
residential and commercial  mortgage loans. The Company also receives  servicing
fees with respect to  residential  mortgage  loans it has sold. It also receives
loan fees related to existing  loans,  including  late charges,  and credit life
insurance commissions. Loan origination and

                                        8

<PAGE>

commitment fees and discounts are a volatile source of income,  varying with the
volume and type of loans and commitments made and purchased and with competitive
and economic conditions.

      Loans fees generated on origination of loans under  accounting  principles
generally  accepted in the United  States of America are  deferred to the extent
that they exceed the costs of  originating  such loans.  Deferred  loan fees and
discounts  on  mortgage  loans  purchased  are  amortized  to  income as a yield
adjustment  over the estimated  remaining terms of such loans using the interest
method.

      As of September 30, 2008,  the Company was servicing $2.9 million of loans
for others,  which related to loans sold by the Company to the FHLMC and Federal
Home Loan  Bank of  Pittsburgh  in the  amounts  of  $17,900  and $2.9  million,
respectively. The Company receives a servicing fee of 0.25% on such loans.

      Non-performing  Loans and Real Estate Owned. When a borrower fails to make
a required loan payment,  the Company attempts to cure the default by contacting
the borrower; generally, after a payment is more than 15 days past due, at which
time a late charge is assessed.  Defaults are cured  promptly in most cases.  If
the  delinquency on a mortgage loan exceeds 60 days and is not cured through the
Company's  normal  collection  procedures,  or an acceptable  arrangement is not
worked out with the borrower,  the Company will institute measures to remedy the
default.  This may  include  commencing  a  foreclosure  action  or, in  special
circumstances,  accepting  from the  borrower a  voluntary  deed of the  secured
property in lieu of foreclosure with respect to mortgage loans and equity loans,
or title and  possession  of  collateral  in the case of other  consumer  loans.
Substantial   delays  may  occur  in  instituting  and  completing   residential
foreclosure  proceedings  due to  the  extensive  procedures  and  time  periods
required to be complied with under Pennsylvania law.

      All  interest  accrued  but not  collected  for loans  that are  placed on
nonaccrual  status or charged  off is  reversed  against  interest  income.  The
interest on these loans is  accounted  for on the  cash-basis  or  cost-recovery
method,  until  qualifying for return to accrual  status.  Loans are returned to
accrual status when all the principal and interest amounts contractually due are
brought current and future payments are reasonably  assured.  Interest income is
recognized using the interest method when the collection is reasonably  assured.
The Company had no loans  outstanding which were recorded as loans accounted for
on a non-accrual basis as of the end of fiscal 2007 and one residential mortgage
loan totaling  $244,000 which was classified as non-accrual at the end of fiscal
year 2008.

      If  foreclosure  is effected,  the property is sold at a public auction in
which the Company may participate as a bidder.  If the Company is the successful
bidder, the acquired real estate property is then included in the Company's real
estate owned ("REO") account until it is sold. When property is acquired,  it is
recorded at the market value at the date of  acquisition  less estimated cost to
sell and any  write-down  resulting is charged to the allowance for loan losses.
Interest  accrual,  if any,  ceases  on the date of  acquisition  and all  costs
incurred in maintaining the property from that date forward are expended.  Costs
incurred for the  improvement or  development of such property are  capitalized.
The Company is permitted under  Department  regulations to finance sales of real
estate owned by "loans to facilitate," which may involve more favorable interest
rates and terms than generally would be granted under the Company's underwriting
guidelines. The Company had no REO at the end of fiscal 2008 or 2007.

                                        9

<PAGE>

      The following table sets forth information  regarding  non-accrual  loans,
loans which are 90 days or more  delinquent but on which the Company is accruing
interest,  troubled debt restructuring,  and other real estate owned held by the
Company at the dates  indicated.  The Company  continues  to accrue  interest on
loans which are 90 days or more  overdue  where  management  believes  that such
interest is collectible.

<TABLE>
<CAPTION>
                                                      As of September 30,
                                            --------------------------------------
                                             2008     2007    2006    2005    2004
                                            ------   -----   -----   -----   -----
                                                    (Dollars in Thousands)
<S>                                         <C>      <C>     <C>     <C>     <C>
Residential real estate loans:
   Non-accrual loans                        $  244   $  --   $  --   $  --   $  --
   Accruing loans 90 days overdue              192      --      --     260     291
   Troubled debt restructurings                 --      --      --      --      --
                                            ------   -----   -----   -----   -----
      Total                                    436      --      --     260     291
                                            ------   -----   -----   -----   -----
Commercial loans:
   Non-accrual loans                            --      --      --      --      --
   Accruing loans 90 days overdue              815      --      --      --      --
   Troubled debt restructurings                 --      --      --      --      --
                                            ------   -----   -----   -----   -----
      Total                                    815      --      --      --      --
                                                     -----   -----   -----   -----
Consumer loans:
   Non-accrual loans                            --      --      --      --      --
   Accruing loans 90 days overdue                7      28      18      --      --
   Troubled debt restructurings                 --      --      --      --      --
                                            ------   -----   -----   -----   -----
      Total                                      7      28      18      --      --
                                            ------   -----   -----   -----   -----

Total non-performing loans:
   Non-accrual loans                           244      --      --      --      --
   Accruing loans 90 days overdue            1,014      28      18     260     291
   Troubled debt restructurings                 --      --      --      --      --
                                            ------   -----   -----   -----   -----
      Total                                 $1,258   $  28   $  18   $ 260   $ 291
                                            ------   =====   =====   =====   =====

Total non-performing loans to total loans      .26%    n/m*    n/m*    .07%    .09%
Total real estate owned, net of related
   reserves                                     --      --      --      --      --
Total non-performing loans and other real
   estate owned to total assets               n/m*     n/m*    n/m*    .03%    .04%
</TABLE>

* Not material

      Management  establishes  reserves for losses on  delinquent  loans when it
determines  that losses are  probable.  The Company has recorded a provision for
general  loan losses  totaling  $85,000 in fiscal  2008,  due to the increase in
unemployment  trends and decline in property values reflecting an instability in
the economy.  The Company did not record a provision  for general loan losses in
fiscal  2007  due  to  the  overall   performance  of  the  loan  portfolio  and
management's  assessment  of the  overall  adequacy  of the  allowance  for loan
losses. Although management believes that it uses the best information available
to make determinations with respect to loan loss reserves, future adjustments to
reserves may be necessary if economic  conditions differ  substantially from the
assumptions used in making the initial determinations.

      Residential  mortgage  lending  generally  entails a lower risk of default
than other types of lending.  Consumer  loans and  commercial  real estate loans
generally involve more risk of collectibility  because of the type and nature of
the  collateral  and, in certain  cases,  the absence of  collateral.  It is the
Company's  policy to  establish  specific  reserves  for  losses  on  delinquent
consumer loans and commercial loans when it determines that losses are probable.
In addition,  consumer loans are charged against  reserves if they are more than
120 days delinquent unless a satisfactory repayment schedule is arranged.

                                       10

<PAGE>

      The following  table  summarizes  activity in the Company's  allowance for
loan losses during the periods indicated.

<TABLE>
<CAPTION>
                                                                Year Ended September 30,
                                                ---------------------------------------------------------
                                                   2008        2007       2006        2005        2004
                                                ---------   ---------   ---------   ---------   ---------
                                                                     (In Thousands)
<S>                                             <C>         <C>         <C>         <C>         <C>
Total loans outstanding at end of period          484,407     424,233     392,892     373,580     346,754
Average loans outstanding                         454,320     408,563     383,236     360,167     327,720

Allowances at beginning of year                 $   1,933   $   1,956   $   1,968   $   1,977   $   1,991
Provision for loan loss                                85          --          --          --          --
Charge-offs:
   Single family                                       --          --          --          --          --
   Multi family                                        --          --          --          --          --
   Construction                                        --          --          --          --          --
   Commercial                                          --          --          --          --          --
   Home equity                                        (13)         (1)         --          --         (15)
   Consumer non-real estate                           (27)        (35)        (20)        (14)         --
                                                ---------   ---------   ---------   ---------   ---------
      Total charge-offs                               (40)        (36)        (20)        (14)        (15)
Recoveries of loans previously charged off             10          13           8           5           1
                                                ---------   ---------   ---------   ---------   ---------
Allowance for loan losses, end of period        $   1,988   $   1,933   $   1,956   $   1,968   $   1,977
                                                =========   =========   =========   =========   =========
Allowance for loan losses as a percent non-
   performing loans                                158.03%   6,903.57%  10,866.67%     756.92%     679.38%
Ratio of net charge-offs during the period to
   average loans outstanding during the
   period                                            0.01%       0.01%       0.00%       0.00%       0.00%
</TABLE>

     The following table shows how our allowance for loan losses is allocated by
type of loan at each of the dates indicated.

<TABLE>
<CAPTION>
                                                                       As of September 30,
                            -------------------------------------------------------------------------------------------------------
                                   2008                  2007                 2006                 2005                2004
                            -------------------  -------------------  -------------------  -------------------  -------------------
                                         Loan                 Loan                 Loan                 Loan                 Loan
                                       Category             Category             Category             Category             Category
                             Amount     as a %    Amount     as a %    Amount     as a %    Amount     as a %    Amount     as a %
                               of      of total     of      of total     of      of total     of      of total     of      of total
                            Allowance   Loans    Allowance   Loans    Allowance   Loans    Allowance    Loans   Allowance   Loans
                            ---------  --------  ---------  --------  ---------  --------  ---------  --------  ---------  --------
                                                                    (Dollars in Thousands)
<S>                         <C>        <C>       <C>        <C>       <C>        <C>       <C>        <C>       <C>        <C>
Single-family               $     543      68.8% $     304      71.3% $     285      72.1% $     300      71.8% $     302      73.9%
Commercial real estate and
   multi family residential       486       9.7        236       4.2         49       0.9         46       1.0         22       0.5
Construction                       13       1.7          9       1.4         10       1.8         11       2.0         12       2.3
Lot loan                            3       0.2          1       0.1          2       0.2          2       0.2          1       0.2
Installment equity loans           99      13.7        115      17.5        107      17.9        100      16.0         69      13.3
Line of credit loans              103       5.5        125       5.1        133       6.6        143       8.6        138       9.4
Savings account loans               1       0.2          1       0.2          1       0.3          1       0.2          1       0.2
Automobile and other loans         19       0.2         17       0.2         15       0.2         14       0.2         13       0.2
Unallocated                       721        --      1,125        --      1,354        --      1,351        --      1,419        --
                            ---------  --------  ---------  --------  ---------  --------  ---------  --------  ---------  --------

      Total                 $   1,988     100.0% $   1,933     100.0% $   1,956     100.0% $   1,968     100.0% $   1,977     100.0%
                            =========  ========  =========  ========  =========  ========  =========  ========  =========  ========
</TABLE>

     The  allowance  consists of specific and general  components.  The specific
component  relates to loans that are classified as either doubtful,  substandard
or special mention.  The general  component covers  non-classified  loans and is
based on historical loss experience adjusted for qualitative factors.

                                       11

<PAGE>

Investment Activities

     The  Company's  investment  portfolio  consists  primarily of United States
government  agency  mortgage-backed  securities  and debt  obligations of United
States government  agencies.  The other investments include tax-exempt municipal
obligations, money market mutual funds, and stock of the FHLB of Pittsburgh. The
Company has primarily  invested in  instruments  that reprice within five years;
the amount of such investments as of September 30, 2008 was $49.5 million.

     As of September 30, 2008, the Company had $214.7 million of mortgage-backed
securities,  invested  in  Federal  Home Loan  Mortgage  Corporation  ("FHLMC"),
Government National Mortgage  Association  ("GNMA") or Federal National Mortgage
Association  ("FNMA") backed securities.  FHLMC securities are guaranteed by the
FHLMC, GNMA securities by the Federal Housing Administration and FNMA securities
by the FNMA, which are an instrumentality of the United States government,  and,
pursuant to federal  regulations,  are deemed to be part of the  Company's  loan
portfolio.

     The  following  table  sets  forth  certain  information  relating  to  our
investment and mortgage-backed securities portfolios and our investments in FHLB
stock at the dates indicated.

<TABLE>
<CAPTION>
                                                                                September 30,
                                                      ------------------------------------------------------------------
                                                              2008                   2007                   2006
                                                      --------------------   --------------------   --------------------
                                                      Amortized     Fair     Amortized     Fair     Amortized     Fair
                                                         Cost       Value       Cost       Value       Cost      Value
                                                      ---------   --------   ---------   --------   ---------   --------
                                                                                (In thousands)
<S>                                                   <C>         <C>        <C>         <C>        <C>         <C>
Mortgage-backed securities                            $ 214,691   $212,572   $ 193,660   $189,430   $ 222,314   $214,733
U.S. government and agency
   Obligations                                           54,314     54,076      83,155     82,834      86,503     85,173
Municipal securities                                     24,940     24,897      25,538     26,472      24,596     26,075
Equity securities                                           842        842       1,334      1,334         997        997
Mutual Funds                                                 12         12         576        576       7,110      7,110
FHLB stock                                               16,574     16,574      14,140     14,140      15,499     15,499
                                                      ---------   --------   ---------   --------   ---------   --------

Total investment and mortgage-backed securities and
   FHLB stock                                         $ 311,373   $308,973   $ 318,403   $314,786   $ 355,019   $349,587
                                                      =========   ========   =========   ========   =========   ========
</TABLE>

     The following table sets forth the amount of investment and mortgage-backed
securities  which mature  during each of the periods  indicated and the weighted
average yields for each range of maturities at September 30, 2008. No tax-exempt
yields have been adjusted to a tax-equivalent basis.

<TABLE>
<CAPTION>
                                                   Amounts at September 30, 2008 Which Mature in
                              --------------------------------------------------------------------------------------
                                                    Over One                Over
                                                      Year                  Five
                                         Weighted   Through    Weighted    Through   Weighted     Over      Weighted
                              One year    Average     Five      Average      Ten     Average       Ten      Average
                              Or less      Yield     Years       Yield      Years     Yield       Years      Yield
                              --------   --------   --------   --------   --------   --------   ---------   --------
                                                               (Dollars in Thousands)
<S>                           <C>        <C>        <C>        <C>        <C>        <C>        <C>         <C>
Bonds and other
   Debt securities:
      Mortgage-backed
      securities              $  3,517      3.96%   $ 27,149       4.32%  $ 27,590       4.37%  $ 156,435       5.07%
      U.S. government
         agency obligations         --         --      5,000       4.21%     2,000       4.46%     47,314       5.93%
      Municipal securities          --         --         --         --      2,231       5.63%     22,708       5.07%
                              --------   --------   --------   --------   --------   --------   ---------   --------
         Total                $  3,517       3.96%  $ 32,149       4.30%  $ 31,821       4.47%  $ 226,458       5.25%
                              ========   ========   ========   ========   ========   ========   =========   ========
</TABLE>

     The Company's  investment strategy is set and reviewed  periodically by the
entire Board of Directors.

                                       12

<PAGE>

Sources of Funds

     General.  Deposits are the primary source of the Company's funds for use in
lending and for other general business  purposes.  In addition to deposits,  the
Company  obtains  funds from loan  payments and  prepayments,  FHLB advances and
other borrowings, and, to a lesser extent, sales of loans. Loan repayments are a
relatively  stable  source of funds,  while  deposit  inflows and  outflows  are
significantly   influenced  by  general  market   interest  rates  and  economic
conditions.

     Deposits.  The  Company  has a number of  different  programs  designed  to
attract  both  short-term  and  long-term  deposits  from the general  public by
providing an assortment of accounts and rates consistent with FDIC  regulations.
These  programs  include  passbook  and club savings  accounts,  NOW and regular
checking  accounts,   money  market  deposit  accounts,   retirement   accounts,
certificates  of  deposit  ranging  in terms from 90 days to 60 months and jumbo
certificates of deposit in denominations of $100,000 or more. The interest rates
on the Company's  various  accounts are  determined  weekly by the Interest Rate
Risk  Management  Officer  based  on  reports  prepared  by  members  of  senior
management.  The Company attempts to control the flow of deposits by pricing its
accounts to remain  competitive with other financial  institutions in its market
area.

     The Company's  deposits are obtained primarily from residents of Montgomery
and  Bucks  Counties;  the  Company  does not  utilize  brokered  deposits.  The
principal  methods used by the Company to attract deposit accounts include local
advertising,  offering a wide  variety of  services  and  accounts,  competitive
interest rates and convenient office locations.  The Company also is a member of
the "STAR" ATM network.

                                       13

<PAGE>

      The  following  table  shows  the   distribution  of,  and  certain  other
information  relating  to,  the  Company's  deposits  by  type  as of the  dates
indicated.

<TABLE>
<CAPTION>
                                                       As of September 30,
                                         -----------------------------------------------
                                                  2008                     2007
                                         ----------------------   ----------------------
                                                     Percent of               Percent of
                                           Amount     Deposits      Amount     Deposits
                                         ---------   ----------   ---------   ----------
                                                      (Dollars in Thousands)
<S>                                      <C>         <C>          <C>         <C>
Passbook and club accounts               $   2,641          0.7%  $   2,864          0.7%
NOW and interest-bearing checking
   accounts                                 42,203          9.9      39,460          9.3
Non-interest-bearing checking
   accounts                                 10,964          2.6      11,741          2.9
Money market demand accounts                50,928         12.0      50,966         12.0
Certificates of deposit:
         3 month                               584          0.1         703          0.2
         6 month                             1,840          0.4       2,697          0.6
         7 month                            69,257         16.4      41,186          9.7
         9 month                            15,488          3.6      55,684         13.1
         12 month                           19,327          4.5       6,269          1.5
         15 month                            6,113          1.4      10,989          2.6
         17 month                           40,895          9.6      56,257         13.3
         18 month                           14,039          3.3       4,336          1.0
         20 month                           18,811          4.4         971          0.2
         24 month                            3,037          0.7       2,576          0.6
         27 month                              582          0.1         728          0.2
         36 month                           30,048          7.1       5,099          1.2
         48 month                           33,636          7.9      60,381         14.2
         60 month                            8,591          2.0      15,464          3.6
         Other                                 203          0.0         204          0.0
Retirement accounts:
   Money market deposit accounts             1,076          0.3         860          0.2
   Certificates of deposit                  55,250         13.0      54,600         12.9
                                         ---------   ----------   ---------   ----------
      Total deposits                     $ 425,513        100.0%  $ 424,035        100.0%
                                         =========                =========
</TABLE>

      The large variety of deposit accounts offered by the Company has increased
the Company's ability to retain deposits and has allowed it to be competitive in
obtaining new funds, although the threat of disintermediation (the flow of funds
away  from  savings   institutions  into  direct  investment  vehicles  such  as
government and corporate securities and non-deposit  products) still exists. The
new types of accounts;  however, have been more costly than traditional accounts
during periods of high interest rates. In addition,  the Company has become more
vulnerable to short-term  fluctuations in deposit flows as customers have become
more rate-conscious and willing to move funds into higher yielding accounts. The
ability of the Company to attract and retain  deposits and the Company's cost of
funds have been, and will continue to be, significantly affected by money market
conditions.

                                       14

<PAGE>

      The following table presents certain information  concerning the Company's
deposit accounts as of September 30, 2008 and the scheduled quarterly maturities
of its certificates of deposit.

<TABLE>
<CAPTION>
                                                                                 Weighted
                                                            Percentage of         Average
                                                  Amount    Total Deposits     Nominal Rate
                                                ---------   --------------   ----------------
                                                             (Dollars in Thousands)
<S>                                             <C>         <C>              <C>
Passbook and club accounts                      $   2,641              0.6%              1.00%
NOW and interest-bearing checking accounts         42,203              9.9               0.83
Non-interest-bearing checking accounts             10,963              2.6               0.00
Money market deposits accounts(1)                  52,005             12.2               1.47
                                                ---------   --------------   ----------------
      Total                                     $ 107,812             25.3%              1.06%
                                                =========   ==============   ================

Certificate accounts maturing by quarter:
   December 31, 2008                            $  91,899             21.6%              3.56%

   March 31, 2009                                  69,615             16.5               3.31
   June 30, 2009                                   26,572              6.2               3.08
   September 30, 2009                              20,804              4.9               3.13
   December 31, 2009                               16,356              3.8               3.10

   March 31, 2010                                  26,974              6.3               3.70
   June 30, 2010                                    3,183              0.7               3.28
   September 30, 2010                               1,975              0.5               3.81
   December 31, 2010                                1,425              0.3               4.28

   March 31, 2011                                   1,794              0.4               4.17
   June 30, 2011                                   10,857              2.6               3.92
   September 30, 2011                              25,272              6.0               3.95

Thereafter                                         20,975              4.9               3.81
                                                ---------   --------------   ----------------
Total certificate accounts(1)                     317,701             74.7               3.49
                                                ---------   --------------   ----------------
      Total deposits                            $ 425,513            100.0%              2.87%
                                                =========   ==============   ================
</TABLE>

----------
(1)   Includes retirement accounts.

      Management of the Company expects,  based on historical experience and its
pricing  policies,  to retain a  significant  portion of the  $208.9  million of
certificates  of deposit which mature during the 12 months ending  September 30,
2009.

      The following table sets forth the net deposit flows of the Company during
the periods indicated.

                                                       Year Ended September 30,
                                                       ------------------------
                                                          2008          2007
                                                       ------------------------
                                                             (In Thousands)
Decrease before interest credited                      $  (13,740)  $   (19,514)
Interest credited                                          15,218        14,295
                                                       ----------   -----------
   Net deposit increase (decrease)                     $    1,478   $    (5,219)
                                                       ==========   ===========

                                       15

<PAGE>

      The  following  table  presents by various  interest rate  categories  the
amounts of  certificate  accounts as of the dates  indicated  and the amounts of
certificate  accounts as of September  30, 2008 which mature  during the periods
indicated.

<TABLE>
<CAPTION>
                                                         Amounts at September 30, 2008 Maturing
                                                    ------------------------------------------------
                                        As of
                                    September 30,    One Year
                                        2008         or Less    Two Years   Three Years   Thereafter
                                    -------------   ---------   ---------   -----------   ----------
                                                             (In Thousands)
<S>                                 <C>             <C>         <C>         <C>           <C>
Certificate accounts:
   0.01% to 2.00%                   $         996   $     964   $      32   $        --   $       --
   2.01% to 4.00%                         223,768     137,686      34,344        34,963       16,775
   4.01% to 6.00%                          92,937      70,239      14,113         4,385        4,200
                                    -------------   ---------   ---------   -----------   ----------

Total certificate accounts(1)       $     317,701   $ 208,889   $  48,489   $    39,348   $   20,975
                                    =============   =========   =========   ===========   ==========
</TABLE>

----------
(1)   Includes retirement accounts.

      The following table sets forth the maturity of our certificates of deposit
of $100,000 or more at September 30, 2008, by time remaining to maturity.

                             At September 30, 2008
  ---------------------------------------------------------------------------
                                                                    Weighted
                                                                    Average
                   Quarter Ending:                       Amount       Rate
  -------------------------------------------------    ----------------------
                                                       (Dollars in Thousands)

  December 31, 2008                                    $  16,015         3.44%
  March 31, 2009                                          14,666         2.98%
  June 30, 2009                                            4,278         3.03%
  September 30, 2009                                       3,414         3.14%
  After September 30, 2009                                15,056         3.90%
                                                       ---------   ----------
     Total certificates of deposit with balances of
        $100,000 or more                               $  53,429         3.39%
                                                       =========   ==========

      Borrowings. The Bank obtains advances from the FHLB of Pittsburgh upon the
security of its  capital  stock in the FHLB of  Pittsburgh  and a portion of its
first  mortgages.  See  "Regulation - Regulation of the Bank - Federal Home Loan
Bank  System." At September 30, 2008,  the Bank had advances with  maturities of
one year or less  totaling  $35.9  million at an interest rate of 3.18% and FHLB
advances  with  maturities  of 13 months to 10 years  totaling  $262  million at
interest-rates  ranging from 2.05% to 5.60%.  Such advances are made pursuant to
several  different credit programs,  each of which has its own interest rate and
range of maturities.  In addition, there are three long-term advances from other
financial  institutions  that are  secured  by  investment  and  mortgage-backed
securities totaling $50 million at interest-rates ranging from 3.50% to 4.55%.

      Depending on the program,  limitations on the amount of advances are based
on either a fixed percentage of assets or the FHLB of Pittsburgh's assessment of
the Bank's  creditworthiness.  FHLB  advances  are  generally  available to meet
seasonal and other withdrawals of deposit accounts, to purchase  mortgage-backed
securities, investment securities and to expand lending.

                                       16

<PAGE>

      The  following  table  sets  forth  certain   information   regarding  the
borrowings of the Company as of the dates indicated.

                                             September 30,
                              -------------------------------------------
                                      2008                   2007
                              --------------------   --------------------
                                          Weighted               Weighted
                                           Average               Average
                               Balance      Rate      Balance      Rate
                              ---------   --------   ---------   --------
                                         (Dollars In Thousands)
      Advances                $ 347,846       4.12%  $ 298,609       4.65%

      The  following  table  sets  forth  certain  information   concerning  the
short-term borrowings of the Company for the periods indicated.

                                                        Year Ended September 30,
                                                        ------------------------
                                                           2008         2007
                                                        ----------   ----------
                                                             (In Thousands)
Advances :
   Average balance outstanding                          $   16,934   $   48,172
   Maximum amount outstanding at any
      month-end during the period                       $   39,000   $   67,400
   Weighted average interest rate during the period           2.96%        5.36%

Employees

      The Company had 71 full-time  employees  and 46 part-time  employees as of
September  30,  2008.  None of these  employees is  represented  by a collective
bargaining  agent,  and the Company  believes that it enjoys good relations with
its personnel.

Regulation

      The references to laws and regulations which are applicable to the Company
and the Bank set forth below and elsewhere  herein are brief  summaries  thereof
which do not  purport to be  complete  and are  qualified  in their  entirety by
reference to such laws and regulations.

Regulation of the Company

      General.  The Company is a registered bank holding company pursuant to the
Bank Holding  Company Act ("BHCA") and, as such,  is subject to  regulation  and
supervision  by the Federal  Reserve  Board and the  Department.  The Company is
required to file  annually a report of its  operations  with,  and is subject to
examination by, the Federal Reserve Board and the Department.

      BHCA Activities and Other  Limitations.  The BHCA prohibits a bank holding
company from acquiring  direct or indirect  ownership or control of more than 5%
of the voting shares of any bank, or increasing such ownership or control of any
bank,  without  prior  approval  of the  Federal  Reserve  Board.  The BHCA also
generally  prohibits a bank  holding  company  from  acquiring  any bank located
outside of the state in which the existing bank subsidiaries of the bank holding
company are located unless  specifically  authorized by applicable state law. No
approval under the BHCA is required; however, for a bank holding company already
lawfully  owning or controlling  more than 50% of the voting shares of a bank to
acquire additional shares of such bank.

                                       17

<PAGE>

      The BHCA also prohibits a bank holding company,  with certain  exceptions,
from  acquiring  more than 5% of the voting  shares of any company that is not a
bank and from  engaging  in any  business  other  than  banking or  managing  or
controlling  banks.  Under the BHCA, the Federal  Reserve Board is authorized to
approve the  ownership of shares by a bank holding  company in any company,  the
activities of which the Federal  Reserve  Board has  determined to be so closely
related  to  banking  or to  managing  or  controlling  banks  as to be a proper
incident thereto.  In making such  determinations,  the Federal Reserve Board is
required  to  weigh  the  expected  benefit  to  the  public,  such  as  greater
convenience,  increased competition or gains in efficiency, against the possible
adverse effects,  such as undue concentration of resources,  decreased or unfair
competition,  conflicts  of  interest  or unsound  banking  practices.  The BHCA
permits a bank holding  company to elect to be  considered  a financial  holding
company ("FHC").  A bank holding company that makes an FHC election is permitted
to engage in  activities  that are  financial  in nature or  incidental  to such
financial  activities.  The BHCA lists certain  activities  that are  considered
financial in nature and permits the Federal Reserve Board to expand that list to
include  other  activities  that  are  complementary  to the  activities  on the
preapproved   list.   The   preapproved   activities   include  (1)   securities
underwriting,  dealing  and  market  making;  (2)  insurance  underwriting;  (3)
merchant banking; and (4) insurance company portfolio  investments.  The Company
has not made the FHC election.

      The  Federal  Reserve  Board has by  regulation  determined  that  certain
activities are closely related to banking within the meaning of the BHCA.  These
activities  include operating a mortgage company,  finance company,  credit card
company,  factoring company,  trust company or savings  association;  performing
certain data  processing  operations;  providing  limited  securities  brokerage
services;  acting as an investment or financial advisor;  acting as an insurance
agent for certain types of credit-related  insurance;  leasing personal property
on a full-payout,  non-operating  basis;  providing tax planning and preparation
services; operating a collection agency; and providing certain courier services.
The Federal  Reserve Board also has  determined  that certain other  activities,
including real estate  brokerage and  syndication,  land  development,  property
management   and   underwriting   of  life   insurance  not  related  to  credit
transactions,  are not closely related to banking and a proper incident thereto.
However,  under the BHCA certain of these  activities are permissible for a bank
holding company that becomes an FHC.

      Limitations on Transactions with Affiliates.  Transactions between savings
banks and any  affiliate  are  governed by  Sections  23A and 23B of the Federal
Reserve  Act. An  affiliate  of a savings  bank is any  company or entity  which
controls,  is controlled by or is under common control with the savings bank. In
a holding company context, the parent holding company of a savings bank (such as
the Company)  and any  companies  which are  controlled  by such parent  holding
company are  affiliates of the savings bank.  Generally,  Section 23A (i) limits
the extent to which the savings bank or its  subsidiaries may engage in "covered
transactions"  with any one  affiliate  to an amount equal to 10% of such bank's
capital  stock  and  surplus,  and  contains  an  aggregate  limit  on all  such
transactions with all affiliates to an amount equal to 20% of such capital stock
and surplus.  Section 23B applies to "covered  transactions"  as well as certain
other transactions and requires that all transactions be on terms  substantially
the same, or at least favorable,  to the bank or subsidiary as those provided to
a non-affiliate. The term "covered transaction" includes the making of loans to,
purchase of assets from,  issuance of a guarantee  to an  affiliate  and similar
transactions.  Section 23B  transactions  also include the provision of services
and the sale of assets by a savings bank to an affiliate.

      In  addition,  Sections  22(h) and (g) of the  Federal  Reserve Act places
restrictions   on  loans  to  executive   officers,   directors   and  principal
stockholders. Under Section 22(h), loans to a director, an executive officer and
to a greater than 10%  stockholder  of a savings  bank,  and certain  affiliated
interests of either,  may not exceed,  together with all other outstanding loans
to such  person  and  affiliated  interests,  the  savings  bank's  loans to one
borrower  limit  (generally  equal to 15% of the bank's  unimpaired  capital and
surplus).  Section  22(h)  also  requires  that  loans to  directors,  executive
officers and principal  stockholders be made on terms  substantially the

                                       18

<PAGE>

same as offered in  comparable  transactions  to other persons and also requires
prior board approval for certain  loans.  In addition,  the aggregate  amount of
extensions of credit by a savings bank to all insiders  cannot exceed the bank's
unimpaired  capital and surplus.  Furthermore,  Section 22(g) places  additional
restrictions on loans to executive officers.

      Capital  Requirements.  The  Federal  Reserve  Board has  adopted  capital
adequacy  guidelines  pursuant to which it assesses  the  adequacy of capital in
examining and supervising a bank holding  company and in analyzing  applications
to it under the BHCA.  The Federal  Reserve  Board capital  adequacy  guidelines
generally  require bank holding  companies to maintain total capital equal to 8%
of total risk-adjusted  assets, with at least one-half of that amount consisting
of Tier I or core capital and up to one-half of that amount  consisting  of Tier
II or supplementary capital. Tier I capital for bank holding companies generally
consists of the sum of common stockholders' equity and perpetual preferred stock
(subject in the case of the latter to limitations on the kind and amount of such
stocks which may be included as Tier I capital), less goodwill and, with certain
exceptions,  intangibles.  Tier II capital generally  consists of hybrid capital
instruments;  perpetual  preferred stock which is not eligible to be included as
Tier I capital;  term subordinated debt and  intermediate-term  preferred stock;
and,  subject to  limitations,  general  allowances for loan losses.  Assets are
adjusted  under the  risk-based  guidelines to take into account  different risk
characteristics,  with the  categories  ranging from 0% (requiring no additional
capital)  for  assets  such as cash to 100% for the  bulk of  assets  which  are
typically held by a bank holding company, including multi-family residential and
commercial  real estate loans,  commercial  business  loans and consumer  loans.
Single-family  residential  first mortgage loans which are not past-due (90 days
or more) or  non-performing  and which have been made in accordance with prudent
underwriting  standards are assigned a 50% level in the risk-weighing system, as
are certain  privately-issued  mortgage-backed  securities representing indirect
ownership of such loans.  Off-balance sheet items also are adjusted to take into
account certain risk characteristics.

      In addition to the risk-based  capital  requirements,  the Federal Reserve
Board  requires bank holding  companies to maintain a minimum  leverage  capital
ratio of Tier I capital to total  assets of 3.0%.  Total assets for this purpose
does not include goodwill and any other  intangible  assets and investments that
the Federal Reserve Board determines should be deducted from Tier I capital. The
Federal Reserve Board has announced that the 3.0% Tier I leverage  capital ratio
requirement is the minimum for the top-rated bank holding  companies without any
supervisory,  financial or operational weaknesses or deficiencies or those which
are not  experiencing or  anticipating  significant  growth.  Other bank holding
companies  will be  expected to maintain  Tier I leverage  capital  ratios of at
least 4.0% to 5.0% or more, depending on their overall condition.

      Financial Support of Affiliated Institutions.  Under Federal Reserve Board
policy,  the Company is expected to act as a source of financial strength to the
Bank and to commit resources to support the Bank in circumstances  when it might
not do so absent such policy.  Section 18 of the Federal  Deposit  Insurance Act
("FDIA") describes the circumstances  under which a Federal banking agency would
be protected  from a claim by an affiliate or a  controlling  shareholder  of an
insured depository institution seeking the return of assets of such an affiliate
or controlling shareholder. Under that provision, a claim would not be permitted
if (1) the insured depository  institution was under a written Federal directive
to raise capital, (2) the institution was undercapitalized,  and (3) the subject
Federal  banking agency followed the procedures set forth in Section 5(g) of the
BHCA.

      Sarbanes-Oxley  Act of  2002.  The  Sarbanes-Oxley  Act of 2002  generally
established a  comprehensive  framework to modernize and reform the oversight of
public  company  auditing,  improve the quality and  transparency  of  financial
reporting by those companies and strengthen the independence of auditors.  Among
other things, the legislation (i) created a public company accounting  oversight
board which is empowered to set auditing,  quality control and ethics standards,
to inspect registered public accounting firms, to conduct  investigations and to
take disciplinary actions, subject to SEC oversight and review; (ii)

                                       19

<PAGE>

strengthened  auditor  independence  from  corporate  management by, among other
things,  limiting the scope of consulting services that auditors can offer their
public company audit clients;  (iii)  heightened  the  responsibility  of public
company directors and senior managers for the quality of the financial reporting
and disclosure made by their  companies;  (iv) adopted a number of provisions to
deter wrongdoing by corporate management;  (v) imposed a number of new corporate
disclosure  requirements;  (vi) adopted provisions which generally seek to limit
and expose to public view possible  conflicts of interest  affecting  securities
analysts;  and (vii)  imposed a range of new  criminal  penalties  for fraud and
other  wrongful  acts, as well as extended the period during which certain types
of lawsuits can be brought against a company or its insiders.

Regulation of the Bank

      General.  The Bank is subject to extensive  regulation and  examination by
the Department and by the FDIC, which insures its deposits to the maximum extent
permitted  by law.  The  federal  and  state  laws  and  regulations  which  are
applicable to banks regulate,  among other things,  the scope of their business,
their  investments,   their  reserves  against  deposits,   the  timing  of  the
availability  of deposited funds and the nature and amount of and collateral for
certain loans. There are periodic examinations by the Department and the FDIC to
test the Bank's compliance with various regulatory requirements. This regulation
and supervision  establishes a comprehensive framework of activities in which an
institution  can engage and is  intended  primarily  for the  protection  of the
insurance  fund  and  depositors.   The  regulatory  structure  also  gives  the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement  activities and examination  policies,  including  policies with
respect to the  classification  of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such regulation, whether by
the Department, the FDIC or the Congress could have a material adverse impact on
the Bank and its operations.

      Pennsylvania  Savings Bank Law. The Pennsylvania  Banking Code of 1965, as
amended  (the  "Banking  Code")  contains  detailed  provisions   governing  the
organization,  location of offices,  rights and  responsibilities  of directors,
officers,  employees  and  members,  as well as  corporate  powers,  savings and
investment operations and other aspects of the Bank and its affairs. The Banking
Code delegates extensive  rulemaking power and administrative  discretion to the
Department so that the  supervision  and regulation of  state-chartered  savings
banks may be flexible and readily  responsive to changes in economic  conditions
and in savings and lending practices.

      One of the purposes of the Banking Code is to provide  savings  banks with
the  opportunity  to be  competitive  with each other and with  other  financial
institutions existing under other Pennsylvania laws and other state, federal and
foreign laws. A  Pennsylvania  savings bank may locate or change the location of
its  principal   place  of  business  and   establish  an  office   anywhere  in
Pennsylvania, with the prior approval of the Department.

      The Department  generally  examines each savings bank not less  frequently
than once every two years.  Although the Department may accept the  examinations
and  reports of the FDIC in lieu of the  Department's  examination,  the present
practice  is  for  the  Department  to  conduct  individual  examinations.   The
Department  may order any savings bank to  discontinue  any  violation of law or
unsafe or  unsound  business  practice  and may  direct  any  trustee,  officer,
attorney or employee of a savings  bank  engaged in an  objectionable  activity,
after the Department has ordered the activity to be terminated, to show cause at
a hearing before the Department why such person should not be removed.

                                       20

<PAGE>

      Interstate  Acquisitions.   The  Interstate  Banking  Act  allows  federal
regulators  to  approve  mergers  between  adequately   capitalized  banks  from
different  states  regardless of whether the transaction is prohibited under any
state law,  unless one of the banks'  home  states has  enacted a law  expressly
prohibiting  out-of-state mergers before June 1997. This act also allows a state
to permit  out-of-state  banks to  establish  and operate  new  branches in this
state.  The  Commonwealth of Pennsylvania has not "opted out" of this interstate
merger  provision.   Therefore,  the  federal  provision  permitting  interstate
acquisitions  applies to banks  chartered  in  Pennsylvania.  Pennsylvania  law,
however,  retained  the  requirement  that  an  acquisition  of  a  Pennsylvania
institution by a Pennsylvania or a  non-Pennsylvania-based  holding company must
be approved by the Banking Department. The Interstate Act also allows a state to
permit  out-of-state  banks to establish and operate new branches in this state.
Pennsylvania  law permits an out of state  banking  institution  to  establish a
branch  office  in  Pennsylvania  only  if the  laws  of the  state  where  that
institution is located would permit an institution  chartered  under the laws of
Pennsylvania  to  establish  and  maintain  a  branch  in such  other  state  on
substantially the same terms and conditions.

      FDIC  Insurance  Premiums.  The  deposits  of the Bank are  insured by the
Deposit Insurance Fund, which is administered by the FDIC. Insured  institutions
are assigned to one of three capital  groups which are based solely on the level
of an institution's capital: "well capitalized,"  "adequately  capitalized," and
"undercapitalized."  There are also three supervisory  groups generally based on
an   institution's   CAMEL-composite   rating.   Assessment  rates  for  insured
institutions  are determined  semi-annually by the FDIC and currently range from
zero basis points for well-capitalized  healthy institutions,  such as the Bank,
to  43  basis  points  for   undercapitalized   institutions   with  substantial
supervisory concerns.

      In  addition,  all  institutions  with  deposits  insured  by the FDIC are
required to pay  assessments  to fund  interest  payments on bonds issued by the
Financing Corporation,  a mixed-ownership  government corporation established to
recapitalize a predecessor to the Deposit  Insurance  Fund. The assessment  rate
for the third  quarter of 2008 was .0028% of insured  deposits  and is  adjusted
quarterly. These assessments will continue until the Financing Corporation bonds
mature in 2019.

      Under the FDIA, insurance of deposits may be terminated by the FDIC upon a
finding  that the  institution  has engaged or is engaging in unsafe and unsound
practices,  is in an unsafe or unsound  condition to continue  operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
FDIC or written agreement entered into with the FDIC. The management of the Bank
does not  know of any  practice,  condition  or  violation  that  might  lead to
termination of deposit  insurance.  At September 30, 2008, the Bank's regulatory
capital exceeded all of its capital requirements.

      On October 16, 2008, the Federal Deposit Insurance Corporation published a
restoration plan designed to replenish the Deposit  Insurance Fund over a period
of five  years and to  increase  the  deposit  insurance  reserve  ratio,  which
decreased  to 1.01% of  insured  deposits  on June 30,  2008,  to the  statutory
minimum of 1.15% of insured deposits by December 31, 2013. In order to implement
the restoration  plan, the Federal  Deposit  Insurance  Corporation  proposes to
change both its  risk-based  assessment  system and its base  assessment  rates.
Assessment  rates would  increase by seven basis points across the range of risk
weightings  of depository  institutions.  Changes to the  risk-based  assessment
system would include increasing premiums for institutions that rely on excessive
amounts of brokered deposits, including CDARS, increasing premiums for excessive
use of secured liabilities,  including Federal Home Loan Bank advances, lowering
premiums  for smaller  institutions  with very high capital  levels,  and adding
financial  ratios and debt issuer ratings to the premium  calculations for banks
with over $10 billion in assets, while providing a reduction for their unsecured
debt.

      Capital Requirements.  The FDIC has promulgated  regulations and adopted a
statement of policy  regarding  the capital  adequacy of  state-chartered  banks
which, like the Bank, are not members of the Federal

                                       21

<PAGE>

Reserve System. The FDIC's capital  regulations  establish a minimum 3.0% Tier I
leverage  capital   requirement  for  the  most  highly-rated   state-chartered,
non-member banks, with an additional cushion of at least 100 to 200 basis points
for all other state-chartered, non-member banks, which effectively will increase
the minimum Tier I leverage  ratio for such other banks to 4.0% to 5.0% or more.
Under  the  FDIC's  regulation,  highest-rated  banks  are  those  that the FDIC
determines are not anticipating or experiencing significant growth and have well
diversified  risk,  including no undue  interest rate risk  exposure,  excellent
asset  quality,  high  liquidity,  good  earnings  and,  in  general,  which are
considered a strong banking  organization,  rated  composite 1 under the Uniform
Financial Institutions Rating System. Leverage or core capital is defined as the
sum of common stockholders' equity (including retained earnings),  noncumulative
perpetual  preferred  stock and  related  surplus,  and  minority  interests  in
consolidated  subsidiaries,  minus all  intangible  assets  other  than  certain
qualifying supervisory goodwill, and certain purchased mortgage servicing rights
and purchased credit and relationships.

      The FDIC also  requires  that  savings  banks  meet a  risk-based  capital
standard.  The  risk-based  capital  standard  for savings  banks  requires  the
maintenance   of  total   capital  which  is  defined  as  Tier  I  capital  and
supplementary (Tier 2 capital) to risk weighted assets of 8%. In determining the
amount of  risk-weighted  assets,  all assets,  plus  certain off balance  sheet
assets,  are multiplied by a risk-weight  of 0% to 100%,  based on the risks the
FDIC believes are inherent in the type of asset or item.

      The components of Tier I capital are equivalent to those  discussed  above
under the 3% leverage standard. The components of supplementary (Tier 2) capital
include  certain  perpetual  preferred  stock,  certain  mandatory   convertible
securities,  certain  subordinated  debt and  intermediate  preferred  stock and
general  allowances  for loan losses.  Allowance  for loan losses  includable in
supplementary  capital is limited to a maximum of 1.25% of risk-weighted assets.
Overall,  the amount of capital  counted  toward  supplementary  capital  cannot
exceed 100% of core  capital.  At September  30, 2008,  the Bank met each of its
capital requirements.

      Prompt  Corrective  Action.  Under  Section 38 of the FDIA,  each  federal
banking agency is required to implement a system of prompt corrective action for
institutions  which it regulates.  The federal banking  agencies  (including the
FDIC) have adopted  substantially similar regulations to implement Section 38 of
the FDIA. Under the regulations,  a savings bank shall be deemed to be (i) "well
capitalized" if it has total  risk-based  capital of 10.0% or more, has a Tier 1
risk-based ratio of 6.0% or more, has a Tier 1 leverage capital ratio of 5.0% or
more and is not  subject  to any order or final  capital  directive  to meet and
maintain a specific  capital  level for any capital  measure,  (ii)  "adequately
capitalized" if it has a total risk-based  capital ratio of 8.0% or more, a Tier
1 risk-based  capital ratio of 4.0% or more and a Tier 1 leverage  capital ratio
of 4.0% or more  (3.0%  under  certain  circumstances)  and  does  not  meet the
definition of "well  capitalized",  (iii)  "undercapitalized"  if it has a total
risk-based  capital  ratio that is less than 8.0%, a Tier 1  risk-based  capital
ratio  that is less than 4.0% or a Tier 1  leverage  capital  ratio that is less
than   4.0%   (3.0%   under   certain   circumstances),    (iv)   "significantly
undercapitalized"  if it has a total  risk-based ratio that is less than 6.0%, a
Tier 1  risk-based  capital  ratio  that is less than 3.0% or a Tier 1  leverage
capital ratio that is less than 3.0%, and (v) "critically  undercapitalized"  if
it has a ratio of tangible  equity to total assets that is equal to or less than
2.0%.  Section 38 of the FDIA and the  regulations  promulgated  thereunder also
specify  circumstances  under which the FDIC may  reclassify a well  capitalized
savings bank as adequately capitalized and may require an adequately capitalized
savings  bank or an  undercapitalized  savings  bank to comply with  supervisory
actions as if it were in the next lower  category  (except that the FDIC may not
reclassify  a   significantly   undercapitalized   savings  bank  as  critically
undercapitalized). At September 30, 2008, the Bank was in the "well capitalized"
category.

                                       22

<PAGE>

      The Bank is also subject to more stringent  Department capital guidelines.
Although  not  adopted in  regulation  form,  the  Department  utilizes  capital
standards requiring a minimum of 6% leverage capital and 10% risk-based capital.
The components of leverage and risk-based  capital are substantially the same as
those defined by the FDIC.

      Loans-to-One  Borrower  Limitation.  With certain  limited  exceptions,  a
Pennsylvania  chartered  savings  bank may lend to a single or related  group of
borrowers on an "unsecured" basis an amount equal to 15% of its capital account.

      Activities and Investments of Insured State-Chartered Banks. Section 24 of
the FDIA generally limits the activities and equity investments of FDIC-insured,
state-chartered  banks to those that are permissible  for national banks.  Under
regulations dealing with equity investments, an insured state bank generally may
not directly or indirectly acquire or retain any equity investment of a type, or
in an amount, that is not permissible for a national bank. An insured state bank
is not  prohibited  from,  among other  things,  (i)  acquiring  or  retaining a
majority  interest in a  subsidiary,  (ii)  investing as a limited  partner in a
partnership  the sole purpose of which is direct or indirect  investment  in the
acquisition,  rehabilitation or new construction of a qualified housing project,
provided  that such  limited  partnership  investments  may not exceed 2% of the
bank's total assets,  (iii) acquiring up to 10% of the voting stock of a company
that solely provides or reinsures directors',  trustees' and officers' liability
insurance coverage or bankers' blanket bond group insurance coverage for insured
depository institutions,  and (iv) acquiring or retaining the voting shares of a
depository institution if certain requirements are met.

      Pursuant to FDIC  regulations  promulgated  under  Section 24 of the FDIA,
insured  savings banks  engaging in  impermissible  activities may seek approval
from the FDIC to continue  such  activities.  Savings banks not engaging in such
activities but that desire to engage in otherwise  impermissible  activities may
apply for approval from the FDIC to do so;  however,  if such bank fails to meet
the minimum capital requirements or the activities present a significant risk to
the FDIC insurance funds, such application will not be approved by the FDIC. The
FDIC has authorized the bank's  subsidiary HARL, LLC, to invest up to 15% of its
capital in the equity securities of bank holding companies, banks or thrifts. As
of  September  30,  2008,  $842,000  was  invested  by HARL,  LLC in such equity
securities.

      Regulatory Enforcement Authority.  FIRREA included substantial enhancement
to the  enforcement.  Federal banking  regulators have  substantial  enforcement
authority over the financial  institutions that they regulate  including,  among
other  things,   the  ability  to  assess  civil  money   penalties,   to  issue
cease-and-desist  or removal orders and to initiate  injunctive  actions against
banking  organizations  and  institution-affiliated   parties,  as  defined.  In
general,  these enforcement  actions may be initiated for violations of laws and
regulations  and unsafe or unsound  practices.  Other  actions or inactions  may
provide  the basis for  enforcement  action,  including  misleading  or untimely
reports filed with regulatory  authorities.  Except under certain circumstances,
federal law  requires  public  disclosure  of final  enforcement  actions by the
federal banking agencies.

Federal and State Taxation

      General.  The Bank is  subject  to  federal  income  taxation  in the same
general  manner  as  other   corporations   with  some   exceptions,   including
particularly the reserve for bad debts discussed below. The following discussion
of federal  taxation is intended  only to summarize  certain  pertinent  federal
income  tax  matters  and is not a  comprehensive  description  of the tax rules
applicable to the Bank.

                                       23

<PAGE>

      Method of Accounting.  For federal income tax purposes, the Bank currently
reports its income and expenses on the accrual  method of accounting  and uses a
tax year ending September 30 for filing its federal income tax returns.

      Bad Debt  Reserves.  The Company  computes its reserve for bad debts under
the specific  charge-off  method.  The bad debt deduction  allowable  under this
method is  available  to large  banks with  assets  greater  than $500  million.
Generally,  this method  allows the Company to deduct an annual  addition to the
reserve  for bad  debts  equal  to its net  charge-offs.  Retained  earnings  at
September 30, 2008 and 2007 includes approximately $1.3 million representing bad
debt deductions for which no deferred income taxes have been provided.

      Distributions.   If  the  Bank   distributes   cash  or  property  to  its
stockholders,  and the  distribution  is treated  as being from its  accumulated
pre-1988 tax bad debt  reserves,  the  distribution  will cause the Bank to have
additional taxable income. A distribution to stockholders is deemed to have been
made from  accumulated  bad debt  reserves to the extent  that (a) the  reserves
exceed the amount that would have been  accumulated  on the basis of actual loss
experience,  and  (b)  the  distribution  is a  "non-dividend  distribution."  A
distribution  in respect of stock is a non-dividend  distribution  to the extent
that, for federal income tax purposes,  (i) it is in redemption of shares,  (ii)
it is pursuant to a liquidation  of the  institution,  or (iii) in the case of a
current  distribution,  together  with all other such  distributions  during the
taxable year, it exceeds the Bank's current and post-1951  accumulated  earnings
and profits.  The amount of additional  taxable income created by a non-dividend
distribution  is an amount that when  reduced by the tax  attributable  to it is
equal to the amount of the distribution.

      Minimum Tax. The Code imposes an alternative  minimum tax at a rate of 20%
on a base of regular taxable income plus certain tax  preferences  ("alternative
minimum  taxable income" or "AMTI").  The alternative  minimum tax is payable to
the extent such AMTI is in excess of an exemption amount. The Code provides that
an item of tax preference is the excess of the bad debt deduction  allowable for
a taxable year  pursuant to the  percentage  of taxable  income  method over the
amount allowable under the experience  method. The other items of tax preference
that constitute AMTI include (a) tax exempt interest on newly-issued (generally,
issued on or after  August 8, 1986)  private  activity  bonds other than certain
qualified  bonds and (b) for taxable  years  beginning  after  1989,  75% of the
excess (if any) of (i) adjusted  current  earnings as defined in the Code,  over
(ii) AMTI  (determined  without regard to this preference and prior to reduction
by net operating  losses).  Net operating  losses can offset no more than 90% of
AMTI. Certain payments of alternative minimum tax may be used as credits against
regular tax liabilities in future years.

      Net Operating Loss Carryovers.  A financial institution may carry back net
operating  losses  to the  preceding  three  taxable  years and  forward  to the
succeeding 15 taxable years.  Effective for net operating  losses arising in tax
years  beginning  after October 1, 1997,  the  carryback  period is reduced from
three years to two years and the  carryforward  period is extended from 15 years
to 20  years.  At  September  30,  2008,  the  Bank  had no net  operating  loss
carryforwards for federal income tax purposes.

      Corporate  Dividends-Received  Deduction. The corporate dividends-received
deduction is 80% in the case of dividends  received from corporations with which
a corporate  recipient does not file a consolidated tax return, and corporations
which own less than 20% of the stock of a  corporation  distributing  a dividend
may deduct only 70% of dividends received or accrued on their behalf. However, a
corporation  may deduct 100% of dividends  from a member of the same  affiliated
group of corporations.

      Other Matters.  The Company's federal income tax returns for its tax years
1993 and beyond are open under the  statute of  limitations  and are  subject to
review by the Internal Revenue Service ("IRS").

                                       24

<PAGE>

      Pennsylvania  Taxation.  The Bank is subject to tax under the Pennsylvania
Mutual Thrift  Institutions Tax Act, which imposes a tax at the rate of 11.5% on
the Bank's net earnings,  determined in accordance  with  accounting  principles
generally  accepted in the United States of America,  as shown on its books. For
fiscal years  beginning in 1983,  and  thereafter,  net operating  losses may be
carried forward and allowed as a deduction for three succeeding  years. This Act
exempts the Bank from all other  corporate  taxes  imposed by  Pennsylvania  for
state tax purposes,  and from all local taxes imposed by political  subdivisions
thereof, except taxes on real estate and real estate transfers.

Subsidiary

      The Bank is the only direct wholly owned  subsidiary  of the Company.  The
Bank formed HSB, Inc., a Delaware  company,  as a wholly owned subsidiary of the
Bank during  fiscal  1997.  HSB,  Inc.  was formed in order to  accommodate  the
transfer  of  certain  assets  that are  legal  investments  for the Bank and to
provide for a greater  degree of protection to claims of creditors.  The laws of
the State of Delaware and the court system create a more  favorable  environment
for the proposed business affairs of the subsidiary. HSB, Inc. currently manages
the investment  securities for the Bank, which as of September 30, 2008 amounted
to approximately $159.2 million. The Bank formed two limited liability companies
in 2002,  Freedom  Financial  Solutions  LLC  ("FFS")  and  HARL,  LLC.  FFS was
established to engage in the sale of insurance  products  through a third party.
HARL, LLC was established for the purpose of investing in FDIC insured financial
institutions/holding company equity securities.

Item 1A. Risk Factors.
----------------------

      In  analyzing  whether  to  make  or to  continue  an  investment  in  our
securities,  investors should consider,  among other factors, the following risk
factors.

Our results of operations are significantly dependent on economic conditions and
related uncertainties.

      Commercial banking is affected,  directly and indirectly,  by domestic and
international economic and political conditions and by governmental monetary and
fiscal policies. Conditions such as inflation, recession, unemployment, volatile
interest rates, real estate values,  government  monetary policy,  international
conflicts,  the actions of terrorists  and other factors  beyond our control may
adversely  affect our  results of  operations.  Changes in  interest  rates,  in
particular,  could adversely affect our net interest income and have a number of
other  adverse  effects  on our  operations,  as  discussed  in the  immediately
succeeding  risk factor.  Adverse  economic  conditions  also could result in an
increase in loan  delinquencies,  foreclosures  and  nonperforming  assets and a
decrease in the value of the  property  or other  collateral  which  secures our
loans,  all of which could  adversely  affect our results of operations.  We are
particularly   sensitive   to  changes  in  economic   conditions   and  related
uncertainties in Eastern Pennsylvania because we derive substantially all of our
loans,  deposits  and other  business  from this  area.  Accordingly,  we remain
subject to the risks  associated  with  prolonged  declines in national or local
economies.

Changes  in  interest  rates  could  have  a  material  adverse  effect  on  our
operations.

      The operations of financial  institutions  such as ours are dependent to a
large  extent  on net  interest  income,  which is the  difference  between  the
interest income earned on  interest-earning  assets such as loans and investment
securities and the interest expense paid on interest-bearing liabilities such as
deposits  and  borrowings.  Changes in the general  level of interest  rates can
affect our net interest income by affecting the difference  between the weighted
average  yield earned on our  interest-earning  assets and the weighted  average
rate paid on our interest-bearing  liabilities, or interest rate spread, and the
average life of our interest-earning  assets and  interest-bearing  liabilities.
Changes in interest  rates also can affect our ability to originate  loans;  the

                                       25

<PAGE>

value of our  interest-earning  assets and our ability to realize gains from the
sale of such assets;  our ability to obtain and retain  deposits in  competition
with other available  investment  alternatives;  the ability of our borrowers to
repay adjustable or variable rate loans.  Interest rates are highly sensitive to
many  factors,   including   governmental   monetary   policies,   domestic  and
international  economic and political  conditions  and other factors  beyond our
control.   Although   we  believe   that  the   estimated   maturities   of  our
interest-earning assets currently are well balanced in relation to the estimated
maturities of our interest-bearing liabilities (which involves various estimates
as to how changes in the  general  level of  interest  rates will  impact  these
assets and liabilities),  there can be no assurance that our profitability would
not be adversely affected during any period of changes in interest rates.

There are increased  risks involved with  multi-family  residential,  commercial
real estate, commercial business and consumer lending activities.

      Our lending  activities  include  loans  secured by existing  multi-family
residential  and  commercial  real  estate.  In  addition,  from time to time we
originate loans for the construction of multi-family residential real estate and
land acquisition and development  loans.  Multi-family  residential,  commercial
real estate and construction lending generally is considered to involve a higher
degree of risk  than  single-family  residential  lending  due to a  variety  of
factors,  including generally larger loan balances, the dependency on successful
completion  or  operation  of the project for  repayment,  the  difficulties  in
estimating  construction  costs and loan terms which  often do not require  full
amortization  of the loan  over its term  and,  instead,  provide  for a balloon
payment at stated  maturity.  Our lending  activities  also  include  commercial
business  loans and leases to small to medium  businesses,  which  generally are
secured by various  equipment,  machinery and other corporate assets, and a wide
variety of consumer loans,  including home improvement loans, home equity loans,
education  loans  and  loans  secured  by  automobiles,   boats,  mobile  homes,
recreational vehicles and other personal property.  Although commercial business
loans and leases and consumer  loans  generally  have  shorter  terms and higher
interests  rates than  mortgage  loans,  they  generally  involve more risk than
mortgage loans because of the nature of, or in certain cases the absence of, the
collateral which secures such loans.

We are subject to extensive regulation which could adversely affect our business
and operations.

      We and our  subsidiaries  are  subject  to  extensive  federal  and  state
governmental  supervision and regulation,  which are intended  primarily for the
protection of depositors.  In addition,  we and our  subsidiaries are subject to
changes  in  federal  and  state  laws,  as  well  as  changes  in  regulations,
governmental  policies  and  accounting  principles.  The  effects  of any  such
potential  changes cannot be predicted but could  adversely  affect the business
and operations of us and our subsidiaries in the future.

We face strong competition which may adversely affect our profitability.

      We are  subject to  vigorous  competition  in all aspects and areas of our
business from banks and other financial institutions, including savings and loan
associations,   savings  banks,  finance  companies,  credit  unions  and  other
providers of financial  services,  such as money market mutual funds,  brokerage
firms, consumer finance companies and insurance companies.  We also compete with
non-financial  institutions,  including  retail stores that  maintain  their own
credit  programs  and  governmental  agencies  that make  available  low cost or
guaranteed  loans to certain  borrowers.  Certain of our  competitors are larger
financial  institutions with substantially  greater  resources,  lending limits,
larger  branch  systems  and a  wider  array  of  commercial  banking  services.
Competition from both bank and non-bank organizations will continue.

                                       26

<PAGE>

Our  ability  to  successfully  compete  may be reduced if we are unable to make
technological advances.

      The banking  industry is  experiencing  rapid  changes in  technology.  In
addition to improving customer services,  effective use of technology  increases
efficiency and enables financial  institutions to reduce costs. As a result, our
future  success  will depend in part on our  ability to address  our  customers'
needs  by  using  technology.  We  cannot  assure  you  that  we will be able to
effectively develop new technology-driven products and services or be successful
in marketing these products to our customers.  Many of our competitors  have far
greater resources than we have to invest in technology.

We and our banking  subsidiary  are  subject to capital  and other  requirements
which restrict our ability to pay dividends.

      Our ability to pay dividends to our shareholders depends to a large extent
upon the dividends we receive from Harleysville  Savings Bank. Dividends paid by
the Bank are subject to  restrictions  under  Pennsylvania  and federal laws and
regulations.  In  addition,  Harleysville  Savings  Bank must  maintain  certain
capital  levels,  which may restrict the ability of the Bank to pay dividends to
us and our ability to pay dividends to our shareholders.

Holders  of our  common  stock  have no  preemptive  rights  and are  subject to
potential dilution.

      Our  articles  of  incorporation  do not provide  any  shareholder  with a
preemptive  right to subscribe  for  additional  shares of common stock upon any
increase  thereof.  Thus,  upon the issuance of any additional  shares of common
stock or other voting  securities of the Company or securities  convertible into
common stock or other voting securities,  shareholders may be unable to maintain
their pro rata voting or ownership interest in us.

Our deposit insurance premium could be substantially  higher in the future which
would have an adverse effect on our future earnings.

      Under the Federal Deposit  Insurance Act, the FDIC,  absent  extraordinary
circumstances,  must  establish  and  implement  a plan to restore  the  deposit
insurance reserve ratio to 1.15% of insured  deposits,  over a five-year period,
at any time that the reserve ratio falls below 1.15%.  The recent  failures of a
large  financial   institution  and  several  smaller  ones  have  significantly
increased the Deposit  Insurance Fund's loss provisions,  resulting in a decline
in the reserve  ratio to 1.01% as of June 30,  2008,  18 basis  points below the
reserve  ratio as of March 31,  2008.  The FDIC expects a higher rate of insured
institution  failures  in the next few years,  which may  result in a  continued
decline in the reserve ratio.

      On October 7, 2008,  the FDIC released a five-year  recapitalization  plan
and a proposal to raise premiums to recapitalize the fund. In order to implement
the restoration plan, the FDIC proposed to change both its risk-based assessment
system and its base assessment  rates.  Assessment rates would increase by seven
basis  points  across the range of risk  weightings.  Changes to the  risk-based
assessment system would include  increasing  premiums for institutions that rely
on excessive amounts of brokered deposits, increasing premiums for excessive use
of secured liabilities, and lowering premiums for smaller institutions with very
high capital levels.

The actions of the U.S.  Government for the purpose of stabilizing the financial
markets,  or market  response to those  actions,  may not  achieve the  intended
effect, and our results of operations could be adversely effected.

      In response  to the  financial  issues  affecting  the banking  system and
financial  markets  and going  concern  threats  to  investment  banks and other
financial  institutions,  the  U.S.  Congress  recently  enacted  the

                                       27

<PAGE>

Emergency  Economic  Stabilization  Act of 2008 ("EESA").  The EESA provides the
U.S.  Secretary of the Treasury with the authority to establish a Troubled Asset
Relief  Program to purchase from  financial  institutions  up to $700 billion of
residential  or commercial  mortgages and any  securities,  obligations or other
instruments  that are based on or related to such  mortgages,  that in each case
was  originated  or  issued on or before  March 14,  2008,  as well as any other
financial instrument that the U.S. Secretary of the Treasury, after consultation
with the Chairman of the Federal  Reserve,  determines  the purchase of which is
necessary to promote  financial  market  stability.  As of the date hereof,  the
Treasury has determined not to purchase troubled assets under the program.

      As part of the EESA,  the  Treasury  Department  has  developed  a Capital
Purchase  Program to purchase up to $250 billion in senior  preferred stock from
qualifying financial institutions.  The Capital Purchase Program was designed to
strengthen  the capital and liquidity  positions of viable  institutions  and to
encourage banks and thrifts to increase lending to creditworthy  borrowers.  The
EESA also  establishes a Temporary  Liquidity  Guarantee  Program that gives the
Federal  Deposit  Insurance  Corporation  the ability to provide a guarantee for
newly-issued senior unsecured debt and non-interest  bearing transaction deposit
accounts at eligible insured institutions.  For non-interest bearing transaction
deposit  accounts,  a 10 basis point  annual rate  surcharge  will be applied to
deposit amounts in excess of $250,000. We have elected not to participate in the
Capital  Purchase  Program  but  will  participate  in the  Temporary  Liquidity
Guarantee Program.

      The U.S.  Congress  or federal  banking  regulatory  agencies  could adopt
additional regulatory requirements or restrictions in response to the threats to
the  financial  system and such changes may adversely  affect the  operations of
Company and the Bank. In addition, the EESA may not have the intended beneficial
impact on the  financial  markets  or the  banking  industry.  To the extent the
market does not respond  favorably to the Troubled  Asset Relief  Program or the
program does not function as intended,  our  prospects and results of operations
could be adversely effected.

Item 1B. Unresolved Staff Comments.
----------------------------------

      Not applicable.

                                       28

<PAGE>

Item 2. Properties.
------------------

      As of September 30, 2008, the Company conducted its business from its main
office in Harleysville, Pennsylvania and five other full service branch offices.
The Company is also part of the STAR ATM System,  which provides  customers with
access to their deposits at locations worldwide.

<TABLE>
<CAPTION>
                                                                         Net Book Value of
                                                         Lease         Property and Leasehold
                                          Owned or     Expiration         Improvements at
  County               Address             Leased         Date           September 30, 2008      Deposits
----------   --------------------------   --------   ---------------   ----------------------   ----------
                                                                                  (In Thousands)
<S>          <C>                          <C>        <C>               <C>                      <C>
Montgomery   1889 Ridge Pike
             Royersford, Pennsylvania      Owned           --                  $ 3,152          $   17,976
Montgomery   271 Main Street
             Harleysville, Pennsylvania    Owned           --                    1,089             148,400
Montgomery   640 East Main Street
             Lansdale, Pennsylvania        Leased      May 2043(1)                 854              42,312
Montgomery   1550 Hatfield Valley Road
             Hatfield, Pennsylvania        Leased    January 2064(1)               855              79,334
Montgomery   2301 West Main Street
             Norristown, Pennsylvania      Owned           --                      507              83,920
Montgomery   3090 Main Street
             Sumneytown, Pennsylvania      Owned           --                      281              53,571
                                                                               -------          ----------
          Total                                                                $ 6,738          $  425,513
                                                                               =======          ==========
</TABLE>

(1)   The land at this office is leased; however, the Bank owns the building.

Item 3. Legal Proceedings.
-------------------------

      The Company is not involved in any legal  proceedings  except  nonmaterial
litigation incidental to the ordinary course of business.

Item 4. Submission of Matters to a Vote of Security Holders.
-----------------------------------------------------------
      Not Applicable.

                                       29

<PAGE>

                                     PART II

Item 5. Market for the Registrant's Common Equity,  Related  Stockholder Matters
--------------------------------------------------------------------------------
        and Issuer Purchases of Equity Securities.
        -----------------------------------------

      (a) The  information  for all  equity  based and  individual  compensation
arrangements is incorporated by reference from Part III, Item 12 hereof.

      Harleysville Savings Financial Corporation's Common Stock is listed on the
Nasdaq Global Market under the symbol "HARL".  The Common Stock was issued at an
adjusted  price of $1.45 per share in connection  with the Company's  conversion
from mutual to stock form and the Common Stock  commenced  trading on the NASDAQ
Stock  Market on  September  3, 1987.  Prices  shown  below  reflect  the prices
reported by the NASDAQ Stock Market  during the indicated  periods.  The closing
price of the Common Stock on September 30, 2008 was $12.57 per share. There were
3,567,934  shares  outstanding as of September 30, 2008,  held by  approximately
1,000  stockholders  of record,  not including the number of persons or entities
whose stock is held in nominee or "street" name through various  brokerage firms
and banks.

                                                           Cash Dividends
        For The Quarter Ended    High      Low     Close      Declared
        ---------------------   ------   ------   ------   --------------

        September 30, 2008      $13.50   $10.70   $12.57        $0.18
        June 30, 2008            14.31    11.85    11.85         0.17
        March 31, 2008           13.99    10.55    13.50         0.17
        December 31, 2007        14.69    12.00    12.50         0.17

        September 30, 2007       16.72    13.30    13.71         0.17
        June 30, 2007            17.59    16.00    16.20         0.17
        March 31, 2007           19.25    16.02    16.75         0.17
        December 31, 2006        19.93    15.60    18.48         0.17

      (b)   Not applicable.

      (c)   The following table sets forth information with respect to purchases
made by or on behalf of the  Company  of shares of Common  Stock of the  Company
during the fourth quarter of fiscal 2008.

<TABLE>
<CAPTION>
                                                        Total Number of
                                                      Shares Purchased as       Maximum Number of
                          Total Number     Average      Part of Publicly      Shares that May Yet Be
                            of Shares    Price Paid    Announced Plans or   Purchased Under the Plans
        Period              Purchased     per Share         Programs              or Programs(1)
-----------------------   ------------   ----------   -------------------   -------------------------
<S>                       <C>            <C>          <C>                   <C>
July 1-31, 2008 .......             --   $       --            --                     66,351
August 1-31, 2008 .....             --           --            --                     66,351
September 1-30, 2008 ..             --           --            --                     66,351
                          ------------   ----------          ----                     ------
   Total ..............             --   $       --            --                     66,351
                          ============   ==========          ====                     ======
</TABLE>

----------
(1)   On June 20, 2007, the Company  announced its current program to repurchase
      up to 5.0% of the  outstanding  shares of Common Stock of the Company,  or
      196,000  shares.  The  program  does not have an  expiration  date and all
      shares are purchased in the open market.

                                       30

<PAGE>

Item 6. Selected Financial Data.
-------------------------------

Selected Balance Sheet Data:
(Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                 As of September 30,
                                                -----------------------------------------------------
                                                  2008       2007       2006       2005       2004
-----------------------------------------------------------------------------------------------------
<S>                                             <C>        <C>        <C>        <C>        <C>
Total Assets                                    $825,675   $773,544   $775,638   $766,990   $718,232
Mortgage-backed securities held to maturity      213,933    192,842    219,494    263,964    261,292
Mortgage-backed securities available-for-sale        758        818        820      1,045      3,795
Consumer loans receivable                        434,439    405,672    386,486    368,034    340,561
Commercial loans                                  44,407     15,314        920         --         --
Allowance for loan losses                          1,988      1,933      1,956      1,968      1,977
Investment securities held to maturity            79,254    108,693    111,099     87,364     68,162
Investment securities available-for-sale             854      1,910      8,108      2,835      7,715
Other investments (1)                             25,948     22,457     25,549     23,971     19,903
Deposits                                         425,513    424,035    429,254    418,980    405,231
FHLB advances and other borrowings               347,846    298,609    294,611    297,268    265,953
Total stockholders' equity                        47,209     47,041     48,471     47,576     44,313
Book value per share (3)                           13.23      12.65      12.59      12.20      11.56
</TABLE>

Selected Operations Data:

<TABLE>
<CAPTION>
                                                              Year Ended September 30,
                                                -----------------------------------------------------
                                                  2008       2007       2006       2005       2004
-----------------------------------------------------------------------------------------------------
<S>                                             <C>        <C>        <C>        <C>        <C>
Interest income                                 $ 43,076   $ 40,289   $ 39,091   $ 35,902   $ 32,636
Interest expense                                  29,016     28,806     26,366     22,747     20,391
                                                --------   --------   --------   --------   --------

Net interest income                               14,060     11,483     12,725     13,155     12,245
Provision for loan losses                             85         --         --        (40)        --
                                                --------   --------   --------   --------   --------
Net interest income after provision
   for loan losses                                13,975     11,483     12,725     13,195     12,245

Gain (loss) on impairment of securities
   and sales of loans and securities                (179)       160         27        115        326
Other income                                       1,909      1,730      1,273      1,351      1,282
Other expense                                     10,094      9,216      8,568      7,965      7,399
                                                --------   --------   --------   --------   --------

Income before taxes                                5,611      4,157      5,457      6,696      6,454
Income tax expense                                 1,232        911      1,255      1,693      1,604
                                                --------   --------   --------   --------   --------

Net income                                      $  4,379   $  3,246   $  4,202   $  5,003   $  4,850
                                                ========   ========   ========   ========   ========

Earnings per share - basic (3)                  $   1.20   $   0.85   $   1.09   $   1.29   $   1.28
Earnings per share - diluted (3)                    1.20       0.83       1.08       1.27       1.25
Dividends per share (3)                              .69       0.68       0.64       0.58       0.48
</TABLE>

Selected Other Data:

<TABLE>
<CAPTION>
                                                              Year Ended September 30,
                                                -----------------------------------------------------
                                                  2008       2007       2006       2005       2004
-----------------------------------------------------------------------------------------------------
<S>                                               <C>        <C>        <C>        <C>        <C>
Return on average assets (2)                        0.54%      0.42%      0.55%      0.67%      0.70%
Return on average equity (2)                        9.42%      6.71%      8.76%     10.91%     11.44%
Dividend payout ratio                              57.26%     80.02%     58.72%     44.96%     37.56%
Average equity to average assets (2)                5.76%      6.13%      6.21%      6.19%      6.12%
Interest rate spread (2)                            1.57%      1.39%      1.51%      1.65%      1.64%
Net yield on interest-earning assets (2)            1.79%      1.58%      1.71%      1.82%      1.80%
Ratio of non-performing assets to
   total assets at end of period                    0.15%      0.00%      0.00%      0.03%      0.04%
Ratio of interest-earning assets to
   Interest-bearing liabilities at end of
   period                                          105.9%     104.7%     105.6%     105.4%     105.6%
Full service banking offices at
   end of period                                       6          6          6          5          5
</TABLE>

(1) Includes  interest-bearing deposits at other depository institutions & stock
of the Federal Home Loan Bank of Pittsburgh.

(2) All ratios  are based on  average  monthly  balances  during  the  indicated
periods.

(3) The number of shares and per share information for all periods presented has
been restated to reflect the five for three stock split as of February 24, 2005.

                                       31

<PAGE>

Item 7. Management's  Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
        of Operations.
        -------------

      The  following  discussion  is  intended  to assist in  understanding  our
financial  condition,  and the results of operations  for  Harleysville  Savings
Financial  Corporation,  and its subsidiary  Harleysville  Savings Bank, for the
fiscal years ended  September 30, 2008 and 2007. The information in this section
should be read in conjunction  with the Company's  financial  statements and the
accompanying notes included elsewhere herein.

Critical Accounting Policies and Judgments

      The Company's  consolidated financial statements are prepared based on the
application of certain  accounting  policies,  the most significant of which are
described  in Note 2, Summary of  Significant  Accounting  Policies.  Certain of
these policies require numerous estimates and strategic or economic  assumptions
that may prove inaccurate or subject to variations and may significantly  affect
the  Company's  reported  results and  financial  position  for the period or in
future periods. Changes in underlying factors,  assumptions, or estimates in any
of these areas could have a material  impact on the Company's  future  financial
condition and results of operations.

      Analysis  and  Determination  of  the  Allowance  for  Loan  Losses  - The
allowance for loan losses is a valuation  allowance for probable losses inherent
in the loan portfolio.  The Company  evaluates the need to establish  allowances
against  losses on loans on a monthly  basis.  When  additional  allowances  are
necessary, a provision for loan losses is charged to earnings.

      Our  methodology  for assessing the  appropriateness  of the allowance for
loan losses consists of three key elements:  (1) specific allowances for certain
impaired or  collateral-dependent  loans; (2) a general  valuation  allowance on
certain identified  problem loans; and (3) a general valuation  allowance on the
remainder  of the loan  portfolio.  Although  we  determine  the  amount of each
element of the  allowance  separately,  the entire  allowance for loan losses is
available for the entire portfolio.

      Specific Allowance  Required for Certain Impaired or  Collateral-Dependent
Loans:  We establish an allowance for certain  impaired loans for the amounts by
which the discounted cash flows (or collateral value or observable market price)
are  lower  than  the  carrying  value of the  loan.  Under  current  accounting
guidelines, a loan is defined as impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all amounts due
under the contractual terms of the loan agreement.

      General Valuation  Allowance on Certain Identified Problem Loans - We also
establish  a  general  allowance  for  classified  loans  that  do not  have  an
individual  allowance.  We  segregate  these loans by loan  category  and assign
allowance  percentages to each category based on inherent losses associated with
each type of lending  and  consideration  that these  loans,  in the  aggregate,
represent an  above-average  credit risk and that more of these loans will prove
to be uncollectible compared to loans in the general portfolio.

      General  Valuation  Allowance on the Remainder of the Loan  Portfolio - We
establish  another  general  allowance  for  loans  that are not  classified  to
recognize the inherent  losses  associated with lending  activities,  but which,
unlike specific allowances, has not been allocated to particular problem assets.
This general valuation  allowance is determined by segregating the loans by loan
category  and  assigning  allowance  percentages  based on our  historical  loss
experience, delinquency trends and management's evaluation of the collectibility
of the loan portfolio.  The allowance is adjusted for significant  factors that,
in management's  judgment,  affect the collectibility of the portfolio as of the
evaluation  date.  These  significant  factors  may  include  changes in lending
policies  and  procedures,  changes in existing  general  economic  and business
conditions   affecting  our  primary  lending  areas,   credit  quality  trends,
collateral  value,  loan  volumes  and  concentrations,  seasoning  of the  loan
portfolio, loss experience in particular segments of the portfolio,  duration of
the current business cycle, and

                                       32

<PAGE>

bank regulatory  examination  results.  The applied loss factors are reevaluated
monthly to ensure their relevance in the current economic environment.

      Investment   Securities   Impairment   Valuation.   Management   evaluates
securities for  other-than-temporary  impairment on at least a quarterly  basis,
and more frequently when economic or market  concerns  warrant such  evaluation.
Consideration  is given to (1)  length of time and the  extent to which the fair
value  has been  less than  cost,  (2) the  financial  condition  and  near-term
prospects of the issuer, and (3) the intent and ability of the Company to retain
its  investment  in the issuer for a period of time  sufficient to allow for any
anticipated recovery in fair value.

Overview

      Harleysville  Savings Financial  Corporation,  a bank holding company,  of
which Harleysville Savings Bank (the "Bank"), is a wholly owned subsidiary,  was
formed in February 2000. For purposes of this discussion, the Company, including
its wholly owned subsidiary, will be referred to as the "Company." The Company's
earnings  are  primarily  dependent  upon  its net  interest  income,  which  is
determined  by (i) the  difference  between  yields  earned on  interest-earning
assets and rates paid on interest-bearing  liabilities  ("interest rate spread")
and (ii) the relative amounts of  interest-earning  assets and  interest-bearing
liabilities  outstanding.  The  Company's  interest  rate  spread is affected by
regulatory,  economic,  and competitive  factors that influence  interest rates,
loan demand and deposit flows. The Company,  like other thrift institutions,  is
vulnerable to an increase in interest rates to the extent that  interest-bearing
liabilities  mature or reprice  more rapidly than  interest-earning  assets.  To
reduce the effect of adverse  changes in interest rates on its  operations,  the
Company has adopted certain asset and liability management strategies, described
below. The Company's  earnings are also affected by, among other factors,  other
non-interest income, other expenses, and income taxes.

      The  Company's  total  assets at September  30,  2008,  amounted to $825.7
million,  compared to $773.5  million as of September 30, 2007.  The increase in
assets was primarily due to the retail growth in mortgage and commercial  loans,
resulting in an overall  increase in loans  receivable  of  approximately  $57.8
million. In addition,  there was an increase in Federal Home Loan Bank stock and
cash equivalents of $2.4 million and $1.1 million, respectively. These increases
were  offset by a decrease  in  mortgage-backed  and  investment  securities  of
approximately $9.5 million.  Total liabilities at September 30, 2008 were $778.5
million  compared to $726.5  million at  September  30,  2007.  The  increase in
liabilities was due to an increase in long-term  borrowing and deposits of $58.9
million and $1.5 million,  respectively.  This increase was offset by a decrease
in short-term  borrowing of $9.7  million.  Stockholder's  equity  totaled $47.2
million as of September  30, 2008,  compared to $47.0  million at September  30,
2007.

      During fiscal 2008,  net interest  income after  provision for loan losses
increased  $2.5 million or 21.7% from prior fiscal year.  This  increase was the
result of an 8.29%  increase in the average  interest-earning  assets  which was
offset by a 7.08%  increase  in  average  interest-bearing  liabilities,  and an
increase in the interest  rate spread from 1.39% in fiscal year 2007 to 1.57% in
fiscal year 2008.  Earnings for fiscal 2008 were $4.4  million  compared to $3.2
million for fiscal year ended 2007. The Company's  return on average assets (net
income  divided by average total assets) was .54% during fiscal 2008 compared to
..42% during fiscal year 2007.  Return on average  equity (net income  divided by
average  equity) was 9.42% during  fiscal year 2008  compared to 6.71% in fiscal
year  2007.  This  increase  in return on  average  assets and return on average
equity  during  the  two-year  period  was a direct  result of the growth in the
balance sheet.

                                       33

<PAGE>

Results of Operations

      The following  table sets forth as of the periods  indicated,  information
regarding: (i) the total dollar amounts of interest income from interest-earning
assets  and the  resulting  average  yields;  (ii) the  total  dollar  amount of
interest  expense on  interest-bearing  liabilities  and the  resulting  average
costs;   (iii)  net  interest  income;   (iv)  interest  rate  spread;  (v)  net
interest-earning  assets; (vi) the net yield earned on interest-earning  assets;
and (vii) the ratio of total  interest-earning  assets to total interest-bearing
liabilities. Average balances are calculated on a monthly basis.

                                       34

<PAGE>

<TABLE>
<CAPTION>
                                                                For The Year Ended September 30,
                                     -------------------------------------------------------------------------------------------
                                                 2008                          2007                            2006
                                     -----------------------------  -----------------------------  -----------------------------
                          As of
                          Sept. 30,
                          2008
                          --------
                                      Average             Yield/                         Yield/     Average             Yield/
                            Rate      Balance  Interest    Rate      Balance  Interest    Rate      Balance   Interest   Rate
                          ---------  --------- --------- ---------  --------- --------- ---------  --------- --------- ---------
                                                                     (Dollars in Thousands)
<S>                           <C>       <C>        <C>        <C>     <C>        <C>        <C>      <C>         <C>       <C>
Interest-earning assets:
   Mortgage loans (2)(3)       5.87% $ 320,925 $  19,043      5.93% $ 294,014 $  17,270      5.87% $ 277,359 $  16,101      5.81%
   Mortgage-backed
     securities                4.86%   211,563    10,088      4.77%   204,546     9,339      4.57%   241,751    10,801      4.47%
   Commercial                  6.45%    26,492     1,799      6.79%     8,839       674      7.63%        --        --        --
   Consumer and other
     loans(3)                  5.83%   108,747     5,719      5.26%    96,481     6,035      6.37%    94,987     5,675      5.97%
   Investments                 4.81%   119,133     6,427      5.39%   122,748     6,971      5.68%   130,424     6,514      4.99%
                          ---------  --------- --------- ---------  --------- --------- ---------  --------- --------- ---------
Total interest-earning
  assets                       5.48%   786,860    43,076      5.47%   726.627    40,289      5.54%   744,522    39,091      5.25%
                          ---------  --------- --------- ---------  --------- --------- ---------  --------- --------- ---------

Interest-bearing
  liabilities:
   Savings and money
     market                    1.45%    54,669     1,189      2.17%    58,503     1,552      2.65%    62,315       712      1.14%
   Checking                    0.83%    42,832       367      0.86%    51,198       506      0.97%    36,130       352      0.97%
   Certificate of deposit      3.49%   329,405    13,662      4.15%   307,567    13,414      4.36%   320,061    12,101      3.78%
                          ---------  --------- --------- ---------  --------- --------- ---------  --------- ---------
Total deposits                 2.95%   426,906    15,218      3.56%   418,268    15,472      3.70%   418,506    13,165      3.15%

Borrowings                     4.12%   315,935    13,798      4.37%   275,429    13,334      4.84%   286,500    13,201      4.61%
                          ---------  --------- --------- ---------  --------- --------- ---------  --------- ---------

Total interest-bearing
  liabilities                  3.48%   742,841    29,016      3.90%   693,697    28,806      4.15%   705,006    26,366      3.74%
                          ---------  --------- --------- ---------  --------- --------- ---------  --------- --------- ---------

Net interest income/
   interest rate spread        2.00%           $  14,060      1.57%           $  11,483      1.39%           $  12,725      1.51%
                          =========            ========= =========            =========  =========           ========= =========

Net interest-earning
   assets/net yield
   on interest-earning
   assets(1)                         $  44,019                1.79% $  32,930                1.58% $  39,516                1.71%
                                     =========           =========  =========           =========  =========           =========

Ratio of interest-earning
   assets to interest-
   bearing liabilities                                       105.9%                         104.7%                         105.6%
                                                         =========                      =========                      =========
----------
</TABLE>

(1) Net interest income divided by average interest-earning assets.

(2) Loan fee income is immaterial to this analysis.

(3) There was one  non-accruing  loan totaling  $244,000 at September  2008, and
there were no non-accruing loans at September 2007.

                                       35

<PAGE>

      The  following  table  shows,  for the periods  indicated,  the changes in
interest income and interest expense  attributable to changes in volume (changes
in volume  multiplied  by prior year rate) and changes in rate  (changes in rate
multiplied  by  prior  year  volume).  Changes  in  rate/volume  (determined  by
multiplying  the change in rate by the change in volume) have been  allocated to
the change in rate or the change in volume based upon the respective percentages
of their combined totals.

<TABLE>
<CAPTION>
                                                  Fiscal 2008 Compared          Fiscal 2007 Compared
                                                     to Fiscal 2007                to Fiscal 2006
                                                  Increase (Decrease)           Increase (Decrease)
                                              ---------------------------   ---------------------------
(In Thousands)                                 Volume     Rate     Total     Volume     Rate     Total
                                              -------   -------   -------   -------   -------   -------
<S>                                           <C>       <C>       <C>       <C>       <C>       <C>
Interest income on interest-earning assets:
   Mortgage loans (1)                         $ 1,595       178   $ 1,773   $   976       193   $ 1,169
   Mortgage-backed securities                     327       422       749    (1,694)      232    (1,462)
   Commercial                                   1,206       (81)    1,125       673        --       673
   Consumer and other loans (1)                   713    (1,029)     (316)      (30)      390       360
   Interest and dividends on Investments         (201)     (343)     (544)     (398)      856       458
                                              -------   -------   -------   -------   -------   -------

      Total                                     3,640      (853)    2,787      (473)    1,671     1,198
                                              -------   -------   -------   -------   -------   -------

Interest expense on interest-bearing
liabilities:
   Deposits                                       312      (566)     (254)       (7)    2,314     2,307
   Borrowings                                   1,846    (1,382)      464      (521)      654       133
                                              -------   -------   -------   -------   -------   -------

      Total                                     2,158    (1,948)      210      (528)    2,968     2,440
                                              -------   -------   -------   -------   -------   -------

Net change in net interest income             $ 1,482   $ 1,095   $ 2,577   $    55   $(1,297)  $(1,242)
                                              =======   =======   =======   =======   =======   =======
</TABLE>

--------
(1) There was one  non-accruing  loan totaling  $244,000 at September  2008, and
there were no non-accruing loans at September 2007.

                                       36

<PAGE>

Net Interest Income

      Net interest  income  after  provision  for loan losses  increased by $2.5
million  or 21.7% in fiscal  2008,  and  decreased  by $1.2  million or 9.76% in
fiscal 2007 over the prior period. The increase in the net interest income after
provision  for loan losses in fiscal 2008 was due to a increase in the  interest
rate spread between interest bearing assets and interest earning liabilities and
the growth in the balance sheet. The driving factors are further explained below
in Interest Income and Interest Expense.

Interest Income

      Interest  income on mortgage  loans  increased by $1.8 million or 10.3% in
fiscal 2008 and  increased by $1.2 million or 7.3% in fiscal 2007 from the prior
year.  During fiscal 2008, the average balance of mortgage loans increased $26.9
million or 9.2% and the yield increased by 6 basis points. The combined increase
in yield on mortgage loans and the higher loan volume  increased  income for the
period.  During fiscal 2007,  the average  balance of mortgage  loans  increased
$16.7 million or 6.0% and the yield increased by 6 basis points. The increase in
volume and yield during 2007  increased  income for the period.  The majority of
loans  during  both years were fixed rate  mortgages.  The  increase in interest
income on mortgage-backed securities during fiscal 2008 reflected an increase of
$7.0 million or 3.43% in the average balance. In addition, there was an increase
in yield earned by 20 basis points during fiscal 2008.  During fiscal 2007,  the
decrease in interest income on mortgage-backed  securities  reflected a decrease
of $37.2  million  or 15.4% in the  average  balance.  There  was,  however,  an
increase in yield earned by 10 basis points  during  fiscal 2007.  In 2008,  the
decrease in interest  income on consumer and other loans reflected a decrease in
the yield of 100 basis points, in spite of the average balance increase of $12.3
million or 12.7%. In 2007, the increase in interest income on consumer and other
loans reflected an increase of $1.5 million or 1.6% in the average balance. This
increase is  primarily  due to an increase  in the  average  yield to 6.4%.  The
increase in interest income on commercial  loans during fiscal 2008 reflected an
increase of $17.7  million in average  balance in spite of the decrease in yield
to 6.79%.  During fiscal 2007, the average  growth of commercial  loans was $8.8
million.

      Interest  and  dividends on  investments  decreased by $544,000 or 7.8% in
fiscal 2008 over the prior year. Interest and dividends on investments increased
by $457,000 or 7.0% in fiscal 2007 over the prior year.  During fiscal 2008, the
decrease  resulted  from a 29 basis point  decrease in yield,  and the redundant
average  balance of investments  decreased  $3.6 million or 2.9%.  During fiscal
2007, the increase resulted from a 69 basis point increase in yield, even though
the average balance of investments  decreased $7.7 million or 5.9%. The decrease
in the average  balance in 2008 reflects funds that were  redeployed from normal
cash flows to commercial and  residential  lending.  The decrease in the average
balance in 2007 reflects  funds that were  redeployed  from normal cash flows to
pay down borrowings.

Interest Expense

      Interest expense on deposits decreased $254,000 or 1.6% in fiscal 2008 and
increased by $2.3 million or 17.5% in fiscal 2007 as compared to the prior year.
In fiscal  2008,  the average  balance of deposits  increased by $8.6 million or
2.1% with a 14 basis point  decrease in the average  rate paid.  In fiscal 2007,
the average balance of deposits decreased $238,000 or 0.1% with a 55 basis point
increase in the average rate paid. The decrease in the average balance  reflects
additional competition in a challenging rate environment.  The average rate paid
on deposits was 3.56% for the year ended  September 30, 2008,  compared to 3.70%
for the year ended  September  30, 2007.  The average rate paid on deposits is a
direct reflection of the falling interest rate environment.

      Interest  expense on  borrowings  increased  by $464,000 or 3.5% in fiscal
2008 and  increased  by $133,000 or 1.0% in fiscal 2007 as compared to the prior
year. The increase in 2008 was the result of an increase in the average  balance
in borrowings of $40.5 million or 14.7% offset by a decrease in the average rate
paid to 4.4%.  Even  though  there was a  decrease  in the  average  balance  of
borrowings of $11.1 million or 3.9%, the increase in the average rate paid of 23
basis points increased the interest  expense in 2007.

                                       37

<PAGE>

Borrowings  were  primarily  obtained  during  fiscal  2008 and 2007 to fund the
purchase of  mortgage-backed  securities and to originate  long-term  fixed-rate
mortgages.  Long-term  FHLB  advances  were used to match the expected  maturity
terms of these mortgage products.

Provision for Loan Losses

      Management  establishes  reserves  for losses on loans when it  determines
that losses are  probable.  The  adequacy of loan loss  reserves is based upon a
regular monthly review of loan delinquencies and "classified assets", as well as
local and national  economic trends.  The allowance for loan losses totaled $2.0
million  and $1.9  million at  September  30,  2008 and 2007 or 0.4% and 0.5% of
total  loans at  September  30,  2008 and 2007,  respectively.  The  Company has
recorded a provision  for general loan losses  totaling  $85,000 in fiscal 2008,
due to the  increase in  unemployment  trends and  declines  in property  values
reflecting an  instability  in the economy.  Due to the Company's loan portfolio
status and its analysis of quantitative  and qualitative  factors,  no provision
was made in fiscal 2007.

Other Income

      The Company's  total other operating  income  decreased to $1.7 million in
fiscal 2008 and  increased to $1.9 million in fiscal 2007  compared to the prior
year.  The  decrease  in 2008  was  primarily  due to an  other  than  temporary
impairment of equity securities of $252,000.  The increase in 2007 was primarily
attributed to a gain on the sale of investments and mortgage  backed  securities
available for sale of $160,000 in fiscal 2007.

      Customer  service  fees  were  $633,000  and  $564,000  in 2008 and  2007,
respectively. The increases were due to more NFS fees during the periods.

      Bank Owned Life  Insurance  ("BOLI")  income was  $499,000 and $475,000 in
2008 and 2007, respectively.

      Other income, which consists primarily of loan servicing fees, the sale of
non-deposit  products and insurance  commissions,  increased by $86,000 or 12.4%
during fiscal 2008.  During fiscal 2007,  other income  increased by $223,000 or
47.5% during fiscal year 2007. The fees, which comprise other income, are set by
the Company at a level,  which is intended  to cover the cost of  providing  the
related services and expenses to customers and employees.

Other Expenses

      Salaries  and employee  benefits  increased by $775,000 or 15.6% in fiscal
2008 and by $365,000 or 7.9% in fiscal  2007 as compared to prior  fiscal  year.
The increased  expenses of salaries and employee benefits during the periods are
attributable to the increased staffing,  normal growth,  normal salary increases
and increased employee benefit expenses.  The Company  anticipates  increases in
salaries and employee  benefits in fiscal year 2009 due to  additional  staffing
needs of opening a branch, normal salary increases and stock option expense.

      Occupancy  and  equipment  expense  decreased by $17,000 or 1.5% in fiscal
2008 and  increased by $154,000 or 15.9% in fiscal 2007 as compared to the prior
fiscal  year.  Data  processing  costs  increased  by $23,000 in fiscal 2008 and
decreased by $11,000 in fiscal 2007.  The  increase in occupancy  and  equipment
expenses was attributable to the normal activity of the Company.

      The Company  anticipates  additional  increases in occupancy and equipment
expenses due to opening of a new branch,  normal growth, normal technology needs
and inflationary effects in fiscal year 2009.

      The Company  anticipates  an increase  in the FDIC  insurance  premiums in
2009. See "Risk Factors - Our deposit  insurance  premium could be substantially
higher in the future which would have an adverse effect on our future  earnings"
in Item 1A.

                                       38

<PAGE>

      Other  expenses,   which  consist   primarily  of  advertising   expenses,
directors' fees, ATM network fees,  professional  fees,  checking account costs,
stockholders  expense,  and insurance premiums,  increased by $93,000 or 3.7% in
fiscal  2008 and  increased  by  $142,000  or 6.0% in fiscal 2007 over the prior
respective   fiscal  years.  The  increases  in  other  expenses  are  primarily
attributable to a additional  commercial  lending and business deposits in 2008,
as well as additional legal and auditing expenses.

Income Taxes

      The Company  recorded  income tax  provisions of $1.2 million and $911,000
for  fiscal  years  2008 and 2007,  respectively.  The  primary  reason  for the
increase in the income tax  provision in fiscal 2008 and 2007 was an increase in
pretax income. See Note 11 of the "Notes to Consolidated  Financial  Statements"
which provides an analysis of the provision for income taxes.

Commitments and Off-Balance Sheet Arrangements

      We are a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing  needs of our  customers.  These
financial  instruments  include  commitments  to extend  credit  and the  unused
portions of lines of credit.  These  instruments  involve,  to varying  degrees,
elements of credit and interest rate risk in excess of the amount  recognized in
the consolidated statements of financial condition. Commitments to extend credit
and lines of credit are not  recorded as an asset or  liability  by us until the
instrument is exercised.  At September 30, 2008 and 2007, we had no  commitments
to originate loans for sale.

      Commitments  to extend credit are agreements to lend to a customer as long
as there is no violation of any  condition  established  in the loan  agreement.
Commitments  generally have fixed expiration dates or other termination  clauses
and may require  payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent  future cash  requirements.  The  Company  evaluates  each  customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained,  if
deemed  necessary  by  the  Company  upon  extension  of  credit,  is  based  on
management's  credit  evaluation  of  the  customer.  The  amount  and  type  of
collateral  required  varies,  but may include accounts  receivable,  inventory,
equipment, real estate and income-producing  commercial properties. At September
30, 2008 and 2007,  commitments to originate loans and commitments  under unused
lines  of  credit,  including  undisbursed  portions  of  construction  loans in
process,  for which the Company is  obligated  amounted to  approximately  $66.5
million and $63.4 million, respectively.

      Letters  of credit  are  conditional  commitments  issued  by the  Company
guaranteeing  payments of drafts in  accordance  with the terms of the letter of
credit agreements. Commercial letters of credit are used primarily to facilitate
trade or commerce  and are also issued to support  public and private  borrowing
arrangements,  bond  financings  and similar  transactions.  Standby  letters of
credit  are  conditional  commitments  issued by the  Company to  guarantee  the
performance  of a customer  to a third  party.  Collateral  may be  required  to
support   letters  of  credit  based  upon   management's   evaluation   of  the
creditworthiness  of each customer.  The credit risk involved in issuing letters
of  credit  is  substantially  the  same  as that  involved  in  extending  loan
facilities  to  customers.  Most letters of credit  expire  within one year.  At
September  30, 2008 and  September  30, 2007,  the Company had letters of credit
outstanding of approximately $741,000 and $292,000,  respectively,  of which all
are  standby   letters  of  credit.   At  September  30,  2008  and  2007,   the
uncollateralized  portion of the  letters of credit  extended by the Company was
approximately  $151,000 and  $26,000,  respectively,  of which  $135,000 was for
standby letters of credit in current year.

      The  Company  is also  subject to various  pending  claims and  contingent
liabilities arising in the normal course of business, which are not reflected in
the unaudited consolidated  financial statements.  Management considers that the
aggregate liability, if any, resulting from such matters will not be material.

                                       39

<PAGE>

      We  anticipate  that  we  will  continue  to  have  sufficient  funds  and
alternative funding sources to meet our current commitments.

      The following  tables  summarize our outstanding  commitments to originate
loans and to advance  additional  amounts  pursuant  to  outstanding  Letters of
credit, lines of credit and under our construction loans at September 30, 2008.

                                                                   Total Amounts
                                                                     Committed
                                                                  --------------
                                                                  (In Thousands)
Letters of credit                                                 $          741
Commitments to originate loans                                            15,583
Unused portion of home equity lines of credit                             41,379
Unused portion of commercial lines of credit                               4,106
Undisbursed portion of construction loans in process                       4,691
                                                                  --------------
   Total commitments                                              $       66,500
                                                                  ==============

Contractual Obligations

      The Company's  contractual  cash obligations at September 30, 2008 were as
follows:

<TABLE>
<CAPTION>
                                      Less Than     1 to 3      3 to 5     After 5
                            Total       1 Year      Years       Years       Years
                          ---------------------------------------------------------
                                                (In Thousands)
<S>                       <C>         <C>         <C>         <C>         <C>
Lease agreements          $     639   $     121   $     250   $     268   $      --
Borrowings                  347,846      35,855      49,144      96,372     166,475
Certificates of deposit     317,701     208,889      87,837      20,975          --
                          ---------   ---------   ---------   ---------   ---------
                          $ 666,186   $ 244,865   $ 137,231   $ 117,615   $ 166,475
                          =========   =========   =========   =========   =========
</TABLE>

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
-------------------------------------------------------------------

Asset and Liability Management

      The Company has instituted  programs  designed to decrease the sensitivity
of its  earnings to material  and  prolonged  increases or decreases in interest
rates.  The principal  determinant of the exposure of the Company's  earnings to
interest rate risk is the timing difference between the repricing or maturity of
the  Company's  interest-earning  assets and the  repricing  or  maturity of its
interest-bearing  liabilities.  If the maturities of such assets and liabilities
were  perfectly  matched,  and if the  interest  rates  borne by its  assets and
liabilities  were equally flexible and moved  concurrently,  neither of which is
the case, the impact on net interest  income of rapid  increases or decreases in
interest rates would be minimized.  The Company's asset and liability management
policies  seek to increase the  interest  rate  sensitivity  by  shortening  the
repricing intervals and the maturities of the Company's interest-earning assets.
Although  management  of the Company  believes that the steps taken have reduced
the  Company's  overall  vulnerability  to increases  and  decreases in interest
rates,  the Company remains  vulnerable to material and prolonged  increases and
decreases in interest  rates during periods in which its interest rate sensitive
liabilities  exceed  its  interest  rate  sensitive  assets  and  interest  rate
sensitive assets exceed interest rate sensitive liabilities, respectively.

      The authority and responsibility for interest rate management is vested in
the Company's  Board of Directors.  The Chief Financial  Officer  implements the
Board of Directors'  policies  during the day-to-day  operations of the Company.
Each month,  the Chief Financial  Officer presents the Board of Directors with a
report,  which  outlines the  Company's  asset and liability  "gap"  position in
various  time  periods.  The "gap" is the  difference  between  interest-earning
assets and  interest-bearing  liabilities  which  mature or reprice over a given
time period.  The Chief  Financial  Officer also meets weekly with the Company's
other senior officers to review and establish  policies and strategies  designed
to regulate the Company's  flow of funds and  coordinate  the sources,  uses and
pricing of such  funds.  The first  priority  in  structuring  and  pricing  the
Company's  assets

                                       40

<PAGE>

and liabilities is to maintain an acceptable interest rate spread while reducing
the  effects of changes in  interest  rates and  maintaining  the quality of the
Company's assets.

      The following table summarizes the amount of  interest-earning  assets and
interest-bearing  liabilities  outstanding  as of September 30, 2008,  which are
expected to mature,  prepay or reprice in each of the future time periods shown.
Except as stated below, the amounts of assets or liabilities  shown which mature
or reprice  during a particular  period were  determined in accordance  with the
contractual terms of the asset or liability. Adjustable and floating-rate assets
are included in the period in which  interest rates are next scheduled to adjust
rather  than in the  period  in which  they are due,  and  fixed-rate  loans and
mortgage-backed  securities  are  included  in the  periods  in  which  they are
anticipated  to be  repaid.  However,  many of our assets can prepay at any time
without  a  penalty  unlike  many of our  liabilities  that  have a  contractual
maturity.

      The passbook accounts, negotiable order of withdrawal ("NOW") accounts and
a portion of the money  market  deposit  accounts,  are  included in the "Over 5
Years"  categories  based on  management's  beliefs  that  these  funds are core
deposits having significantly longer effective maturities based on the Company's
retention of such deposits in changing interest rate environments.

      Generally,  during a period of rising interest rates, a positive gap would
result  in an  increase  in net  interest  income  while a  negative  gap  would
adversely  affect net interest  income.  Conversely,  during a period of falling
interest rates, a positive gap would result in a decrease in net interest income
while a negative gap would positively affect net interest income.  However,  the
table below does not  necessarily  indicate the impact of general  interest rate
movements on the Company's net interest  income because the repricing of certain
categories  of  assets  and  liabilities  is  discretionary  and is  subject  to
competitive  and other  pressures.  As a result,  certain assets and liabilities
indicated as repricing  within a stated  period may in fact reprice at different
rate levels in a different period.

<TABLE>
<CAPTION>
                                                   1 Year     1 to 3      3 to 5      Over 5
                                                  or less      Years       Years       Years       Total
                                                 ---------   ---------   ---------   ---------   ---------
                                                                       (In Thousands)
<S>                                              <C>         <C>         <C>         <C>         <C>
Interest-earning assets:
   Mortgage loans                                $  68,188   $  54,866   $  23,027   $ 191,235   $ 337,316
   Commercial Mortgage loans                        17,448       5,123       7,438      14,398      44,407
   Mortgage-backed securities                       70,875      73,346      21,141      49,329     214,691
   Consumer and other loans                         47,055      24,549       6,820      24,260     102,684
   Investment securities and other investments      30,143      16,455      10,572      46,670     103,840
                                                 ---------   ---------   ---------   ---------   ---------

Total interest-earning assets                      233,709     174,339      68,998     325,892     802,938
                                                 ---------   ---------   ---------   ---------   ---------

Interest-bearing liabilities:
   Passbook and Club accounts                           --          --          --       2,641       2,641
   NOW and interest-bearing checking accounts           --          --          --      42,203      42,203
   Consumer Money Market Deposit accounts           12,530          --          --      30,368      42,898
   Business Money Market Deposit accounts            6,830          --          --       2,277       9,107
   Certificate accounts                            209,041      87,715      20,945          --     317,701
   Borrowed money                                   43,299      58,853      90,610     155,084     347,846
                                                 ---------   ---------   ---------   ---------   ---------

Total interest-bearing liabilities                 271,700     146,568     111,555     232,573     762,396
                                                 ---------   ---------   ---------   ---------   ---------

Repricing GAP during the period                  $ (37,991)  $  27,771   $ (42,557)  $  93,319   $  40,542
                                                 =========   =========   =========   =========   =========

Cumulative GAP                                   $ (37,991)  $ (10,220)  $ (52,777)  $  40,542
                                                 =========   =========   =========   =========

Ratio of GAP during the period to total assets       -4.60%       3.36%      -5.15%      11.30%
                                                 =========   =========   =========   =========

Ratio of cumulative GAP to total assets              -4.60%      -1.24%      -6.39%       5.23%
                                                 =========   =========   =========   =========
</TABLE>

                                       41

<PAGE>

Liquidity and Capital Resources

      The Company's assets increased to $825.7 million as of September 30, 2008,
from $773.5 million as of September 30, 2007.  Stockholders' equity increased to
$47.2 million as of September  30, 2008,  from $47.0 million as of September 30,
2007. As of September  30, 2008,  stockholders'  equity  amounted to 5.7% of the
Bank's total assets under accounting principles generally accepted in the United
States of America ("GAAP"). For a financial institution,  liquidity is a measure
of the  ability to fund  customers'  needs for loans,  deposit  withdrawals  and
repayment of  borrowings.  Harleysville  Savings  regularly  evaluates  economic
conditions  in order to maintain a strong  liquidity  position.  One of the most
significant   factors   considered  by  management  when  evaluating   liquidity
requirements is the stability of the Company's core deposit base. In addition to
cash, the Company maintains a portfolio of cash flows generating  investments to
meet its  liquidity  requirements.  The Company  also relies upon cash flow from
operations and other financing  activities,  generally  short-term and long-term
debt. Liquidity is also provided by investing activities including the repayment
and maturity of loans and  investment  securities  as well as the  management of
asset  sales  when  considered  necessary.  The  Company  also has access to and
sufficient  assets to secure  lines of credit  and other  borrowings  in amounts
adequate to fund any unexpected cash requirements.

      As of September 30, 2008, the Company had a remaining  borrowing  capacity
with the Federal Home Loan Bank of Pittsburgh of  approximately  $230.1 million.
To the extent that the Company cannot meet its liquidity  needs with normal cash
flows and  deposit  growth,  the Company  will be able to utilize the  available
borrowing  capacity provided by the Federal Home Loan Bank of Pittsburgh to fund
asset  growth and loan  commitments.  At  September  30,  2008 the  Company  had
exposures to limited recourse arrangements with respect to the Company's sale of
whole loans. At September 30, 2008, the exposure,  which represents a portion of
credit  risk  associated  with the sold  interests,  amounted  to  $84,000.  The
exposure is for the life of the related loans and payable,  on our  proportional
share, as losses are incurred.

Impact of Inflation and Changing Prices

      The  consolidated  financial  statements and related data presented herein
have been prepared in  accordance  with GAAP which  require the  measurement  of
financial position and operating results in terms of historical dollars, without
considering  changes in the relative  purchasing power of money over time due to
inflation.

      Unlike  most  industrial  companies,  virtually  all  of  the  assets  and
liabilities  of a financial  institution  are  monetary in nature.  As a result,
interest  rates  have a more  significant  impact on a  financial  institution's
performance  than the effects of general levels of inflation.  Interest rates do
not  necessarily  move in the same  direction  or in the same  magnitude  as the
prices of goods and services, since prices are affected by inflation to a larger
extent than interest rates.

                                       42

<PAGE>

Item 8. Financial Statements and Supplementary Data.
---------------------------------------------------

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Harleysville Savings Financial Corporation
Harleysville, Pennsylvania

      We have  audited the  accompanying  consolidated  statements  of financial
condition of Harleysville  Savings  Financial  Corporation and subsidiary  ("the
Company")  as of  September  30,  2008 and 2007,  and the  related  consolidated
statements of income,  comprehensive income, stockholders' equity and cash flows
for the years  then  ended.  These  consolidated  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

      We conducted  our audits in  accordance  with the  standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain  reasonable  assurance about whether the
financial  statements  are free of  material  misstatement.  The  Company is not
required  to have,  nor were we engaged  to  perform,  an audit of its  internal
control over financial reporting.  Our audits included consideration of internal
control over financial  reporting as a basis for designing audit procedures that
are appropriate in the  circumstances,  but not for the purpose of expressing an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting.  Accordingly,  we express  no such  opinion.  An audit also  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial   statements,   assessing  the  accounting  principles  used  and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

      In our opinion,  the consolidated  financial  statements referred to above
present fairly, in all material respects, the financial position of Harleysville
Savings Financial  Corporation and subsidiary as of September 30, 2008 and 2007,
and the  results  of their  operations  and their  cash flows for the years then
ended in conformity with accounting  principles generally accepted in the United
States of America.

                                                    /s/ Beard Miller Company LLP

Beard Miller Company LLP
Allentown, Pennsylvania
December 15, 2008

                                       43

<PAGE>

Consolidated Statements of Financial Condition

<TABLE>
<CAPTION>
                                                                                                 September 30,
                                                                                          ---------------------------
(In thousands, except share data)                                                             2008           2007
---------------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>            <C>
Assets
Cash and amounts due from depository institutions                                         $      2,217   $      1,647
Interest bearing deposits                                                                        7,157          6,670
                                                                                          ------------   ------------

   Total cash and cash equivalents                                                               9,374          8,317

Investment securities held to maturity
   (fair value - 2008, $78,973; 2007, $109,306)                                                 79,254        108,693
Investment securities available-for-sale at fair value                                             854          1,910
Mortgage-backed securities held to maturity
   (fair value - 2008, $211,814; 2007, $188,612)                                               213,933        192,842
Mortgage-backed securities available-for-sale at fair value                                        758            818
Loans receivable (net of allowance for loan losses -
   2008, $1,988; 2007, $1,933                                                                  476,858        419,053
Accrued interest receivable                                                                      3,799          4,047
Federal Home Loan Bank stock - at cost                                                          16,574         14,140
Office properties and equipment, net                                                            10,154          9,916
Prepaid expenses and other assets                                                               14,117         13,808
                                                                                          ------------   ------------

TOTAL ASSETS                                                                              $    825,675   $    773,544
                                                                                          ============   ============

Liabilities and Stockholders' Equity
Liabilities:
   Deposits                                                                               $    425,513   $    424,035
   Short-term borrowings                                                                        21,800         31,500
   Long-term debt                                                                              326,046        267,109
   Accrued interest payable                                                                      1,686          1,556
   Advances from borrowers for taxes and insurance                                               1,483          1,247
   Accounts payable and accrued expenses                                                         1,938          1,056
                                                                                          ------------   ------------

   Total liabilities                                                                           778,466        726,503
                                                                                          ------------   ------------

Commitments and contingencies (Notes 16 & 17)

Stockholders' Equity:
   Preferred Stock: $.01 par value;
      12,500,000 shares authorized; none issued                                                     --             --
   Common stock: $.01 par value; 25,000,000
      shares authorized; issued 3,921,177 shares: outstanding 2008 3,567,934
      shares 2007 3,717,519 shares                                                                  39             39
   Additional paid-in capital                                                                    7,993          8,044
   Treasury stock, at cost (2008, 353,243 shares; 2007, 203,658 shares)                         (5,017)        (3,316)
   Retained earnings - partially restricted                                                     44,235         42,363
   Accumulated other comprehensive loss                                                            (41)           (89)
                                                                                          ------------   ------------

   Total stockholders' equity                                                                   47,209         47,041
                                                                                          ------------   ------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                $    825,675   $    773,544
                                                                                          ============   ============
</TABLE>

See notes to consolidated financial statements.

                                       44

<PAGE>

Consolidated Statements of Income

<TABLE>
<CAPTION>
                                                                                            Year Ended September 30,
                                                                                          ---------------------------
(In thousands, except share data)                                                             2008           2007
---------------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>            <C>
Interest Income:
Interest and fees on mortgage loans                                                       $     19,043   $     17,270
Interest on mortgage-backed securities                                                          10,088          9,339
Interest on commercial loans                                                                     1,799            674
Interest on consumer and other loans                                                             5,719          6,035
Interest on taxable investments                                                                  5,008          5,411
Interest on tax-exempt investments                                                               1,360          1,497
Dividends on investment securities                                                                  59             63
                                                                                          ------------   ------------

Total interest and dividend income                                                              43,076         40,289
                                                                                          ------------   ------------

Interest Expense:
Interest on deposits                                                                            15,218         15,472
Interest on borrowings                                                                          13,798         13,334
                                                                                          ------------   ------------

Total interest expense                                                                          29,016         28,806
                                                                                          ------------   ------------

Net Interest Income                                                                             14,060         11,483
Provision for loan losses                                                                           85             --
                                                                                          ------------   ------------

Net Interest Income, after Provision for Loan Losses                                            13,975         11,483
                                                                                          ------------   ------------

Other Income:
Customer service fees                                                                              633            564
Impairment of equity securities                                                                   (252)            --
Realized gains on investments and mortgage-backed securities                                        73            160
Income on bank-owned life insurance                                                                499            475
Other income                                                                                       777            691
                                                                                          ------------   ------------

Total other income                                                                               1,730          1,890
                                                                                          ------------   ------------

Other Expenses:
Salaries and employee benefits                                                                   5,757          4,982
Occupancy and equipment                                                                          1,105          1,122
Deposit insurance premiums                                                                          56             52
Data processing                                                                                    602            579
Other                                                                                            2,574          2,481
                                                                                          ------------   ------------

Total other expenses                                                                            10,094          9,216
                                                                                          ------------   ------------

Income before Income Taxes                                                                       5,611          4,157

Provision for income taxes                                                                       1,232            911
                                                                                          ------------   ------------

Net Income                                                                                $      4,379   $      3,246
                                                                                          ============   ============

Earnings Per Share:
   Basic                                                                                  $       1.20   $       0.85
                                                                                          ============   ============
   Diluted                                                                                $       1.20   $       0.83
                                                                                          ============   ============

Weighted Average Shares Outstanding:
   Basic                                                                                     3,643,363      3,834,518
                                                                                          ============   ============
   Diluted                                                                                   3,663,469      3,896,317
                                                                                          ============   ============
</TABLE>

See notes to consolidated financial statements.

                                       45

<PAGE>

Consolidated Statements of Income

<TABLE>
<CAPTION>
                                                                                      Year Ended September 30,
                                                                                   ------------------------------
(In Thousands)                                                                         2008              2007
-----------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>               <C>
Net Income                                                                         $      4,379      $      3,246

Other Comprehensive (Loss) Income

Unrealized gain (loss) on securities available for sale, net of tax (benefit) or
   expense -- 2008, $25; 2007, $(40)                                                         48 (1)           (77) (1)
                                                                                   ------------      ------------

Total Comprehensive Income                                                         $      4,427      $      3,169
                                                                                   ============      ============
</TABLE>

(1) Disclosure of reclassification amount, net of tax for the years ended:

<TABLE>
<CAPTION>
                                                                                       2008              2007
                                                                                   ------------      ------------
<S>                                                                                <C>               <C>
   Net unrealized gain (loss) arising during the year                              $       (106)     $         43
   Reclassification adjustment for net losses (gains) included in net income                179              (160)
                                                                                   ------------      ------------
                                                                                   $         73      $       (117)
   Tax (expense) benefit                                                                    (25)               40
                                                                                   ------------      ------------
   Net unrealized gain (loss) on securities                                        $         48      $        (77)
                                                                                   ============      ============
</TABLE>

See notes to consolidated financial statements.

                                       46

<PAGE>

Consolidated Statements of Stockholders' Equity

<TABLE>
<CAPTION>
                                            Common                            Retained     Accumulated
                                            Stock               Additional    Earnings-       Other                     Total
                                            Shares     Common     Paid-in     Partially   Comprehensive   Treasury   Stockholders'
(In thousands, except share data)        Outstanding    Stock     Capital    Restricted   Income (Loss)     Stock       Equity
                                         -----------------------------------------------------------------------------------------
<S>                                      <C>           <C>      <C>          <C>          <C>             <C>        <C>
Balance at September 30, 2006              3,849,736   $   39   $    7,992   $   41,714   $         (12)  $ (1,262)  $      48,471
Net income                                                                        3,246                                      3,246
Dividends - $.68  per share                                                      (2,597)                                    (2,597)
Stock option compensation                                               97                                                      97
Treasury stock purchased                    (169,496)                                                       (2,694)         (2,694)
Treasury stock delivered under
   employee stock plans                        3,751                   (16)                                     65              49
Treasury stock delivered under
   dividend reinvestment plan                 33,528                   (29)                                    575             546
Change in unrealized holding loss
   on available-for-sale securities,
   net of tax                                                                                       (77)                       (77)
                                         -----------   ------   ----------   ----------   -------------   --------   -------------

Balance at September 30, 2007              3,717,519   $   39   $    8,044   $   42,363   $         (89)  $ (3,316)  $      47,041

Net income                                                                        4,379                                      4,379
Dividends - $.69  per share                                                      (2,507)                                    (2,507)
Stock option compensation                                               99                                                      99
Treasury stock purchased                    (205,358)                                                       (2,556)         (2,556)
Treasury stock delivered under
   employee stock plans                        8,000                   (32)                                    133             101
Treasury stock delivered under
   dividend reinvestment plan                 42,773                  (118)                                    646             528
Employee options exercised                     5,000                                                            76              76
Change in unrealized holding loss
   on available-for-sale securities,
   net of tax                                                                                        48                         48
                                         -----------   ------   ----------   ----------   -------------   --------   -------------

Balance at September 30, 2008            $ 3,567,934   $   39   $    7,993   $   44,235   $         (41)  $ (5,017)  $      47,209
                                         ===========   ======   ==========   ==========   =============   ========   =============
</TABLE>

See notes to consolidated financial statements.

                                       47

<PAGE>

Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                  Year Ended September 30,
                                                                  ------------------------
(In Thousands)                                                       2008         2007
------------------------------------------------------------------------------------------
<S>                                                               <C>          <C>
Operating Activities:
Net Income                                                        $    4,379   $     3,246
Adjustments to reconcile net income to net cash provided by
   operating activities:

   Depreciation                                                          523           511
   Deferred income taxes                                                 (41)           56
   Provision for loan losses                                              85            --
   Gain on sales of securities                                           (73)         (160)
   Loss on impairment of securities                                      252            --
   Amortization of deferred loan fees                                      9           (19)
   Net amortization of premiums and discounts                            147           206
   Increase in cash surrender value                                     (499)         (475)
   Compensation charge on stock options                                   99            97
Changes in assets and liabilities which provided (used) cash:
   Increase in accounts payable and accrued expenses                     882           344
   Decrease (increase) in prepaid expenses and other assets              230          (228)
   Decrease (increase) in accrued interest receivable                    248           (77)
   Increase in accrued interest payable                                  130           150
                                                                  ----------   -----------

Net cash provided by operating activities                              6,371         3,651
                                                                  ----------   -----------

Investing Activities:
Purchase of mortgage-backed securities held to maturity              (61,835)      (20,939)
Purchase of investment securities held to maturity                   (20,997)      (19,918)
Purchase of investment securities available-for-sale                      --          (466)
Net (purchase) redemption of FHLB stock                               (2,434)        1,359
Proceeds from the sale of investment securities
   available-for-sale                                                    442            --
Proceeds from maturities of investment securities                     42,408        28,987
Principal collected on mortgage-backed securities                     49,168        38,897
Principal collected on long-term loans                                85,717        96,866
Long-term loans originated or acquired                              (143,616)     (121,935)
Purchases of premises and equipment                                     (760)       (2,414)
                                                                  ----------   -----------

Net cash (used in) provided by  investing activities                 (51,907)          437
                                                                  ----------   -----------

Financing Activities:
Net increase (decrease) in demand deposits, NOW accounts
   And savings accounts                                                1,920        (2,891)
Net decrease in certificates of deposit                                 (442)       (2,295)
Cash dividends                                                        (1,979)       (2,051)
Net decrease in short-term borrowings                                 (9,700)      (26,700)
Proceeds from long-term debt                                         113,000        63,000
Repayment of long-term debt                                          (54,063)      (32,302)
Acquisition of treasury stock                                         (2,556)       (2,694)
Treasury stock delivered under employee stock plan                       177            49
Net increase in advances from borrowers for taxes and insurance          236            63
                                                                  ----------   -----------

Net  provided (used in) by cash financing activities                  46,593        (5,821)
                                                                  ----------   -----------

INCREASE (DECREASE)  IN CASH AND CASH EQUIVALENTS                      1,057        (1,733)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                         8,317        10,050
                                                                  ----------   -----------

CASH AND CASH EQUIVALENTS AT END OF YEAR                          $    9,374   $     8,317
                                                                  ==========   ===========

Supplemental Disclosure of Cash Flow Information

Cash paid during the period for:
   Interest (credited and paid)                                   $   28,886   $    28,656
   Income Tax                                                          1,183           665
</TABLE>

See notes to consolidated financial statements.

                                       48

<PAGE>

Notes to Consolidated Financial Statements

1. Nature of Operations and Organizational Structure

The Company is a bank holding  company that is regulated by the Federal  Reserve
Bank of Philadelphia.  The Bank is a wholly owned subsidiary and is regulated by
the FDIC and the Pennsylvania  Department of Banking. The Bank is principally in
the business of  attracting  deposits  through its branch  offices and investing
those deposits, together with funds from borrowings and operations, primarily in
single family residential and consumer loans. The Bank's customers are primarily
in southeastern Pennsylvania.

2. Summary of Significant Accounting Policies

Principles of Consolidation - The accompanying consolidated financial statements
include the  accounts of the  Company,  the Bank,  and the Bank's  wholly  owned
subsidiary,  HSB  Inc a  Delaware  subsidiary  which  was  formed  in  order  to
accommodate the transfer of certain assets, Freedom Financial Solutions LLC that
allows the Company to offer non deposit  products and HARL,  LLC that allows the
Bank to invest in equity investments.  All significant intercompany accounts and
transactions have been eliminated in consolidation.

Use of Estimates in Preparation of the Consolidated  Financial  Statements - The
preparation of consolidated  financial  statements in conformity with accounting
principles   generally  accepted  in  the  United  States  of  America  requires
management to make estimates and assumptions that affect the reported amounts of
assets and  liabilities  and disclosure of contingent  assets and liabilities at
the date of the  consolidated  financial  statements and the reported amounts of
income and expenses during the reporting  period.  The most significant of these
estimates and assumptions in the Company's  consolidated financial statements is
the allowance for loan losses. Actual results could differ from those estimates.

Significant  Group  Concentrations  of  Credit  Risk  - Most  of  the  Company's
activities  are  with  customers  located  within  the  southeastern  region  of
Pennsylvania.  Notes 3, 4, 5 and 6 discuss types of securities  that the Company
invests in. Note 7 discusses  the types of lending that the Company  engages in.
The Company does not have any significant  concentrations to any one industry or
customer.

Cash and Cash Equivalents - For purposes of the consolidated  statements of cash
flows, cash and cash equivalents include cash and balances due from banks.

Interest-Bearing  Deposits  in Banks -  Interest-bearing  deposits  in banks are
carried at cost.

Investment and Mortgage-Backed  Securities - The Company classifies and accounts
for debt and equity securities as follows:

Held to Maturity - Debt  securities  that management has the positive intent and
ability  to hold until  maturity  are  classified  as held to  maturity  and are
carried at their remaining unpaid principal balance, net of unamortized premiums
or unaccreted discounts. Premiums are amortized and discounts are accreted using
the  interest  method  over  the  estimated  remaining  term  of the  underlying
security.

Available for Sale - Debt and equity securities that will be held for indefinite
periods of time, including securities that may be sold in response to changes in
market  interest or  prepayment  rates,  needs for  liquidity and changes in the
availability  of and the yield of  alternative  investments  are  classified  as
available for sale. These assets are carried at fair value. Unrealized gains and
losses  are  excluded  from  earnings  and  are  reported  net of  tax in  other
comprehensive  income.  Realized  gains  and  losses  on the sale of  investment
securities  are  recorded  as of the trade date,  reported  in the  consolidated
statement  of income and  determined  using the  amortized  cost of the specific
security sold.

For all  securities  that are in an  unrealized  loss  position  for an extended
period of time and for all securities  whose fair value is  significantly  below
amortized  cost,  the Company  performs an  evaluation  of the  specific  events
attributable  to the market decline of the security.  The Company  considers the
length of time and extent to which the security's fair value has been below cost
as well as the general market conditions, industry

                                       49

<PAGE>

characteristics,  and  the  fundamental  operating  results  of  the  issuer  to
determine if the decline is other-than-temporary.  The Company also considers as
part of the  evaluation  its intent and ability to hold the  security  until its
fair value has recovered to a level at least equal to the amortized  cost.  When
the   Company    determines    that   a    security's    unrealized    loss   is
other-than-temporary,  an  impairment  loss is recognized in the period in which
the decline in value is determined to be other-than-temporary.

Loans - The Company grants commercial, mortgage and consumer loans to customers.
A substantial  portion of the loan  portfolio is  represented  by mortgage loans
throughout  southeastern  Pennsylvania.  The ability of the Company's debtors to
honor their  contracts  is dependent  upon the real estate and general  economic
conditions in this area.

Loans that  management  has the intent and  ability to hold for the  foreseeable
future or until  maturity or pay-off are  reported at their  outstanding  unpaid
principal balances adjusted for charge-offs,  the allowance for loan losses, and
any deferred fees or costs on originated loans.

Interest  Income on Loans - Interest  income is accrued on the unpaid  principal
balance.  Interest on loans is recognized as income when earned.  The accrual of
interest  on  mortgage  loans  is  discontinued  at the time the loan is 90 days
delinquent  unless the credit is well-secured  and in process of collection.  In
all cases,  loans are placed on nonaccrual or  charged-off at an earlier date if
collection of principal or interest is considered doubtful.

All interest  accrued but not  collected for loans that are placed on nonaccrual
or charged off is reversed against interest income.  The interest on these loans
is accounted for on the cash-basis or cost-recovery method, until qualifying for
return to accrual.  Loans are returned to accrual  status when all the principal
and interest amounts  contractually  due are brought current and future payments
are reasonably assured.

Deferred Loan Fees - Loan  origination  fees, net of certain direct  origination
costs, are deferred and the balance is amortized to income as an adjustment over
the life of the loan using the interest method.

Allowance  for Loan Losses - The  allowance  for loan losses is  established  as
losses are  estimated  to have  occurred  through a  provision  for loan  losses
charged to  earnings.  Loan  losses  are  charged  against  the  allowance  when
management  believes  the  uncollectibility  of a  loan  balance  is  confirmed.
Subsequent recoveries,  if any, are credited to the allowance.  An allowance for
loan  losses is  maintained  at a level that  management  considers  adequate to
provide for losses based upon evaluation of known and inherent risks in the loan
portfolio.  The loan loss reserves are established as an allowance for estimated
losses based on the probable  losses of the loan  portfolio.  In assessing risk,
management  considers historical  experience,  volume and composition of lending
conducted by the Company,  industry  standards,  status of nonperforming  loans,
general  economic  conditions as they relate to the Company's  market area,  and
other factors related to the collectibility of the Company's loan portfolio.

The  allowance  for  loan  losses  consists  of  three  elements:  (1)  specific
allowances  for  impaired  loans;  (2) a  general  valuation  allowance  on  all
classified loans which are not impaired;  and (3) a general valuation  allowance
on the remainder of the loan  portfolio.  This is consistent with the regulatory
method of  classifying  reserves.  Although  the  amount of each  element of the
allowance is  determined  separately,  the entire  allowance  for loan losses is
available  for  the  entire  portfolio.  An  allowance  for  impaired  loans  is
established  in the amounts by which the  discounted  cash flows (or  collateral
value or observable market price) are lower than the carrying value of the loan.
A general  allowance is established for classified  loans that are not impaired.
These loans are  segregated  by loan  category,  and allowance  percentages  are
assigned to each category based on inherent losses  associated with each type of
lending and  consideration  that these  loans,  in the  aggregate,  represent an
above-average  credit  risk  and  that  more of  these  loans  will  prove to be
uncollectible compared to loans in the general portfolio.

The  general  allowance  for loans that are not  classified  is  established  to
recognize the inherent  losses  associated with lending  activities,  but which,
unlike specific allowances, has not been allocated to particular problem assets.
This general  valuation  allowance is determined by  segregating  non-classified
loans by loan category and

                                       50

<PAGE>

assigning allowance percentages to each category. The allowance percentages have
been derived using percentages  commonly applied under the regulatory  framework
for the Company and similarly sized  institutions.  The percentages are adjusted
for  significant  factors  that,  in  management's  judgment,  could  affect the
collectibility  of the portfolio as of the evaluation  date.  These  significant
factors may  include  changes in lending  policies  and  procedures,  changes in
existing general economic and business conditions  affecting our primary lending
areas, credit quality trends, collateral value, loan volumes and concentrations,
seasoning of the loan portfolio,  loss experience in particular  segments of the
portfolio,   duration  of  the  current  business  cycle,  and  bank  regulatory
examination  results. The applied loss factors are reevaluated monthly to ensure
their relevance in the current economic environment.

A loan is considered  impaired when, based on current information and events, it
is probable that the Company will be unable to collect the scheduled payments of
principal or interest  when due according to the  contractual  terms of the loan
agreement.  Factors  considered by management in determining  impairment include
payment status,  collateral  value, and the probability of collecting  scheduled
principal and interest  payments when due. Loans that  experience  insignificant
payment delays and payment shortfalls  generally are not classified as 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 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.  Impairment is
measured on a loan by loan basis for commercial and construction loans by either
the  present  value of  expected  future  cash  flows  discounted  at the  loans
effective  interest rate, the loan's  obtainable market price, or the fair value
of the collateral if the loan is collateral dependent.

Large groups of smaller balances homogenous loans are collectively evaluated for
impairment. Accordingly, the Corporation does not separately identify individual
consumer and residential loans for impairment disclosures, unless such loans are
the subject of a restructuring agreement.

Foreclosed  Real  Estate - Real  estate  acquired  through,  or in lieu of, loan
foreclosures  are  carried  at the  fair  value  of the  property,  based  on an
appraisal less cost to sell.  Costs relating to the  development and improvement
of the property are capitalized,  and those relating to holding the property are
charged to expense.  The Company had no foreclosed  real estate at September 30,
2008 and 2007.

Office Properties and Equipment - Land is carried at cost. Office properties and
equipment are recorded at cost, less accumulated  depreciation.  Depreciation is
computed using the  straight-line  method over the expected  useful lives of the
assets that range from four to fifty years. The costs of maintenance and repairs
are expensed as they are incurred, and renewals and betterments are capitalized.

Federal  Home Loan Bank Stock - The Company  reports its  investment  in Federal
Home Loan Bank (FHLB) stock at cost in the consolidated  statements of financial
condition.  Federal law requires a member of the FHLB to hold stock according to
a predetermined formula.

Cash Surrender  Value Of Bank Owned Life Insurance  (BOLI) - The Bank funded the
purchase of  insurance  policies on the lives of officers  and  employees of the
Bank. The Company has  recognized  any increase in cash surrender  value of life
insurance,  net of insurance costs, in the consolidated  statements of income as
income on BOLI. The cash surrender  value of the insurance  policies is recorded
as an  asset  in  other  assets  in the  consolidated  statements  of  financial
condition and amounted to $12,906,000  and  $12,407,000 at September 30 2008 and
2007, respectively.

Income Taxes - Deferred income taxes are recognized for the tax  consequences of
"temporary  differences" by applying  enacted  statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and  liabilities.  The effect on deferred taxes
of a change in tax rates is recognized in income in the period that includes the
enactment date.

Transfers of Financial  Assets - Transfers of financial assets are accounted for
as sales,  when  control  over the assets  has been  surrendered.  Control  over
transferred assets is deemed to be surrendered when (1) the assets

                                       51

<PAGE>

have been isolated from the Company (2) the  transferee  obtains the right (free
of conditions  that constrain it from taking  advantage of that right) to pledge
or  exchange  the  transferred  assets,  and (3) the Company  does not  maintain
effective control over the transferred assets through an agreement to repurchase
them before their maturity.

Treasury Stock - The Company records treasury stock purchases at cost. Gains and
losses on subsequent  reissuance of shares are credited or charged to additional
paid-in capital using the average-cost method.

Accounting  for Stock  Options - The Company  currently has several stock option
plans in place for employees and directors of the Company. In December 2004, the
Financial  Accounting  Standards  Board ("FASB")  issued  Statement of Financial
Accounting  Standards ("SFAS") No. 123R (revised 2004),  "Share-Based  Payment",
which  revises SFAS No. 123,  "Accounting  for  Stock-Based  Compensation",  and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees".  This
Statement requires an entity to recognize the cost of employee services received
in exchange for an award of equity  investment based on grant-date fair value of
the award. That cost will be recognized over the period during which an employee
is required to provide  service in exchange for the award.  The Company  adopted
the  modified  prospective  method  provisions  of SFAS  No.  123R.  Stock-based
compensation  expense related to stock options for the years ended September 30,
2008 and 2007 was $99,000 and $97,000,  respectively. The tax benefit recognized
related to the  compensation  expense for the years ended September 30, 2008 and
2007 was $5,000 and $5,000, respectively.

The weighted  average fair value of options granted in the years ended September
30, 2008 and 2007 was $1.39 and $2.81,  respectively,  and was  estimated at the
date of  grant  using  a  Binomial  Option  Pricing  Model  with  the  following
weighted-average assumptions:

                                       Year Ended September 30,
                                          2008        2007
   ------------------------------------------------------------
   Risk free interest rate of return        3.59%       4.77%
   Expected option life                84 months   84 months
   Expected volatility                        17%         17%
   Expected dividends                        5.4%        3.9%

The expected volatility is based on historic volatility.  The risk-free interest
rates for  periods  within the  contractual  life of the awards are based on the
U.S.  Treasury yield curve in effect at the time of the grant. The expected life
is based on historical  exercise  experience.  The dividend yield  assumption is
based on the Company's history and expectation of dividend payouts.

Earnings Per Share - Basic  earnings  per common share is computed  based on the
weighted  average number of shares  outstanding.  Diluted  earnings per share is
computed based on the weighted average number of shares  outstanding,  increased
by  additional  common  shares  that would  have been  outstanding  if  dilutive
potential  common  shares had been issued.  Potential  common shares that may be
issued by the  Company  relate  solely to  outstanding  stock  options,  and are
determined  using  the  treasury  stock  method.  The  weighted  average  shares
outstanding used to calculate earnings per share were as follows:

                                                   Year Ended September 30,
                                                      2008       2007
---------------------------------------------------------------------------
Weighted average shares outstanding - basic        3,643,363     3,834,518
Increase in shares due to dilutive stock options      20,106        61,799
                                                   ---------     ---------
Weighted average shares outstanding - diluted      3,663,469     3,896,317
                                                   =========     =========

Other  Comprehensive   Income  -  The  Company  presents,   as  a  component  of
comprehensive  income,  amounts from  transactions  and other events,  which are
currently  excluded  from the  statement of income and are recorded  directly to
stockholders'  equity. The Company's other comprehensive  income consists of net
unrealized  holding  gains or losses on  securities  available-for-sale,  net of
income taxes.

                                       52

<PAGE>

Recent  Accounting  Pronouncements  - - In  July  2006,  the  FASB  issued  FASB
Interpretation  No.  48,  "Accounting  for  Uncertainty  in  Income  Taxes  - an
Interpretation  of SFAS  Statement  No.  109 ("FIN  48").  FIN 48  prescribes  a
recognition  threshold and  measurement  attribute  for the financial  statement
recognition and measurement of a tax position taken in a tax return. The Company
must presume the tax position will be examined by the relevant tax authority and
determine  whether  it is more  likely  than not that the tax  position  will be
sustained  upon  examination,  including  resolution  of any related  appeals or
litigation  processes,  based on the  technical  merits of the  position.  A tax
position that meets the  more-likely-than-not  recognition threshold is measured
to determine the amount of benefit to recognize in the financial statements. FIN
48  also  provides  guidance  on  derecognition,  classification,  interest  and
penalties,  accounting in interim periods,  disclosure and transition. FIN 48 is
effective for fiscal years  beginning  after  December 15, 2006.  The cumulative
effect of applying the  provisions  of FIN 48  represents a change in accounting
principle  and shall be reported  as an  adjustment  to the  opening  balance of
retained earnings.  In May 2007, the FASB issued FASB Staff Position ("FSP") FIN
48-1  "Definition of Settlement in FASB  Interpretation  No. 48" (FSP FIN 48-1).
FSP FIN 48-1  provides  guidance on how to  determine  whether a tax position is
effectively settled for the purpose of recognizing  previously  unrecognized tax
benefits.  There  was no  impact  on the  Company's  financial  statements  upon
adoption  of FIN 48 as of October 1, 2007 and for the year ended  September  30,
2008.

In February  2007,  the FASB issued  SFAS No.  159,  "The Fair Value  Option for
Financial  Assets  and  Financial  Liabilities-Including  an  amendment  of FASB
Statement  No.  115." SFAS No. 159 permits  entities  to choose to measure  many
financial  instruments and certain other items at fair value.  Unrealized  gains
and losses on items for which the fair value  option  has been  elected  will be
recognized  in  earnings  at each  subsequent  reporting  date.  SFAS No. 159 is
effective for our Company October 1, 2008. We do not expect the adoption of SFAS
No. 159 to have a significant impact on our consolidated financial statements.

In  September  2006,  the FASB issued SFAS No.  157,  "Fair Value  Measurements"
("SFAS No. 157").  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.  The  changes to current  practice
resulting from the  application of SFAS No. 157 relate to the definition of fair
value, the methods used to measure fair value and the expanded disclosures about
fair value  measurements.  SFAS No. 157 is effective  for  financial  statements
issued for fiscal years  beginning  after  November 15, 2007.  The provisions of
SFAS No. 157 should be applied  prospectively  as of the beginning of the fiscal
year in which it is initially applied,  except for certain financial instruments
which require  retrospective  application as of the beginning of the fiscal year
of  initial  application  (a limited  form of  retrospective  application).  The
transition  adjustment,  measured as the difference between the carrying amounts
and the fair values of those  financial  instruments at the date SFAS No. 157 is
initially applied, should be recognized as a cumulative-effect adjustment to the
opening balance of retained  earnings.  The Company is currently  evaluating the
impact of adopting SFAS No. 157 on its Consolidated Financial Statements.

In February 2000,  the FASB issued FASB Staff  Position (FSP) 157-2,  "Effective
Date of FASB  Statement  No.  157," that would  permit a  one-year  deferral  in
applying the measured  provisions of Statement No. 157 to  non-financial  assets
and non-financial  liabilities  (non-financial items) that are not recognized or
disclosed at fair value in an entity's financial statements on a recurring basis
(at least annually).  Therefore,  if the change in fair value of a non-financial
item is not required to be recognized  or disclosed in the financial  statements
on an annual basis or more  frequently,  the effective  date of  application  of
Statement  157 to that item is  deferred  until  fiscal  years  beginning  after
November 15, 2008 and interim  periods within those fiscal years.  This deferral
does not apply,  however,  to an entity that applies Statement 157 in interim or
annual  financial  statements  before  FSB 157-2 is  effective.  The  Company is
currently  evaluating  the impact,  if any,  that the adoption of FSP 157-2 will
have on the Company's operating income or net earnings.

In September  2006,  the  Emerging  Issues Task Force (EITF) of FASB issued EITF
Issue No. 06-4, "Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split Dollar Life Insurance  Arrangements"  (EITF 06-04).
EITF 06-4 requires the recognition of a liability related to the  postretirement
benefits covered by an endorsement split-dollar life insurance arrangement.  The
consensus

                                       53

<PAGE>

highlights that the employer (who is also the  policyholder) has a liability for
the benefit it is providing to its employee.  As such, if the  policyholder  has
agreed to maintain  the  insurance  policy in force for the  employee's  benefit
during  his  or  her  retirement,  then  the  liability  recognized  during  the
employee's active service period should be based on the future cost of insurance
to  be  incurred  during  the  employee's  retirement.   Alternatively,  if  the
policyholder  has agreed to provide the employee with a death benefit,  then the
liability  for the future death  benefit  should be  recognized by following the
guidance in SFAS No. 106 or Accounting Principles Board (APB) Opinion No. 12, as
appropriate.  For  transition,  an entity can choose to apply the guidance using
either of the following approaches: (a) a change in accounting principle through
retrospective application to all periods presented or (b) a change in accounting
principle  through a  cumulative-effect  adjustment  to the  balance in retained
earnings at the beginning of the year of adoption.  The disclosures are required
in  fiscal  years  beginning  after  December  15,  2007,  with  early  adoption
permitted.  The adoption of this new accounting standard will not have an impact
to our consolidated financial statements.

In March 2007,  the FASB  ratified  Emerging  Issues Task Force Issue No.  06-10
"Accounting for Collateral  Assignment  Split-Dollar Life Insurance  Agreements:
(EITF 06-10).  EITF 06-10 provides  guidance for determining a liability for the
postretirement  benefit obligation as well as recognition and measurement of the
associated  asset  on the  basis  of the  terms  of  the  collateral  assignment
agreement. EITF 06-10 is effective for fiscal years beginning after December 15,
2007.  The  adoption  of EITF  06-10  will not have an impact  on the  Company's
consolidated financial position and results of operations.

In December of 2007, FASB issued statement No. 141 (R) "Business  Combinations".
This Statement 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. The Statement 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. The new  pronouncement  will impact the Company's  accounting
for business combinations completed beginning October 1, 2009.

In December 2007,  FASB issued  statement No. 160  "Noncontrolling  Interests in
Consolidated Financial  Statements--an  amendment of ARB No. 51". This Statement
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. The Company believes that this new pronouncement will have an
immaterial impact on the Company's financial statements in future periods.

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 have 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. The Company is currently evaluating
the  potential  impact  the new  pronouncement  will  have  on its  consolidated
financial statements.

In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally  Accepted
Accounting  Principles."  This  Statement  identifies  the sources of accounting
principles  and  the  framework  for  selecting  the  principles   used  in  the
preparation  of  financial  statements.  This  Statement  is  effective  60 days
following the SEC's approval of the Public Company  Accounting  Oversight  Board
amendments to AU Section 411, "The Meaning of Present Fairly in Conformity  with
Generally Accepted  Accounting  Principles." The implementation of this standard
will not have any impact on the Company's consolidated financial statements.

                                       54

<PAGE>

In October 2008, the FASB issued FSP SFAS No. 157-3, "Determining the Fair Value
of a Financial  Asset When The Market for That Asset Is Not Active" (FSP 157-3),
to clarify the  application of the provisions of SFAS 157 in an inactive  market
and how an entity would determine fair value in an inactive market. FSP 157-3 is
effective   immediately   and  applies  to  our  September  30,  2008  financial
statements.  The  application  of the provisions of FSP 157-3 did not materially
affect our  results  of  operations  or  financial  condition  as of and for the
periods ended September 30, 2008.

In September  2008, the FASB issued FSP 133-1 and FIN 45-4,  "Disclosures  about
Credit  Derivatives and Certain  Guarantees:  An Amendment of FASB Statement No.
133 and FASB  Interpretation  No. 45; and Clarification of the Effective Date of
FASB Statement No. 161" (FSP 133-1 and FIN 45-4).  FSP 133-1 and FIN 45-4 amends
and  enhances  disclosure  requirements  for sellers of credit  derivatives  and
financial guarantees. It also clarifies that the disclosure requirements of SFAS
No. 161 are effective for quarterly  periods  beginning after November 15, 2008,
and fiscal years that include those periods. FSP 133-1 and FIN 45-4 is effective
for reporting  periods  (annual or interim)  ending after November 15, 2008. The
implementation  of  this  standard  will  not  have  a  material  impact  on our
consolidated financial position and results of operations.

3. INVESTMENT SECURITIES HELD TO MATURITY

A  comparison  of  amortized  cost and  approximate  fair  value  of  investment
securities  held  to  maturity  with  gross  unrealized  gains  and  losses,  by
maturities, is as follows:

<TABLE>
<CAPTION>
                                                            September 30, 2008
                                                           Gross        Gross
                                            Amortized   Unrealized   Unrealized
(In Thousands)                                 Cost        Gains       Losses     Fair Value
--------------------------------------------------------------------------------------------
<S>                                         <C>         <C>          <C>          <C>
U.S. Government Agencies
   Due after 1 year through 5 years         $   5,000   $       67   $       --   $    5,067
   Due after 5 years through 10 years           2,500            5           --        2,005
   Due after 10 years through 15 years         38,497           11         (341)      38,167
   Due after 15 years                           8,818           64          (44)       8,838
Tax Exempt Obligations
   Due after 10 years through 15 years         21,544          592         (109)      22,027
   Due after 15 years                           3,395           --         (526)       2,869
                                            ---------   ----------   ----------   ----------
Total Investment Securities                 $  79,254   $      739   $   (1,020)  $   78,973
                                            =========   ==========   ==========   ==========
</TABLE>

<TABLE>
<CAPTION>
                                                            September 30, 2007
                                                           Gross        Gross
                                            Amortized   Unrealized   Unrealized
(In Thousands)                                 Cost        Gains       Losses     Fair Value
--------------------------------------------------------------------------------------------
<S>                                         <C>         <C>          <C>          <C>
U.S. Government Agencies
   Due after 1 year through 5 years         $   5,000   $       --   $      (27)  $    4,973
   Due after 5 years through 10 years          20,919           38         (114)      20,843
   Due after 10 years through 15 years         48,422           87         (342)      48,167
   Due after 15 years                           8,814           87          (50)       8,851
Tax Exempt Obligations
   Due after 10 years through 15 years         15,853          717           --       16,570
   Due after 15 years                           9,685          384         (167)       9,902
                                            ---------   ----------   ----------   ----------
Total Investment Securities                 $ 108,693   $    1,313   $     (700)  $  109,306
                                            =========   ==========   ==========   ==========
</TABLE>

                                       55

<PAGE>

A summary of investments  with  unrealized  losses,  aggregated by category,  at
September 30, 2008 is as follows:

<TABLE>
<CAPTION>
                               Less than 12 Months              12 Months or Longer           Total           Total
                         Fair Value   Unrealized Losses   Fair Value   Unrealized Losses   Fair Value   Unrealized Losses
                         ----------   -----------------   ----------   -----------------   ----------   -----------------
                                                                   (In Thousands)
<S>                      <C>          <C>                 <C>          <C>                 <C>          <C>
US Government agencies   $   34,501   $            (385)  $       --   $              --   $   34,501   $            (385)
Tax exempt obligations        4,502                (298)       1,675                (337)       6,177                (635)
                         ----------   -----------------   ----------   -----------------   ----------   -----------------
Total                    $   39,003   $            (683)  $    1,675   $            (337)  $   40,678   $          (1,020)
                         ==========   =================   ==========   =================   ==========   =================
</TABLE>

At September 30, 2008, investment securities in a gross unrealized loss position
consisted of 21 securities  that at such date had an aggregate  depreciation  of
..36% from the  Company's  amortized  cost basis.  Management  believes  that the
estimated fair value of the securities  disclosed  above is primarily  dependent
upon the movement in market interest rates.  Management  evaluated the length of
time and the  extent to which  the fair  value  has been  less  than  cost;  the
financial  condition  and near  term  prospects  of the  issuer,  including  any
specific  events which may influence the  operations of the issuer.  The Company
has the ability and intent to hold these securities  until maturity.  Management
does not  believe  any  individual  unrealized  loss as of  September  30,  2008
represents an other-than-temporary impairment.

A summary of investments  with  unrealized  losses,  aggregated by category,  at
September 30, 2007 is as follows:

<TABLE>
<CAPTION>
                               Less than 12 Months              12 Months or Longer           Total           Total
(In Thousands)           Fair Value   Unrealized Losses   Fair Value   Unrealized Losses   Fair Value   Unrealized Losses
                         ----------   -----------------   ----------   -----------------   ----------   -----------------
<S>                      <C>          <C>                 <C>          <C>                 <C>          <C>
US Government agencies   $    4,446   $             (26)  $   56,849   $            (506)  $   61,295   $            (532)
Tax exempt obligations        2,849                (168)          --                  --        2,849                (168)
                         ----------   -----------------   ----------   -----------------   ----------   -----------------
Total                    $    7,295   $            (194)  $   56,849   $            (506)  $   64,144   $            (700)
                         ==========   =================   ==========   =================   ==========   =================
</TABLE>

4. INVESTMENT SECURITIES AVAILABLE-FOR-SALE

A  comparison  of  amortized  cost and  approximate  fair  value  of  investment
securities  available-for  sale with gross  unrealized  gains and losses,  is as
follows:

                                             September 30, 2008
                              ------------------------------------------------

                                             Gross        Gross
                              Amortized   Unrealized   Unrealized
(In Thousands)                   Cost        Gain        Losses     Fair Value
---------------------------------------   ----------   ----------   ----------
Equity Securities             $     877   $       46   $      (81)  $      842
Money Market Mutual Funds            12           --           --           12
                              ---------   ----------   ----------   ----------
Total Investment Securities   $     889   $       46   $      (81)  $      854
                              =========   ==========   ==========   ==========

                                             September 30, 2007
                                             Gross        Gross
                              Amortized   Unrealized   Unrealized
(In Thousands)                   Cost        Gain        Losses     Fair Value
------------------------------------------------------------------------------

Equity Securities             $   1,501   $        6   $     (173)  $    1,334
Money Market Mutual Funds           576           --           --          576
                              ---------   ----------   ----------   ----------
Total Investment Securities   $   2,077   $        6   $     (173)  $    1,910
                              =========   ==========   ==========   ==========

A summary of investments  with  unrealized  losses,  aggregated by category,  at
September 30, 2008 is as follows:

<TABLE>
<CAPTION>
                               Less than 12 Months              12 Months or Longer
                         ------------------------------   ------------------------------
                                                                                              Total           Total
(In Thousands)           Fair Value   Unrealized Losses   Fair Value   Unrealized Losses   Fair Value   Unrealized Losses
                         ----------   -----------------   ----------   -----------------   ----------   -----------------
<S>                      <C>          <C>                 <C>          <C>                 <C>          <C>
Equity Securities        $      258   $             (14)  $      339   $             (67)  $      597   $             (81)
                         ----------   -----------------   ----------   -----------------   ----------   -----------------
</TABLE>

                                       56

<PAGE>

As of September 30, 2008 there were 3 equity  securities  in an unrealized  loss
position.  Management  evaluated  the length of time and the extent to which the
market  value has been less than cost;  the  financial  condition  and near term
prospects of the issuer,  including any specific  events which may influence the
operations  of the  issuer  such as changes  in  technology  that may impair the
earnings  potential of the investment or the  discontinuance of a segment of the
business  that may effect the future  earnings  potential.  The  Company has the
ability and intent to hold these  securities  until the anticipated  recovery of
fair value occurs. Management does not believe any individual unrealized loss as
of September 30, 2008 represents an other-than-temporary impairment.

A summary of investments  with  unrealized  losses,  aggregated by category,  at
September 30, 2007 is as follows:

<TABLE>
<CAPTION>
                               Less than 12 Months              12 Months or Longer
                         ------------------------------   ------------------------------
                                                                                              Total           Total
(In Thousands)           Fair Value   Unrealized Losses   Fair Value   Unrealized Losses   Fair Value   Unrealized Losses
                         ----------   -----------------   ----------   -----------------   ----------   -----------------
<S>                      <C>          <C>                 <C>          <C>                 <C>          <C>
Equity Securities        $      793   $             (89)  $      255   $             (84)  $    1,048   $            (173)
                         ----------   -----------------   ----------   -----------------   ----------   -----------------
</TABLE>

Proceeds  from the sale of investment  securities  available for sale during the
year ended September 30, 2008 were $442,000 resulting in a gross gain of $69,000
and an after tax gain of $46,000.  There were no sales of investment  securities
available for sale for the year ended September 30, 2007.

During the year ended  September 30, 2008, the Company  recognized an impairment
charge of $252,000 on two equity securities.

5. MORTGAGE-BACKED SECURITIES HELD TO MATURITY

A comparison of amortized  cost and  approximate  fair value of  mortgage-backed
securities  held to  maturity  with gross  unrealized  gains and  losses,  is as
follows:

<TABLE>
<CAPTION>
                                                     September 30, 2008
                                                     Gross       Gross
                                      Amortized   Unrealized   Unrealized
(In Thousands)                          Cost        Gains        Losses     Fair Value
--------------------------------------------------------------------------------------
<S>                                   <C>         <C>          <C>          <C>
Collateralized mortgage obligations   $  14,708   $        8   $     (624)  $   14,092
FHLMC pass-through certificates          88,594          283         (826)      88,051
FNMA pass-through certificates          110,431           99       (1,061)     109,469
GNMA pass-through certificates              200            2           --          202

                                      ---------   ----------   ----------   ----------
Total mortgage-backed securities      $ 213,933   $      392   $   (2,511)  $  211,814
                                      =========   ==========   ==========   ==========
</TABLE>

<TABLE>
<CAPTION>
                                                     September 30, 2007
                                                     Gross       Gross
                                      Amortized   Unrealized   Unrealized
(In Thousands)                          Cost        Gains        Losses     Fair Value
--------------------------------------------------------------------------------------
<S>                                   <C>         <C>          <C>          <C>
Collateralized mortgage obligations   $  16,470   $       97   $     (299)      16,268
FHLMC pass-through certificates          89,533          164       (2,198)      87,499
FNMA pass-through certificates           86,587           12       (2,008)      84,591
GNMA pass-through certificates              252            2           --          254
                                      ---------   ----------   ----------   ----------

Total Mortgage-Backed Securities      $ 192,842   $      275   $   (4,505)  $  188,612
                                      =========   ==========   ==========   ==========
</TABLE>

                                       57

<PAGE>

A summary of securities  with  unrealized  losses,  aggregated  by category,  at
September 30, 2008 is as follows:

<TABLE>
<CAPTION>
                                   Less than 12 Months              12 Months or Longer
                             ------------------------------   ------------------------------                      Total
                                                                                                  Total     -----------------
(In Thousands)               Fair Value   Unrealized Losses   Fair Value   Unrealized Losses   Fair Value   Unrealized Losses
                             ----------   -----------------   ----------   -----------------   ----------   -----------------
<S>                          <C>          <C>                 <C>          <C>                 <C>          <C>
Mortgage-backed securities
   held to maturity          $  159,415   $          (2,412)  $    4,615   $             (99)  $  164,030   $          (2,511)
                             ----------   -----------------   ----------   -----------------   ----------   -----------------
</TABLE>

At September 30, 2008,  mortgage-backed  securities in a gross  unrealized  loss
position for twelve months or longer consisted of 6 securities that at such date
had an aggregate  depreciation of 10.9% from the Company's amortized cost basis.
Management  believes that the estimated fair value of the  securities  disclosed
above is  primarily  dependent  upon the  movement  in  market  interest  rates.
Management  evaluated  the length of time and the extent to which the fair value
has been less than cost; the financial  condition and near term prospects of the
issuer.  The Company has the ability and intent to hold these  securities  until
maturity.  Management  does not believe  any  individual  unrealized  loss as of
September 30, 2008 represents an other-than-temporary impairment.

A summary of securities  with  unrealized  losses,  aggregated  by category,  at
September 30, 2007 is as follows:

<TABLE>
<CAPTION>
                                   Less than 12 Months              12 Months or Longer
                             ------------------------------   ------------------------------
                                                                                                  Total           Total
                                                                                               ----------   -----------------
(In Thousands)               Fair Value   Unrealized Losses   Fair Value   Unrealized Losses   Fair Value   Unrealized Losses
                             ----------   -----------------   ----------   -----------------   ----------   -----------------
<S>                          <C>          <C>                 <C>          <C>                 <C>          <C>
Mortgage-backed securities
   held to maturity          $   11,829   $             (95)  $  162,008   $          (4,410)  $  173,837   $          (4,505)
                             ----------   -----------------   ----------   -----------------   ----------   -----------------
</TABLE>

Proceeds  from the sales of  mortgage-backed  securities  during  the year ended
September  30, 2008 were  $1,271,000  resulting in a gross gain of $4,000 and an
after tax gain of $3,000. Proceeds from the sales of mortgage-backed  securities
during the year ended September 30, 2007 were  $10,281,000  resulting in a gross
gain of $160,000 and an after tax gain of $106,000.  The Company sold securities
held to maturity in  accordance  with  provisions  of SFAS No. 115 allowing such
securities to be sold if principal  reductions on such  securities were at least
85%.

6. MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE

A comparison of amortized  cost and  approximate  fair value of  mortgage-backed
securities  available-for  sale with gross  unrealized  gains and losses,  is as
follows:

<TABLE>
<CAPTION>
                                                  September 30, 2008
                                                  Gross        Gross
                                   Amortized   Unrealized   Unrealized
(In Thousands)                        Cost        Gains        Losses    Fair Value
------------------------------------------------------------------------------------
<S>                                <C>         <C>          <C>          <C>
FNMA pass-through certificates     $     785   $       --   $      (27)  $      758
                                   ---------   ----------   ----------   ----------

Total mortgage-backed securities   $     785   $       --   $      (27)  $      758
                                   =========   ==========   ==========   ==========
</TABLE>

The Company has one security in an  unrealized  loss  position at September  30,
2008 for  less  than  twelve  months.  Management  does not  believe  this  loss
represents an other-than-temporary impairment.

                                       58

<PAGE>

<TABLE>
<CAPTION>
                                                  September 30, 2007
                                                  Gross        Gross
                                   Amortized   Unrealized   Unrealized
(In Thousands)                        Cost        Gains        Losses    Fair Value
------------------------------------------------------------------------------------
<S>                                <C>         <C>          <C>          <C>
FNMA pass-through certificates     $     785   $       33   $       --   $      818
                                   ---------   ----------   ----------   ----------
Total mortgage-backed securities   $     785   $       33   $       --   $      818
                                   =========   ==========   ==========   ==========
</TABLE>

7. LOANS RECEIVABLE

Loans receivable consists of the following:

                                                 September 30,
 (In Thousands)                                 2008        2007
-------------------------------------------------------------------
Residential Mortgages                        $ 337,316   $ 305,341
Commercial Mortgages                            44,407      15,314
Construction                                     8,346       6,093
Savings Account                                    955         977
Home Equity                                     66,280      74,218
Home Equity Line of Credit                      26,103      21,386
Automobile and other                             1,000         904
                                             ---------   ---------

Total                                          484,407     424,233
Undisbursed portion of loans in process         (5,109)     (2,794)
Deferred loan fees                                (452)       (453)
Allowance for loan losses                       (1,988)     (1,933)
                                             ---------   ---------

Loans Receivable - net                       $ 476,858   $ 419,053
                                             =========   =========

At  September  30, 2008 and 2007,  the Company  was  servicing  loans for others
amounting to  approximately  $2,918,000 and $3,642,000  respectively.  Servicing
loans for others generally consists of collecting mortgage payments, maintaining
escrow accounts,  disbursing  payments to investors and foreclosure  processing.
Loan  servicing  income is  recognized  over the life of the loan. In connection
with the loans serviced for others,  the Company held borrowers' escrow balances
of  approximately   $13,000  and  $18,000,  at  September  30,  2008  and  2007,
respectively.

Loans  to  officers  and  directors  at  September  30,  2008  and  2007,   were
approximately  $554,000  and  $582,000,   respectively.   Additional  loans  and
repayments  for  the  year  ended  September  30,  2008,  were  $0 and  $28,000,
respectively.

                                       59

<PAGE>

The following schedule summarizes the changes in the allowance for loan losses:

                                               Year Ended September 30,
         (In Thousands)                          2008            2007
         ---------------------------------------------------------------
         Balance, beginning of year            $  1,933        $  1,956
            Provision of loan losses                 85              --
            Recoveries                               10              13
            Charge offs                             (40)            (36)
                                               --------        --------
         Balance, end of year                  $  1,988        $  1,933
                                               ========        ========

The activity in the  recoveries and charge off accounts was primarily the result
of  the  Company's  Bounce  protection  program.  This  program  extends  credit
automatically  to our  depositors.  If the account is not brought current by the
depositor  the loan is charged  off.  If the  customer  subsequently  brings the
account current, a recovery is recognized.

The  provision  for loan  losses  charged  to  expense  is based  upon past loss
experiences and an evaluation of potential losses in the current loan portfolio,
including  the  evaluation  of  impaired  loans  under  SFAS No.  114. A loan is
considered to be impaired when, based upon current information and events, it is
probable that the Company will be unable to collect all amounts due according to
the  contractual  terms of the loan.  An  insignificant  delay or  insignificant
shortfall in amount of payments  does not  necessarily  result in the loan being
identified  as  impaired.  For  this  purpose,  delays  less  than 90  days  are
considered to be  insignificant.  As of September 30, 2008, 100% of the impaired
loan balance was measured for  impairment  based on the fair value of the loans'
collateral.  Impairment  losses are included in the  provision  for loan losses.
SFAS No. 114 does not apply to large groups of smaller balance homogeneous loans
that  are  collectively  evaluated  for  impairment,   except  for  those  loans
restructured under a troubled debt restructuring.  Loans collectively  evaluated
for impairment  include  consumer loans and  residential  real estate loans.  At
September 30, 2008 and 2007,  the Company had impaired loans of $815,000 and $0,
respectively,  with a related  allowance  for loan  losses of  $122,000  and $0,
respectively.  At  September  30,  2008,  the Company had  non-accrual  loans of
$244,000.  At  September  30, 2007,  the Company had no  non-accrual  loans.  At
September  30,  2008 and  2007,  the  Company  had  loans in  excess  of 90 days
delinquent and still accruing  interest in the amount of $1,014,000 and $28,000,
respectively.

8. OFFICE PROPERTIES AND EQUIPMENT

Office  properties  and equipment are  summarized  by major  classifications  as
follows:

                                                     September 30,
         (In Thousands)                          2008            2007
         ---------------------------------------------------------------
         Land                                  $  1,159        $  1,159
         Buildings                                7,725           7,548
         Branch office in construction            2,430           2,193
         Furniture, fixtures and equipment        4,251           3,904
         Automobiles                                 25              25
                                               --------        --------

         Total                                   15,590          14,829
         Less accumulated depreciation           (5,436)         (4,913)
                                               --------        --------
         Net                                   $ 10,154        $  9,916
                                               ========        ========

Depreciation expense for the years ended September 30, 2008 and 2007 amounted to
approximately $523,000 and $511,000 respectively.

                                       60

<PAGE>

9. DEPOSITS

Deposits are summarized as follows:

<TABLE>
<CAPTION>
                                                        September 30,
                                                 2008                   2007
                                         --------------------   ---------------------
                                                     Weighted               Weighted
                                                     Interest               Interest
(Dollars in Thousands)                     Amount      Rate       Amount      Rate
-------------------------------------------------------------------------------------
<S>                                      <C>         <C>        <C>         <C>
Non-interest bearing checking accounts   $  10,963       0.00%  $  11,740       0.00%
NOW accounts                                14,315       0.25      13,711       0.25
Interest bearing checking accounts          27,888       1.13      25,750       2.41
Money market deposit accounts               52,005       1.47      51,827       1.80
Passbook and club accounts                   2,641       1.00       2,864       0.98
Certificate of deposit accounts            317,701       3.49     318,143       4.50
                                         ---------   --------   ---------   --------

Total Deposits                           $ 425,513       2.87%  $ 424,035       3.76%
                                         =========   ========   =========   ========
</TABLE>

At September 30, 2008,  the amounts of scheduled  maturities of  certificate  of
deposit accounts were as follows:

For the year ended September 30:            2009       $ 208,889
                                            2010          48,489
                                            2011          39,348
                                            2012          12,760
                                            2013           8,215
                                                       ---------
                             Total                     $ 317,701
                                                       =========

The aggregate  amount of certificate  accounts in  denominations  of $100,000 or
more at September 30, 2008 and 2007 amounted to approximately  $53.4 million and
$53.6  million,  respectively.  On  October  3,  2008,  FDIC  deposit  insurance
temporarily  increased from $100,000 to $250,000 per depositor  through December
31, 2009

Interest expense on savings deposits is composed of the following:

                                                    Year Ended September 30,
 (In Thousands)                                       2008            2007
-----------------------------------------------------------------------------

 NOW, interest-bearing checking and MMDA accounts   $  2,212        $  2,558
 Passbook and club accounts                               31              32
 Certificate accounts                                 12,975          12,882
                                                    --------        --------

Total                                               $ 15,218        $ 15,472
                                                    ========        ========

                                       61

<PAGE>

10. SHORT-TERM BORROWINGS AND LONG-TERM DEBT

The Company has a line of credit with the Federal  Home Loan Bank of which $21.8
million and $31.5 million of the  available  $75.0 million was used at September
30, 2008 and 2007, respectively.  The average balance outstanding on the line of
credit for the years ended  September  30,  2008 and 2007 was $16.9  million and
$48.2 million, respectively. The maximum amount outstanding at any time for 2008
and 2007 was $39.0 million and $67.4 million, respectively. The weighted average
interest  rate during 2008 and 2007 was 2.96% and 5.36%.  The  interest  rate at
September 30, 2008 and 2007 was 2.05% and 5.15%, respectively.

Long-term debt consist of the following:

<TABLE>
<CAPTION>
                                                                  Weighted
                                                Amount          Average Rate
                                        ---------------------   ------------
                                           2008        2007     2008    2007
                                        ---------   ---------   ----    ----
                                               (dollars in thousands)
<S>                              <C>    <C>         <C>         <C>     <C>
FHLB long-term debt:
Fixed rate advances maturing:
                                 2009   $  14,055               4.93%
                                 2010      31,405               4.36%
                                 2011      17,740               4.33%
                                 2012      57,090               4.48%
                                 2013      24,282               3.61%
                                 2014      11,444               3.47%
                                 2015      19,683               3.81%
            Maturing after 9/30/2015:     100,347               4.32%
                                        ---------               ----

Total FHLB long-term debt                 276,046     227,109   4.25%   4.56%

Other long-term debt:
Fixed rate advances maturing:
                                 2013      15,000               4.55%
                                 2014      15,000               4.50%
            Maturing after 9/30/2015:      10,000               3.50%
                                        ---------               ----

Total other long term debt fixed           40,000      30,000   4.27%   4.70%
Adjustable long-term debt maturing:
            Maturing after 9/30/2015:      10,000      10,000   4.37%   4.97%
                                        ---------   ---------   ----    ----

Total other long term debt              $  50,000      40,000   4.29%   4.77%
                                        ---------   ---------   ----    ----

Total Long Term Debt                    $ 326,046   $ 267,109   4.26%   4.59%
                                        =========   =========   ====    ====
</TABLE>

Federal Home Loan Bank (FHLB) advances are  collateralized  by Federal Home Loan
Bank stock and  substantially  all first mortgage loans. In addition,  there are
three long-term  advances from other financial  institutions that are secured by
investment and mortgage-backed securities totaling $50 million.

11. INCOME TAXES

The Company  computes  its reserve for bad debts under the  specific  charge-off
method. The bad debt deduction allowable under this method is available to large
banks with assets greater than $500 million.  Generally,  this method allows the
Company to deduct an annual  addition  to the reserve for bad debts equal to its
net  charge-offs.  Retained  earnings at  September  30, 2008 and 2007  includes
approximately  $1,325,000 representing bad debt deductions for which no deferred
income taxes have been provided.

                                       62

<PAGE>

The expense for income taxes differs from that computed at the statutory federal
corporate tax rate as follows:

                                          Year Ended September 30,
                                        2008                   2007
                                --------------------   ---------------------
                                          Percentage             Percentage
                                          of Pretax              of Pretax
(Dollars in Thousands)           Amount     Income      Amount     Income
----------------------------------------------------------------------------
At statutory rate               $ 1,908         34.0%  $ 1,413         34.0%
Adjustments resulting from:
Tax-exempt income                  (597)       (10.6)     (557)       (13.4)
State tax-net of federal
   tax benefit                       --           --        --           --
Other                               (79)        (1.4)       55          1.3
                                -------   ----------   -------   ----------
Expense per consolidated
   statements of income         $ 1,232         22.0%  $   911         21.9%
                                =======   ==========   =======   ==========

Income tax expense is summarized as follows:

                                              Year Ended September 30,
(In thousands)                                  2008             2007
                                              ------------------------
Current                                       $ 1,273           $  855
Deferred                                          (41)              56
                                              -------           ------
Total Income Tax Expense                      $ 1,232           $  911
                                              =======           ======

Items that gave rise to significant portions of the deferred tax accounts are as
follows:

                                                    September 30,
(In thousands)                                 2008             2007
                                              -------           ------
Deferred Tax Assets:
   Deferred Loan Fees                         $    37           $   55
   Allowance for Loan Losses                      676              657
   Unrealized loss on investment securities        21               46
   Securities impairment                           86               --
   Other                                           32               27
                                              -------           ------
      Sub-Total                                   852              785
                                              -------           ------
Deferred Tax Liabilities:
   Properties and equipment                      (501)            (450)
                                              -------           ------
      Sub-Total                                  (501)            (450)
                                              -------           ------
      Total                                   $   351           $  335
                                              =======           ======

12. REGULATORY CAPITAL REQUIREMENTS

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

                                       63

<PAGE>

regulation  to ensure  capital  adequacy  require the Bank to  maintain  minimum
amounts  and ratios  (set forth in the table  below) of total Tier 1 capital (as
defined in the regulations) to risk weighted assets (as defined),  and of Tier 1
capital  (as  defined)  to  assets  (as  defined).  Management  believes,  as of
September 30, 2008,  that the Bank meets all capital  adequacy  requirements  to
which it is subject.

As of September 30, 2008, the most recent  notification from the Federal Deposit
Insurance  Corporation  categorized  the  Bank as  well  capitalized  under  the
regulatory  framework for prompt  corrective  action.  To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the table. There are no conditions or
events since that notification that management  believes have changed the Bank's
category.

The Bank's actual capital amounts and ratios are also presented in the table.

<TABLE>
<CAPTION>
                                                                                  To Be Considered Well
                                                                                    Capitalized Under
                                                                 For Capital        Prompt Corrective
                                                Actual        Adequacy Purposes     Action Provisions
                                           ----------------   -----------------   ----------------------
(Dollars in Thousands)                      Amount    Ratio    Amount     Ratio     Amount       Ratio
--------------------------------------------------------------------------------------------------------
<S>                                        <C>        <C>     <C>         <C>     <C>            <C>
Tier 1 Capital (to assets)                 $ 47,191    5.69%  $ 33,167     4.00%  $  41,459        5.00%
Tier 1 Capital (to risk weighted assets)     47,191   10.97%    17,203     4.00%     25,804        6.00%
Total Capital (to risk weighted assets)      49,179   11.44%    34,406     8.00%     43,007       10.00%

Tier 1 Capital (to assets)                 $ 46,797    6.02%  $ 31,021     4.00%  $  38,776        5.00%
Tier 1 Capital (to risk weighted assets)     46,797   12.12%    15,443     4.00%     23,164        6.00%
Total Capital (to risk weighted assets)      48,729   12.62%    30,886     8.00%     38,607       10.00%
</TABLE>

The Company's  capital  ratios are not  significantly  different than the Bank's
disclosed above.

13. RETIREMENT SAVINGS PLANS

The Company has an employee stock ownership pension plan and a qualified 401 (k)
retirement  savings  plan  covering  all  full-time  employees  meeting  certain
eligibility requirements.  Contributions for both plans are at the discretion of
the Company's Board of Directors. Contributions expense related to the plans was
$309,000  and  $278,000  for the  years  ended  September  30,  2008  and  2007,
respectively.

14. STOCK OPTIONS

In January 1996, the stockholders approved the 1995 Stock Option Plan. This plan
consists  of  two  parts:  Plan  I -  incentive  stock  options  and  Plan  II -
compensatory stock options.

In January 2001, the stockholders approved the 2000 Stock Option Plan. This plan
consists  of  two  parts:  Plan  I -  incentive  stock  options  and  Plan  II -
compensatory stock options.

In January 2006, the stockholders approved the 2005 Stock Option Plan. This plan
consists  of  two  parts:  Plan  I -  incentive  stock  options  and  Plan  II -
compensatory  stock options.  There are 151,499  options  remaining for grant in
this plan.

                                       64

<PAGE>

A summary of transactions under this plan follows:

                                           Year Ended September 30,
                                          2008                 2007
                                   ------------------   ------------------
                                             Weighted             Weighted
                                              Average              Average
                                   Options     Price    Options    Price
--------------------------------------------------------------------------

Outstanding, beginning of year     279,799   $  15.54   243,100   $  15.01
   Exercised                        (5,000)      8.87    (3,751)     10.10
   Canceled                        (10,918)     15.61    (8,750)     14.35
   Granted                          79,478      12.50    49,200      17.68
                                   -------   --------   -------   --------
   Outstanding, end of year        343,359   $  15.02   279,799   $  15.54
                                   =======   ========   =======   ========
Options exercisable, end of year   145,666   $  14.45   145,599   $  13.86
                                   =======   ========   =======   ========

A summary of the exercise price ranges at September 30, 2008 is as follows:

                                                            Weighted
                    Exercise          Weighted              Average
   Number of         Price        Average Remaining     Exercise Price
 Option Shares       Range        Contractual Life         per Share
 -------------    ------------    -----------------     --------------
       127,527    $ 8.10-12.50           6.72           $        11.50
       101,567     13.13-17.50           6.09                    16.41
       114,265     17.68-18.00           5.88                    17.81
 -------------    ------------           ----           --------------
       343,359    $ 8.10-18.00           7.34           $        15.02
 =============    ============           ====           ==============

For the years ended  September 30, 2008 and 2007, the aggregate  intrinsic value
of options  outstanding was $137,000 and $251,000,  respectively.  For the years
ended  September  30, 2008 and 2007,  the aggregate  intrinsic  value of options
exercisable was $131,000 and $242,000, respectively.

The aggregate  intrinsic  value of a stock option  represents  the total pre-tax
intrinsic  value (the amount by which the current market value of the underlying
stock exceeds the exercise price of the option) that would have been received by
the option holder had all option  holders  exercised  their options on September
30,  2008.  This  amount  changes  based on changes  in the market  value of the
Company's stock.

Stock based  compensation  expense  related to stock options for the years ended
September 30, 2008 and 2007 was $99,000,  or $94,000 net of tax and $97,000,  or
$92,000,  net  of  tax,  respectively.  As of  September  30,  2008,  there  was
approximately  $231,000  of total  unrecognized  compensation  cost  related  to
non-vested stock options under the plans.

The Company also has  established an Employee Stock Purchase Plan (the "Purchase
Plan") whereby employees may elect to make contributions to the Purchase Plan in
an aggregate  amount not less than 2% nor more than 10% of such employee's total
compensation. These contributions would then be used to purchase stock during an
offering period determined by the Company's Salary and Benefits  Committee.  The
purchase  price of the stock  would be the lesser of 85% of the market  price on
the first day or the last day of the offering  period.  During 2008 and 2007, no
shares were issued to employees,  respectively.  At September 30, 2008 and 2007,
there were 31,081 shares  available for future purchase.  The Company  suspended
participation  in the Purchase  Plan in March 2005 and the plan is not currently
active.

                                       65

<PAGE>

15. COMMITMENTS

At  September  30,  2008,  the  Company  had  approximately   $10.6  million  in
outstanding commitments to originate mortgage loans, of which $10.4 million were
at fixed rates ranging from 5.00% to 7.625% and adjustable  rates of $167,000 at
6.00%. The unfunded line of credit  commitments at September 30, 2008 were $41.3
million.  The Company had $4.7 million and $370,000 of committed  commercial and
consumer loans, respectively at September 30, 2008. In addition, the Company had
$4.1 million of unused  commercial  lines of credit.  The amounts of undisbursed
portions  of loans in process  at  September  30,  2008 were $4.7  million.  The
Company had a total of $741,000 in standby letters of credit. Also, at September
30, 2008 the Company had no outstanding futures or options positions.

The  Company  leases  land  for  two  of  its  branch  offices.  Minimum  rental
commitments for the next five years at September 30, 2008, are summarized below:

                   Fiscal Year      Rental Amount
                   -----------      -------------

                          2009      $     121,627
                          2010            124,272
                          2011            125,595
                          2012            130,463
                          2013            137,277
                                    -------------
            Total                   $     639,234
                                    =============

16. LEGAL CONTINGENCIES

Various  legal  claims  also  arise  from time to time in the  normal  course of
business  which,  in the opinion of management,  will have no material effect on
the Company's consolidated financial statements.

17. CONVERSION TO A STOCK SAVINGS BANK

At the time of conversion,  in 1987, the Bank established a liquidation  account
in an  amount  equal  to the  Bank's  net  worth  as  reflected  in  the  latest
consolidated  statement  of  financial  condition  of the Bank  contained in the
offering  circular  utilized in the conversion.  The function of the liquidation
account is to establish a priority on  liquidation  and,  except with respect to
the payment of cash dividends on, or the re-purchase of, any of the common stock
by the Bank,  the  existence  of the  liquidation  account  will not  operate to
restrict the use or application of any of the net worth accounts of the Bank. In
the event of a complete  liquidation of the Bank (and only in such event),  each
eligible account holder will be entitled to receive a pro rata distribution from
the  liquidation  account,  based on such holder's  proportionate  amount of the
total current adjusted  balances from deposit accounts then held by all eligible
account holders, before any liquidation distribution may be made with respect to
stockholders.  The liquidation account was approximately $2,300,000 at September
30, 2008.  Furthermore,  the Company may not  repurchase any of its stock if the
effect  thereof  would cause the Company's net worth to be reduced below (i) the
amount  required  for the  liquidation  account or (ii) the  regulatory  capital
requirements.

                                       66

<PAGE>

18. FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS

The  estimated  fair value  amounts have been  determined  by the Company  using
available market information and appropriate valuation  methodologies.  However,
considerable  judgment is  necessarily  required to interpret the market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not  necessarily  indicative  of the amounts the Company  could realize in a
current  market  exchange.  The  use  of  different  market  assumptions  and/or
estimation  methodologies may have a material effect on the estimated fair value
amounts.

<TABLE>
<CAPTION>
                                                                         September 30,
                                                               2008                          2007
                                                   ---------------------------------------------------------
                                                    Carrying    Estimated Fair    Carrying    Estimated Fair
(In Thousands)                                       Amount         Value          Amount         Value
                                                   ----------   --------------   ----------   --------------
<S>                                                <C>          <C>              <C>          <C>
Assets:

   Cash and cash equivalents                       $    9,374   $        9,374   $    8,317   $        8,317
   Investment securities held to maturity              79,254           78,973      108,693          109,306
   Investment securities available-for-sale               854              854        1,910            1,910
   Mortgage-backed securities held to maturity        213,933          211,814      192,842          188,612
   Mortgage-backed securities available-for-sale          758              758          818              818
   Loans receivable - net                             476,858          476,399      419,053          411,521
   Federal Home Loan Bank Stock                        16,574           16,574       14,140           14,140
   Accrued interest receivable                          3,799            3,799        4,047            4,047

Liabilities:
   Checking, Passbook, Club and NOW accounts           55,807           55,807       54,065           54,065
   Money Market Demand accounts                        52,005           52,005       51,827           51,827
   Certificate accounts                               317,701          318,929      318,143          315,848
   Borrowings                                         347,846          357,376      298,609          300,032
   Accrued interest payable                             1,686            1,686        1,556            1,556

Off balance sheet financial instruments                    --               --           --               --
</TABLE>

The carrying amounts of cash and short-term instruments approximate fair values.
The carrying amounts of  interest-bearing  deposits  maturing within ninety days
approximate  their fair  values.  The fair value of  investment  securities  and
mortgage-backed  securities is based on quoted market prices, dealer quotes, and
prices obtained from independent pricing services.  For variable-rate loans that
reprice  frequently and with no significant  change in credit risk,  fair values
are based on carrying  values.  Fair values for certain  mortgage  loans  (e.g.,
one-to-four  family  residential)  and other  consumer loans are based on quoted
market  prices  of  similar  loans  sold  in  conjunction  with   securitization
transactions, adjusted for differences in loan characteristics.  Fair values for
non-performing  loans are  estimated  using  discounted  cash flow  analyses  or
underlying collateral values, where applicable.  Although Federal Home Loan Bank
Stock  (FHLB) is an equity  interest in FHLB,  it is carried at cost  because it
does not have a readily  determinable  fair value as its ownership is restricted
and it lacks a market.  The  estimated  fair  value  approximates  the  carrying
amount.  The fair  value of  accrued  interest  receivable  and  payable  is the
carrying amount.

The fair value of checking,  NOW and money market deposits and savings  accounts
is the amount reported in the consolidated financial statements.  The fair value
of savings  certificates  and  borrowings  are based on a present value estimate
using rates  currently  offered for instruments of similar  remaining  maturity.
Fair  values  for  off-balance  sheet  lending  commitments  are  based  on fees
currently charged to enter similar agreements.

The fair value  estimates  presented  herein are based on pertinent  information
available to management as of September 30, 2008 and 2007.  Although  management
is not aware of any factors that would  significantly  affect the estimated fair
value amounts, such amounts have not been comprehensively  revalued for purposes
of

                                       67

<PAGE>

these financial statements since that date and, therefore,  current estimates of
fair value may differ significantly from the amounts presented herein.

19. PARENT COMPANY CONDENSED FINANCIAL INFORMATION

Condensed financial statements of Harleysville Savings Financial Corporation are
as follows:

Condensed Statements of Financial Condition

<TABLE>
<CAPTION>
                                                                       September 30,
                                                            ---------------------------------
                                                                  2008              2007
                                                            ---------------   ---------------
(In Thousands)
<S>                                                         <C>               <C>
Assets
Cash                                                        $            47   $           195
Investment in subsidiary                                             47,618            47,312
                                                            ---------------   ---------------
Total Assets                                                $        47,665   $        47,507
                                                            ===============   ===============
Liabilities & Stockholders' Equity
Other liabilities                                           $           456   $           466
Stockholders' equity                                                 47,209            47,041
                                                            ---------------   ---------------
Total Liabilities & Stockholders' Equity                    $        47,665   $        47,507
                                                            ===============   ===============
</TABLE>

Condensed Statement of Income:

<TABLE>
<CAPTION>
                                                             For the Year Ended September 30,
                                                                  2008              2007
                                                            ---------------   ---------------
<S>                                                         <C>               <C>
Equity in income of subsidiary                              $         4,788   $         3,680
Other expense                                                           409               434
                                                            ---------------   ---------------
Net income                                                  $         4,379   $         3,246
                                                            ===============   ===============
</TABLE>

Condensed Statements of Cash Flows

<TABLE>
<CAPTION>
                                                             For the Year Ended September 30,
                                                                  2008              2007
                                                            ---------------   ---------------
<S>                                                         <C>               <C>
Net income                                                  $         4,379   $         3,246
(Decrease) increase in other liabilities                                (10)               92
Income of Harleysville Savings Bank                                  (4,788)           (3,680)
                                                            ---------------   ---------------

Net cash used by operating activities                                  (419)             (342)
                                                            ---------------   ---------------

Investing activities:
Dividends received from subsidiary                                    4,629             5,050
                                                            ---------------   ---------------

Net cash provided by investing activities                             4,629             5,050
                                                            ---------------   ---------------

Financing activities:
   Acquisition of treasury stock                                     (2,556)           (2,694)
   Issuance of treasury stock                                           177                49
   Dividends paid                                                    (1,979)           (2,051)
                                                            ---------------   ---------------

Net cash used in financing activities                                (4,358)           (4,696)
                                                            ---------------   ---------------

Net increase (decrease) in cash and cash equivalents                   (148)               12

Cash and cash equivalents at the beginning of the period                195               183
                                                            ---------------   ---------------

Cash and cash equivalents at the end of the period          $            47   $           195
                                                            ===============   ===============
</TABLE>

                                       68

<PAGE>

20. Quarterly Financial Data (Unaudited)

Unaudited  quarterly  financial data for the years ended  September 30, 2008 and
2007 is as follows: (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                       2008                                       2007
                                    -----------------------------------------   ---------------------------------------
                                       1st        2nd        3rd        4th       1st       2nd        3rd        4th
                                       QTR        QTR        QTR        QTR       QTR       QTR        QTR        QTR
                                    --------   --------   --------   --------   -------   -------   --------   --------
<S>                                 <C>        <C>        <C>        <C>        <C>       <C>       <C>        <C>
(In Thousands)

Interest Income                     $ 10,501   $ 10,722   $ 10,812   $ 11,041   $ 9,840   $ 9,899   $ 10,115   $ 10,442
Interest Expense                       7,631      7,519      7,056      6,810     7,015     6,957      7,249      7,572
                                    --------   --------   --------   --------   -------   -------   --------   --------
Net Interest Income                    2,870      3,203      3,756      4,231     2,825     2,942      2,866      2,870
Provision for loan losses                 --          5         35         45        --        --         --         --
                                    --------   --------   --------   --------   -------   -------   --------   --------
Net interest income after
   provision for loan losses           2,870      3,198      3,721      4,186     2,825     2,942      2,866      2,870
Impairment of equity securities           --         --        252         --        --        --         --         --
Gain on sales of investments              --          4         --         69        --       160         --         --
Other Income                             499        463        453        494       373       386        475        477
Non-interest expense                   2,386      2,425      2,554      2,729     2,260     2,315      2,316      2,326
                                    --------   --------   --------   --------   -------   -------   --------   --------
Income before income taxes               983      1,240      1,368      2,020       938     1,173      1,025      1,021
Income tax expense                       182        206        332        512       181       269        212        250
                                    --------   --------   --------   --------   -------   -------   --------   --------
Net income                          $    801   $  1,034   $  1,036   $  1,508   $   757   $   904   $    813   $    771
                                    ========   ========   ========   ========   =======   =======   ========   ========
Per Common Share:

Earnings per share - basic          $   0.22   $   0.28   $   0.29   $   0.42   $  0.20   $  0.23   $   0.21   $   0.21
Earnings per share - diluted        $   0.21   $   0.28   $   0.29   $   0.42   $  0.19   $  0.23   $   0.21   $   0.21
</TABLE>

Earnings  per  share  is  computed  independently  for  each  period  presented.
Consequently, the sum of the quarters may not equal the total earnings per share
for the year.

                                       69

<PAGE>

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

      The  information  required  herein is  incorporated  by reference from the
information  contained in the section  captioned  "Ratification  of Selection of
Independent  Registered  Public  Accounting  Firm - Change in  Auditors"  in the
Company's  definitive  Proxy Statement for the Annual Meeting of Stockholders to
be held in January 2009 (the "Proxy Statement").

Item 9A(T). Controls and Procedures
-----------------------------------

      Our management  evaluated,  with the  participation of our Chief Executive
Officer  and  Chief  Financial  Officer,  the  effectiveness  of our  disclosure
controls and procedures (as defined in Rules  13a-15(e) and 15d-15(e)  under the
Securities  Exchange  Act of  1934)  as of  September  30,  2008.  Based on such
evaluation,  our Chief  Executive  Officer  and  Chief  Financial  Officer  have
concluded  that our  disclosure  controls and  procedures are designed to ensure
that  information  required to be disclosed by us in the reports that we file or
submit  under  the  Securities  Exchange  Act of  1934 is  recorded,  processed,
summarized and reported within the time periods specified in the SEC's rules and
regulations and are operating in an effective manner.

      No change in our internal control over financial  reporting (as defined in
Rules  13a-15(f)  and  15(d)-15(f)  under the  Securities  Exchange Act of 1934)
occurred during the fourth fiscal quarter of 2008 that has materially  affected,
or is  reasonably  likely  to  materially  affect,  our  internal  control  over
financial reporting.

Report of Management's Assessment of Internal Control over Financial Reporting

Management  is  responsible  for  designing,   implementing,   documenting,  and
maintaining an adequate system of internal control over financial reporting.  An
adequate  system of internal  control over financial  reporting  encompasses the
processes and procedures that have been established by management to:

   o  maintain records that accurately reflect the company's transactions;

   o  prepare  financial  statement and footnote  disclosures in accordance with
      GAAP that can be relied upon by external users;

   o  prevent and detect  unauthorized  acquisition,  use or  disposition of the
      company's  assets  that  could  have a  material  effect on the  financial
      statements.

Management  conducted  an  evaluation  of the  effectiveness  of  the  Company's
internal  control  over  financial  reporting  based on the criteria in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway  Commission (COSO).  Based on this evaluation under the criteria
in Internal  Control-Integrated  Framework,  management  concluded that internal
control  over  financial  reporting  was  effective  as of  September  30, 2008.
Furthermore,  during the conduct of its  assessment,  management  identified  no
material weakness in its financial reporting control system.

The Board of Directors of Harleysville  Savings Financial  Corporation,  through
its Audit Committee, provides oversight to managements' conduct of the financial
reporting  process.   The  Audit  Committee,   which  is  composed  entirely  of
independent  directors,  is also  responsible  to recommend the  appointment  of
independent public accountants.  The Audit Committee also meets with management,
the internal audit staff, and the independent public accountants  throughout the
year to provide assurance as to the adequacy of the financial  reporting process
and to monitor the overall  scope of the work  performed by the  internal  audit
staff and the independent public accountants.

Because of its inherent limitations,  our disclosure controls and procedures may
not  prevent  or detect  misstatements.  A control  system,  no matter  how well
conceived and operated,  can only provide  reasonable,  not absolute,  assurance
that the  objectives  of the  control  system are met.  Because of the  inherent
limitations  in all control  systems,  no  evaluation  of  controls  can provide
absolute  assurance that all control issues and instances

                                       70

<PAGE>

of fraud,  if any, have been  detected.  Also,  projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate  because of changes in  conditions  or that the degree of  compliance
with the policies or procedures may deteriorate.

This  annual  report  does not include an  attestation  report of the  Company's
registered  public  accounting  firm regarding  internal  control over financial
reporting.  Management's  report was not subject to attestation by the Company's
registered public accounting firm pursuant to a temporary rule of the Securities
and Exchange  Commission  that permits the Company to provide only  management's
report in this annual report.

/s/ Ronald B. Geib                                       /s/ Brendan J. McGill
------------------                                       ---------------------
President and Chief Executive Officer                    Chief Financial Officer

Item 9B. Other Information.
--------------------------

Not applicable.

                                       71

<PAGE>

                                    PART III

Item 10. Directors, Executive Officers and Corporate Governance.
---------------------------------------------------------------

      The  information  required  herein is  incorporated  by reference from the
information  contained in the sections  captioned  "Information  with Respect to
Nominees for Director,  Directors  Whose Terms Continue and Executive  Officers"
and  "Beneficial  Ownership  of Common  Stock by Certain  Beneficial  Owners and
Management - Section 16(a)  Beneficial  Ownership  Reporting  Compliance" in the
Company's definitive Proxy Statement for the 2009 Annual Meeting of Stockholders
to be held in January 2009 (the "Proxy Statement").

      The Company  has adopted a Code of Conduct and Ethics that  applies to its
principal  executive officer and principal  financial officer,  as well as other
officers and employees of the Company and the Bank. A copy of the Code of Ethics
may be found on the Company's website at www.harleysvillesavingsbank.com.

Item 11. Executive Compensation.
-------------------------------

      The  information  required  herein is  incorporated  by reference from the
information contained in the sections captioned "Management Compensation" in the
Proxy Statement.

Item 12. Security  Ownership  of Certain Beneficial  Owners and  Management  and
--------------------------------------------------------------------------------
         Related Stockholder Matters.
         ---------------------------

      The  information  required  herein is  incorporated  by reference from the
information  contained in the section captioned  "Beneficial Ownership of Common
Stock by Certain Beneficial Owners and Management" in the Proxy Statement.

Equity Compensation Plan Information

      The  following  table  sets  forth  certain  information  for  all  equity
compensation  plans  and  individual  compensation  arrangements  (whether  with
employees or  non-employees,  such as directors),  in effect as of September 30,
2008.

<TABLE>
<CAPTION>
                                   Number of Shares to be
                                  issued upon the Exercise     Weighted-Average     Number of Shares Remaining Available for
                                   of Outstanding Options,    Exercise Price of    Future Issuance (Excluding Shares Reflected
         Plan Category             Warrants and Rights(1)    Outstanding Options             in the First Column)(2)
-------------------------------   ------------------------   -------------------   -------------------------------------------
<S>                               <C>                        <C>                   <C>
Equity compensation plans
   approved by security holders            343,359                  $15.02                           205,082
Equity compensation plans not
   approved by security holders                 --                      --                                --
                                           -------                  ------                           -------
      Total                                343,359                  $15.02                           205,082
                                           =======                  ======                           =======
</TABLE>

----------
(1)   Does not take into account  purchase  rights  accruing under the Company's
      1995 Employee Stock Purchase Plan,  which was approved by stockholders and
      provides for up to 87,281  shares to be issued.  Under the Employee  Stock
      Purchase Plan, each eligible  employee may purchase shares of common stock
      at semi-annual  intervals each year at a purchase price  determined by the
      committee  of the board of directors  which  administers  the plan,  which
      shall not be less than the lesser of (i) 85% of the fair market value of a
      share  of  common  stock  on the  first  business  day  of the  applicable
      semi-annual  offering  period  or (ii) 85% of the fair  market  value of a
      share of common stock on the last business day of such offering period. In
      no event may the amount of common stock  purchased by a participant in the
      Employee Stock Purchase Plan in a calendar year exceed  $25,000,  measured
      as of the time an option under the plan is granted.

(2)   Includes  shares  available for future  issuance  under the Employee Stock
      Purchase  Plan. As of September 30, 2008, an aggregate of 53,583 shares of
      common  stock were  available  for issuance  under this plan.  The Company
      suspended  participation in the Employee Stock Purchase Plan in March 2005
      and the plan is not currently active.

                                       72

<PAGE>

Item 13. Certain   Relationships   and  Related   Transactions   and   Directors
--------------------------------------------------------------------------------
         Independence.
         ------------

      The  information  required  herein is  incorporated  by reference from the
information  contained  in the sections  captioned  "Management  Compensation  -
Related  Party  Transactions"  and  "Information  with  Respect to Nominees  for
Director, Continuing Directors and Executive Officers" in the Proxy Statement.

Item 14. Principal Accounting Fees and Services.
-----------------------------------------------

      The  information  required  herein is  incorporated  by reference from the
information  contained in the section captioned  "Relationship  with Independent
Registered Public Accounting Firm - Audit Fees" in the Proxy Statement.

                                       73

<PAGE>

                                     PART IV

Item 15. Exhibits and Financial Statement Schedules.
---------------------------------------------------

(a)   (1)   The following  financial  statements are  incorporated  by reference
from Item 8 hereof:

<TABLE>
<S>                                                                                              <C>
Consolidated Statements of Financial Condition as of September 30, 2008 and 2007
Consolidated Statements of Income for the Years Ended September 30, 2008 and 2007
Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 2008 and 2007
Consolidated Statements of Comprehensive Income for the Years Ended September 30, 2008 and 2007
Consolidated Statements of Cash Flows for the Years Ended September 30, 2008 and 2007
Notes to Consolidated Financial Statements
</TABLE>

      (2)   All  schedules  are  omitted   because  they  are  not  required  or
applicable,  or the required information is shown in the consolidated  financial
statements or the notes thereto.

      (3)   Exhibits

      The  following  exhibits are filed as part of this Form 10-K and this list
includes the Exhibit Index.

<TABLE>
<CAPTION>
  No.                                          Description                                            Location
------   -------------------------------------------------------------------------------------   --------------
<S>      <C>                                                                                     <C>
  3.1    Amended and Restated Articles of Incorporation                                                (1)

  3.2    Amended and Restated Bylaws                                                                   (1)

  4.0    Common Stock Certificate                                                                      (2)

 10.1    1995 Stock Option Plan*                                                                       (3)

 10.2    Amended and Restated 2000 Stock Option Plan*                                                  (4)

 10.3    Amended and Restated 2005 Stock Option Plan*                                                  (4)

 10.4    Profit Sharing Incentive Plan*                                                                (3)

 10.5    Amended and Restated Employment Agreement between the Company,
            the Bank and Ronald B. Geib*                                                               (4)

 22.0    Subsidiaries of the Registrant - Reference is made to "Item 1. Business
            - Subsidiaries" of this Form 10-K for the required information                             --

 23.1    Consent of Beard Miller Company LLP                                                     Filed herewith

 31.1    Certification of Chief Executive Officer                                                Filed herewith

 31.2    Certification of Chief Financial Officer                                                Filed herewith

 32.0    Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer   Filed herewith
</TABLE>

----------
*     Denotes management compensation plan or arrangement.

(1)   Incorporated  herein by reference to the Company's  Current Report on Form
      8-K filed with the  Securities and Exchange  Commission  ("SEC") on August
      17, 2007.

(2)   Incorporated  by reference  to the  Company's  Current  Report on Form 8-K
      filed with the SEC on February 25, 2000.

(3)   Incorporated  herein by reference to the  Company's  Annual Report on Form
      10-K for the year ended September 30, 2003, filed with the SEC on December
      23, 2003.

(4)   filed with the SEC on December 16, 2005.

(6)   Incorporated  by reference  to the  Company's  Current  Report on Form 8-K
      filed with the SEC on November 21, 2008.

(b)   Exhibits

      The exhibits listed under (a)(3) of this Item 15 are filed herewith.

(c)   Reference is made to (a)(2) of this Item 15.

                                       74

<PAGE>

                                   SIGNATURES

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

                                  HARLEYSVILLE SAVINGS
                                  FINANCIAL CORPORATION

December 19, 2008                 By:   /s/ Ronald B. Geib
                                        ----------------------------------------
                                        Ronald B. Geib
                                        President and Chief Executive Officer

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

<TABLE>
<CAPTION>
              Name                               Title                        Date
--------------------------------   ----------------------------------   -----------------
<S>                                <C>                                  <C>
/s/ Edward J. Molnar               Chairman of the Board                December 19, 2008
--------------------------------
Edward J. Molnar

/s/ Ronald B. Geib                 President and Chief Executive        December 19, 2008
--------------------------------   Officer
Ronald B. Geib                     (principal executive officer)

/s/ Brendan J. McGill              Senior Vice President, Treasurer     December 19, 2008
--------------------------------   and Chief Financial Officer
Brendan J. McGill                  (principal financial and principal
                                   accounting officer)

/s/ Sanford L. Alderfer            Director                             December 19, 2008
--------------------------------
Sanford L. Alderfer

/s/ Mark R. Cummins                Director                             December 19, 2008
--------------------------------
Mark R. Cummins

/s/ David J. Friesen               Director                             December 19, 2008
--------------------------------
David J. Friesen
</TABLE>

                                       75

<PAGE>

<TABLE>
<CAPTION>
              Name                               Title                        Date
--------------------------------   ----------------------------------   -----------------
<S>                                <C>                                  <C>
/s/ Charlotte A. Hunsberger        Director                             December 19, 2008
--------------------------------
Charlotte A. Hunsberger

/s/ George W. Meschter             Director                             December 19, 2008
--------------------------------
George W. Meschter

/s/ James L. Rittenhouse           Director                              December 19, 2008
--------------------------------
James L. Rittenhouse
</TABLE>

                                       76