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

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.

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.

                                                                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)
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%
                                                         =========                      =========                      =========
----------

(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.

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.

                                                  Fiscal 2008 Compared          Fiscal 2007 Compared
                                                     to Fiscal 2007                to Fiscal 2006
                                                  Increase (Decrease)           Increase (Decrease)
                                              ---------------------------   ---------------------------
(In Thousands)                                 Volume     Rate     Total     Volume     Rate     Total
                                              -------   -------   -------   -------   -------   -------
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)
                                              =======   =======   =======   =======   =======   =======

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.

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.

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 . . .