FARNSWORTH BANCORP, INC.
                       2003 ANNUAL REPORT TO STOCKHOLDERS



<PAGE>



                            FARNSWORTH BANCORP, INC.
                               2003 ANNUAL REPORT



                                TABLE OF CONTENTS

                                                                          Page

Letter to Stockholders.......................................................1

Corporate Profile............................................................2

Stock Price Information......................................................2

Selected Financial Ratios and Other Data.....................................3

Management's Discussion and Analysis.........................................4

Independent Auditors' Report...............................................F-1

Consolidated Statements of Financial Condition.............................F-2

Notes to Consolidated Financial Statements.................................F-6

Corporate Information.......................................................11


<PAGE>

                            FARNSWORTH BANCORP, INC.

To Our Stockholders:

         On behalf of our Board of Directors  and  employees,  we are pleased to
present our 2003 Annual  Report to  Stockholders.  As you will see in the Annual
Report, our net income increased  significantly during fiscal 2003 due, in large
part, to increased net interest income from core operations.  As a result of our
improved  earnings and our continuing  commitment to enhancing your value in our
Company, the Board of Directors declared its first cash dividend during the 2003
fiscal year.  This was a big step in our  evolution  as a public  company and we
were very pleased to return some of our earnings to our stockholders  this year.
Dividends of $.05 per share were paid in October 2002 and May 2003. We expect to
continue paying cash dividends on a semi- annual basis.

         Additionally,  a 20% stock  dividend was paid in August 2003. The Board
of Directors was very pleased to declare the Company's  first stock  dividend as
another  method to increase  shareholder  value in the Company and also increase
the liquidity of the stock.

         We are also proud to  announce  that we opened our new  Marlton  branch
office in January  2003, as well as adding  interactive  Internet  banking.  The
Marlton  office grew by $3.0  million  from the date of its opening to September
30, 2003.

         For the fiscal  year ended  September  30,  2003,  the  Company  earned
$614,000 or $1.51 per share,  as compared to $395,000 or $0.98 per share for the
fiscal year ended  September  30, 2002.  At September  30, 2003,  the  Company's
assets  totaled  $91.8  million,  as compared to $83.2  million at September 30,
2002. Stockholders' equity was $6.6 million or $15.16 per share at September 30,
2003,  compared to $6.2 million or $14.28 per share at September  30, 2002.  The
increase in assets was primarily due to an increase in loans receivable, net.

         Our goal  remains  the same as it has  always  been,  to  enhance  your
investment in our Company.

                                           Sincerely,


                                           /s/Gary N. Pelehaty
                                           -------------------------------------
                                           Gary N. Pelehaty
                                           President and Chief Executive Officer

                                        1

<PAGE>

Corporate Profile

Farnsworth  Bancorp,  Inc.  (the  "Company")  is the parent  company for Peoples
Savings Bank (the "Bank"). The Company was formed as a New Jersey corporation in
May 1998 at the direction of the Bank in connection  with the Bank's  conversion
from a mutual  to stock  form of  ownership.  The  Company  acquired  all of the
capital stock issued by the Bank upon its conversion. On September 29, 1998, the
Bank completed its conversion in connection  with a $3.8 million  initial public
offering of the Company's common stock.  The Company is a grandfathered  unitary
savings and loan holding  company which,  under existing laws,  generally is not
restricted in the types of business  activities in which it may engage  provided
that the Bank  retains  a  specified  amount of its  assets  in  housing-related
investments.  At the present time, the Company conducts no significant  business
or operations of its own other than holding all of the outstanding  stock of the
Bank and  investing the  Company's  portion of the net proceeds  obtained in the
mutual-to-stock conversion.

Peoples Savings Bank, founded in 1880 under the name of "The Bordentown Building
and Loan Association," is a federally chartered stock savings bank headquartered
in Bordentown,  New Jersey. The Bank is subject to examination and comprehensive
regulation by the Office of Thrift  Supervision (the "OTS") and its deposits are
federally  insured by the Federal  Deposit  Insurance  Corporation  (the "FDIC")
under the Savings Association  Insurance Fund (the "SAIF"). The Bank is a member
of, and owns  capital  stock in, the Federal  Home Loan Bank (the "FHLB") of New
York, which is one of the twelve regional banks in the FHLB system.

The Bank  operates a  traditional  savings  bank  business,  attracting  deposit
accounts from the general public and using those  deposits,  together with other
funds, primarily to originate and invest in loans secured by one- to four-family
residential real estate.

In addition  to the Bank,  the Company  has one  subsidiary,  Peoples  Financial
Services, Inc., a New Jersey corporation which was incorporated in 2000. Peoples
Financial Services,  Inc. was organized for the purpose of providing  securities
brokerage and investment advisory services and products to customers of the Bank
and the general  public.  Peoples  Financial  Services,  Inc.  has a  networking
agreement  with a third party and offers such  products  and  services  from the
Bank's main and branch offices.

Stock Price Information

The Company's common stock has been traded in the over the counter market on the
OTC-Electronic  Bulletin  Board  under the  trading  symbol  of "FNSW"  since it
commenced  trading on September 30, 1998. The following  table reflects high and
low  bid  prices  as  reported  on  www.nasdaq.com  for  the  calendar  quarters
indicated.  The quotations reflect inter-dealer prices,  without retail mark-up,
markdown or commission and may not represent actual transactions.  The following
quotations  and cash  dividends  have been  adjusted to take into  account a 20%
stock dividend in August 2003.

                                       2

<PAGE>


Quarter Ended                  High          Low       Cash Dividends per share

December 31, 2001.......     $10.25        $ 8.88             -
March 31, 2002..........     $10.84        $ 9.80             -
June 30, 2002 ..........     $12.75        $10.80             -
September 30, 2002......     $12.84        $11.38             -

December 31, 2002.......     $12.30        $12.30         $0.05
March 31, 2003..........     $14.99        $12.92             -
June 30, 2003 ..........     $15.21        $14.17         $0.05
September 30, 2003......     $16.50        $15.25             -

         The number of shareholders of record of common stock as of December 17,
2003,  was  approximately  383.  This does not  reflect the number of persons or
entities who held stock in nominee or "street"  name through  various  brokerage
firms. At December 17, 2003, there were 433,031 shares outstanding.

         The  Company's  ability to pay  dividends  to  stockholders  is largely
dependent upon the dividends it receives from the Bank. The Bank may not declare
or pay a cash dividend on any of its stock if the effect thereof would cause the
Bank's  regulatory  capital to be reduced below (1) the amount  required for the
liquidation   account   established  in  connection  with  the   mutual-to-stock
conversion, or (2) the regulatory requirements imposed by the OTS.

                    Selected Financial Ratios and Other Data


                                                      At or For the Years Ended
                                                              September 30,
                                                         2003          2002
                                                        ------        -----
Return on average assets..............................    7.05%        5.25%
Return on average equity..............................    9.51         6.84
Average equity to average assets ratio................    7.41         7.68
Equity to assets at period end........................    7.15         7.44
Net interest rate spread..............................    3.98         3.59
Net yield on average interest-earning assets..........    4.19         3.86
Non-performing loans to total assets..................    0.52         0.17
Allowance for loan losses to total loans..............    0.52         0.48
Dividend payout ratio.................................    6.62            -


                                        3

<PAGE>

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

         The  following  discussion  of the  financial  condition and results of
operations  of the Company and its  subsidiaries  should be read in  conjunction
with the accompanying Consolidated Financial Statements.

General

         The following discussion relates only to the Bank's financial condition
and results of operations.

         The Bank's  results of  operations  depend  primarily  on net  interest
income,  which is determined by (i) the difference between rates of interest the
Bank  earns on its  interest-earning  assets  and the  rates  the  Bank  pays on
interest-bearing  liabilities  (interest  rate  spread),  and (ii) the  relative
amounts of interest-earning assets and interest-bearing  liabilities. The Bank's
results of  operations  are also  affected by  non-interest  income,  including,
primarily,  income from customer  deposit  account  service  charges,  gains and
losses  from  the  sale  of  investment  securities  and  non-interest  expense,
including,  primarily,  compensation  and  employee  benefits,  federal  deposit
insurance premiums,  office occupancy cost, and data processing cost. The Bank's
results of operations  are also affected  significantly  by general and economic
and  competitive  conditions,  particularly  changes in market  interest  rates,
government  policies  and actions of  regulatory  authorities,  all of which are
beyond the Bank's control.

Market Risk Analysis

         Qualitative Analysis. The Bank's assets and liabilities may be analyzed
by  examining  the  extent to which  they are  interest  rate  sensitive  and by
monitoring  the  expected  effects of  interest  rate  changes on the Bank's net
portfolio  value.  An asset or liability  is interest  rate  sensitive  within a
specific time period if it will mature or re-price  within that time period.  If
the Bank's assets  mature or re-price  more quickly or to a greater  extent than
its  liabilities,  the Bank's net portfolio  value and net interest income would
tend to increase  during periods of rising  interest  rates but decrease  during
periods of falling  interest rates.  Conversely,  if the Bank's assets mature or
re-price more slowly or to a lesser extent than its liabilities,  the Bank's net
portfolio value and net interest income would tend to decrease during periods of
rising interest rates but increase during periods of falling interest rates. The
Bank's policy has been to address the interest rate risk inherent in the typical
savings institution business of originating long-term loans funded by short-term
deposits by  maintaining  sufficient  liquid  assets for material and  prolonged
changes  in  interest  rates and by  originating  loans  with  shorter  terms to
maturity such as construction, commercial and consumer loans.

         Quantitative  Analysis.  In order to encourage savings  associations to
reduce  their  interest  rate  risk,  the OTS  adopted a rule  incorporating  an
interest rate risk ("IRR") component into the risk-based  capital rules. The IRR
component is a dollar  amount that will be deducted  from total  capital for the
purpose of calculating an institution's  risk-based  capital  requirement and is
measured  in terms of the  sensitivity  of its net  portfolio  value  ("NPV") to
changes in interest rates.  NPV is the difference  between incoming and outgoing
discounted cash flows from assets,

                                        4

<PAGE>

liabilities,  and off-balance sheet contracts.  An institution's IRR is measured
as the change to its NPV as a result of a  hypothetical  200 basis point  ("bp")
change in market  interest  rates. A resulting  change in NPV of more than 2% of
the estimated  present value of total assets ("PV") will require the institution
to deduct from its capital 50% of that excess change. The rules provide that the
OTS will calculate the IRR component  quarterly for each  institution.  Based on
the Bank's asset size and risk-based capital,  the Bank has been informed by the
OTS that it is exempt from this rule. Nevertheless, the following table presents
the Bank's  NPV at  September  30,  2003,  as  calculated  by the OTS,  based on
quarterly information voluntarily provided to the OTS.


        Changes
       In Market                   Net Portfolio Value
       ---------        ------------------------------------------
    Interest Rates      $ Amount        $ Change         % Change   NPV Ratio(1)
    --------------     ----------      ----------       ----------  ------------
   (basis points)(2)                    (Dollars in thousands)
         +300            4,407          -5,716             -56%       4.89%
         +200            6,311          -3,812             -38%       6.84%
         +100            8,261          -1,862             -18%       8.72%
            0           10,123               -               -       10.43%
         -100           10,847             724              +7%      11.03%

-------------
(1)  Calculated as the estimated NPV divided by present value of total assets.
(2)  the  -200bp  and  -300bp  scenarios  are not shown due to the  current  low
     interest rate environment.

         Computations  of  prospective  effects of  hypothetical  interest  rate
changes are based on numerous  assumptions,  including relative levels of market
interest rates,  prepayments and deposit  run-offs and should not be relied upon
as  indicative  of actual  results.  Certain  shortcomings  are inherent in such
computations.   Although   certain  assets  and  liabilities  may  have  similar
maturities or periods of  re-pricing,  they may react at different  times and in
different degrees to changes in market rates of interest.  The interest rates on
certain types of assets and  liabilities  may fluctuate in advance of changes in
market interest rates,  while rates on other types of assets and liabilities may
lag  behind  changes  in  market  interest  rates.  In the  event of a change in
interest  rates,   prepayments  and  early   withdrawal   levels  could  deviate
significantly  from those  assumed in making the  calculations  set forth above.
Additionally,  an  increased  credit  risk may result as many  borrowers  may be
unable to service their debt in the event of an interest rate increase.

         The Bank's  Board of Directors  review the Bank's  asset and  liability
policies on a quarterly basis. The Board meets quarterly to review interest rate
risk and  trends,  as well as  liquidity  and capital  ratios and  requirements.
Management administers the policies and determinations of the Board of Directors
with respect to the Bank's asset and liability  goals and  strategies.  The Bank
expects that its asset and liability  policies and  strategies  will continue as
described so long as  competitive  and  regulatory  conditions  in the financial
institution  industry and market  interest rates continue as they have in recent
years.

                                        5

<PAGE>

Financial Condition

         Total  assets  increased  $8.6  million  or 10.4% to $91.8  million  at
September 30, 2003 from $83.2  million at September  30, 2002.  The increase was
primarily   attributable  to  a  $3.4  million  increase  in  the  Bank's  loans
receivable,  net, a $3.3 million  increase in available for sale  securities,  a
$115,000  increase in equipment and a $2.4 million increase in cash and due from
banks, partially offset by a decrease of $700,000 in held-to-maturity investment
securities.  The increase in loans  receivable was due to greater  marketing and
increased  demand in the Bank's  primary market area. The Bank has increased its
commercial real estate loan portfolio in recent periods.

         The Bank's total  liabilities  increased $8.3 million or 10.8% to $85.3
million at  September  30, 2003 from $77.0  million at September  30, 2002.  The
increase was  primarily  attributable  to a $8.4  million  increase in deposits,
offset by a $100,000 decrease in FHLB advances. Deposits increased primarily due
to  stock  market  conditions  and  the  resulting  shift  of  investments  into
certificates of deposit and money market and NOW accounts.

         Stockholders'  equity  was  $6.6  million  or 7.1% of total  assets  at
September  30,  2003,  as  compared to $6.2  million or 7.4% of total  assets at
September 30, 2002. The increase was due primarily to increased net income.

                                       6
<PAGE>

Average Balance Sheet

         The following table sets forth a summary of average  balances of assets
and liabilities as well as average yield and rate information.  Average balances
are based upon month-end balances, however, the Bank does not believe the use of
month-end  balances  differs  significantly  from an  average  based  upon daily
balances. There have been no tax equivalent adjustments made to yields.

<TABLE>
<CAPTION>
                                                                             Year Ended September 30,
                                                      ---------------------------------------------------------------------------

                                                                  2003                                    2002
                                                      ----------------------------------     ------------------------------------
                                                                                Average                                 Average
                                                      Average                    Yield/       Average                    Yield/
                                                      Balance      Interest       Cost        Balance     Interest        Cost
                                                      -------      --------       ----        -------     --------        ----
                                                                             (Dollars in thousands)
<S>                                                 <C>           <C>          <C>        <C>          <C>             <C>
Interest-earning assets:
    Loans receivable(1).........................      $61,146       $4,426         7.24%      $53,258      $3,976          7.46%
    Investment securities(2)....................       23,640          866         3.66        18,778         865          4.61
                                                      -------       ------       ------       -------      ------        ------
        Total interest-earning assets...........       84,786        5,292         6.24        72,036       4,841          6.72
                                                                                 ------                                  ------
Noninterest-earning assets......................        2,401           --                      3,134          --
                                                      -------       ------                    -------      ------
        Total assets............................      $87,187        5,292                    $75,170       4,841
                                                      =======       ------                    =======      ------
Interest-bearing liabilities:
    NOW accounts................................      $17,216           95         0.55       $ 9,457          96          1.01
    Savings accounts............................       10,870          257         2.36        13,191         288          2.18
    Money market accounts.......................        7,245          126         1.74         2,451          55          2.24
    Certificates of deposit.....................       40,403        1,197         2.96        39,013       1,508          3.87
    FHLB - Advances.............................        1,022           61         5.95         1,780         114          6.40
                                                      -------       ------       ------       -------      ------        ------
        Total interest-bearing liabilities......       76,756        1,736         2.26        65,892       2,061          3.13
                                                                    ------       ------                    ------        ------
Noninterest-bearing liabilities.................        3,968                                   3,506
                                                      -------                                 -------
        Total liabilities.......................       80,724                                  69,398
                                                                                              -------
Stockholders' equity............................        6,463                                   5,772
                                                      -------                                 -------
        Total liabilities and
        stockholders' equity....................      $87,187                                 $75,170
                                                      =======                                 =======
Net interest income.............................                    $3,556                                 $2,780
                                                                    ======                                 ======
Interest rate spread(3).........................                                   3.98%                                   3.59%
                                                                                 ======                                    ====
Net yield on interest-earning assets(4).........                                   4.19%                                   3.86%
                                                                                 ======                                    ====
Ratio of average interest-earning assets
    to average interest-bearing liabilities.....                                 110.46%                                 109.54%
                                                                                 ======                                  ======
</TABLE>

-------------------
(1)  Average balances include non-accrual loans.
(2)  Includes    mortgage-backed    securities,    investment   securities   and
     interest-bearing deposits in other financial institutions.
(3)  Interest rate spread represents the difference between the average yield on
     interest-earning   assets  and  the   average   cost  of   interest-bearing
     liabilities.
(4)  Net yield on  interest-earning  assets  represents net interest income as a
     percentage of average interest-earning assets.

                                        7

<PAGE>

Rate/Volume Analysis

         The table below sets forth certain information regarding changes in the
Bank's interest income and interest expense for the periods indicated.  For each
category   of   interest-earning   assets  and   interest-bearing   liabilities,
information is provided on changes attributable to (i)changes in volume (changes
in average volume multiplied by old rate); (ii)changes in rates (changes in rate
multiplied by old average volume);  (iii)changes in rate-volume (changes in rate
multiplied by the change in average volume).


                                                Year Ended September 30,
                                                      2003 vs 2002
                                          --------------------------------------
                                                  Increase (Decrease)
                                                         Due to
                                          --------------------------------------
                                                                 Rate/
                                           Volume      Rate     Volume     Net
                                           ------      ----     ------     ---
                                                       (In thousands)
Interest income:
    Loans receivable                        $ 589     $(122)    $ (15)    $ 452
    Investment securities                     224      (178)      (47)       (1)
                                            -----     -----     -----     -----
        Total interest income               $ 813     $(300)    $ (62)    $ 451
                                            =====     =====     =====     =====

Interest expense:
    NOW accounts                            $  78     $ (44)    $ (35)    $  (1)
    Savings account                           (51)       24        (4)      (31)
    Money market accounts                     107       (12)      (24)       71
    Certificates of deposits                   54      (355)      (10)     (311)
    FHLB advances                             (49)       (8)        4       (53)
                                            -----     -----     -----     -----
        Total interest expense              $ 139     $(395)    $ (69)    $(325)
                                            =====     =====     =====     =====

Change in net interest income               $ 674     $  95     $   7     $ 776
                                            =====     =====     =====     =====


Results of Operations

         Net Income. The Bank's net income increased $219,000 for the year ended
September 30, 2003,  to $614,000 from $395,000 for the year ended  September 30,
2002. This increase was primarily  attributable to increased net interest income
of $776,000 and an increase in noninterest income of $161,000,  partially offset
by an increase  in  noninterest  expense of  $569,000  and an increase in income
taxes of $193,000.

         Net  Interest  Income.  Net  interest  income  is the most  significant
component  of the Bank's  income from  operations.  Net  interest  income is the
difference  between interest the Bank received on its  interest-earning  assets,
primarily loans, investment and mortgage-backed securities and

                                        8

<PAGE>

interest the Bank pays on its interest-bearing  liabilities,  primarily deposits
and borrowings. Net interest income depends on the volume of and rates earned on
interest-earning  assets and the  volume of and rates  paid on  interest-bearing
liabilities.

         Net interest income after provision for loan losses increased  $821,000
or 30.8%,  to $3.5 million for the year ended  September 30, 2003. This increase
was primarily due to an increase in interest on loans of $453,000 coupled with a
decrease in interest  on  deposits of  $271,000,  a decrease in interest on FHLB
advances of $53,000 and a decrease in the  provision for loan losses of $45,000,
partially offset by a decrease in interest on investments of $2,000.

         The increase in the average balance of interest-earning assets of $12.8
million primarily reflects increases of approximately $7.9 million in the Bank's
average balance of loans and $4.9 million in the average balance of securities.

         The increase in average  interest-bearing  liabilities of $10.9 million
reflects   increases  of  $7.8  million  in  the  Bank's   average   balance  of
interest-bearing  NOW  accounts  and $3.9  million  in the  average  balance  of
savings,  money  market  and  certificates  of  deposit,  partially  offset by a
decrease of $800,000 in the average balance of FHLB borrowings.

         Provision  for Loan Losses.  Provision  for loan losses was $71,000 for
the year ended  September  30, 2003,  as compared to $116,000 for the year ended
September 30, 2002.  The provision is  established  to adjust the balance of the
allowance for loan losses to a level  management  feels is appropriate  based on
the risk characteristics of the loan portfolio.

         Management believes the allowance for loan losses is at a level that is
adequate to provide for  estimated  losses.  However,  there can be no assurance
that further  additions  will not be made to the  allowance and that such losses
will not exceed the estimated amount.

         Noninterest Income. Noninterest income increased $161,000 or 46.7% from
$344,000  for the year ended  September  30,  2002 to  $505,000  for 2003.  This
increase  in the Bank's  noninterest  income was due to an  increase  in the net
realized  gains  on the  sale of  available  for sale  securities  and  loans of
$166,000, offset by a decrease in fees and other service charges of $5,000.

         Noninterest  Expense.  Noninterest  expense increased $570,000 or 23.8%
from $2.4 million for the year ended  September  30,  2002,  to $3.0 million for
2003.  The  increase  in the Bank's  noninterest  expense  was due to a $137,000
increase in the Bank's  occupancy and equipment  expense,  a $72,000 increase in
other noninterest  expense,  an increase of $359,000 in the Bank's  compensation
and benefits and an increase of $2,000 in the Bank's federal insurance premiums.
The  category of  non-interest  expense  described  as "Other" is  comprised  of
expenses  related to advertising,  fees charged by banks,  loan processing fees,
NOW  expenses,  costs  related to supplies and various  professional  fees.  The
highest of these expenses was $160,000 for bank processing fees. The increase in
compensation  and  benefits  expense  was due in part  to  additional  personnel
required to support the new branch office and the Bank's continued growth.

         Income Tax Expense. Income tax expense increased $193,000 from $218,000
for the year ended  September  30, 2002 to $411,000 for 2003.  This  increase in
income tax expense was primarily due to the increase in net taxable  earnings of
the Bank. The Bank's effective tax rate

                                        9

<PAGE>

was  40.1%  and  35.6%  for  the  years  ended  September  30,  2003  and  2002,
respectively.  The increase in the effective tax rate is primarily  attributable
to a change in the income tax rate by the state of New Jersey.

Liquidity and Capital Resources

         The Bank is required to maintain  adequate  levels of liquid assets for
its safe and sound operation.

         The Bank's  primary  sources of funds are deposits,  repayment of loans
and  mortgage-backed   securities,   maturities  of  investment  securities  and
interest-bearing  deposits with other banks, advances from the FHLB of New York,
and funds  provided from  operations.  While  scheduled  repayments of loans and
mortgage-backed   securities  and   maturities  of  investment   securities  are
predictable  sources of funds,  deposit flows,  and loan prepayments are greatly
influenced  by the general  level of interest  rates,  economic  conditions  and
competition.  The Bank uses its liquidity resources principally to fund existing
and future loan commitments, maturing certificates of deposit and demand deposit
withdrawals,  to invest in other interest-earning assets, to maintain liquidity,
and meet operating expenses.

         Net cash provided by the Bank's operating  activities (the cash effects
of  transactions  that enter into the Bank's  determination  of net income e.g.,
non-cash items,  amortization and  depreciation,  provision for loan losses) for
the year ended September 30, 2003 totaled  $723,000,  an increase of $111,000 as
compared to 2002.

         Net  cash  used  by  the  Bank's  investing   activities   (i.e.,  cash
disbursements,  primarily for the purchase of the Bank's  investment  securities
and mortgage-backed securities portfolios and the Bank's loan portfolio) for the
year ended September 30, 2003, totaled $6.7 million, a decrease of $9.1 million.
The decrease in cash used was primarily  attributable to funding net loan growth
of $3.5 million in 2003 as compared to $13.1 million in 2002 partially offset by
net  purchases  of  available  for sale  investment  securities  in 2003 of $3.7
million.  Additional  uses of cash were to purchase  premises  and  equipment of
$261,000 and purchase of Federal Home Loan Bank stock of $8,000. The use of cash
was partially offset by paydowns and maturities of  held-to-maturity  investment
securities of $685,000 in 2003.

         Net cash  provided  in the  Bank's  financing  activities  (i.e.,  cash
receipts  primarily from net proceeds from stock issuance and from net increases
in deposits and net increases in FHLB advances) for the year ended September 30,
2003  totaled $8.3  million,  a decrease of $6.7 million as compared to the year
ended  September 30, 2002.  This increase in cash was primarily  attributable to
increased  deposits of $8.4  million  offset by  repayment  of FHLB  advances of
$100,000, net of advances.

         Approximately  $25.5 million of the Bank's time deposits  mature within
the next 12  months.  The Bank  expects  such  deposits  to be renewed at market
rates.  In  addition to this source of  continuing  funding,  the Bank has total
borrowing capacity of 25% of total assets through the FHLB of New York.

                                       10


<PAGE>

To the Board of Directors
Farnsworth Bancorp, Inc.


                          INDEPENDENT AUDITORS' REPORT
                          ----------------------------


We have audited the accompanying  consolidated statements of financial condition
of Farnsworth Bancorp,  Inc. and Subsidiaries as of September 30, 2003 and 2002,
and the related  consolidated  statements  of income and  comprehensive  income,
changes in 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 auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain reasonable  assurance about whether the consolidated
financial  statements  are free of  material  misstatement.  An  audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  consolidated  financial  statements.  An audit also includes  assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall  consolidated  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 Farnsworth Bancorp,
Inc. and  Subsidiaries  at September 30, 2003 and 2002, 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/ KRONICK KALADA BERDY & CO.
Kingston, Pennsylvania
November 20, 2003


                                       F-1
<PAGE>

                   FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                          September 30, 2003 and 2002

<TABLE>
<CAPTION>
                                       ASSETS                         2003            2002
                                       ------                     ------------    ------------

<S>                                                             <C>             <C>
Cash and due from banks                                           $ 11,539,886    $  9,161,801
Securities available for sale                                       15,003,778      11,710,884
Securities held to maturity (fair value $475,189 and $1,186,158
  at September 30, 2003 and 2002, respectively)                        461,443       1,147,300
Loans receivable, net                                               61,462,266      58,026,218
Accrued interest receivable                                            415,259         390,459
Federal Home Loan Bank of New York stock at
  cost, substantially restricted                                       507,400         499,800
Premises and equipment                                               2,232,650       2,117,790
Deferred income taxes                                                  125,667               -
Other assets                                                            81,219          99,447
                                                                  ------------    ------------

Total assets                                                      $ 91,829,568    $ 83,153,699
                                                                  ============    ============

                        LIABILITIES AND STOCKHOLDERS' EQUITY
                        ------------------------------------

Deposits:
   Non interest bearing                                           $  3,733,030    $  2,702,286
   Interest bearing                                                 79,980,941      72,586,701
Federal Home Loan Bank advance                                         956,436       1,094,474
Advances by borrowers for taxes and insurance                          328,379         255,953
Accrued income taxes                                                    97,788          87,911
Deferred income taxes                                                     --            71,002
Accrued interest payable                                                23,122          35,984
Accounts payable and other accrued expenses                            146,405         132,228
                                                                  ------------    ------------

Total liabilities                                                   85,266,101      76,966,539
                                                                  ------------    ------------

Preferred stock $.10 par value, 1,000,000 shares
  authorized; none issued and outstanding                                    -               -
Common stock $.10 par value, 5,000,000 shares
  authorized; 452,023 and 379,858 shares issued for 2003
  and 2002 respectively; shares outstanding 433,031 and 360,866
  for 2003 and 2002, respectively                                       45,202          37,985
Additional paid in capital                                           4,688,162       3,396,262
Treasury stock at cost, 18,992 shares                                 (185,172)       (185,172)
Retained earnings substantially restricted                           2,260,041       2,980,935
Common stock acquired by employee stock
  ownership plan (ESOP)                                               (144,054)       (174,414)
Common stock acquired by restricted stock
  plans (RSPs)                                                          (3,645)        (54,765)
Accumulated other comprehensive income (loss), unrealized
  (depreciation) appreciation on available for sale securities,
  net of income taxes                                                  (97,067)        186,329
                                                                  ------------    ------------

Total stockholders' equity                                           6,563,467       6,187,160
                                                                  ------------    ------------

Total liabilities and stockholders' equity                        $ 91,829,568    $ 83,153,699
                                                                  ============    ============
</TABLE>
                  The accompanying notes are an integral part
                  of these consolidated financial statements.

                                       F-2

<PAGE>
                   FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

                 For the Years Ended September 30, 2003 and 2002

<TABLE>
<CAPTION>

                                                                                        2003           2002
                                                                                    -----------    -----------
<S>                                                                               <C>            <C>
Interest income:
  Loans receivable                                                                  $ 4,428,888    $ 3,975,688
  Investments                                                                           863,151        865,143
                                                                                    -----------    -----------

          Total interest income                                                       5,292,039      4,840,831
                                                                                    -----------    -----------

Interest expense:
  Deposits                                                                            1,674,955      1,946,940
  Federal Home Loan Bank advances                                                        60,821        113,651
                                                                                    -----------    -----------

          Total interest expense                                                      1,735,776      2,060,591
                                                                                    -----------    -----------

          Net interest income                                                         3,556,263      2,780,240
Provision for loan losses                                                                70,879        115,849
                                                                                    -----------    -----------

          Net interest income after provision
            for loan losses                                                           3,485,384      2,664,391
                                                                                    -----------    -----------

Noninterest income:
  Fees and other service charges                                                        281,356        285,567
  Net realized gains on sale of:
       Available for sale securities                                                    167,441         58,836
       Loans                                                                             56,778             --
                                                                                    -----------    -----------

          Total noninterest income                                                      505,575        344,403
                                                                                    -----------    -----------

Noninterest expense:
  Compensation and benefits                                                           1,638,397      1,279,154
  Occupancy and equipment                                                               623,661        486,831
  Federal insurance premiums and assessments                                             12,118         10,605
  Other                                                                                 691,127        619,129
                                                                                    -----------    -----------

          Total noninterest expense                                                   2,965,303      2,395,719
                                                                                    -----------    -----------

Income before provision for income taxes                                              1,025,656        613,075

Provision for income taxes                                                              411,227        217,844
                                                                                    -----------    -----------

          Net income                                                                    614,429        395,231

Other comprehensive income (loss):
  Unrealized gain (loss) on securities available for sale, arising during
     the period, net of tax expense (benefit) of  $(115,076), 2003; $53,185, 2002      (182,825)        84,286
  Reclassification adjustment, net of taxes of $66,870, 2003; $20,000, 2002            (100,571)       (38,836)
                                                                                    -----------    -----------
          Comprehensive income                                                      $   331,033    $   440,681
                                                                                    ===========    ===========

Net income per common share:
   Basic                                                                            $      1.51    $      0.98
                                                                                    ===========    ===========
   Diluted                                                                          $      1.45    $      0.96
                                                                                    ===========    ===========

Weighted average number of shares outstanding during the year:
   Basic                                                                                406,182        402,532
                                                                                    ===========    ===========
   Diluted                                                                              424,806        408,638
                                                                                    ===========    ===========
</TABLE>

                  The accompanying notes are an integral part
                  of these consolidated financial statements.

                                       F-3

<PAGE>
                   FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                 For the Years Ended September 30, 2003 and 2002

<TABLE>
<CAPTION>
                                                                                               Appreciation
                                                           Retained      Common    Common     (Depreciation)
                                Additional                 Earnings      Stock      Stock     on Securities             Total
                        Common   Paid in    Treasury     Substantially  Acquired  Acquired    Available for          Stockholders'
                        Stock    Capital      Stock       Restricted    By ESOP    By RSP     Sale, Net of Tax          Equity
                      --------- ----------  -----------  -------------  --------- ----------  ----------------  -------------------
<S>                   <C>      <C>         <C>          <C>           <C>         <C>           <C>                  <C>
Balance at
  September 30, 2001   $ 37,985 $3,396,262  $(185,172)   $ 2,585,704   $(204,774)  $(105,444)    $ 140,879            $ 5,665,440

Net income for the
  year ended
  September 30, 2002          -          -                   395,231           -                         -                395,231

RSP shares allocated          -          -                         -           -      50,679             -                 50,679
ESOP shares allocated                                                     30,360           -             -                 30,360
Unrealized
  appreciation on
  securities
  available for sale,
  net of tax                  -          -                         -           -           -        45,450                 45,450
                       -------- ----------  ---------    -----------  ----------     -------     ---------            -----------


Balance at
  September 30, 2002     37,985  3,396,262   (185,172)     2,980,935    (174,414)    (54,765)      186,329              6,187,160

Net income for the
  year ended
  September 30, 2003          -          -                   614,429           -                         -                614,429

RSP shares allocated          -          -                         -           -      51,120             -                 51,120
ESOP shares allocated         -          -          -              -      30,360           -             -                 30,360
Unrealized
  depreciatioN
  on securities
  available for sale,
  net of tax                  -          -          -              -           -           -      (283,396)              (283,396)
Cash dividends
  ($.10 per share)            -          -          -        (36,206)          -           -             -                (36,206)
20% stock dividend        7,217  1,291,900                (1,299,117)                                                           -
                       -------- ----------  ---------    -----------  ----------     -------     ---------            -----------

Balance at
  September 30, 2003   $ 45,202 $4,688,162  $(185,172)   $ 2,260,041  $ (144,054)    $(3,645)    $ (97,067)           $ 6,563,467
                       ======== ==========  =========    ===========  ==========     =======     =========            ===========
</TABLE>

                  The accompanying notes are an integral part
                  of these consolidated financial statements.

                                       F-4

<PAGE>
                   FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                 For the Years Ended September 30, 2003 and 2002

<TABLE>
<CAPTION>

                                                                  2003            2002
                                                            ------------    ------------
<S>                                                       <C>             <C>
Cash flows from operating activities:
  Net income                                                $    614,429    $    395,231
                                                            ------------    ------------
  Adjustments to reconcile net income to net cash
    provided by operating activities:
      Depreciation                                               145,737         114,625
      Provision for loan losses                                   70,879         115,849
      Net gain on sale of investments                           (167,441)        (57,195)
      Stock compensation                                          81,480          81,039
      Increase in accrued interest receivable                    (24,800)        (71,774)
      (Increase) decrease in other assets                         18,228         (40,805)
      (Decrease) increase in income taxes                        (17,094)         67,517
      Decrease in accrued interest payable                       (12,862)        (25,025)
      Increase in accounts payable
        and other accrued liabilities                             14,177          31,931
                                                            ------------    ------------

           Total adjustments                                     108,304         216,162
                                                            ------------    ------------

           Net cash provided by operations                       722,733         611,393
                                                            ------------    ------------

Cash flows from investing activities:
  Net increase in loans receivable                            (3,506,927)    (13,083,288)
  Redemption and principal payments of
    held to maturity securities                                  685,857         910,945
  Purchase of available for sale securities                  (32,305,734)    (14,505,217)
  Proceeds from sale of available for sale securities         28,727,187      11,748,671
  Proceeds from sale of real estate owned                           --            56,948
  Purchase of Federal Home Loan Bank stock                        (7,600)       (127,200)
  Purchase of premises and equipment                            (260,597)       (750,740)
                                                            ------------    ------------

           Net cash used in investing activities              (6,667,814)    (15,749,881)
                                                            ------------    ------------

Cash flows from financing activities:
  Increase in deposits                                         8,424,984      17,132,552
  Federal Home Loan Bank advances, repayments                   (138,038)     (2,130,132)
  Increase in advances by borrowers                               72,426          15,785
  Cash dividends                                                 (36,206)           --
                                                            ------------    ------------

           Net cash provided by financing activities           8,323,166      15,018,205
                                                            ------------    ------------

Net increase (decrease) in cash and due from banks             2,378,085        (120,283)

Cash and due from banks at beginning of year                   9,161,801       9,282,084
                                                            ------------    ------------

Cash and due from banks at end of year                      $ 11,539,886    $  9,161,801
                                                            ============    ============

Supplement disclosure:
  Cash paid during the period for:
    Interest                                                $  1,748,638    $  2,085,616
                                                            ============    ============
    Income taxes                                            $    424,571    $    150,000
                                                            ============    ============
Non cash items:
  Unrealized (loss) gain on securities available for
    sale, net of deferred income taxes                      $   (283,396)   $     45,450
                                                            ============    ============
  Stock dividend                                            $  1,299,117
                                                            ============
  Acquisition of real estate in settlement of loans                         $     41,797
                                                                            ============
  Acquisition of loans in settlement of real estate owned                   $    113,500
                                                                            ============
</TABLE>
                  The accompanying notes are an integral part
                  of these consolidated financial statements.

                                       F-5

<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    Operations and Summary of Significant Accounting Policies
      ---------------------------------------------------------

      Basis of Financial Statement Presentation
      -----------------------------------------

      The  consolidated  financial  statements,  which  have  been  prepared  in
      conformity with  accounting  principles  generally  accepted in the United
      States of America,  include the accounts of Farnsworth  Bancorp,  Inc. and
      its wholly  owned  subsidiaries,  Peoples  Savings  Bank (the  "Bank") and
      Peoples  Financial  Services,  Inc. (PFSI).  All significant  intercompany
      accounts  and  transactions  have been  eliminated  in  consolidation.  In
      preparing  the  financial  statements,  management  is  required  to  make
      estimates and assumptions  that affect the reported  amounts of assets and
      liabilities and disclosure of contingent  assets and liabilities as of the
      date of the statements of financial  condition and the reported amounts of
      revenues and expenses for the  reporting  periods.  Actual  results  could
      differ  significantly  from those estimates.  Material  estimates that are
      particularly susceptible to significant changes in the near term relate to
      the  determination  of the  allowance  for loan losses,  the  valuation of
      foreclosed   real  estate  (real  estate  owned)  and  the  assessment  of
      prepayment risks associated with  mortgage-backed  securities.  Management
      believes that the allowance for loan losses is adequate,  foreclosed  real
      estate is  appropriately  valued  and  prepayment  risks  associated  with
      mortgage-backed securities are properly recognized.  While management uses
      available  information to recognize  losses on loans and  foreclosed  real
      estate,  future  additions  to the  allowance  for loan  losses or further
      writedowns of foreclosed  real estate may be necessary based on changes in
      economic  conditions  in the market  area.  Additionally,  assessments  of
      prepayment  risks  related to  mortgage-backed  securities  are based upon
      current market conditions, which are subject to frequent change.

      In addition,  various  regulatory  agencies,  as an integral part of their
      examination  process,  periodically  review the Bank's  allowance for loan
      losses and foreclosed  real estate.  Such agencies may require the Bank to
      recognize  additions  to the  allowance  for  loan  losses  or  additional
      writedowns  on  foreclosed  real estate  based on their  judgements  about
      information available to them at the time of their examination.

      Nature of Operations
      --------------------

      The Bank, which operates four branches in Burlington  County,  New Jersey,
      offers  customary  banking  services,  including  accepting  of  checking,
      savings and time  deposits and the making of  commercial,  real estate and
      consumer loans, to customers who are predominantly small and middle-market
      businesses  and  middle-income   individuals.   PFSI  provides  securities
      brokerage and  investment  advisory  services and products to customers of
      the Bank. Farnsworth is a non-operating holding company

      Concentration of Risk
      ---------------------

      The Bank's lending and real estate activity is concentrated in real estate
      and loans secured by real estate  located in the State of New Jersey.  The
      Bank's loan portfolio is predominantly made up of first mortgage loans and
      loans secured by real estate in Burlington County. In general,  the Bank's
      loan   portfolio   performance   is  dependent  upon  the  local  economic
      conditions.

      Interest-rate Risk
      ------------------

      The Bank is  principally  engaged in the business of  attracting  deposits
      from the general  public and using these deposits to make loans secured by
      real  estate  and,  to a lesser  extent,  consumer  loans and to  purchase
      investment  securities.  The potential for interest-rate  risk exists as a
      result  of  the  shorter   duration   of  the  Bank's   interest-sensitive
      liabilities    compared   to   the    generally    longer    duration   of
      interest-sensitive assets. In a rising interest rate environment, interest
      sensitive  liabilities will reprice faster than interest sensitive assets,
      thereby  reducing the market  value of  long-term  assets and net interest
      income.  For this  reason,  management  regularly  monitors  the  maturity
      structure  of the Bank's  assets and  liabilities  in order to measure its
      level of interest-rate risk and to plan for future volatility.

                                       F-6
<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

1. Operations and Summary of Significant Accounting Policies (Continued)
   ---------------------------------------------------------------------

      Investment Securities
      ---------------------

      The Bank's  investments in securities are classified in two categories and
      accounted for as follows:

          o    Securities Held to Maturity. Mortgage backed securities for which
               ---------------------------
               the Bank has the positive  intent and ability to hold to maturity
               are reported at cost,  adjusted for  amortization of premiums and
               accretion of discounts  which are  recognized in interest  income
               using the interest method over the period to maturity.

          o    Securities Available for Sale.  Securities available for sale are
               -----------------------------
               reported at market  value and consist of certain  debt and equity
               securities  not classified as trading or securities to be held to
               maturity.

      Declines in the fair value of  individual  held to maturity and  available
      for sale  securities  below their cost that are other than  temporary will
      result in write-downs  of the  individual  securities to their fair value.
      The related write-downs will be included in earnings as realized losses.

      Unrealized holding gains and losses,  net of tax, on securities  available
      for sale are  reported as a net amount in a separate  component  of equity
      until realized.

      Gains  and  losses  on the  sale of  securities  available  for  sale  are
      determined using the specific-identification method.

      Loans Receivable
      ----------------

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

      Loan origination fees and certain direct origination costs are capitalized
      and recognized as an adjustment of the yield over the contractual  life of
      the loan, using the interest method.

      Loans  classified as impaired,  if any, are measured  based on the present
      value of expected  future cash flows  discounted  at the loan's  effective
      interest  rate,  or as a  practical  expedient,  at the loan's  observable
      market price or the fair value of the collateral if the loan is collateral
      dependent.  A loan  evaluated for impairment is deemed to be impaired when
      based on current information and events; it is probable that the Bank will
      be unable to collect all amounts due according to the contractual terms of
      the loan  agreement.  All  loans  identified  as  impaired  are  evaluated
      independently.  The accrual of interest on impaired loans is  discontinued
      when, in management's opinion, the borrower may be unable to meet payments
      as they become due.  When  interest  accrual is  discontinued,  all unpaid
      accrued interest is reversed.  Interest income is subsequently  recognized
      only to the extent cash payments are received. No loans were identified as
      impaired as of September 30, 2003 and 2002, respectively, or for the years
      then ended.

      The  allowance  for loan  losses is  increased  by  charges  to income and
      decreased  by  charge-offs  (net  of  recoveries).  Management's  periodic
      evaluation  of the  adequacy of the  allowance is based on the Bank's past
      loan loss experience,  known and inherent risks in the portfolio,  adverse
      situations that may affect the borrower's  ability to repay, the estimated
      value of any underlying collateral, and current economic conditions.

                                       F-7
<PAGE>
                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

1. Operations and Summary of Significant Accounting Policies (Continued)
   --------------------------------------------------------------------

   Loans Sold
   ----------

      Loans sold were one-to-four  family residential  mortgages  originated and
      intended  for sale in the  secondary  market.  The loans  were  carried in
      aggregate at lower of cost or estimated  market value,  based upon current
      delivery  prices in the secondary  market.  Gains or losses on the sale of
      these  loans are  recognized  in  non-interest  income at the time of sale
      using the identification  method. All loans are sold without recourse.  No
      loans were held for sale at either year end.

      Premises and Equipment
      ----------------------

      Land is carried at cost.  Bank  premises and equipment are carried at cost
      less accumulated depreciation.  Renovations and additions are capitalized.
      When assets are  retired or  otherwise  disposed  of, the cost and related
      accumulated  depreciation  are removed from the accounts and any resulting
      gain  or  loss  is  reflected  in  income  for  the  period.  The  cost of
      maintenance  and  repairs is charged  to  expense  as  incurred.  The Bank
      computes  depreciation on a straight-line  basis over the estimated useful
      lives of the assets.

      Real Estate Owned:
      ------------------

      Real estate properties  acquired through,  or in lieu of, loan foreclosure
      are  initially  recorded at the lower of cost or fair value at the date of
      foreclosure. Costs relating to development and improvement of property are
      capitalized,  whereas  costs  relating  to the  holding  of  property  are
      expensed.  Management  periodically performs valuations,  and an allowance
      for losses is  established by a charge to operations if the carrying value
      of a property  exceeds its fair value less estimated  selling cost.  Gains
      and losses from sale of these properties are recognized as they occur.

      Income Taxes
      ------------

      Deferred  tax assets and  liabilities  are  reflected  at income tax rates
      applicable  to the period in which the deferred tax assets or  liabilities
      are  expected to be  realized or settled.  As changes in tax laws or rates
      are enacted,  deferred tax assets and liabilities are adjusted through the
      provision  for  income  taxes or as an  adjustment  to  accumulated  other
      comprehensive income.

2.    Stockholders' Equity
      --------------------

      On March 2, 1998,  the Board of  Directors  of the Bank  adopted a Plan of
      Conversion,  pursuant  to  which  the  Bank  converted  from  a  federally
      chartered mutual savings bank to a federally chartered stock savings bank,
      with the concurrent formation of a holding company.

      At the time of the  conversion,  the Bank,  in order to grant  priority to
      eligible  depositors  in the event of future  liquidation,  established  a
      liquidation account of $2,225,315,  an amount equal to its total net worth
      as of June  30,  1998,  the  date of the  latest  statement  of  financial
      condition appearing in the final prospectus.  The liquidation account will
      be maintained for the benefit of eligible  account holders who continue to
      maintain their accounts at the bank after the conversion.  The liquidation
      account  will be reduced  annually  to the extent  that  eligible  account
      holders have reduced their qualifying  deposits.  Subsequent  increases in
      the deposit account will not restore an eligible account holder's interest
      in  the  liquidation   account.  In  the  unlikely  event  of  a  complete
      liquidation,  each eligible  account  holder will be entitled to receive a
      distribution  from the liquidation  account in an amount  proportionate to
      the account holder's current adjusted qualifying balances.  The balance of
      the  liquidation  account  on  September  30,  2003  and 2002 has not been
      determined.

                                       F-8

<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

2. Stockholders' Equity (Continued)
   --------------------------------

      The Board of Directors  declared a 20% stock  dividend in 2003.  Basic and
      diluted earnings per share have been restated for all periods presented to
      reflect the stock dividend.  Employee stock option plan,  restricted stock
      plans and stock  options  have also been  restated  to  reflect  the stock
      dividend.  The ability of  Farnsworth  Bancorp,  Inc. to pay  dividends to
      stockholders is dependent upon the receipt of dividends from the Bank. The
      Bank may not  declare  or pay any  dividend  on or  repurchase  any of its
      capital  stock if the  effect  thereof  would  cause  its net  worth to be
      reduced below: (1) the amount required for the liquidation account, or (2)
      the net worth  requirements  contained in section  563.13 (b) of the rules
      and  regulation  of the  Office  of Thrift  Supervision  (the  "OTS").  At
      September  30, 2003,  the amount of  dividends  that the Bank could pay to
      Farnsworth Bancorp, Inc. was approximately $1,121,000.

3.    Held to Maturity and Available for Sale Securities
      --------------------------------------------------

      The carrying amounts and fair values of these investments at September 30,
2003 and 2002 are summarized as follows:

<TABLE>
<CAPTION>
                                                                September 30, 2003
                                              --------------------------------------------------------
                                                    Carrying        Gross    Unrealized        Fair
Held to maturity:                                    Value          Gains      Losses         Value
                                              --------------- ------------------------ ---------------
<S>                                              <C>           <C>         <C>            <C>
    Mortgage backed securities                     $ 461,443     $ 13,793    $     47       $ 475,189
                                              =============== ======================== ===============
</TABLE>

<TABLE>
<CAPTION>
                                                                September 30, 2002
                                              --------------------------------------------------------
                                                    Carrying        Gross    Unrealized        Fair
Held to maturity:                                    Value          Gains      Losses         Value
                                              --------------- ------------------------ ---------------
<S>                                             <C>            <C>         <C>           <C>
    Mortgage backed securities                    $1,147,300     $ 38,928    $   $ 70      $1,186,158
                                              =============== ======================== ===============
</TABLE>

<TABLE>
<CAPTION>
                                                                September 30, 2003
                                              --------------------------------------------------------
                                                  Carrying        Gross    Unrealized        Fair
                                                    Value          Gains      Losses         Value
                                              --------------- ------------------------ ---------------
<S>                                             <C>            <C>        <C>            <C>
Available for sale securities:
  U.S. Government and agency securities          $ 6,592,693     $      -   $ 225,830      $6,366,863
  Corporate bonds                                    503,474            -      13,024         490,450
  Mortgage backed securities                       8,067,985       37,363      11,233       8,094,115
                                              --------------- ------------------------ ---------------
     Total debt securities                        15,164,152       37,363     250,087      14,951,428
  Equity securities                                    1,243       51,107           -          52,350
                                              --------------- ------------------------ ---------------

                                                 $15,165,395     $ 88,470   $ 250,087     $15,003,778
                                              =============== ======================== ===============
</TABLE>

<TABLE>
<CAPTION>
                                                              September 30, 2002
                                              --------------------------------------------------------
                                                   Carrying        Gross    Unrealized        Fair
                                                     Value         Gains      Losses         Value
                                              --------------- ------------------------ ---------------
<S>                                            <C>             <C>         <C>          <C>
Available for sale securities:
  U.S. Government and agency securities          $ 3,500,000     $ 13,924    $ 16,880     $ 3,497,044
  Corporate bonds                                  1,917,358       67,912      28,235       1,957,035
  Mortgage backed securities                       6,000,195      200,710           -       6,200,905
                                              --------------- ------------------------ ---------------
     Total debt securities                        11,417,553      282,546      45,115      11,654,984
  Equity securities                                    1,243       54,657           -          55,900
                                              --------------- ------------------------ ---------------

                                                 $11,418,796     $337,203    $ 45,115     $11,710,884
                                              =============== ======================== ===============
</TABLE>

                                     F-9

<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

3. Held to Maturity and Available for Sale Securities (Continued)
   --------------------------------------------------------------

      The  schedule  of  maturities  of  available  for  sale  securities,  debt
securities at September 30, 2003 is as follows:

                                         Amortized              Fair
                                           Cost                 Value
                                       ------------          -----------

      Due after one to five years       $ 1,643,388          $ 1,610,044
      Due after five to ten years         2,984,305            2,870,625
      Due after ten years                 2,468,474            2,376,644
                                        -----------          -----------
                                          7,096,167            6,857,313
      Mortgage backed securities          8,067,985            8,094,115
                                        -----------          -----------
                                        $15,164,152          $14,951,428
                                        ===========          ===========

      There is no schedule of maturities for mortgage backed securities  because
      these investments are subject to prepayment.

      Mortgage-backed  securities  with a  carrying  value  and  fair  value  of
      $260,551 and $267,339 at September 30, 2003 and  $2,314,133 and $2,385,919
      at September 30, 2002 are pledged as security for deposits of governmental
      entities under the provisions of Governmental Unit Deposit Protection Act.

4.    Loans Receivable
      ----------------

      Loans receivable are summarized as follows:


                                                   2003            2002
                                              ------------    ------------
First mortgage loans
    Secured by one to four family residence   $ 31,628,121    $ 34,184,915
    Construction loans                             988,911       1,233,301
    Commercial real estate                      18,556,448      12,364,600
    Land loans                                     985,945               -
                                              ------------    ------------
                                                52,159,425      47,782,816
                                              ------------    ------------
  Less:
    Loans in process - real estate              (1,179,011)       (473,057)
    Deferred loan origination fees net of
      costs of $110,916 and $120,268              (272,007)       (338,803)
                                              ------------    ------------
Total first mortgage loans                      50,708,407      46,970,956
                                              ------------    ------------

Consumer and other loans:
    Home equity                                  8,204,003      10,004,090
    Personal loans                                 302,898         268,729
    Loans secured by savings                       205,008         119,961
    Commercial business loans                       66,000          99,695
    Mobile and automobile                        2,303,950         842,787
                                              ------------    ------------
Total consumer and other loans                  11,081,859      11,335,262
                                              ------------    ------------
Total loans                                     61,790,266      58,306,218
Less allowance for loan losses                    (328,000)       (280,000)
                                              ------------    ------------
                                              $ 61,462,266    $ 58,026,218
                                              ============    ============

                                     F-10
<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

4.    Loans Receivable (continued)
      ----------------------------

      At September 30, 2003 and 2002,  nonaccrual  loans for which  interest had
      been discontinued  totaled  approximately  $191,000 and $0,  respectively.
      Interest income actually recognized is summarized as follows:

                                             2003         2002
                                            ------       ------
        Interest income that would have
          been recognized                   $9,774        $  -
        Income recognized                    1,256           -
                                            ------        ----

        Interest income foregone            $8,518        $  -
                                            ======        ====

      An analysis of the change in the allowance for loan losses:

                                              2003         2002
                                           ---------    ---------
             Allowance for loan losses:
                   Beginning of year       $ 280,000    $ 207,000
                   Additional provisions      70,879      115,849
                   Charge offs               (22,879)     (42,849)
                                           ---------    ---------

                                           $ 328,000    $ 280,000
                                           =========    =========

      The activity with respect to loans to directors, officers and associates
      of such persons is summarized as follows:

                                          2003         2002
                                       ---------    ---------

             Beginning of year         $ 574,731    $ 600,569
             Loans originated            141,192      261,576
             Collection of principal    (135,843)    (287,414)
                                       ---------    ---------

             End of year               $ 580,080    $ 574,731
                                       =========    =========

      All loans to  directors,  officers  and  associates  of such  persons  are
      collateralized by deposits and/or real estate.

5.    Servicing
      ---------

      Loans   serviced  for  others  are  not   included  in  the   accompanying
      consolidated  statements  of  financial  position.  The  unpaid  principal
      balances of mortgage and other loans  serviced for others were  $5,411,116
      and $2,526,254 at September 30, 2003 and 2002, respectively.

6.    Accrued Interest Receivable
      ---------------------------

      Accrued interest receivable is summarized as follows:

                                          2003       2002
                                        --------   --------

           Loans receivable             $291,154   $321,810
           Mortgage backed securities     36,434     35,198
           Other securities               87,671     33,451
                                        --------   --------

                                        $415,259   $390,459
                                        ========   ========

                                      F-11
<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

7.    Premises and Equipment
      ----------------------

      Premises and equipment are summarized by major classification as follows:

<TABLE>
<CAPTION>
                                                                2003              2002          Useful lives
                                                           ---------------   ---------------  ------------------
<S>                                                          <C>               <C>           <C>
             Land                                              $  125,553        $  125,553
             Leasehold improvements  (Marlton)                    119,022            48,501    25 to 40 years
             Office building (Bordentown)                       1,361,417         1,358,175    25 to 40 years
             Office building (Florence)                            53,032            53,032    25 to 40 years
             Office building (Mount Laurel)                       674,336           671,296    25 to 40 years
             Furniture, fixtures and equipment                    817,039           633,246     5 to 7 years
                                                               -----------       -----------
                                                                3,150,399         2,889,803
             Less accumulated depreciation                        917,749           772,013
                                                               -----------       -----------
                                                               $2,232,650        $2,117,790
                                                               ===========       ===========
</TABLE>

      Depreciation charged to operations was $145,737 and $114,625 for the years
      ended 2003 and 2002,  respectively.  The Bank leases the Marlton  building
      and has renovated the leased space as a branch, which opened in the second
      quarter of fiscal year 2003. This lease is included in footnote 12.

8.    Deposits
      --------

      Deposits as of September 30 are summarized as follows:


                                              2003               2002
                                           -----------        -----------

          NOW accounts                     $10,302,694        $ 9,172,687
          Money market accounts             10,050,161          3,343,808
          Passbook and club accounts        18,189,985         17,133,253
          Non interest bearing               3,733,030          2,702,286
                                           -----------        -----------
          Subtotal                          42,275,870         32,352,034
                                           -----------        -----------
          Certificates of deposit:
            1.01% to 2.00%                  18,127,556            376,387
            2.01% to 3.0%                    9,664,781         26,130,176
            3.01% to 4.0%                   10,075,146          9,407,919
            4.01% to 5.0%                    2,990,317          3,166,692
            5.01% to 6.0%                      580,301          3,645,697
            6.01% to 7.0%                            -            210,082
                                           -----------        -----------
          Subtotal                          41,438,101         42,936,953
                                           -----------        -----------

                                           $83,713,971        $75,288,987
                                           ===========        ===========


      Deposits  of  officers  and  directors  totaled  $70,000  and  $313,000 at
      September 30, 2003 and 2002,  respectively.  The aggregate amount of jumbo
      certificates  of  deposit  with a minimum  denomination  of  $100,000  was
      approximately  $13,795,000 and $16,588,000 at September 30, 2003 and 2002.
      These  certificates  of  deposit  do not  receive  preferential  rates  of
      interest. Deposits in excess of $100,000 are not federally insured.

                                      F-12

<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

8.    Deposits (Continued)
      --------------------

      As of September 30, 2003 and 2002, scheduled maturities of certificates of
      deposit (rounded to the nearest $1,000) are summarized as follows:

                                                   2003           2002
                                               --------------- --------------

             Due in 3 months or less              $ 8,223,000    $14,563,000
             Due after 3 months to 1 year          17,322,000     20,350,000
             Due after 1 year to 3 years            9,190,000      5,579,000
             Due after 3 years to 5 years           6,703,000      2,445,000
                                                 ------------    -----------

                                                 $ 41,438,000    $42,937,000
                                                 ============    ===========


      Interest  expense on deposits for the years ended  September  30, 2003 and
      2002 is summarized as follows:

                                                    2003           2002
                                                -------------  -------------

             NOW accounts                         $   95,428     $   96,012
             Money market accounts                   126,129         55,148
             Passbook and club accounts              256,509        287,882
             Certificates of deposit               1,196,889      1,507,898
                                                  -----------    ----------

                                                  $1,674,955     $1,946,940
                                                  ===========    ==========


9.    Federal Home Loan Bank Advance
      ------------------------------

      This advance bears fixed interest at 5.9% and matures in April 2009. It is
      collateralized  by FHLB  stock  and  investment  securities.  The Bank has
      approximately  $22,001,000  available  for  borrowing as of September  30,
      2003.

          Principal payments are as follow:

                  2004                       $ 146,423
                  2005                         155,318
                  2006                         164,754
                  2007                         174,762
                  2008                         186,292
               Thereafter                      128,887
                                             ---------

                 Total                       $ 956,436
                                             =========


10.   Net Gain on Sale of Investments
      -------------------------------

      For the years ended  September  30, 2003 and 2002,  proceeds from sales of
      securities  available for sale amounted to  $28,727,187  and  $11,748,671,
      respectively.  Gross  realized  gains  amounted to $167,441  and  $58,836,
      respectively.   Gross   realized   losses   amounted  to  $-0-  and  $-0-,
      respectively.

                                      F-13
<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

11.   Income Taxes
      ------------

      The Bank has qualified as a Savings  Institution  under  provisions of the
      Internal  Revenue Code. Prior to January 1, 1996 the Bank was permitted to
      deduct  from  taxable  income  an  allowance  for  bad  debts  based  on a
      percentage-of   taxable  income.   Such  percentage  was  8%  before  such
      deduction.  Retained  earnings at  September  30,  2003 and 2002  included
      untaxed earnings of approximately $278,700 and $304,400, representing such
      bad debt deductions.

      Retained  earnings at September 30, 2003 and 2002  includes  approximately
      $153,850  of tax bad debt  deductions  which are  considered  a  permanent
      difference between the book and income tax basis of loans receivable,  and
      for which income taxes have not been provided.  If such amount is used for
      purposes  other  than  bad  debt  losses,   including   distributions   in
      liquidation, it will be subject to income tax at the then current rate.

    The  provision for federal and state income taxes differs from that computed
    at the statutory rate as follows:

                                                          2003         2002
                                                      ------------  -----------
             Statutory tax rates                        34%          34%
             Tax at statutory rates                     $ 348,723    $ 208,400
             New Jersey Savings Institution Tax and
                Corporation Income Tax                     59,066       12,184
             Change in enacted State Tax rate               7,890            -
             Miscellaneous                                 (4,452)      (2,740)
                                                        ---------    ---------
                                                        $ 411,227    $ 217,844
                                                        =========    =========

      The tax provision is summarized as follows:

                                                          2003         2002
                                                       -----------   ----------
             Current federal                            $ 339,687    $ 233,035
             Deferred federal                             (20,962)     (33,938)
             Current state                                 98,414       20,495
             Deferred state                                (5,912)      (1,748)
                                                        ---------    ---------
                                                        $ 411,227    $ 217,844
                                                        =========    =========

      The following  temporary  differences gave rise to deferred tax assets and
      liabilities:

                                                       2003           2002
                                                    ---------      ---------
       Deferred tax assets:
         Allowance for loan losses                  $ 131,200      $ 100,801
         Unrealized depreciation on investments        64,647              -
         Loans                                         23,523         15,266
         Accrued compensation                          23,767         17,962
                                                    ---------      ---------
         Total deferred tax assets                    243,137        134,029
                                                    ---------      ---------

       Deferred tax liabilities:
         Unrealized appreciation on investments             -        105,148
         Premises and equipment                        67,460         45,643
         Tax reserve for loan losses                   50,010         54,240
                                                    ---------      ---------
         Total deferred tax liabilities               117,470        205,031
                                                    ---------      ---------
         Net deferred tax asset (liability)         $ 125,667      $ (71,002)
                                                    =========      =========


                                      F-14
<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

12.   Commitments
      -----------

      At September 30, 2003 the Bank had the following commitments  outstanding.
      Mortgage  commitments are for 45 days. Home equity  commitments are for 60
      days.  Commitments  on other loans are for 90 days.  The  commitments  are
      summarized as follows:

                             Amounts       Rate                Term
                          ------------ --------------  ------------------------

Mortgages (fixed rate)    $ 1,310,900  4.25% to 6.75%      6 months to 30 years
                                         0 to 1 point
Home equity loans              89,000  4.00% to 6.25%      15 years
                                         0 points
Other loans                 4,065,000  5.25% to 8.94%      3 to 25 years
                          ------------
                          $ 5,464,900  0 to 1 points
                          ============

      There are nine letters of credit  outstanding  at September  30, 2003.  An
      annual  fee of 1/2 to 1 point  is due on each of the  letters  of  credit.
      Interest is due at various  rates if the  letters of credit are  utilized.
      The  amount  of the nine  letters  totals  $1,284,311.  The Bank  also has
      consumer  and  commercial   lines  of  credit  with  undrawn  balances  of
      $2,626,148 and $109,000, respectively.

      The Bank has available  two lines of credit  through the Federal Home Loan
      Bank.  An  overnight  line  of  credit  is  available  in  the  amount  of
      $4,302,450.  Additionally,  a one month overnight repricing line of credit
      is available in the amount of $4,302,450.

      Future minimum lease payments under  noncancellable  operating  leases for
      branch building and transportation equipment are as follows:


                  2004                     $    52,309
                  2005                          54,666
                  2006                          47,643
                  2007                          46,772
                  2008                          49,578
               Thereafter                      800,437
                                           -----------

                 Total                     $ 1,051,405
                                           ===========

13.  Financial Instruments
     ---------------------

     Fair Values of Financial Instruments
     ------------------------------------

     The following  methods and assumptions  were used in estimating fair values
     of financial instruments as disclosed herein:

     Cash and Due from Banks
     -----------------------

     The  carrying  amounts of cash and due from banks  approximate  their fair
     value.

     Available for Sale and Held to Maturity Securities and FHLB Stock
     -----------------------------------------------------------------

     Fair  values for securities, excluding FHLB securities, are based on quoted
     market  prices.  The carrying  values of FHLB securities  approximate  fair
     values based on the redemption provisions of the Federal Home Loan Bank.

                                      F-15
<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

13.   Financial Instruments (Continued)
      ---------------------------------

      Loans Receivable
      ----------------

      For  variable-rate  loans that reprice  frequently and have no significant
      credit  risk,  fair values are based on carrying  values.  Fair values for
      fixed rate mortgage loans,  excluding commercial loans, 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 fixed rate  commercial real estate
      and  other  commercial  loans are  estimated  using  discounted  cash flow
      analyses,  using  interest  rates  currently  being offered for loans with
      similar terms to borrowers of similar credit quality.

      Deposit Liabilities
      -------------------

      The fair values of demand deposits are, by definition, equal to the amount
      payable  on  demand  at  the  reporting  date.  The  carrying  amounts  of
      variable-rate,   fixed-term  money-market  accounts  and  certificates  of
      deposit (CDs)  approximate  their fair values at the reporting  date. Fair
      values for  fixed-rate  CDs are  estimated  using a  discounted  cash flow
      calculation  that  applies  interest  rates  currently  being  offered  on
      certificates to a schedule of aggregated  expected  monthly  maturities of
      certificates.

      Accrued Interest
      ----------------

      The carrying amounts of accrued interest approximate their fair values.

      FHLB Advances
      -------------

      The fair value of FHLB  advances  is  estimated  based on rates  currently
      available to the Bank for debt with similar terms.

      Advances by Borrowers and Accounts Payable and Other Accrued Expenses
      ---------------------------------------------------------------------

      The carrying amounts of these liabilities approximate their fair values.

      Off-Balance-Sheet Instruments
      -----------------------------

      The Bank is a party to financial instruments with  off-balance-sheet  risk
      in the  normal  course  of  business  to meet  the  financing  need of its
      customers.  These financial  instruments  consist of commitments to extend
      credit.  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.  These commitments are comprised of the undisbursed  portion of
      loans and  letters of  credit.  The Bank's  exposure  to credit  loss from
      nonperformance  by the  other  party  to  the  financial  instruments  for
      commitments to extend credit is represented by the  contractual  amount of
      those  instruments.  The Bank  uses the same  credit  policies  in  making
      commitments  as  it  does  for  on-balance-sheet  instruments.  Generally,
      collateral,  usually in the form of real  estate,  is  required to support
      financial  instruments with credit risk.  Commitments generally have fixed
      expirations dates or other  termination  clauses and may require a payment
      of a fee.  Since many of the  commitments  are expected to expire  without
      being  drawn  upon by  customers,  the  total  commitment  amounts  do not
      necessarily  represent future cash  requirements.  The Bank evaluates each
      customer's  credit  worthiness  on a  case-by-case  basis.  The  amount of
      collateral obtained,  if it is deemed necessary by the Bank upon extension
      of credit, is based on management's  credit valuation of the counterparty.
      The fair value of commitments is not considered significant.

                                      F-16

<PAGE>
                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

13.   Financial Instruments (Continued)
      ---------------------------------

      The  carrying   amounts  and  estimated   fair  values  of  the  financial
      instruments were as follows:
<TABLE>
<CAPTION>
                                                             2003          2003           2002           2002
                                                          Carrying        Fair         Carrying         Fair
                                                            Amount         Value         Amount         Value
                                                         ------------- -------------- -------------- -------------
<S>                                                     <C>            <C>            <C>           <C>
             Financial Assets (000's omitted)
             ---------------------------------------
             Cash and due from banks                       $11,540        $11,540        $ 9,162       $ 9,162
             Securities held to maturity                       461            475          1,147         1,186
             Securities available for sale                  15,004         15,004         11,711        11,711
             FHLB stock                                        507            507            500           500
             Loans receivable                               61,462         64,186         58,026        60,573
             Accrued interest receivable                       415            415            390           390

             Financial Liabilities (000's omitted)
             ---------------------------------------
             Deposit liabilities                            83,714         85,129         75,289        75,987
             FHLB advance                                      956          1,076          1,094         1,262
             Accrued interest payable                           23             23             36            36
             Other liabilities                                 572            572            476           476
</TABLE>

14.   Benefit Plans
      -------------

      401 (k) Plan
      ------------

      A  401  (k)  Plan  covers  substantially  all  employees.   Employees  may
      contribute  up to 15  percent  of their  compensation  subject  to certain
      limits  based  on  federal  tax  laws.  The  Corporation   makes  matching
      discretionary  contributions equal to 50 percent of the first 6 percent of
      an employee's compensation contributed to the Plan. Matching contributions
      vest immediately. For the years ended September 30, 2003 and 2002, expense
      attributable to the Plan amounted to $22,965 and $19,313, respectively.

      Employee Stock Option Plan (ESOP)
      ---------------------------------

      Effective  upon  conversion,  an ESOP  was  established  for all  eligible
      employees.  The ESOP  used  $303,880  of  proceeds  from a term  loan from
      Farnsworth  to  purchase  36,466  shares of  Company  common  stock in the
      initial  offering.  The term  loan of  $151,396  at  September  30,  2003,
      including interest, is payable in equal monthly installments through March
      2008.  The interest rate is 8.50% fixed for the term of the loan. The Bank
      is making  contributions  to the ESOP which are equal to the principal and
      interest  payment  required  from the ESOP on the term  loan.  Unallocated
      shares  purchased with the loan proceeds are pledged as collateral for the
      term loan and are held in a suspense  account for future  allocation among
      participants.  Shares  released  from the suspense  account are  allocated
      among the participants on the basis of  compensation.  ESOP shares pledged
      as  collateral  are  reported  as  common  stock  acquired  by ESOP in the
      consolidated statements of financial condition. As shares are committed to
      be released from  collateral the shares become  outstanding for net income
      per common share  computations.  Dividends  on  allocated  ESOP shares are
      recorded as a reduction of retained earnings.

                                                          2003           2002
                                                       ----------    ----------

             Allocated shares                             18,229        14,582
             Unallocated shares                           18,237        21,884
                                                       ---------     ---------

             Total ESOP shares                            36,466        36,466
                                                       =========     =========

             Fair value of unallocated shares          $ 296,345     $ 273,540
                                                       =========     =========

                                      F-17
<PAGE>
                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

14.   Benefit Plans (Continued)
      -------------------------

      Restricted Stock Plans (RSP)
      ----------------------------

      On April 16, 2000 the Bank established a RSP to provide both key employees
      and  outside  directors  with a  proprietary  interest  in it in a  manner
      designed to  encourage  such  person to remain  with the Bank.  A total of
      18,233  restricted  shares were  purchased  at an average  market value of
      $8.73.  Rights to a total of  12,757  shares  were  issued to the board of
      directors  and two  executive  officers  in 2000.  The fair value of these
      shares  will be  charged to expense  over the five years  vesting  period.
      During each of the years ended  September 30, 2003 and 2002,  2,554 shares
      vested.

      On September 5, 2002 the Bank  established  an  additional  RSP to provide
      both key employees and outside directors with a proprietary interest in it
      in a manner  designed to encourage  such person to remain with the Bank. A
      total  of  5,476  restricted  shares  were  transferred  from the RSP Plan
      established  on  April  16,  2000.  An  additional  7,516  shares  will be
      purchased as vesting requirements need to be satisfied.  Rights to a total
      of 12,992  shares were  issued to the board of  directors,  two  executive
      officers  and three  employees.  The fair  value of these  shares  will be
      charged to expense over the four year vesting  period.  During each of the
      years ended September 30, 2003 and 2002, 3,250 shares vested.

      The awards become fully vested upon termination of employment due to death
      or disability.

      Stock-based compensation plan
      -----------------------------

      Farnsworth  has a stock  option  plan that  provides  for the  granting of
      non-qualified stock options. In April 1999, it issued 31,899 options at an
      exercise price of $8.86 per share to key Bank  employees and  non-employee
      members  of its  Board of  Directors.  The  options  vest  ratably  on the
      anniversary  date over five years.  The options expire ten years after the
      initial  grant date.  At  September  30, 2003 and 2002,  a total number of
      25,523  and  19,142  options  were  vested,  respectively,  and none  were
      exercised or forfeited.

      In September 2002,  Farnsworth  issued 25,981 options at an exercise price
      of $12.08 per share to key and non-key  Bank  employees  and  non-employee
      members  of  its  Board  Directors.   The  options  vest  ratably  on  the
      anniversary  date over three years. The options expire ten years after the
      initial  grant date.  At  September  30, 2003 and 2002,  a total number of
      17,321  and  8,660  options  were  vested,  respectively,  and  none  were
      exercised or forfeited.

      In  accordance  with  an  election  under  generally  accepted  accounting
      principles  for stock options no  compensation  cost has been recorded for
      the stock options in the accompanying  consolidated  financial statements.
      Had compensation cost been determined based on the fair value at the grant
      dates for awards  under the plan,  the net income and  earnings  per share
      would have been reduced to the proforma amounts disclosed below:

                                                       2003          2002
                                                  -------------  ------------
             Net income:
                As reported                          $ 614,429     $ 395,231
                Proforma                             $ 595,323     $ 376,128

             Earnings per common share
                As reported
                      Basic                          $    1.51     $    0.98
                      Diluted                        $    1.45     $    0.96
                Proforma
                      Basic                          $    1.47     $    0.93
                      Diluted                        $    1.41     $    0.91

                                      F-18
<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

14.   Benefit Plans (Continued)
      -------------------------

      Stock-based compensation plan (Continued)
      -----------------------------------------

      The fair values were  determined  using the  Black-Scholes  option pricing
      model with the following  weighted  average  assumptions  for the 1999 and
      2002 plans,  respectively:  0% and 1% dividend yield, 5.88% and 5.75% risk
      free  interest  rate,  5 and 3 year  expected  life and 4.85%  and  10.18%
      volatility.

15.   Net Income Per Common Share
---   ---------------------------

      Basic net income per common share is  calculated by dividing net income by
      the number of shares of common  stock  outstanding,  less shares that have
      not been  committed  to be  released.  Diluted  net  income  per  share is
      calculated by adjusting  the number of shares of common stock  outstanding
      to include the effect of stock options,  stock-based  compensation  grants
      and other  securities,  if dilutive,  generally  using the treasury  stock
      method.

<TABLE>
<CAPTION>
                                                           2003                                          2002
                                           ---------------------------------------  -----------------------------------------
                                                         Weighted          Per-                         Weighted       Per-
                                                          Average          Share                        Average       Share
                                            Income        Shares          Amount       Income           Shares        Amount
                                           ---------  ------------- --------------  ------------ ---------------- -----------
<S>                                      <C>             <C>         <C>             <C>               <C>         <C>
        Net income available to
        Common Shareholders                $614,429        433,031                     $395,231          433,031
        ESOP shares, not
        committed to be released                           (20,060)                                      (21,883)
        RSP shares                                          (6,789)                                       (8,616)
                                           ---------  ------------- --------------  ------------ ---------------- -----------
        Basic earnings per share            614,429        406,182         $ 1.51       395,231          402,532      $ 0.98
        Common stock
        equivalents                                         18,624                                         6,106
                                           ---------  ------------- --------------  ------------ ---------------- -----------
        Diluted earnings
        Per  share                         $614,429        424,806         $ 1.45      $395,231          408,638      $ 0.96
                                           =========  =============                 ============ ================
</TABLE>

16.   Regulatory Capital Requirement
      ------------------------------

      The  Bank  is   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 Bank'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.

      The  Office  of  Thrift   Supervision   ("OTS")  has  prescribed   capital
      requirements   which  include  three  separate   measurements  of  capital
      adequacy:  a leverage-ratio  capital standard ("core"), a tangible capital
      standard  and a risk-based  capital  standard  (collectively  known as the
      "Capital  Rule").  The Capital Rule requires each savings  institution  to
      maintain  tangible  capital  equal to at least 1.5% of its adjusted  total
      assets  and core  capital  equal to at least  4.0% of its  adjusted  total
      assets.  The Capital Rule further  requires  each savings  institution  to
      maintain  risk-based  capital equal to at least 8.0% of its  risk-weighted
      assets.

                                      F-19

<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


16.   Regulatory Capital Requirement (Continued)
      ------------------------------------------

      The Bank at September  30, 2003 and 2002 meets the  regulatory  risk based
      capital, Tier 1 capital, core capital and tangible capital requirements as
      summarized below:

<TABLE>
<CAPTION>
                                                                                                To Be         Well
                                                                                             Capitalized      Under
                                                                       For        Capital       Prompt     Corrective
                                          Actual                    Adequacy     Purposes       Action     Provisions
                                          Amount         Ratio       Amount        Ratio        Amount        Ratio
                                        ------------  ------------ ------------ ------------ ------------- ------------
<S>                                    <C>            <C>         <C>            <C>         <C>           <C>
             As of September 30, 2003:
               Risk-based capital        $ 6,473        12.72%      $ 4,071        8.00%       $ 5,089       10.00%
               Tier 1 capital              6,145        12.08%          N/A          N/A         3,053        6.00%
               Core capital                6,145         6.71%        3,665        4.00%         4,582        5.00%
               Tangible capital            6,145         6.71%        1,375        1.50%           N/A          N/A

             As of September 30, 2002:
               Risk-based capital        $ 5,903        12.86%      $ 3,673        8.00%       $ 4,591       10.00%
               Tier 1 capital              5,430        11.83%          N/A          N/A         2,754        6.00%
               Core capital                5,430         6.58%        3,304        4.00%         4,125        5.00%
               Tangible capital            5,430         6.58%        1,237        1.50%           N/A          N/A
</TABLE>


      The  Federal  Deposit  Insurance  Corporation   Improvement  Act  of  1991
      ("FDICIA")  imposes increased  requirements on the operations of financial
      institutions  and  mandated the  development  of  regulations  designed to
      empower  regulators  to take  prompt  corrective  action  with  respect to
      institutions that fall below certain capital standards.  FDICIA stipulates
      that an  institution  with  less  than 4% core  capital  is  deemed  to be
      undercapitalized.  Quantitative  measures  established by FDICIA to ensure
      capital  adequacy  require the Bank to maintain minimum amounts and ratios
      of  total  and  Tier  I  capital  (as  defined  in  the   regulations)  to
      risk-weighted assets (as defined), and of Tier I capital to average assets
      (as defined). Management believes, as of September 30, 2003, that the Bank
      meets all capital adequacy requirements to which it is subject.

      As of September  2003, the date of the most recent  notification  from the
      OTS, the Bank was  categorized  as well  capitalized  under the regulatory
      framework  for  prompt  corrective  action.  To  be  categorized  as  well
      capitalized, the Bank must maintain risk based capital, Tier I capital and
      core  capital  ratios  of 10%,  6%,  and 5%,  respectively.  There  are no
      conditions  existing or events which have occurred since notification that
      management believes have changed the Bank's category.

      Management  believes that,  under the current  regulations,  the Bank will
      continue  to meet its  minimum  capital  requirements  in the  foreseeable
      future.  However,  events  beyond the control of the Bank could  adversely
      affect its future minimum capital requirements.

                                      F-20

<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


17.   Parent Only Financial Information
      ---------------------------------

      The earnings of the  subsidiaries  are recognized by Farnsworth  using the
      equity method of accounting. Accordingly, the earnings of the subsidiaries
      are recorded as increases in Farnsworth's investment in subsidiaries.  The
      following are the condensed  financial  statements for Farnsworth  (parent
      company  only) as of  September  30,  2003 and 2002 and for the years then
      ended.


             Statement of Financial Condition              2003           2002
                                                       ----------     ----------

             Assets
             Cash                                      $  296,863     $  366,720
             ESOP loan receivable                         151,396        182,328
             Investment in subsidiaries                 4,062,319      3,416,380
             Other assets                                  75,373         48,163
                                                       ----------     ----------

             Total assets                              $4,585,951     $4,013,591
                                                       ==========     ==========

             Liabilities
             Accrued expenses                          $   17,291     $   23,154
                                                       ----------     ----------
             Total liabilities                             17,291         23,154

             Stockholders' equity                       4,568,660      3,990,437
                                                       ----------     ----------

             Total liabilities and
                 stockholders' equity                  $4,585,951     $4,013,591
                                                       ==========     ==========

                                                           2003           2002
                                                       ----------     ----------

             Income from subsidiaries                  $  666,198     $  436,374
             Interest income                               16,848         22,794
                                                       ----------     ----------
             Total income                                 683,046        459,168

             Meeting expenses                              13,961         12,690
             Stock transfer fees                            6,938           --
             Professional fees                             74,386         68,460
                                                       ----------     ----------
             Total expenses                                95,285         81,150

             Income before income taxes                   587,761        378,018
             Income tax benefit                            26,668         17,213
                                                       ----------     ----------
             Net income                                $  614,429     $  395,231
                                                       ==========     ==========


                                      F-21
<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


17.   Parent Only Financial Information (Continued)
      ---------------------------------------------

Statement of Cash Flows                                     2003         2002
                                                         ---------    ---------

Cash flows from operations activities:
  Net income                                             $ 614,429    $ 395,231
  Adjustments to reconcile net income to net cash
     used in operating activities:
   Increase (decrease) in accrued expenses                  (5,863)       3,074
   Equity in undistributed earnings of subsidiaries       (645,939)    (436,374)
   Increase in other assets                                (27,210)     (14,555)
                                                         ---------    ---------

               Net cash used in operating activities       (64,583)     (52,624)
                                                         ---------    ---------

Cash flows from investing activities,
  repayment of ESOP loan                                    30,932       30,388
                                                         ---------    ---------

Cash flows from financing activities, cash dividends       (36,206)
                                                         ---------

Net decrease in cash                                       (69,857)     (22,236)
Cash - beginning                                           366,720      388,956
                                                         ---------    ---------

Cash - ending                                            $ 296,863    $ 366,720
                                                         =========    =========
                                      F-22
<PAGE>


Corporate Information
---------------------
                            FARNSWORTH BANCORP, INC.
                              789 Farnsworth Avenue
                          Bordentown, New Jersey 08505
                                 (609) 298-0723

                              PEOPLES SAVINGS BANK

                                   Main Office
                              789 Farnsworth Avenue
                             Bordentown, New Jersey


   Florence Office                 Marlton Office            Mt. Laurel Office
   4 Broad Street            320 Evesboro-Medford Road       101 Gaither Drive
Florence, New Jersey            Marlton, New Jersey       Mt. Laurel, New Jersey



                               Board of Directors

                                    Chairman
                                Edgar N. Peppler
                   Retired - President - Peppler Funeral Home

   George G. Aaronson, Jr.                      G. Edward Koenig, Jr.
  Realtor - Falconer & Bell             Retired - President - E.J.Koenig, Inc.
                                 (petroleum products/heating & air-conditioning)

       Charles E. Adams                            Gary N. Pelehaty
 Retired - Florence Township            President and Chief Executive Officer
        Administrator

       Joseph H. Kelly                        William H. Wainwright, Jr.
President - Kelly Enterprises                   Retired - Loan Officer
        (Investments)

                               Executive Officers

         Gary N. Pelehaty                                Charles Alessi
resident and Chief Executive Officer             Vice President, Chief Financial
                                                Officer, Secretary and Treasurer

                                    Officers

          Elaine C. Denelsbeck                         Christopher Nunn
           Assistant Secretary                        Assistant Treasurer


                        PEOPLES FINANCIAL SERVICES, INC.
                               BOARD OF DIRECTORS
               Gary N. Pelehaty                 Charles Alessi
                   President            Vice President, Chief Financial
                                        Officer, Secretary and Treasurer

 Joseph H. Kelly        R. Theodore Hinderer               Jonas Singer
    President                President                       Attorney
Kelly Enterprises   Credit Lenders Title Agency   Wells, Singer, Rubin & Musulin


                                       11

<PAGE>


                            ------------------------

     Local Counsel                           Independent Auditors
     Wells, Singer, Rubin & Musulin          Kronick Kalada Berdy & Co.
     6 East Park Street                      190 Lathrop Street
     Bordentown, New Jersey 08505            Kingston, Pennsylvania 18704

     Special Counsel                         Transfer Agent and Registrar
     Malizia Spidi & Fisch, PC               Computershare Trust Company, Inc.
     1100 New York Avenue, N.W.              350 Indiana Street
     Suite 340 West                          Suite 800
     Washington, D.C. 20005                 Golden, Colorado 80401

                            ------------------------

The Company's  Annual Report on Form 10-KSB for the fiscal year ended  September
30, 2003 is available  without  charge upon written  request.  For a copy of the
Form 10-KSB,  please write or call Mr.  Charles  Alessi,  Vice  President at the
Company's  Office.  The Annual Meeting of Stockholders  will be held on February
17, 2004 at 10:00 a.m. at the Days Inn, 1073 Route 206, Bordentown, New Jersey.


                                       12