UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q
(Mark One)

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

For the quarterly period ended June 30, 2004, OR
                               -------------

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


For the transition period from ____________ to ____________.


Commission File No. 0-12870.


                        FIRST CHESTER COUNTY CORPORATION
             (Exact name of Registrant as specified in its charter)


 Pennsylvania                                         23-2288763
 ------------                                         ----------
(State or other jurisdiction of                      (IRS Employer
 incorporation or organization)                       Identification No.)


 9 North High Street, West Chester, Pennsylvania                  19380
 -----------------------------------------------                  -----
     (Address of principal executive office)                    (Zip code)


                                 (484) 881-4000
              (Registrant's telephone number, including area code)


Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed  by  Section  13 or 15 (d) of the  Securities  Exchange  Act of 1934
during the preceding 12 months (or for such shorter  period that the  Registrant
was  required  to file such  reports),  and (2) has been  subject to such filing
requirements for the past 90 days. Yes ___ No X

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X  No ___

The number of shares  outstanding of Common Stock of the Registrant as of August
9, 2004 was 4,512,707.

                                       2
<PAGE>


                FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

                                      INDEX
<TABLE>
<CAPTION>


                                                                                                                       PAGE
<S>               <C>                                                                                            <C>

Part I.  FINANCIAL INFORMATION

                  Item 1 -  Financial Statements
                             Consolidated Statements of Condition
                             June 30, 2004 (unaudited) and December 31, 2003                                              4


                             Consolidated Statements of Income
                             Three and Six-Months Ended June 30, 2004 and 2003 (unaudited)                                5


                             Consolidated Statements of Cash Flows
                             Six-Months Ended June 30, 2004 and 2003 (unaudited)                                          6


                             Notes to Consolidated Financial Statements (unaudited)                                    7-10


                  Item 2 -   Management's Discussion and Analysis of
                             Financial Condition and Results of Operations                                          11 - 25

                  Item 3 -   Quantitative and Qualitative Disclosures About Market Risk                                  26

                  Item 4 -   Controls and Procedures                                                                26 - 27


Part II. OTHER INFORMATION

                  Item 1 -   Legal Proceedings                                                                           28
                  Item 2 -   Changes in Securities, Use of Proceeds and Issuer Purchases of
                             Equity Securities                                                                        28
                  Item 3 -   Defaults upon Senior Securities                                                             28
                  Item 4 -   Submission of Matters to a Vote of Security Holders                                         28
                  Item 5 -   Other Information                                                                           28
                  Item 6 -   Exhibits and Reports on Form 8-K                                                            29

                  Signatures                                                                                             30
                  Exhibit Index                                                                                          31
                  Exhibits                                                                                          32 - 39

</TABLE>

                                       3
<PAGE>


                          PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>

                                                                                        (Unaudited)
(Dollars in thousands)                                                                    June 30,            December 31,
                                                                                            2004                  2003
                                                                                         ----------           ------------
<S>                                                                                     <C>                   <C>

ASSETS
    Cash and due from banks                                                              $   23,605            $  28,509
    Federal funds sold and other overnight investments                                            -                2,500
    Interest Bearing Deposits in banks                                                          298                  374
                                                                                          ---------             --------

    Total cash and cash equivalents                                                          23,903               31,383
                                                                                          ---------             --------
    Investment securities held-to-maturity (market value of $14 at
    June 30, 2004 and $20 at December 31, 2003, respectively)                                    14                   19

    Investment securities available-for-sale, at market value                               138,203              130,710

    Loans and Leases                                                                        579,806              511,249
    Less:  Allowance for loan losses                                                         (6,626)              (5,864)
                                                                                          ---------             --------
    Net loans                                                                               573,180              505,385

    Premises and equipment                                                                   13,105               13,168
    Other assets                                                                             10,924                8,545
                                                                                          ---------             --------

    Total assets                                                                         $  759,329            $ 689,210
                                                                                          =========             ========
LIABILITIES
    Deposits
    Noninterest-bearing                                                                  $  125,686            $ 114,307
        Interest-bearing (including certificates of deposit over $100
           of $25,755 and $21,346 - June 30, 2004 and
       December 31, 2003 respectively)                                                      473,734              463,007
                                                                                          ---------             --------

    Total deposits                                                                          599,420              577,314
    Federal Home Loan Bank advances and other borrowings                                     88,182               40,543
    Junior Subordinated Debentures                                                           15,465                    -
    Guaranteed preferred beneficial interest in Corporation's subordinated
          debentures                                                                              -               15,000
        Other liabilities                                                                     4,964                4,603
                                                                                          ---------             --------

    Total liabilities                                                                       708,031              637,460
                                                                                          ---------             --------

STOCKHOLDERS' EQUITY
    Common stock, par value $1.00; authorized, 10,000,000 shares;
    outstanding, 4,799,666 at June 30, 2004 and December 31, 2003.                            4,800                4,800
    Additional paid-in capital                                                                2,231                1,877
    Retained earnings                                                                        53,126               50,116
    Accumulated other comprehensive income (loss)                                            (2,383)                 307
    Treasury stock, at cost: 298,710 shares and 283,144 shares
        at June 30, 2004 and December 31, 2003, respectively.                                (6,476)              (5,350)
                                                                                          ---------             --------

    Total stockholders' equity                                                               51,298               51,750
                                                                                          ---------             --------

    Total liabilities and stockholders' equity                                           $  759,329            $ 689,210
                                                                                          =========             ========


The accompanying notes are an integral part of these statements.
</TABLE>

                                       4
<PAGE>


                FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME

                                   (UNAUDITED)
<TABLE>
<CAPTION>


(Dollars in thousands - except per share data)                             Three Months Ended               Six Months Ended
                                                                                 June 30,                         June 30,
                                                                      ---------------------------      -------------------------
                                                                         2004             2003               2004          2003
                                                                         ----             ----               ----          ----
<S>                                                                   <C>              <C>               <C>           <C>

INTEREST INCOME
    Loans, including fees                                             $    7,696       $    7,138        $   15,027    $    14,146
    Investment securities                                                  1,348            1,011             2,635          2,233
    Federal funds sold                                                        10               89                29            181
    Deposits in Banks                                                          1                1                 2              2
                                                                       ---------        ---------         ---------     ----------

                Total interest income                                      9,055            8,239            17,693        16,562
                                                                       ---------        ---------         ---------     ---------

INTEREST EXPENSE
    Deposits                                                               1,197            1,574             2,376         3,269
    Interest on Trust preferred securities                                   172               66               337           129
    Federal Home Loan Bank advances and other borrowings                     497              178               821           361
                                                                       ---------        ---------         ---------     ---------

                Total interest expense                                     1,866            1,818             3,534         3,759
                                                                       ---------        ---------         ---------     ---------

                Net interest income                                        7,189            6,421            14,159        12,803

    Provision for loan losses                                                 56              373               356           767
                                                                       ---------        ---------         ---------     ---------

                Net interest income after provision
                for possible loan losses                                   7,133            6,048            13,803        12,036
                                                                       ---------        ---------         ---------     ---------

NON-INTEREST INCOME
    Trust and Investment Services                                            875              870             1,822         1,652
    Service charges on deposit accounts                                      515              512             1,039         1,045
    Investment securities gains, net                                           -              200                53           259
    Operating lease rental income                                            191              196               384           447
    Gains on sale of premises and other real estate owned                     24                -                48             -
    Gains and fees on the sale of residential mortgages                      100              394               190           804
    Gain on the sale of credit card portfolio                                  -                -                34           306
    Other                                                                    616              524             1,137         1,051
                                                                       ---------        ---------         ---------     ---------
                Total non-interest income                                  2,321            2,696             4,707         5,564
                                                                       ---------        ---------         ---------     ---------

NON-INTEREST EXPENSE
    Salaries and employee benefits                                         3,985            3,823             7,860         7,501
    Net occupancy, equipment and data processing                           1,333            1,368             2,663         2,711
    Depreciation expense on operating leases                                 164              167               336           338
    Bank shares tax                                                          132              122               257           230
    Professional service                                                     286              253               620           510
    Other                                                                  1,398            1,079             2,475         2,161
                                                                       ---------        ---------         ---------     ----------
                Total non-interest expense                                 7,298            6,812            14,211        13,451
                                                                       ---------        ---------         ---------     ----------

                Income before income taxes                                 2,156            1,932             4,299         4,149

INCOME TAXES                                                                 647              582             1,289         1,246
                                                                       ---------        ---------         ----------    ---------

NET INCOME                                                            $    1,509       $    1,350        $    3,010    $    2,903
                                                                       =========        =========         =========     =========

PER SHARE DATA
    Basic earnings per common share                                   $    0.33        $     0.30        $     0.66    $     0.65
                                                                       =========        =========         =========     =========
    Diluted earnings per common share                                 $    0.32        $     0.30        $     0.64    $     0.64
                                                                       =========        =========         =========     =========
    Dividends declared                                                $  0.1375        $    0.135        $    0.275    $    0.270
                                                                       =========        =========         =========     =========

Basic weighted average shares outstanding                              4,530,280        4,459,286         4,545,386     4,448,684
                                                                       =========        =========         =========     =========
Diluted weighted average shares outstanding                            4,694,879        4,565,503         4,725,275     4,531,232
                                                                       =========        =========         =========     =========


The accompanying notes are an integral part of these statements.
</TABLE>

                                       5
<PAGE>


                FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                                                                        Six Months Ended
                                                                                                              June 30,
                                                                                                  ---------------------------

(Dollars in thousands)                                                                              2004               2003
                                                                                                    ----               ----
<S>                                                                                              <C>                <C>

OPERATING ACTIVITIES
    Net Income                                                                                    $  3,010           $  2,903
    Adjustments to reconcile net income to net cash
           provided by operating activities:
    Depreciation                                                                                     1,087              1,416
    Provision for loan losses                                                                          356                767
    Amortization of investment security premiums
           and accretion of discounts                                                                  432              1,084
    Amortization of deferred fees on loans                                                             172                187
    Investment securities gains, net                                                                   (53)              (259)
    Increase in other assets                                                                        (2,402)            (2,836)
    Increase in other liabilities                                                                      361                 56
                                                                                                   -------            -------

           Net cash provided by operating activities                                              $  2,963           $  3,318
                                                                                                   -------            -------

INVESTING ACTIVITIES
    Increase in loans                                                                              (67,561)           (15,249)
    Proceeds from sales of investment securities available-for-sale                                 13,940             47,076
    Proceeds from maturities of investment securities available-for-sale                            26,050             12,913
    Purchases of investment securities available-for-sale                                          (48,566)           (56,640)
    Purchase of premises and equipment, net                                                         (1,024)            (1,117)
                                                                                                   -------            -------
      Net cash used in investing activities                                                       $(78,161)          $(13,017)
                                                                                                   -------            -------

FINANCING ACTIVITIES
    Increase in Federal Home Loan Bank advances                                                     47,639              8,690
    Increase in deposits                                                                            22,106             13,873
    Cash dividends                                                                                  (1,255)            (1,203)
    Treasury stock transactions                                                                       (772)               583
                                                                                                   -------            -------

           Net cash provided by financing activities                                                67,718             21,943
                                                                                                   -------            -------

           NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                     (7,480)            12,244

Cash and cash equivalents at beginning of period                                                    31,383             48,867
                                                                                                   -------            -------

Cash and cash equivalents at end of period                                                        $ 23,903           $ 61,111
                                                                                                   =======            =======





The accompanying notes are an integral part of these statements.
</TABLE>

                                       6
<PAGE>


                FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (UNAUDITED)

1.       BASIS OF PRESENTATION
         ---------------------
     The unaudited  financial  statements  have been prepared in accordance with
generally accepted accounting principles for interim financial  information.  In
the opinion of Management,  all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the financial position and the
results of operations for the interim period presented have been included. These
interim financial statements should be read in conjunction with the consolidated
financial statements and footnotes thereto included in our Annual Report on Form
10-K for the fiscal year ended December 31, 2003.

     The results of operations  for the three and  six-month  periods ended June
30, 2004 are not  necessarily  indicative  of the results to be expected for the
full year. Information regarding risks and uncertainties that could cause actual
results  to  vary  materially  from  our  prior  performance  may  be  found  in
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations in Part I, Item 2 of our Quarterly Report on Form 10-Q for the period
ending June 30, 2004.

2.       EARNINGS PER SHARE
         ------------------
<TABLE>
<CAPTION>

Three Months ended June 30, 2004
--------------------------------
                                                                       Income                Shares                 Per Share
                                                                     (numerator)          (denominator)               Amount
                                                                     -----------          -------------               ------
<S>                                                                 <C>                    <C>                      <C>
Basic earnings per share
       Net income available to common stockholders                      $1,509              4,530,280                 $0.33
Effect of Dilutive Securities
       Options to purchase common stock                                     --                164,599                 (0.01)
Diluted earnings per share
       Net income available to common stockholders                      $1,509              4,694,879                 $0.32
                                                                         =====              =========                  ====

Year to Date June 30, 2004
--------------------------
                                                                       Income                Shares                 Per Share
                                                                     (numerator)          (denominator)               Amount
                                                                     -----------          -------------               ------
Basic earnings per share
       Net income available to common stockholders                      $3,010              4,545,386                 $0.66
Effect of Dilutive Securities
       Options to purchase common stock                                     --                179,889                 (0.02)
Diluted earnings per share
       Net income available to common stockholders                      $3,010              4,725,275                 $0.64
                                                                         =====              =========                  ====

Three Months ended June 30, 2003
--------------------------------
                                                                       Income                Shares                 Per Share
                                                                     (numerator)          (denominator)               Amount
                                                                     -----------          -------------                ------
Basic earnings per share
       Net income available to common stockholders                      $1,350              4,459,286                 $0.30
Effect of Dilutive Securities
       Options to purchase common stock                                     --                106,217                    --
Diluted earnings per share
       Net income available to common stockholders                      $1,350              4,565,503                 $0.30
                                                                         =====              =========                  ====

                                       7
<PAGE>


                FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

                                   (UNAUDITED)

Year to Date June 30, 2003
--------------------------
                                                                       Income                Shares                 Per Share
                                                                     (numerator)          (denominator)               Amount
                                                                     -----------          -------------               ------
Basic earnings per share
       Net income available to common stockholders                      $2,903              4,448,684                 $0.65
Effect of Dilutive Securities
       Options to purchase common stock                                     --                 82,548                 (0.01)
Diluted earnings per share
       Net income available to common stockholders                      $2,903              4,531,232                 $0.64
                                                                         =====              =========                  ====
</TABLE>

3.       COMPREHENSIVE INCOME
         --------------------
     Components of comprehensive income are presented in the following chart:
<TABLE>
<CAPTION>

                                                                      Three Months Ended                Six Months Ended
                                                                           June 30,                          June 30,
                                                                 ----------------------------       ------------------------
                                                                   2004              2003              2004          2003
                                                                 -------           --------          -------        -------
<S>                                                             <C>              <C>                <C>            <C>

Unrealized gains on securities:
       Unrealized gains (losses) arising in period               $(2,781)          $  (13)           $(1,975)       $ (356)
       Reclassification adjustment                                    --              200                 53           259
       Net unrealized gains (losses)                              (2,781)             187             (1,922)          (97)
                                                                  ------            -----             ------         -----
Other comprehensive income before taxes                           (2,781)             187             (1,922)          (97)
Income tax expense                                                   706              (48)               488            25
                                                                  ------            -----             ------         -----
Other comprehensive income                                        (2,075)             139             (1,434)          (72)
                                                                  ------            -----             ------         -----
Comprehensive income (losses)                                    $  (566)          $1,489            $ 1,576        $2,831
                                                                  ======            =====             ======         =====
</TABLE>

4.       JUNIOR SUBORDINATED DEBENTURES
         ------------------------------

     Management  has  determined  that First Chester County Capital Trust I & II
qualify as a variable interest entity under FASB  Interpretation  Number ("FIN")
46, as revised.  First  Chester  County  Capital  Trust I & II issued  mandatory
redeemable  preferred stock to investors and loaned the proceeds to the Company.
First  Chester  County  Capital  Trust  I & II  is  included  in  the  Company's
consolidated balance sheet and statements of income as of and for the year ended
December 31, 2003.  Subsequent  to the issuance of FIN 46 in January  2003,  the
FASB  issued a revised  interpretation,  FIN 46(R)  "Consolidation  of  Variable
Interest  Entities," the provisions of which must be applied to certain variable
interest  entities by March 31, 2004.  The  Corporation  adopted the  provisions
under the revised interpretation in the first quarter of 2004.  Accordingly,  as
of June 30, 2004, the  Corporation no longer  consolidates  First Chester County
Capital  Trust I & II.  The  deconsolidation  results in the  investment  in the
common stock of First Chester  County Capital Trust I & II entity being included
in other assets as of June 30, 2004 and a corresponding  increase in outstanding
debt of $465 thousand.  In addition,  the income  received on the  Corporation's
common stock  investment is included in other income.  The adoption of FIN 46(R)
did not have a  material  impact  on the  Corporation's  financial  position  or
results of operations.  The Federal Reserve has issued proposed  guidance on the
regulatory  capital treatment for the  trust-preferred  securities issued by the
Corporation  as a result of the adoption of FIN 46(R).  The proposed  rule would
retain the current  maximum  percentage  of total  capital  permitted  for trust
preferred  securities  at 25%,  but  would  enact  other  changes  to the  rules
governing  trust  preferred  securities  that  affect  their  use as part of the
collection of entities known as  "restricted  core capital  elements".  The rule
would take effect  March 31,  2007;  however,  a  three-year  transition  period
starting now and leading up to that date would allow bank  holding  companies to
continue to count trust  preferred  securities as Tier 1 Capital after  applying
FIN 46(R).  Management  has  evaluated the effects of the proposed rule and does
not anticipate a material impact on its capital ratios when the proposed rule is
finalized.

                                       8
<PAGE>


                FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

                                   (UNAUDITED)

5.       STOCK-BASED COMPENSATION
         ------------------------

     At June 30, 2004, the Corporation had one stock-based employee compensation
plan.  The  Corporation  accounts  for  that  plan  under  the  recognition  and
measurement principles of APB 25, "Accounting for Stock Issued to Employees" and
related interpretations.  No stock-based employee compensation cost is reflected
in net income, as all options granted under the plan had an exercise price equal
to the market value of the underlying common stock on the date of grant.

     The  following  table  provides the  disclosures  required by SFAS No. 148,
"Accounting   for  Stock-Based   Compensation-Transition   and  Disclosure"  and
illustrates  the effect on net income and earnings per share if the  Corporation
had applied the fair value recognition  provisions of SFAS No. 123,  "Accounting
for Stock-Based Compensation" to stock-based employee compensation.

<TABLE>
<CAPTION>

                                                                           Three Months Ended               Six Months Ended
                                                                                June  30,                       June 30,
                                                                          --------------------          ----------------------

                                                                           2004           2003            2004           2003
                                                                           ----           ----            ----           ----
        <S>                                                              <C>         <C>                <C>         <C>

         Net income (in thousands)      As reported                       $ 1,509     $ 1,350            $ 3,010     $  2,903
         Stock-based compensation costs determined
           under fair value method for all awards                         $   (17)    $   (34)           $   (34)    $    (66)
                                                                           -------     ------            -------      -------
                                            Pro forma net income          $ 1,492     $ 1,316            $ 2,976     $  2,837

         Earnings per share (Basic)      As reported                      $  0.33     $  0.33            $  0.66     $   0.65
                                            Pro forma                     $  0.33     $  0.29            $  0.65     $   0.64
         Earnings per share (Diluted)   As reported                       $  0.32     $  0.30            $  0.64     $   0.64
                                            Pro forma                     $  0.32     $  0.29            $  0.63     $   0.63


         Note: There were no options granted during the three and six-month
               periods ended June 30, 2004.
</TABLE>

     On March 31, 2004, the Financial Accounting Standards Board (FASB) issued a
proposed  Statement,  "Share-Based  Payment, an Amendment of FASB Statements No.
123 and APB No. 25," that  addresses  the  accounting  for  share-based  payment
transactions in which an enterprise  receives  employee services in exchange for
(a) equity  instruments of the enterprise or (b)  liabilities  that are based on
the fair value of the enterprise's  equity instruments or that may be settled by
the issuance of such equity instruments. Under the FASB's proposal, all forms of
share-based  payments to employees,  including employee stock options,  would be
treated the same as other forms of  compensation by recognizing the related cost
in the income statement. The expense of the award would generally be measured at
fair value at the grant date.  Current  accounting  guidance  requires  that the
expense  relating  to  so-called  fixed  plan  employee  stock  options  only be
disclosed in the footnotes to the financial statements.  The proposed Statement,
which would be effective  for fiscal years  beginning  after  December 15, 2004,
would eliminate the ability to account for share-based compensation transactions
using APB Opinion No. 25. The Corporation is currently  evaluating this proposed
statement and its effects on its results of operations.

                                       9
<PAGE>


                FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

                                   (UNAUDITED)

6.       RECENT ACCOUNTING PRONOUNCEMENTS
         --------------------------------

     The SEC recently released Staff Accounting  Bulletin No. 105,  "Application
of Accounting  Principles to Loan  Commitments." SAB 105 provides guidance about
the  measurement  of loan  commitments  recognized  at  fair  value  under  FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
SAB 105 also requires  companies to disclose their  accounting  policy for those
loan commitments  including  methods and assumptions used to estimate fair value
and associated hedging strategies. SAB 105 is effective for all loan commitments
accounted  for as  derivatives  that are entered into after March 31, 2004.  The
adoption of SAB 105 did not have a material effect on our consolidated financial
statements.

     In November 2003, the Emerging  Issues Task Force (EITF) of the FASB issued
EITF Abstract  03-1,  "The Meaning of  Other-Than-Temporary  Impairment  and its
Application  to  Certain  Investments,"  ("EITF  03-1").  The  quantitative  and
qualitative  disclosure  provisions of EITF 03-1 were effective for years ending
after  December  15,  2003  and were  included  in the  Corporation's  financial
statements  for the year ended December 31, 2003. In March 2004, the EITF issued
Consensus on Issue 03-1  requiring  that the  provisions of EITF 03-1 be applied
for reporting periods beginning after June 15, 2004 to investments accounted for
under SFAS No. 115 and 124.  EITF 03-1  establishes  a  three-step  approach for
determining  whether  an  investment  is  considered   impaired,   whether  that
impairment is  other-than-temporary,  and the measurement of an impairment loss.
The  Corporation is in the process of determining the impact that this EITF will
have on its financial statements.


                                       10
<PAGE>


ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
          AND RESULTS OF OPERATIONS

     This  discussion  is  intended  to  further  your   understanding   of  the
consolidated  financial  condition  and results of  operations  of First Chester
County Corporation and its direct and indirect  wholly-owned  subsidiaries,  The
First  National Bank of Chester  County (the "Bank"),  FNB Property  Management,
LLC, First National Insurance Services, LLC, Turks Head Properties,  Inc., Turks
Head II, LLC,  First Chester  County  Capital  Trust I and First Chester  County
Capital  Trust  II,  (collectively,  the  "Corporation").  It  should be read in
conjunction with the consolidated financial statements included in this report.

                             RISKS AND UNCERTAINTIES

     In  addition  to  historical  information,  this  discussion  and  analysis
contains  statements  relating  to future  results of the  Corporation  that are
considered  "forward-looking  statements"  within  the  meaning  of the  Private
Securities  Litigation  Reform  Act of  1995.  These  statements  can  often  be
identified  by the  use  of  forward-looking  terminology  such  as  "believes,"
"expects,"  "intends,"  "may,"  "will,"  "should"  "or  anticipates"  or similar
terminology.  These statements  involve risks and uncertainties and are based on
various assumptions. Although the Corporation believes that its expectations are
based  on  reasonable  assumptions,  investors  and  prospective  investors  are
cautioned that such statements are only projections. The risks and uncertainties
noted below, among others,  could cause the Corporation's  actual future results
to differ  materially  from our  historic  results or the results  described  in
forward-looking  statements  made in  this  report  or  presented  elsewhere  by
Management from time to time.

     These  risks  and  uncertainties  include,  but are  not  limited  to,  the
following:

     o loan  growth  and/or  loan  margins  may be  less  than  expected  due to
       competitive  pressures  in the  banking  industry  and/or  changes in the
       interest rate environment;

     o general economic conditions in the Corporation's  market area may be less
       favorable than expected resulting in, among other things, a deterioration
       in credit quality causing increased loan losses;

     o costs  of  the  Corporation's  planned  training   initiatives,   product
       development,  branch expansion,  new technology and operating systems may
       exceed expectations;

     o competition  among  financial  and  non-financial   institutions  in  the
       Corporation's  market area that may result in customer turnover and lower
       interest rate margins;

     o changes  in  the  regulatory  environment,  securities  markets,  general
       business  conditions  and  inflation  may  adversely  affect loan demand,
       credit quality,  consumer  spending and saving habits,  and interest rate
       margins;

     o impact of changes in interest rates on customer behavior;

     o the impact of changes in demographics on branch locations;

     o technological changes;

     o changes in the value of securities and investments managed for others may
       affect the growth level of the Corporation's non-interest income;

     o changes in the credit of our borrowers, the collateral securing assets or
       other aspects of credit quality; and

     o our ability to manage the risks involved in the foregoing.

     These risks and  uncertainties  are all  difficult  to predict and most are
beyond the control of the Corporation's Management.

     The Corporation  undertakes no obligation to publicly release any revisions
to the  forward-looking  statements to reflect events or circumstances after the
date of this report.

                                       11
<PAGE>


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


              CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

     The accounting  and reporting  policies of the  Corporation  conform to the
accounting  principals  generally  accepted in the United  States of America and
general practices within the financial services industry. The preparation of the
financial statements in conformity with accounting principles generally accepted
in the United  States of  America  requires  management  to make  estimates  and
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.


                           ALLOWANCE FOR CREDIT LOSSES

     The Corporation  considers that the determination of the allowance for loan
and lease losses  involves a higher degree of judgment and  complexity  than its
other  significant  accounting  policies.  The balance in the allowance for loan
losses is determined  based on  Management's  review and  evaluation of the loan
portfolio in relation to past loss  experience,  the size and composition of the
portfolio,  current economic events and conditions, and other pertinent factors,
including  Management's  assumptions as to future delinquencies,  recoveries and
losses.  All of these factors may be susceptible to significant  change.  To the
extent actual outcomes differ from Management's estimates, additional provisions
for loan and lease losses may be required that would  adversely  impact earnings
in future periods.

                                  INCOME TAXES

     Under the  liability  method,  deferred  tax  assets  and  liabilities  are
determined based on the difference between the financial statement and tax bases
of assets and  liabilities.  Deferred  tax assets  are  subject to  Management's
judgment  based upon available  evidence that future  realization is more likely
than not. If Management determines that the Corporation may be unable to realize
all or part of the net  deferred  tax assets in the future,  a direct  charge to
income tax  expense  may be  required  to reduce the  recorded  value of the net
deferred tax asset to the expected realizable amount.

                          EARNINGS AND DIVIDEND SUMMARY

     Net  income  for the  three-month  period  ended  June 30,  2004 was  $1.51
million,  an increase of $159 thousand or 11.78% from $1.35 million for the same
period in 2003.  Net income for the  six-month  period  ended June 30,  2004 was
$3.01 million, an increase of $107 thousand or 3.69% from $2.903 million for the
same period in 2003.  Basic earnings per share was $0.33 and $0.66 for the three
and six-month periods ended June 30, 2004,  respectively,  compared to $0.30 and
$0.65 for the same periods in 2003.  Cash dividends  declared  during the second
quarters of 2004 were  $0.1375 and $0.275 per share for the three and  six-month
periods  compared  to $0.135  per share and  $0.270 per share for the three- and
six-month   periods  ended  June  30,  2003.  Over  the  past  ten  years,   the
Corporation's  practice  has been to pay a  dividend  of at  least  35.0% of net
income.

     Earnings  benefited from increases in net interest  income as the volume of
interest-earning  assets,  primarily in loans,  increased for both the three and
six-month periods.  These increases were partially offset by both an increase in
non-interest  expense and a decrease in non-interest income when compared to the
same  periods  last  year.  The  specific  components  of net  interest  income,
non-interest income and expense are discussed on the following pages.

     Additionally,  earnings for the three and six-month  periods ended June 30,
2004  benefited  from a lower  provision  expense for loan and lease losses when
compared to the three and six-month periods ended June 30, 2003. The corporation
was able to charge this lower expense and still  maintain the allowance for loan
and lease losses at a level that management  believes will be adequate to absorb
loan losses on existing loans because in June of 2004, the corporation recovered
$795 thousand on a commercial loan that was previously charged off.

                                       12
<PAGE>


   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                             OPERATIONS - Continued
<TABLE>
<CAPTION>

                                                                   Three Months Ended                  Six Months Ended
                                                                        June 30,                           June 30,
                                                                 ------------------------            --------------------
                                                                 2004              2003               2004           2003
                                                                 ----              ----               ----           ----
          <S>                                                  <C>               <C>                <C>           <C>

           SELECTED RATIOS
           Return on Average Assets                              0.82%              0.83%             0.84%         0.91%
           Return on Average Equity                             11.48%             10.65%            11.44%        11.58%
           Net Interest Margin                                   4.21%              4.28%             4.28%         4.30%
           Earnings Retained                                    58.65%             55.41%            58.36%        58.59%
           Dividend Payout Ratio                                41.35%             44.59%            41.64%        41.41%
            Book Value Per Share                                $11.40             $11.37            $11.40        $11.37

     The "Consolidated  Average Balance Sheet" on pages 18 and 19 may assist the
reader in understanding the following discussion.

</TABLE>

                               NET INTEREST INCOME


     Net  interest  income  is  the  difference   between   interest  income  on
interest-earning  assets and interest expense on  interest-bearing  liabilities.
Net interest income for the three-months ended June 30, 2004 on a tax equivalent
basis, increased 12.7% to $7.3 million from $6.5 million in the same period last
year. For the  six-months  ended June 30, 2004,  net interest  income  increased
11.8% to $14.4  million  from $12.9  million in the same period  last year.  The
increase in tax equivalent net interest income for both periods is primarily due
to increases in average interest-earning assets and lower average yields paid on
interest-bearing  liabilities,  partially  offset by  decreases  in the  average
interest  rates  earned on  interest-earning  assets and an  increase in average
interest-bearing liabilities, as discussed more fully below.

     Average  interest-earning  assets increased  approximately $88.0 million or
14.5% to $695.0  million  for the  three-months  ended June 30, 2004 from $607.0
million in the same period last year.  For the six months  ended June 30,  2004,
average  interest-earning  assets increased approximately $73.4 million or 12.2%
to $674.7 million from $601.3 million in the same period last year. The increase
in average  interest-earning  assets for the  three-month  period ended June 30,
2004 was the result of a 22.8% or $102.3 million increase in average total loans
and an  8.0%  or  $10.2  million  increase  in  average  investment  securities,
partially  offset by an 86.3% or $25.0 million decrease in average federal funds
sold and other overnight  investments.  For the six-month  period ended June 30,
2004,  the  increase  was the  result of a 20.4% or $90.4  million  increase  in
average  total loans and 4.70% or $6.0  million  increase in average  investment
securities  partially  offset by an 80.1% or $23.3  million  decrease in average
federal  funds  sold  and  other   overnight   investments.   Higher  volume  of
interest-earning assets increases interest income.

     Average interest-bearing  liabilities increased approximately $69.7 million
or 14.4% to $554.5 million for the three-months ended June 30, 2004, from $484.8
million in the same period last year.  For the  six-month  ended June 30,  2004,
average interest-bearing  liabilities increased $56.0 million or 11.6% to $538.5
million  from  $482.5  million in the same  period  last year.  The  increase in
average  interest-bearing  liabilities for the three-month period was the result
of a $10.3  million or 2.3%  increase  in  interest-bearing  deposits  and $48.9
million or 211.0% increase in FHLB advances and other  borrowings.  The increase
in average interest-bearing  liabilities for the six-month period was the result
of an $11.5  million or 2.5%  increase in  interest-bearing  deposits  and $34.2
million or 149.8% increase in FHLB advances and other  borrowings and additional
funds  from  the  issuance  of a trust  preferred  security.  Higher  volume  of
interest-bearing  liabilities  increases  interest expense,  thus decreasing net
interest income.

                                       13
<PAGE>


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

     The average net yield on interest-earning assets, on a tax equivalent basis
for the three-months  ended June 30, 2004 decreased 1.64% or 7 basis points (one
basis  point is equal to 1/100 of a  percent)  to 4.21%  from  4.28% in the same
period last year.  For the  six-month  period ended June 30, 2004,  net yield on
interest earning assets decreased 0.47% or 2 basis points to 4.28% from 4.30% in
the same period in 2003.  The average yield on  interest-earning  assets for the
three-month  period  ended June 30, 2004  decreased  3.5% or 19 basis  points to
5.28% from 5.47% in the same period last year.  For the  six-month  period ended
June 30, 2004,  average yield on  interest-earning  assets  decreased 4.0% or 22
basis points to 5.33% compared to 5.66% for the same period in 2003. The average
yield paid on interest-bearing liabilities for the three-month period ended June
30, 2004  decreased  10.0% or 15 basis points to 1.35% compared to 1.50% for the
same period in 2003. For the six-month period ended June 30, 2004, average yield
paid on interest-bearing liabilities decreased 16.0% or 25 basis points to 1.31%
compared  to 1.56%  for the same  period  in 2003.  The  decrease  is due to the
lowering of interest rates paid on deposit accounts.  Interest rates and pricing
competition  may  continue to put  pressure on our  net-interest  margin and may
adversely impact net-interest income in future time periods.



               AVERAGE INTEREST RATES (ON A TAX EQUIVALENT BASIS)
<TABLE>
<CAPTION>

                                                                       Three Months Ended             Six Months Ended
                                                                             June 30,                       June 30,
                                                                 ---------------------------       ---------------------
                                                                   2004             2003              2004          2003
                                                                 -------           ------            ------        ------
          <S>                                                   <C>                <C>               <C>           <C>

           YIELD ON
           Interest-Earning Assets                               5.28%              5.47%             5.33%         5.55%
           Interest Bearing Liabilities                          1.35%              1.50%             1.31%         1.56%
                                                                 -----              -----             -----         -----
           Net Interest Spread                                   3.93%              3.97%             4.02%         3.99%
           Contribution of Interest-Free Funds                   0.28%              0.31%             0.26%         0.31%
                                                                 -----              -----             -----         -----
           Net Yield on Interest-Earning Assets                  4.21%              4.28%             4.28%         4.30%
                                                                 =====              =====             =====         =====
</TABLE>


      INTEREST INCOME ON FEDERAL FUNDS SOLD AND OTHER OVERNIGHT INVESTMENTS

     Interest income on Federal Funds sold and other  overnight  investments for
the three and six-month periods ended June 30, 2004,  decreased $79 thousand and
$152 thousand to $10 thousand and $29 thousand,  respectively,  when compared to
the same periods in 2003. The decrease in interest  income on Federal Funds sold
and  other  overnight  investments  is the  direct  result of an 86.3% and 80.1%
decrease  in the  average  balance  of Federal  Funds  sold and other  overnight
investments  for  the  three  and  six-  month  periods  ended  June  30,  2004,
respectively as well as an 18.7% or 23 basis points and 20.0% or 25 basis points
decrease on rates earned.  The decrease in the average  balance of Federal Funds
sold and  overnight  investments  can be attributed to strong loan growth in the
latter  part of 2003  as  well as the  first  six  months  of  2004.  Loans  and
investment securities typically yield higher returns than investments in Federal
Funds.

                    INTEREST INCOME ON INVESTMENT SECURITIES

     On a  tax  equivalent  basis,  interest  income  on  investment  securities
increased 37.5% to $1.4 million for the three-month  period ended June 30, 2004,
and  increased  24.0% to $2.8  million for the  six-month  period ended June 30,
2004, respectively,  when compared to the same periods in 2003. The increase for
the three-month period is primarily due to a 27.5% or 89 basis point increase on
interest rates on such  investments as well as an 8.0% or $10.2 million increase
in average investment balance.  The increase for the six-month period ended June
30, 2004 is the result of an 18.3% or 65 basis point  increase on interest rates
on such  investments  compared to the same period last year as well as a 4.7% or
$6.0 million increase in average investment balance.

                                       14
<PAGE>


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

                       INTEREST INCOME ON LOANS AND LEASES

     Interest income on loans and leases, on a tax equivalent  basis,  generated
by the Corporation's loan portfolio  increased 7.8% and 6.3% to $7.7 million and
$15.1 million for the three- and six-month periods ended June 30, 2004, compared
to the same periods in 2003,  respectively.  The increase in interest income for
these  periods  is the  direct  result  of a $102.3  million  or 22.8% and $90.4
million or 20.4% increase in the average balance of loans and leases outstanding
compared  to the same  period  in 2003  partially  offset by a 12.2% or 78 basis
point and 11.6% or 76 basis point  decrease in rates earned on the  portfolio as
compared to last year.

                      INTEREST EXPENSE ON DEPOSIT ACCOUNTS

     Interest  expense on  deposit  accounts  decreased  24.0% and 27.3% for the
three- and  six-month  periods  ended  June 30,  2004 to $1.2  million  and $2.4
million, compared to $1.6 million and $3.3 million for the same periods in 2003.
The decrease for the three-month period is primarily the result of a 25.4% or 35
basis point decrease on rates paid on interest-bearing deposits partially offset
by a 2.3% or $10.3  million  increase in the average  interest-bearing  deposits
balance.  The decrease  for the  six-month  period is primarily  the result of a
29.2% or 42 basis  point  decrease  on rates paid on  interest-bearing  deposits
partially   offset  by  a  2.5%  or  $11.5  million   increase  in  the  average
interest-bearing  deposits  balance  compared to the same period last year.  The
Corporation's effective rate on interest-bearing deposits decreased to 1.03% for
the three-month period ended June 30, 2004 from 1.38% in 2003. The Corporation's
effective rate on interest-bearing deposits decreased to 1.02% for the six-month
period ended June 30, 2004 from 1.44% in 2003.  The June 30, and August 10, 2004
Federal Funds rate increases of 25 basis points each may put upward  pressure on
this component of interest expense.

     Competition  for  deposits  from  non-banking  institutions  such as credit
unions  and  mutual  fund  companies  continues  to  be a  strong.  Despite  the
competition, the Corporation's deposit base continues to grow and is expected to
continue to grow as we continue to open new branches  and attract new  customers
with new services at existing branches. The Corporation continually explores for
new branch sites to expand its core deposit base.

                         INTEREST EXPENSE ON BORROWINGS

     Borrowings consist primarily of Federal Home Loan Bank ("FHLB") borrowings.
Interest expense on borrowings  increased $319 thousand to $497 thousand for the
three-month  period ended June 30, 2004 from $178  thousand when compared to the
same  period in 2003.  The  increase  is the  direct  result of a $48.9  million
increase in the average balance of such borrowings  partially  offset by a 10.1%
or 31 basis point decrease in rates paid on these borrowings for the three-month
period ending June 30, 2004 when compared to the same period last year. Interest
expense on borrowings increased $463 thousand to $821 thousand for the six-month
period ended June 30, 2004 from $358  thousand  when compared to the same period
in 2003.  The increase is a direct result of a $34.2 million or 149.8%  increase
in the average  balance of  borrowings  partially  offset by an 8.3% or 26 basis
point  decrease on rates paid on borrowings  for the six-moth  period ended June
30, 2004.  The increase in the level of  borrowings  for the three and six-month
periods  is the direct  result of the strong  loan  growth the  Corporation  has
experienced  over that period.  The  borrowings are being used to supplement the
growth in deposits.  Borrowing  currently is an easy and inexpensive option when
compared to other  alternatives.  As a long term  solution,  the  Corporation is
pursuing several  initiatives to increase its deposit base.  Initiatives include
researching and opening new branch sites,  introducing new deposit  products and
targeted marketing campaigns.  Borrowings at any time may consist of one or more
of the following:  FHLB Overnight or Term Advances and advances under agreements
with our correspondent banks.

               INTEREST EXPENSE ON JUNIOR SUBORDINATED DEBENTURES

     Interest expense on trust preferred  securities  increased $106 thousand to
$172 thousand for the  three-month  period ended June 30, 2004 from $66 thousand
when compared to the same period last year. For the six-month period

                                       15
<PAGE>


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

ended June 30, 2004,  interest expense on trust preferred  securities  increased
$208  thousand  from $129  thousand to $337  thousand  when compared to the same
period  last  year.  In  accordance  with  FIN 46,  this  interest  expense  was
classified  as  "Junior  Subordinated  Debt" in 2004 and  "Guaranteed  Preferred
Beneficial Interest in Corporation's  Subordinated Debentures" in 2003. For more
details on FIN 46, see note #4 of the notes to consolidated financial statements
on page 8. The increase in interest  expense on trust  preferred  securities was
primarily  due to the  additional  issuance  of $10.0  million  trust  preferred
securities in October 2003 to enhance capital.

                       PROVISION FOR LOAN AND LEASE LOSSES

     During the three and six-month periods ended June 30, 2004, the Corporation
recorded a $56 thousand and a $356 thousand  provision for loan losses  compared
to a $373  thousand  and a $767  thousand  for the same  periods  in  2003.  The
allowance  for loan losses as a percentage  of total loans was 1.14% at June 30,
2004, 1.33% at June 30, 2003 and 1.15% at December 31, 2003,  respectively.  See
the  section  titled  "Allowance  For  Loan and  Lease  Losses"  for  additional
discussion.

                               NON-INTEREST INCOME

     Total  non-interest  income  decreased 13.9% to $2.3 million for the three-
month period ended June 30, 2004 when  compared to the same period in 2003.  For
the six- month period ended June 30, 2003, total  non-interest  income decreased
15.4% to $4.7  million  when  compared to the same  period in 2003.  The various
components of non-interest income are discussed below.

     One of the primary reasons for the decrease in total non-interest income is
that in 2003, the  Corporation  sold its Credit Card portfolio to Elan Financial
Services and recognized a gain of $306 thousand. This was a one-time transaction
and there was no comparable  transaction in 2004 and only a residual  portion of
the 2003 gain of $34 thousand.  Also, gains and fee income generated on the sale
of residential  mortgages for the three and six-month period ended June 30, 2004
decreased  $294  thousand and $614 thousand from $394 thousand and $804 thousand
to $100  thousand  and $190  thousand  compared  to the same  period  last year,
respectively.  The decrease is primarily due to higher long term interest  rates
which led to a lower volume of  originations  of  residential  mortgages in 2004
compared to the same periods in 2003.

     The  largest  component  of  non-interest  income is Trust  and  Investment
Services  revenue,  which  increased  0.6% and 10.3% to $875  thousand  and $1.8
million for the three- and six-month periods ended June 30, 2004,  respectively,
compared  to the same  periods in 2003.  The  increase  in Trust and  Investment
Services  revenue is the result of new business  accounts and a 5.4% increase in
the market value of assets  under  management,  from $515.7  million at June 30,
2003 to $543.5 million at June 30, 2004.  Trust and Investment  Services revenue
also  increased  due to an  increase  in estate  revenue  recognized  during the
six-month period of 2004.

     Service charges on deposit accounts  increased  approximately  0.6% to $515
thousand for the three-months  ended June 30, 2004 compared to $512 thousand for
the same period in 2003. For the six-month  period ended June 30, 2004,  service
charges on deposit  accounts  decreased 0.6% to $1.04 million  compared to $1.05
million for the same period in 2003.

     There were no investment  security gains for the  three-month  period ended
June 30, 2004. For the six-month period ended June 30, 2004, investment security
gains decreased $206 thousand from $259 thousand to $53 thousand,  when compared
to the same  period  in 2003.  The gains in 2003  were  realized  as a result of
normal portfolio management.

     The  Corporation  has  operating  lease  agreements  with  several  of  our
customers;  the income on these leases is classified as "Rental Income".  Rental
income on operating  lease  agreements for the three and six-month  period ended
June 30, 2004  decreased  2.6% and 14.1% to $191 thousand and $384 thousand from
$196 thousand and $447  thousand when compared to the same periods in 2003.  The
Corporation did not add any significant  volume of these types of leases in 2003
or 2004  resulting  in lower  income.  See related  depreciation  expense in the
non-interest expense section for more details.

                                       16
<PAGE>


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


     Gains on sale of premises  and OREO were $24  thousand and $48 thousand for
the three and six-month periods ended June 30, 2004. There were no gains on sale
of premises and OREO for the same period in 2003.

     Other non-interest  income increased $92 thousand or 17.6% to $616 thousand
for the three-months  ended June 30, 2004 compared to $524 thousand for the same
period in 2003. For the six-month period ended June 30, 2004, other non-interest
income  increased $86 thousand or 8.2% when compared to the same period in 2003.
Other non-interest income includes ATM surcharge revenue,  merchant income, safe
deposit box income,  loan fee income,  wealth  advisory  income,  rental income,
management fees, notary fee income, and other miscellaneous income. Increases in
wealth  advisory  income  were  the  largest   component  of  the  increases  in
non-interest income for both periods.

                              NON-INTEREST EXPENSE

     Total  non-interest  expense for the three and six-month periods ended June
30, 2004 increased  7.1% to $7.3 million and 5.7% to $14.2 million,  compared to
the same periods in 2003.  The various  components of  non-interest  expense are
discussed below.

     Employee  salaries and benefits  increased 4.2% to $4.0 million and 4.8% to
$7.9  million for the  three-month  and  six-month  periods  ended June 30, 2004
compared to the same periods in 2003, respectively. Higher employment and annual
employee salary  increases and proportional  increases in employee  benefits are
primarily  responsible for the three- and six-month increase.  At June 30, 2004,
the  Corporation  employed 268 full time and 24 part time employees  compared to
253 full time and 46 part time employees at June 30, 2003.

     Net occupancy,  equipment,  and data processing  expense decreased 4.2% and
7.8% to $1.3 million and $2.7 million for the three and six-month  periods ended
June 30,  2004,  compared  to the same  periods  last  year,  respectively.  The
decreases  are primarily  the result of decreases in  depreciation  on core data
processing systems and hardware expense.

     Depreciation on operating  leases  decreased 1.8% and 0.6% to $164 thousand
and $336  thousand  for the three- and  six-month  periods  ended June 30, 2004,
compared to the same periods last year,  respectively.  The decrease is a result
of lower  volume of new  leases.  This  depreciation  expense  is the  result of
operating  lease  agreements the  Corporation has with several of our customers.
The  income  associated  with these  operating  leases is  classified  as Rental
Income.

     Professional  services  expense  increased 13.0% and 21.6% to $286 thousand
and $620  thousand  for the three and  six-month  periods  ended  June 30,  2004
compared to the same periods in 2003, respectively. The increases are the result
of increased consultant, accounting, and legal fees.

     Other  non-interest  expense  increased 30.2% and 14.9% to $1.4 million and
$2.4 million for the three- and six-month period ended June 30, 2004 compared to
the same periods last year,  respectively.  Other non-interest  expense includes
marketing  expenses,  annual  meeting and reports,  trust  processing,  postage,
directors' costs, bank telephone,  dues and  subscriptions,  travel and mileage,
operating supplies and adjusted loan costs. Increases in marketing expenses were
the  largest  components  of the  increases  in  non-interest  expense  for both
periods.

     In June 2004, the Corporation opened its 18th branch at the Freedom Village
at Brandywine retirement community in West Brandywine Township.  The Corporation
has bought a property in Southern  Chester County area and expects to open a new
branch in the next year. The Corporation anticipates an increase in deposit base
as we open new  branches.  This and other new  branch  sites  will have a direct
impact on all the components of non-interest expense. It is anticipated that the
increases  in costs will be offset over time by an increase in net  interest and
fee income generated by business in the new marketing areas.

                                       17
<PAGE>


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

                       CONSOLIDATED AVERAGE BALANCE SHEET
             AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES FOR THE
                           THREE MONTHS ENDED JUNE 30,
<TABLE>
<CAPTION>

(Dollars in thousands)                                            2004                                       2003
                                                      ------------------------------           ------------------------------

                                                        Daily                                   Daily
                                                       Average                                 Average
                                                       Balance      Interest    Rate           Balance       Interest    Rate
                                                       -------      --------    ----           -------       --------    ----
<S>                                                  <C>           <C>         <C>            <C>            <C>        <C>

ASSETS
Federal funds sold and other overnight investments    $  3,982      $    10     1.00%          $ 29,009       $   89     1.23%
Interest bearing deposits in banks                         766            1     0.52%               296            1     1.35%
Investment securities
Taxable                                                114,626        1,164     4.06%           119,763          943     3.15%
    Tax-exempt (1)                                      24,409          270     4.43%             9,024          100     4.41%
                                                       -------       ------                     -------        -----
        Total investment securities                    139,035        1,434     4.13%           128,787        1,043     3.24%
                                                       -------       ------                     -------        -----
Loans (2)
    Taxable                                            542,573        7,613     5.61%           442,242        7,061     6.39%
    Tax-exempt (1)                                       8,688          123     5.65%             6,699          114     6.81%
                                                       -------       ------                     -------        -----
        Total loans                                    551,261        7,736     5.61%           448,941        7,175     6.39%
                                                       -------       ------                     -------        -----
        Total interest-earning assets                  695,044        9,181     5.28%           607,033        8,308     5.47%
Non-interest earning assets
    Allowance for possible loan losses                  (6,159)                                  (6,479)
    Cash and due from banks                             22,380                                   25,030
    Other assets                                        22,993                                   22,222
                                                      --------                                  -------
        Total assets                                 $ 734,258                                 $647,806
                                                      ========                                  =======

LIABILITIES AND STOCKHOLDERS' EQUITY
Savings, NOW & money market deposits                 $ 355,647      $   518     0.58%          $333,905       $  672     0.81%
Certificates of deposits and other time                111,283          679     2.44%           122,723          902     2.94%
                                                      --------       ------                     -------        -----
   Total interest bearing deposits                     466,930        1,197     1.03%           456,628        1,574     1.38%
Securities sold under repurchase agreements                 --           --       --                 --           --       --
Junior subordinated debentures                          15,465          172     4.45%                --           --       --
Guaranteed preferred beneficial interest in
   Corporation's subordinated debentures                   --            --     0.00%             5,000           66     5.28%
Federal Home Loan Bank advances and
      other borrowings                                  72,096          497     2.76%            23,180          178     3.05%
                                                      --------       ------                     -------        -----

   Total interest bearing liabilities                  554,491        1,866     1.35%           484,808        1,818     1.50%
                                                      --------       ------                     -------        -----
Non-interest bearing liabilities
    Non-interest bearing demand deposits               123,801                                  107,095
    Other liabilities                                    3,385                                    5,181
                                                      --------                                  -------
        Total liabilities                              681,677                                  597,084
Stockholders' equity                                    52,581                                   50,722
                                                      --------                                  -------
        Total liabilities and stockholders' equity   $ 734,258                                 $647,806
                                                      ========                                  =======
Net interest income                                                 $ 7,315                                   $6,491
                                                                     ======                                    =====
Net yield on interest earning assets                                            4.21%                                    4.28%
                                                                                ====                                     =====



(1) The indicated income and annual rate are presented on a taxable equivalent
    basis using the Federal marginal rate of 34% adjusted for the TEFRA penalty
    for 2004 and 2003
(2) Non-accruing loans are included in the average balance.
</TABLE>
                                       18
<PAGE>


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


                       CONSOLIDATED AVERAGE BALANCE SHEET
             AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES FOR THE
                          THREE MONTHS ENDED JUNE 30,
<TABLE>
<CAPTION>



(Dollars in thousands)                                            2004                                         2003
                                                     ---------------------------------        ---------------------------------

                                                        Daily                                   Daily
                                                       Average                                  Average
                                                       Balance     Interest      Rate           Balance     Interest       Rate
<S>                                                 <C>           <C>           <C>          <C>           <C>          <C>

ASSETS
Federal funds sold and other overnight investments   $   5,780     $     29      1.00%        $  29,058     $    181     1.25%
Interest bearing deposits in banks                         569            2      0.70%              269            2     1.49%
Investment securities
Taxable                                                109,410        2,268      4.15%          122,853        2,151     3.50%
    Tax-exempt (1)                                      24,618          554      4.50%            5,131          124     4.83%
                                                      --------      -------                   ---------      -------
        Total investment securities                    134,028        2,822      4.21%          127,984        2,275     3.56%
                                                      --------      -------                    --------      -------
Loans (2)
    Taxable                                            525,530       14,860      5.66%          438,295       14,011     6.39%
    Tax-exempt (1)                                       8,811          254      5.76%            5,665          204     7.20%
                                                      --------      -------                   ---------      -------
        Total loans                                    534,341       15,114      5.66%          443,960       14,215     6.40%
                                                      --------      -------                     -------       ------
Total interest-earning assets                          674,718       17,967      5.33%          601,271       16,673     5.55%
Non-interest earning assets
    Allowance for possible loan losses                  (6,059)                                  (6,475)
    Cash and due from banks                             22,164                                   24,679
    Other assets                                        22,779                                   21,747
                                                      --------                                ---------
        Total assets                                 $ 713,602                                $ 641,222
                                                      ========                                 ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Savings, NOWS & money market deposits                $ 355,139     $  1,015      0.57%        $ 330,959     $  1,399     0.85%
Certificates of deposits and other time                110,877        1,362      2.46%          123,484        1,870     3.03%
                                                      --------      -------                    --------      -------
Total interest bearing deposits                        466,016        2,377      1.02%          454,443        3,269     1.44%
Securities sold under repurchase agreements                 --           --        --               268            3     2.24%
Junior subordinated debentures                          15,465          337      4.36%               --           --        --
Guaranteed preferred beneficial interest in
   Corporation's subordinated debentures                    --           --        --             5,000          129     5.16%
Federal Home Loan Bank advances and
                                                                                                     --
     other borrowings                                   57,013          821      2.88%           22,823          358     3.14%
                                                      --------      -------                    --------      -------
   Total interest bearing liabilities                  538,464        3,535      1.31%          482,534        3,759     1.56%
                                                      --------      -------                     -------      -------
Non-interest bearing liabilities
    Non-interest bearing demand deposits               118,604                                  103,277
    Other liabilities                                    3,842                                    5,263
                                                      --------                               ----------
        Total liabilities                              660,910                                  591,074
Stockholders' equity                                    52,692                                   50,148
                                                      --------                                ---------
        Total liabilities and stockholders' equity   $ 713,602                                $ 641,222
                                                      ========                                 ========
Net interest income                                                $ 14,432                                 $ 12,914
                                                                    =======                                  =======
Net yield on interest earning assets                                             4.28%                                   4.30%
                                                                                 ====                                    ====


(1) The indicated income and annual rate are presented on a taxable equivalent
    basis using the Federal marginal rate of 34% adjusted for the TEFRA penalty
    for 2004 and 2003.
(2) Non-accruing loans are included in the average balance.

</TABLE>

                                       19
<PAGE>



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

                                  INCOME TAXES

     Income tax expense for the three and six-month  periods ended June 30, 2004
was $647 thousand and $1.3  million,  compared to $582 thousand and $1.2 million
in the same periods last year. This represents  effective tax rates of 30.0% for
both  periods  ended June 30,  2004.  The  effective  tax rate for the three and
six-month periods ended June 30, 2003 were 30.1% and 30.0%, respectively.

               LIQUIDITY MANAGEMENT AND INTEREST RATE SENSITIVITY

     The  objective of liquidity  management  is to ensure the  availability  of
sufficient  cash flows to meet all  financial  commitments  and to capitalize on
opportunities  for  business  expansion.   Liquidity  management  addresses  the
Corporation's  ability  to meet  deposit  withdrawals  either  on  demand  or at
contractual  maturity,  to repay borrowings as they mature and to make new loans
and investments as  opportunities  arise.  Liquidity is managed on a daily basis
enabling  Management to monitor changes in liquidity and to react accordingly to
fluctuations  in market  conditions.  The primary  sources of liquidity  for the
Corporation are funding available from deposit growth,  FHLB borrowings and cash
flow  from  the  investment  and  loan  portfolios.  Deposits  consist  of  NOW,
money-market,  savings,  tiered savings,  large and small dollar certificates of
deposit and  non-interest  bearing  demand  deposit  accounts.  The  Corporation
considers funds from demand,  NOW, money market,  savings and certificates  less
than $100 thousand as "core"  deposits  because of the  historical  stability of
such sources of funds.  Details of core  deposits,  non-interest  bearing demand
deposit  accounts and other  deposit  sources are  highlighted  in the following
table:

                                DEPOSIT ANALYSIS
<TABLE>
<CAPTION>

(Dollars in thousands)                        June 30, 2004                December 31, 2003              Average Balance
                                      ---------------------------      -------------------------     ------------------------
                                      Average         Effective        Average         Effective      Dollar       Percentage
DEPOSIT TYPE                          Balance           Yield          Balance           Yield       Variance       Variance
------------                          -------         ----------       ---------       ----------    --------      ----------
<S>                                 <C>                <C>            <C>                 <C>        <C>          <C>

NOW Accounts                         $ 95,200           0.16%          $ 88,518            0.19%      $ 6,682        7.55%
Money Market                           26,973           0.50%            26,051            0.70%          922        3.54%
Statement Savings                      65,883           0.54%            63,032            0.77%        2,851        4.52%
Other Savings                           1,403           0.43%             1,522            0.79%         (119)      -7.82%
CD's Less than $100,000                87,998           2.29%            96,773            2.93%       (8,775)      -9.07%
                                      -------                           -------                        ------

Total Core Deposits                   277,457           0.96%           275,896            1.33%        1,561        0.57%

Non-Interest Bearing
Demand Deposit Accounts               118,574             --            107,334              --        11,240       10.47%
                                      -------                           -------                        ------

Total Core and Non-Interest
  Bearing Deposits                    396,031           0.67%           383,230            0.96%       12,801       3.34%
                                      -------                           -------                        ------

Tiered Savings                        165,689           0.83%           159,220            1.04%        6,469       4.06%
CD's Greater than $100,000             22,870           3.10%            22,365            2.48%          505       2.26%
                                      -------                           -------                        ------

Total Deposits                       $584,590           0.81%          $564,815            1.04%      $19,775       3.50%
                                      -------                           -------                        ------
</TABLE>
                                       20
<PAGE>


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


     The Bank, as a member of the FHLB,  maintains  several  credit  facilities.
During the three and  six-month  periods  ending  June 30,  2004,  average  FHLB
advances were approximately $72.1 million and $57.0 million,  respectively,  and
consisted of term  advances  representing  a  combination  of maturities in each
period. The average interest rate on these advances was approximately  2.76% and
2.88%,  respectively.  The Bank currently has a maximum borrowing  capacity with
the FHLB of approximately $135.3 million.  FHLB advances are collateralized by a
pledge on the Bank's portfolio of unencumbered  investment  securities,  certain
mortgage  loans and a lien on the Bank's FHLB  stock.  FHLB  advances  increased
significantly  during the first and second  quarter of 2004 as they were used to
supplement deposit growth to support strong loan growth.

     The goal of interest rate  sensitivity  management is to avoid  fluctuating
net interest  margins,  and to enhance  consistent growth of net interest income
through periods of changing  interest rates. Such sensitivity is measured as the
difference  in the volume of assets and  liabilities  in the existing  portfolio
that are subject to  repricing in a future time period.  The  Corporation's  net
interest rate  sensitivity  gap within one year is a negative  $222.4 million or
29.3% of total assets at June 30, 2004 compared with a negative  $154.3  million
or 23.2% of total assets at June 30, 2003. The Corporation's gap position is one
tool used to  evaluate  interest  rate risk and the  stability  of net  interest
margins.  Another tool that management uses to evaluate  interest rate risk is a
computer  simulation model that assesses the impact of changes in interest rates
on net interest  income,  net-income  under various  interest rate forecasts and
scenarios.  Management  has set  acceptable  limits  of risk  within  its  Asset
Liability  Committee ("ALCO") policy and monitors the results of the simulations
against these limits  quarterly.  As of the most recent quarter end, all results
are within policy limits and indicate an acceptable level of interest rate risk.
Management monitors interest rate risk as a regular part of corporate operations
with the intention of maintaining a stable net interest margin.

                                       21
<PAGE>


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

                          INTEREST SENSITIVITY ANALYSIS
                               AS OF JUNE 30, 2004

<TABLE>
<CAPTION>

(Dollars in thousands)
                                                                    One              Over
                                                   Within        through              five          Non-rate
                                                  one year      five years            years         sensitive        Total
                                                ------------    ----------        ------------      ---------       -------
<S>                                           <C>              <C>               <C>              <C>               <C>

ASSETS
    Investment securities                      $     40,168     $    50,300       $    47,749      $        --       $138,217
    Interest bearing deposits in banks                  298              --                --               --            298
    Loans and leases                                225,882         257,328            96,596           (6,626)       573,180
    Cash and cash equivalents                            --              --                --           23,605         23,605
    Premises & equipment                                 --              --                --           13,105         13,105
    Other assets                                         --              --                --           10,924         10,924
                                                -----------     -----------        ----------        ---------     ----------
       Total assets                            $    266,348    $    307,628       $   144,345      $    41,008    $   759,329
                                                ===========     ===========        ==========       ==========     ==========

LIABILITIES AND CAPITAL
    Interest bearing deposits                  $    440,879     $    32,855       $        --      $        --    $   473,734
    Non-interest bearing deposit                         --              --                --          125,686        125,686
    FHLB advances and other
       borrowings                                    32,222          53,760             2,200               --         88,182
    Junior Subordinated Debt                         15,465              --                --               --         15,465
    Other liabilities                                   133              --             4,831               --          4,964
    Capital                                             --               --                --          51,298          51,298
                                                -----------       ---------         ---------        --------      ----------
       Total liabilities & capital             $    488,699     $    86,615       $     7,031      $  176,984     $   759,329
                                                ===========      ==========        ==========       ==========     ==========
    Net interest rate
      sensitivity gap                          $  (222,351)     $   221,013       $   137,314      $ (135,976)    $        --
                                                ==========       ==========        ==========       =========      ==========
    Cumulative interest rate
      sensitivity gap                          $  (222,351)     $   (1,338)       $   135,976      $        --    $        --
                                                ==========       =========         ==========       ==========     ==========
    Cumulative interest rate
      sensitivity gap divided
      by total assets                                -29.3%           -0.2%             17.9%
                                                 ==========      =========          =========

</TABLE>


                       ALLOWANCE FOR LOAN AND LEASE LOSSES

     The  allowance  for loan and  lease  losses is an  amount  that  Management
believes  will be adequate  to absorb  loan  losses on  existing  loans that may
become  uncollectible  based  upon  Management's  periodic  evaluations  of  the
collectibility of loans. The evaluations take into consideration such factors as
changes  in the  nature  and  volume of the loan  portfolio,  overall  portfolio
quality,  adequacy of collateral,  review of specific problem loans, and current
economic conditions that may affect our borrower's ability to pay.

                                       22
<PAGE>


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

              ANALYSIS OF CHANGES IN THE ALLOWANCE FOR LOAN LOSSES
                       AND COMPARISON OF LOANS OUTSTANDING
<TABLE>
<CAPTION>

                                                                         Three Months                     Six Months
                                                                             Ended                           Ended
                                                                            June 30,                        June 30,
                                                                  --------------------------       ---------------------------
(Dollars in thousands)                                                2004            2003           2004            2003
                                                                      ----            ----           ----            ----
<S>                                                              <C>             <C>              <C>             <C>

Balance at beginning of period                                    $    6,000      $    6,389       $    5,864      $    6,230
                                                                   ---------       ---------        ---------       ---------

Provision charged to operating expense                                    56             373              356             767
                                                                   ---------       ---------        ---------       ---------

    Recoveries of loans previously charged-off                           857              24              897             144
    Loans charged-off                                                   (284)           (630)            (491)           (985)
                                                                   ---------       ---------        ---------       ---------

Net recoveries (loans charged-off)                                       573            (606)            406             (841)
                                                                   ---------       ---------        --------        ---------

Balance at end of period                                          $    6,626      $    6,156       $   6,626       $    6,156
                                                                   =========       =========        ========        =========
Period-end loans outstanding                                      $  579,806      $  462,438       $ 579,806       $  462,438
Average loans outstanding                                         $  551,261      $  448,941       $ 534,341       $  443,960
Allowance for loan losses as a
  Percentage of period-end loans outstanding                            1.14%           1.33%           1.14%            1.33%

Net charge-offs to average loans
    Outstanding                                                        -0.10%           0.13%          -0.08%            0.19%
</TABLE>

     Non-performing loans include loans on non-accrual status and loans past due
90 days or more and still accruing.  The  Corporation's  policy is to write down
all non-performing loans to net realizable value based on current assessments of
the value of collateral securing such loans and leases. Non-performing loans are
primarily collateralized by real estate and are in the process of collection. As
of June 30, 2004, the level of  non-performing  loans has decreased $2.5 million
from June 30,  2003,  and  non-performing  loans  decreased  $1.7  million  from
December 31, 2003.

     Management  is not aware of any loans  other  than  those  included  in the
following  table  that would be  considered  potential  problem  loans and cause
Management  to have  doubts as to the  borrower's  ability  to comply  with loan
repayment  terms.  Non-performing  loans and  leases  reduce  the  Corporation's
earnings  because  interest income is not earned on such assets.  Management has
taken aggressive steps to control current and future credit quality issues.  The
following chart represents detailed information  regarding  non-performing loans
and leases.

     In June of 2004,  the  Corporation  recovered $795 thousand on a commercial
loan that was previously  charged off. This recovery  allowed the Corporation to
charge a lower  provision  expense  than prior  periods and still  maintain  the
allowance for loan loss at a level that management  believes will be adequate to
absorb loan losses on existing loans.

                                       23
<PAGE>


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

                         NON-PERFORMING LOANS AND ASSETS
<TABLE>
<CAPTION>

                                                                                       June 30,                      December 31,
                                                                               -------------------------             ------------
(Dollars in thousands)                                                            2004             2003                  2003
                                                                                 ------           ------                ------
<S>                                                                           <C>              <C>                 <C>


Past due over 90 days and still accruing                                       $     16         $    600            $      597

Non-accrual loans                                                                 1,947            3,883                 3,093
                                                                                -------          -------              --------

Total non-performing loans                                                        1,963            4,483                 3,690

Other real estate owned                                                           1,523            3,218                   965
                                                                                -------          -------              --------

Total non-performing assets                                                    $  3,486         $  7,701             $   4,655
                                                                                =======          =======              ========

Non-performing loans as a percentage of total loans (gross)                        0.34%            0.97%                 0.72%

Allowance for loan losses as a
   percentage of non-performing loans                                            337.54%          137.32%               158.92%

Allowance for loan losses as a
   percentage of total loans and other real estate owned                           1.14%            1.65%                 0.91%

Allowance for loan losses as a percentage of non-performing assets               190.07%           79.94%               125.97%
</TABLE>

     The allowance for loan losses as a percentage of non-performing loans ratio
indicates  that the  allowance  for  loan  losses  is  sufficient  to cover  the
principal of all non-performing  loans at June 30, 2004. Other real estate owned
("OREO")  represents  residential  and  commercial  real estate that had secured
non-performing  loans that the Corporation acquired through foreclosure or other
collection efforts and that is held for sale. The value of OREO has been written
down to realizable value (net of estimated disposal costs) based on professional
appraisals.

                                 LOAN IMPAIRMENT

     The  Corporation  identifies  a loan as impaired  when it is probable  that
interest and principal will not be collected  according to the contractual terms
of the loan agreement. The accrual of interest is discontinued on impaired loans
and no income is recognized until all recorded amounts of interest and principal
are recovered in full.

     The Corporation  examines commercial and non-residential  mortgage loans on
non-accrual  status  for  impairment.  The  balance of  impaired  loans was $1.9
million, $3.1 million, and $3.9 million at June 30, 2004, December 31, 2003, and
June 30, 2003 respectively. The associated allowance for impaired loans was $191
thousand,  $309 thousand and $388  thousand at June 30, 2004,  December 31, 2003
and June 30, 2003, respectively.

     For the three and  six-month  period ended June 30,  2004,  activity in the
allowance for impaired  loan losses  include a provision of $24 thousand and $43
thousand,  charge  offs of $17  thousand  and  $25  thousand,  recoveries  of $3
thousand and $3 thousand,  respectively.  Contractual  interest  amounted to $41
thousand  for the  three-months  ended June 30,  2004 and $93  thousand  for the
six-months  ended June 30, 2004. Cash collected on loans for the three-month and
six-month  period  ended  June 30,  2004 was $414  thousand  and $863  thousand,
respectively.  The  amount  applied  to  principal  was $410  thousand  and $836
thousand for the three and six- month period, respectively, of which $4 thousand
and $27  thousand  was applied to interest  for the three and  six-month  period
ended June 30, 2004, respectively.

                                       24
<PAGE>


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

     For the three-month and six-month  period ended June 30, 2003,  activity in
the allowance for impaired loan losses  include a provision of $325 thousand and
$528 thousand, charge offs of $60 thousand and $90 thousand,  respectively,  and
recoveries of $20 thousand and $30 thousand, respectively.  Contractual interest
amounted  to $94  thousand  for the three  months  ended June 30,  2003 and $198
thousand for the six-months ended June 30, 2003. Cash collected on loans for the
three-month  and six-month  period ended June 30, 2004 was $1.3 million and $2.0
million, respectively. The amount applied to principal was $1.0 million and $1.7
million for the three- and  six-month  period ended June 30, 2003,  of which $23
thousand and $47 thousand was applied to interest, respectively.


                                CAPITAL ADEQUACY

     The Corporation is subject to Risk-Based  Capital Guidelines adopted by the
Federal  Reserve Board ("FRB") for bank holding  companies.  The  Corporation is
also  subject  to  similar  capital  requirements  adopted  by the Office of the
Comptroller of the Currency.  Under these requirements,  the regulatory agencies
have set minimum  thresholds  for Tier I Capital,  Total  Capital,  and Leverage
ratios. At June 30, 2003, both the Corporation's and the Bank's capital exceeded
all  minimum  regulatory  requirements,   and  the  Bank  was  considered  "well
capitalized"  as  defined  in  the  regulations  issued  pursuant  to  the  FDIC
Improvement Act of 1992. The  Corporation's  Risk-Based  Capital  Ratios,  shown
below, have been computed in accordance with regulatory accounting policies.

     The decrease in the  Corporation's  capital ratio from December 31, 2003 to
June 30,  2004 are due to changes in  unrealized  gains or losses on  securities
held for sale and to the repurchasing of outstanding shares of the Corporation's
common stock.

<TABLE>
<CAPTION>

RISK-BASED                                          June 30,                   December 31,             "Well Capitalized"
CAPITAL RATIOS                             ------------------------            ------------                 Requirements
--------------                             2004               2003                  2003                 ------------------
                                           ----               ----                  ----
<S>                                      <C>                <C>                   <C>                         <C>

    Corporation
    -----------
Leverage Ratio                             9.18%              8.42%                 9.71%                        N/A
Tier I Capital Ratio                      10.94%             10.67%                12.01%                        N/A
Total Risk-Based Capital Ratio            12.02%             11.87%                13.07%                        N/A

       Bank
       ----
Leverage Ratio                             8.57%              7.71%                 8.68%                       5.00%
Tier I Capital Ratio                      10.19%              9.77%                10.72%                       6.00%
Total Risk-Based Capital Ratio            11.26%             10.98%                11.79%                      10.00%
</TABLE>

     The Corporation is not under any agreement with the regulatory  authorities
nor is it aware of any current  recommendations  by the  regulatory  authorities
that, if they were to be implemented, would have a material affect on liquidity,
capital resources or operations of the Corporation.


                                       25
<PAGE>


ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     There have been no material changes in the Corporation's  assessment of its
sensitivity to market risk since its  presentation  in the 2003 Annual Report of
the Corporation,  filed as an exhibit to its Form 10-K for the fiscal year ended
December  31,  2003 with the SEC via EDGAR.  Please  refer to the  "Management's
Discussion and Analysis" section on pages 18-30 of the Corporation's 2003 Annual
Report for additional information.

ITEM 4. CONTROLS AND PROCEDURES

o    Certifications. Included with this Quarterly Report as Exhibits 31.1, 31.2,
     31.3 and 31.4 are four certifications  (the "Section 302  Certifications"),
     one  by  each  of our  principal  executive  and  financial  officers  (the
     "Principal  Officers")  and our  President and  Assistant  Treasurer.  This
     section  of  the  Quarterly  Report  contains  information  concerning  the
     evaluations of our disclosure  controls and procedures and internal control
     over  financial   reporting  that  are  referred  to  in  the  Section  302
     Certifications.  This  information  should be read in conjunction  with the
     Section 302 Certifications for a more complete  understanding of the topics
     presented.

o    Evaluation of Our Disclosure  Controls and  Procedures.  The Securities and
     Exchange  Commission (the "SEC") requires that as of the end of the quarter
     covered by this Report,  the Principal  Officers evaluate the effectiveness
     of the design and operation of our  disclosure  controls and procedures and
     report on the  effectiveness  of the design and operation of our disclosure
     controls and procedures.

     "Disclosure controls and procedures" mean the controls and other procedures
     that are designed with the objective of ensuring that information  required
     to be disclosed in our reports filed under the  Securities  Exchange Act of
     1934 (the  "Exchange  Act"),  such as this Quarterly  Report,  is recorded,
     processed, summarized and reported within the time periods specified in the
     rules and forms promulgated by the SEC.  Disclosure controls and procedures
     are also designed with the objective of ensuring that such  information  is
     accumulated and  communicated  to our  management,  including the Principal
     Officers,  as appropriate,  to allow timely  decisions  regarding  required
     disclosure.

o    Evaluation of Our Internal Control Over Financial  Reporting.  The SEC also
     requires that the Principal  Officers certify certain matters regarding our
     internal control over financial reporting.

     "Internal control over financial  reporting" means the process designed by,
     or under the  supervision of, our Principal  Officers,  and effected by our
     board of directors,  management and other personnel,  to provide reasonable
     assurance   regarding  the  reliability  of  financial  reporting  and  the
     preparation  of financial  statements  for external  purposes in accordance
     with generally accepted  accounting  principles and includes those policies
     and procedures that:

     (i)       pertain to the  maintenance of records that in reasonable  detail
               accurately and fairly reflect the  transactions  and dispositions
               of the assets of the issuer;

     (ii)      provide  reasonable  assurance that  transactions are recorded as
               necessary  to  permit  preparation  of  financial  statements  in
               accordance with generally  accepted  accounting  principles,  and
               that receipts and  expenditures of the issuer are being made only
               in accordance with  authorizations of management and directors of
               the issuer; and

     (iii)     provide  reasonable  assurance  regarding  prevention  or  timely
               detection of unauthorized acquisition,  use or disposition of the
               issuer's  assets  that  could  have  a  material  effect  on  the
               financial statements.


                                       26
<PAGE>

ITEM 4. CONTROLS AND PROCEDURES - Continued

     Among the  matters  our  Principal  Officers  certify  in the  Section  302
     Certifications  are whether all  "significant  deficiencies"  or  "material
     weakness" in the design or operation of our internal control over financial
     reporting  that are  likely to  adversely  affect  our  ability  to record,
     process,  summarize and report financial information have been disclosed to
     our  auditors  and  the  Audit   Committee  of  our  Board  of   Directors.
     "Significant  deficiencies"  has the same  meaning as the term  "reportable
     conditions" in auditing  literature.  Both terms represent  deficiencies in
     the design or operation of internal  control over financial  reporting that
     could adversely affect a company's  ability to record,  process,  summarize
     and report financial data consistent with the assertions of management in a
     company's  financial  statements.  A "material  weakness" is defined in the
     auditing  literature as a particularly  serious reportable  condition where
     the design or operation  of one or more  internal  control  over  financial
     reporting  components  does not reduce to a  relatively  low level the risk
     that misstatements caused by error or fraud may occur in amounts that would
     be material in relation  to the  financial  statements  and not be detected
     within a timely  period by  employees  in the normal  course of  performing
     their  assigned  functions.  A "material  weakness"  constitutes  a greater
     deficiency   than  a  "significant   deficiency,   but  an  aggregation  of
     significant  deficiencies may constitute a material weakness in a company's
     internal control over financial reporting.

o    Limitations on the Effectiveness of Controls. Our management, including the
     Principal  Officers,  does not  expect  that our  disclosure  controls  and
     procedures or our internal  control over  financial  reporting will prevent
     all error and all fraud. A control system, no matter how well conceived and
     operated,  can provide only reasonable,  as opposed to absolute,  assurance
     that the objectives of the control system are met. Further, the design of a
     control  system must reflect the fact that there are resource  constraints,
     and the benefits of controls  must be  considered  relative to their costs.
     Because of the inherent  limitations in all control systems,  no evaluation
     of controls  can provide  absolute  assurance  that all control  issues and
     instances  of fraud,  if any,  within an entity have been  detected.  These
     inherent    limitations   include   the   realities   that   judgments   in
     decision-making  can be faulty,  and that  breakdowns  can occur because of
     simple error or mistake. Additionally,  controls can be circumvented by the
     individual acts of some persons,  by collusion of two or more people, or by
     management  override of the  control.  The design of any system of controls
     also is based in part upon  certain  assumptions  about the  likelihood  of
     future  events,  and there can be no assurance that any design will succeed
     in achieving its stated goals under all potential future  conditions;  over
     time,  a system of  controls  may become  inadequate  because of changes in
     conditions, or the degree of compliance with the policies or procedures may
     deteriorate.  Because  of  the  inherent  limitations  in a  cost-effective
     control  system,  misstatements  due to error or fraud may occur and not be
     detected.

o    Conclusions  about  the  Effectiveness  of  the  Disclosure   Controls  and
     Procedures.  As required by Rule 13a-15(b),  the Corporation's  management,
     including our Principal Officers,  conducted an evaluation as of the end of
     the  period  covered  by  this  report,   of  the   effectiveness   of  the
     Corporation's disclosure controls and procedures. Based on that evaluation,
     the Principal  Officers  concluded that,  subject to the limitations  noted
     above,  our  disclosure  controls and  procedures  are effective to provide
     reasonable  assurance that the disclosure controls and procedures will meet
     their objectives.

o    Changes in Internal control over financial  reporting.  As required by Rule
     13a-15(d), the Corporation's  management,  including the Principal Officers
     conducted  an  evaluation  of  the  Corporation's   internal  control  over
     financial  reporting to determine  whether any changes  occurred during the
     period  covered  by this  report  that  have  materially  affected,  or are
     reasonably likely to materially affect, the Corporation's  internal control
     over financial reporting. Based on that evaluation,  there has been no such
     change during the quarter covered by this report.

                                       27
<PAGE>



                           PART II - OTHER INFORMATION

Item 1.      Legal Proceedings
             -----------------

                  Various actions and proceedings are presently pending to which
                  the  Corporation  is a party.  These  actions and  proceedings
                  arise out of routine operations and, in Management's  opinion,
                  will not,  either  individually  or in the  aggregate,  have a
                  material adverse effect on the consolidated financial position
                  of the Corporation and its subsidiaries.

Item 2.     Changes in Securities, Use of Proceeds and Issuer Purchases of
            Equity Securities
            --------------------------------------------------------------------

                      ISSUER PURCHASES OF EQUITY SECURITIES

<TABLE>
<CAPTION>

                                            (a)             (b)               (c)                            (d)
                                          Total           Average        Total Number of           Maximum Number (or
                                          Number of       Price          Shares (or Units)         Approximate Dollar Value)
                                          Shares (or      Paid           Purchased as Part         of Shares (or Units) that
                                          Units)          Per Share      of Publicly Announced     May Yet Be Purchased Under
                                          Purchased       (or Unit)      Plans or Programs         the Plans or Programs

   <S>                                     <C>            <C>               <C>                       <C>
    April 1 to April 30, 2004                   --             --                --                    $8,394,706

    May 1 to May 31, 2004                   12,000         $24.62            12,000                    $8,099,303

    June 1 to June 30, 2004                 30,500         $23.16            30,500                    $7,392,893

    Total                                   42,500         $23.89            42,500                    $7,392,893

<FN>

Note: All of the foregoing shares were purchased pursuant to the Corporation's
program to repurchase up to $10.0 million of the Corporation's common stock that
was publicly announced on October 16, 2003.
</FN>

</TABLE>

Item 3.     Defaults upon Senior Securities
            -------------------------------
                  None

Item 4.     Submission of Matters to Vote of Security Holders
            -------------------------------------------------
                  None

Item 5.     Other Information
            -----------------
                  None

                                       28
<PAGE>


                     PART II - OTHER INFORMATION - Continued


Item 6.     Exhibits and Reports on Form 8-K
            --------------------------------
(a)      Exhibits
         --------
         3(i).*   Certificate of Incorporation.  Copy of the Corporation's
         Articles of Incorporation,  as amended,  is incorporated herein by
         reference to Exhibit 3(i) to the Corporation's Annual Report on Form
         10-K for the year ended December 31, 2000.

         3(ii).* Bylaws of the Corporation, as amended. Copy of the
         Corporation's Bylaws, as amended, is incorporated herein by reference
         to Exhibit 3(ii) to the Corporation's Annual Report on Form 10-K for
         the year ended December 31, 2000.

         31.1     Rule 13a-14(a) Certification of Chief Executive Officer
         31.2     Rule 13a-14(a) Certification of President
         31.3     Rule 13a-14(a) Certification of Treasurer
         31.4     Rule 13a-14(a) Certification of Assistant Treasurer

         32.1     Section 906 Certification of the Chief Executive Officer
         32.2     Section 906 Certification of the President
         32.3     Section 906 Certification of the Treasurer
         32.4     Section 906 Certification of the Assistant Treasurer

* Indicates document previously filed


(b)      Reports on Form 8-K

         A Form 8-K was filed  with the SEC on April 19,  2004  pertaining  to a
         press  release  announcing  the First Quarter 2004 earnings (the "First
         8-K").

         A Form 8-K was  filed  with the SEC on April  27,  2004  pertaining  to
         actions taken at the annual meeting of shareholders.

         A Form 8-K/A was filed with the SEC on June 30, 2004 to amend the First
         8-K to correctly report the information included in the First 8-K under
         Item 12.

         A Form 8-K was  filed  with the SEC on July 26,  2004  pertaining  to a
         press release announcing the Second Quarter 2004 earnings.



                                       29
<PAGE>


                                   SIGNATURES


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



                        FIRST CHESTER COUNTY CORPORATION


                                            John A. Featherman III


August 13, 2004                             /s/ John A Featherman III
                                            -------------------------
                                            John A. Featherman III
                                            Chief Executive Officer



                                            J. Duncan Smith


August 13, 2004                             /s/ J. Duncan Smith
                                            -------------------
                                            J. Duncan Smith
                                            Treasurer
                                            (Principal Accounting and Financial
                                             Officer)


                                       30
<PAGE>


                                  Exhibit Index

         3(i).* Certificate of Incorporation.  Copy of the Corporation's
                Articles of Incorporation,  as amended,  is incorporated
                herein by reference to Exhibit 3(i) to the Corporation's
                Annual Report on Form 10-K for the year ended December 31, 2000.

        3(ii).* Bylaws of the Corporation, as amended. Copy of the
                Corporation's Bylaws, as amended, is incorporated herein by
                reference to Exhibit 3(ii) to the Corporation's Annual Report on
                Form 10-K for the year ended December 31, 2000.


         31.1     Rule 13a-14(a) Certification of Chief Executive Officer
         31.2     Rule 13a-14(a) Certification of President
         31.3     Rule 13a-14(a) Certification of Treasurer
         31.4     Rule 13a-14(a) Certification of Assistant Treasurer

         32.1     Section 906 Certification of the Chief Executive Officer
         32.2     Section 906 Certification of the President
         32.3     Section 906 Certification of the Treasurer
         32.4     Section 906 Certification of the Assistant Treasurer


* Indicates document previously filed

                                       31