<PAGE>
================================================================================

                    U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                    FORM 10-K

                                   (Mark One)
                 [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 2003
                                             -----------------

                                       or

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

  For the transition period from __________________ to _______________________

                         Commission File Number 0-26366
                                                -------

                     ROYAL BANCSHARES OF PENNSYLVANIA, INC.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

               Pennsylvania                                    23-2812193
--------------------------------------------            ------------------------
      (State of other jurisdiction of                       (I.R.S. Employer
      incorporation or organization)                      Identification No.)

    732 Montgomery Avenue, Narberth, Pennsylvania                19072
------------------------------------------------------  ------------------------
      (Address of principal executive offices)                 (Zip Code)

                                 (610) 668-4700
--------------------------------------------------------------------------------
                (Issuer's telephone number, including area code)


--------------------------------------------------------------------------------
   (Former name, former address and former year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:     None

Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock
                                                            ($2.00 par value)
                                                            Class B Common Stock
                                                            ($.10 par value)

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

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

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

The aggregate market value of common shares of the Registrant held by
non-affiliates, based on the closing sale price as of February 29, 2004, was
$109,346,226.

As of February 29, 2004, the Registrant had 10,227,226 and 1,945,422 shares
outstanding of Class A and Class B common stock, respectively.

================================================================================
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Item 1. BUSINESS
----------------

The Company
-----------

         Royal Bancshares of Pennsylvania, Inc. ("Royal Bancshares") is a
Pennsylvania business corporation and a bank holding company registered under
the Federal Bank Holding Company Act of 1956, as amended (the "Holding Company
Act"). Royal Bancshares is supervised by the Board of Governors of the Federal
Reserve System (Federal Reserve Board). Its legal headquarters is located at 732
Montgomery Avenue, Narberth, PA. On June 29, 1995, pursuant to the plan of
reorganization approved by the shareholders of Royal Bank of Pennsylvania
("Royal Bank"), all of the outstanding shares of common stock of Royal Bank were
acquired by the Royal Bancshares and were exchanged on a one-for-one basis for
common stock of Royal Bancshares. The principal activities of Royal Bancshares
are owning and supervising Royal Bank, which engages in a general banking
business in principally Montgomery, Philadelphia and Berks counties in
Pennsylvania and Southern New Jersey. Royal Bank operates one Branch in New
Jersey under the registered fictitious name of Royal Bank America. Royal
Bancshares also has a wholly owned non-bank subsidiary, Royal Equity Partners,
Inc., which is engaged in investment activities. At December 31, 2003, Royal
Bancshares had consolidated total assets of approximately $1.15 billion, total
deposits of approximately $791 million and shareholders' equity of approximately
$135 million.

         From time to time, Royal Bancshares may include forward-looking
statements relating to such matters as anticipated financial performance,
business prospects, technological developments, new products, research and
development activities and similar matters in this and other filings with the
Securities and Exchange Commission. The Private Securities Litigation Reform Act
of 1995 provides safe harbor for forward-looking statements. When we use words
such as "believes", or "expects," "anticipates" or similar expressions, we are
making forward-looking statements. In order to comply with the terms of the safe
harbor, Royal Bancshares notes that a variety of factors could cause Royal
Bancshares actual results and experience to differ materially from the
anticipated results or other expectations expressed in Royal Bancshares
forward-looking statements. The risks and uncertainties that may affect the
operations, performance development and results of Royal Bancshares business
include the following: general economic conditions, including their impact on
capital expenditures; interest rate fluctuations: business conditions in the
banking industry; the regulatory environment; rapidly changing technology and
evolving banking industry standards; competitive factors, including increased
competition with community, regional and national financial institutions; new
service and product offerings by competitors and price pressures and similar
items.

         The company has one reportable operating segment, Community Banking, as
described in Note C of the Notes to Consolidated Financial Statements included
in this Report. The segment reporting information in Note C is incorporated by
reference into this Item 1.

Royal Bank
----------

         Royal Bank was incorporated in the Commonwealth of Pennsylvania on July
30, 1963, was chartered by the Commonwealth of Pennsylvania Department of
Banking and commenced operation as a Pennsylvania state-chartered bank on
October 22, 1963. Royal Bank is the successor of the Bank of King of Prussia,
the principal ownership of which was acquired by The Tabas Family in 1980. Royal
Bank of Pennsylvania is an insured bank under the Federal Deposit Insurance
Corporation (the "FDIC").

         As of June 22, 2001, the bank completed its acquisition of
substantially all the assets of Crusader Holding Corporation. Under the terms of
the acquisition certain assets and liabilities were purchased for $41.5 million,
which represented the approximate fair value of the assets acquired. The
purchase price was paid in cash with $15.2 million of Royal Bank's cash on hand
being utilized. This transaction was accounted for under the purchase method of
accounting.

         Royal Bank derives its income principally from interest charged on
loans and interest on investment securities and fees received in connection with
the origination of loans and other services. Royal Bank's principal expenses are
interest expense on deposits and operating expenses. Principally operating
revenues, deposit growth and the repayment of outstanding loans provide funds
for activities.

         Service Area. Royal Bank's primary service area includes Montgomery,
Chester, Bucks, Delaware, Berks and Philadelphia counties, southern New Jersey
and the State of Delaware. This area includes residential areas and industrial
and commercial businesses of the type usually found within a major metropolitan
area. Royal Bank serves this area from sixteen branches located throughout
Montgomery, Philadelphia and Berks counties and New Jersey. The Bank also
considers the states of Pennsylvania, New Jersey, New York and Delaware as a
part of its service area for certain products and services. Frequently, Royal
Bank will do business with clients located outside of its service area. Royal
Bank has loans in twenty-nine states via participations with other lenders who
have broad experience in those respective markets. Royal Bank's legal
headquarters are located at 732 Montgomery Avenue, Narberth, PA.



                                        2
<PAGE>

         Royal Bank conducts business operations as a commercial bank offering
checking accounts, savings and time deposits, and loans, including residential
mortgages, home equity and SBA loans. Royal Bank also offers safe deposit boxes,
collections, internet banking and bill payment along with other customary bank
services (excluding trust) to its customers. Drive-up, ATM, and night depository
facilities are available. Services may be added or deleted from time to time.
The services offered and the business of Royal Bank is not subject to
significant seasonal fluctuations. Royal Bank is a member of the Federal Reserve
Fedline Wire Transfer System. Royal Bank became a 16.5% partner in Bankers
Settlement Services of Eastern Pennsylvania, L.L.C., a title company
("Bankers"). The Bank, together with five other banks in the area, formed this
title company on August 16, 2000. Royal Bank's ownership decreased to 15% with
the addition of a new bank partner in 2001.

         Competition. The financial services industry in the company's service
area is extremely competitive. The company's competitors within its service area
include banks and bank holding companies with greater resources. Many
competitors have substantially higher legal lending limits.

         In addition, savings banks, savings and loan associations, credit
unions, money market and other mutual funds, mortgage companies, leasing
companies, finance companies and other financial services companies offer
products and services similar to those offered by the bank, on competitive
terms.

         Many bank holding companies have elected to become financial holding
companies under the Gramm-Leach-Bliley Act, which give a broader range of
products with which the bank must compete. Although the long-range effects of
this development cannot be predicted, most probably it will further narrow the
differences and intensify competition among commercial banks, investment banks,
insurance firms and other financial services companies.

         Employees. Royal Bancshares employed approximately 156 persons on a
full-time equivalent basis as of December 31, 2003.

         Deposits. At December 31, 2003, total deposits of Royal Bank were
distributed among demand deposits (7%), money market deposit accounts, savings
and Super Now (63%) and time deposits (30%). At year-end 2003, deposits
decreased $30 million from year-end 2002, or 4%, primarily due to maturing
brokered deposits being replaced by lower cost borrowed funds.

         Lending. At December 31, 2003, Royal Bank had a total loan portfolio of
$516 million, representing 45% of total assets. The loan portfolio is
categorized into commercial, commercial mortgages, residential mortgages
(including home equity lines of credit), construction, real estate tax liens and
installment loans.

         Current market and regulatory trends in banking are changing the basic
nature of the banking industry. Royal Bank intends to keep pace with the banking
industry by being competitive with respect to interest rates and new types or
classes of deposits insofar as it is practical to do so consistent with Royal
Bank's size, objective of profit maintenance and stable capital structure.

Non-Bank Subsidiary
-------------------

         On June 30, 1995, Royal Bancshares established a special purpose
Delaware investment company, Royal Equity Partners, ("REP") as a wholly owned
subsidiary. Its legal headquarters is at 103 Springer Building, 3411 Silverside
Road, Wilmington, DE. REP buys, holds and sells investment securities. At
December 31, 2003, total assets of REP were $22 million, of which $4 million was
held in cash and cash equivalents, $17 million was held in investment
securities.

         On June 22, 2001, Royal Bancshares through its wholly owned subsidiary
Royal Bank purchased a 60% ownership in Crusader Servicing Corporation ("CSC")
from Crusader Holding Corporation. Its legal headquarters is at 732 Montgomery
Avenue, Narberth, PA. CSC acquires, through auction, delinquent property tax
liens in various jurisdictions, assuming a lien position that is generally
superior to any mortgage liens on the property, and obtaining certain
foreclosure rights as defined by local statute. At December 31, 2003, total
assets of CSC were $51 million.





                                        3
<PAGE>

         On June 23, 2003, Royal Bancshares through its wholly owned subsidiary
Royal Bank of Pennsylvania established Royal Investments of Pennsylvania, LLC
("RIP") as a wholly owned subsidiary. Its legal headquarters is at 732
Montgomery Avenue, Narberth, Pennsylvania. RIP was formed to invest in equity
real estate ventures subject to limitations imposed by regulation. At December
31, 2003, total assets of RIP were $9.8 million.

Website Access to Company Reports.
----------------------------------

         We post publicly available reports required to be filed with the SEC on
our website, www.royalbankpa.com, as soon as reasonably practicable after filing
such reports with the SEC. The required reports are available free of charge
through our website.

Products and Services with Reputation Risk
------------------------------------------

         Royal Bancshares offers a diverse range of financial and banking
products and services. In the event one or more customers and/or governmental
agencies become dissatisfied or object to any product or service offered by
Royal Bancshares or any of its subsidiaries, whether legally justified or not,
negative publicity with respect to any such product or service could have a
negative impact on the company's reputation. The discontinuance of any product
or service, whether or not any customer or governmental agency has challenged
any such product or service, could have a negative impact on Royal Bancshares
reputation.

Future Acquisitions
-------------------

         Royal Bancshares's acquisition strategy consists of identifying
financial institutions, insurance agencies and other financial companies with
business philosophies that are similar to the company's, which operate in strong
markets that geographically compatible with our operations, and which can be
acquired at an acceptable cost. In evaluating acquisitions opportunities, the
company generally considers potential revenue enhancements and operating
efficiencies, asset quality, interest rate risk, and management capabilities.
Royal Bancshares currently has no formal commitments with respect to future
acquisitions although discussions with acquisition candidates take place
occasionally.

Concentrations, Seasonality
---------------------------

         Royal Bancshares does not have any portion of its business dependent on
a single or limited number of customers, the loss of which would have a material
adverse effect on its business. No substantial portion of loans or investments
is concentrated within a single industry or group of related industries, except
a significant majority of loans are secured by real estate much of which is
located in southeastern Pennsylvania. The business of Royal Bancshares and its
subsidiaries is not seasonal in nature.

Environment Compliance
----------------------

         Royal Bancshares and its subsidiaries' compliance with federal, state
and local environment protection laws had no material effect on capital
expenditures, earnings or their competitive position in 2003, and is not
expected to have a material effect on such expenditures, earnings or competitive
position in 2004.

Supervision and Regulation
--------------------------

         Bank holding companies and banks operate in a highly regulated
environment and are regularly examined by federal and state regulatory
authorities.

         The following discussion concerns various federal and state laws and
regulations and the potential impact of such laws and regulation on Royal
Bancshares and its subsidiaries.

         To the extent that the following information describes statutory or
regulatory provisions, it is qualified in its entirety by reference to the
particular statutory or regulatory provisions themselves. Proposals to change
laws and regulations are frequently introduced in Congress, the state
legislatures, and before the various bank regulatory agencies. The company
cannot determine the likelihood or timing of any such proposals or legislations
or the impact they may have on Royal Bancshares and its subsidiaries. A change
in law, regulations or regulatory policy may have a material effect on the
company's business.





                                        4
<PAGE>

         Holding Company. Royal Bancshares, as a Pennsylvania business
corporation, is subject to the jurisdiction of the Securities and Exchange
Commission (the "SEC") and of state securities commissions for matters relating
to the offering and sale of its securities. Accordingly, if Royal Bancshares
wishes to issue additional shares of its Common Stock, in order, for example, to
raise capital or to grant stock options, Royal Bancshares will have to comply
with the registration requirements of the Securities Act of 1933 as amended, or
find an applicable exemption from registration.

         Royal Bancshares is subject to the provisions of the Holding Company
Act, and to supervision by the Federal Reserve Board. The Holding Company Act
requires Royal Bancshares to secure the prior approval of the Federal Reserve
Board before it owns or controls, directly or indirectly, more than 5% of the
voting shares of any corporation, including another bank. In addition, the
Holding Company Act prohibits Royal Bancshares from acquiring more than 5 % of
the voting shares of, or interest in, or all or substantially all of the assets
of, any bank located outside Pennsylvania, unless such an acquisition is
specifically authorized by laws of the state in which such bank is located.

         A bank holding company also is prohibited from engaging in or acquiring
direct or indirect control of more than 5% of the voting shares of any such
company engaged in non-banking activities unless the Federal Reserve Board, by
order or regulation, has found such activities to be closely related to banking
or managing or controlling banks as to be a proper incident thereto. In making
this determination, the Federal Reserve Board considers whether the performance
of these activities by a bank holding company would offer benefits to the public
that outweigh possible adverse effects.

         As a bank holding company, Royal Bancshares is required to file an
annual report with the Federal Reserve Board and any additional information that
the Federal Reserve Board may require pursuant to the Holding Company Act. The
Federal Reserve Board may also make examinations of the holding company and any
or all of subsidiaries. Further, under Section 106 of the 1970 amendments to the
Holding Company Act and the Federal Reserve Board's regulation, a bank holding
company and its subsidiaries are prohibited from engaging in certain tying
arrangements in connection with any extension of credit or provision of credit
of any property or services. The so called "anti-tying" provisions state
generally that a bank may not extend credit, lease, sell property or furnish any
service to a customer on the condition that the customer obtain additional
credit or service from the bank, its bank holding company or any other
subsidiary of its bank holding company, or on the condition that the customer
not obtain other credit or services from a competitor of the bank, its bank
holding company or any subsidiary of its bank holding company.

         Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act and by state banking laws on any
extensions of credit to the bank holding company or any of its subsidiaries, on
investments in the stock or other securities of the bank holding company and on
taking of such stock or securities as collateral for loans to any borrower.

         Under Pennsylvania law, Royal Bancshares is permitted to control an
unlimited number of banks. However, Royal Bancshares would be required under the
Holding Company Act to obtain the prior approval of the Federal Reserve Board
before acquiring all or substantially all of the assets of any bank, or
acquiring ownership or control of any voting shares of any other than the Bank,
if, after such acquisition, would control more than 5% of the voting shares of
such bank.

         Royal Bank. The deposits of Royal Bank are insured by the FDIC. Royal
Bank is subject to supervision, regulation and examination by the Pennsylvania
Department of Banking and by the FDIC. In addition, Royal Bank is subject to a
variety of local, state and federal laws that affect its operation.

         Under the Pennsylvania Banking Code of 1965, as amended, the ("Code"),
Royal Bancshares is permitted to control an unlimited number of banks. This rule
has been in effect since March 4, 1990. However, Royal Bancshares would be
required under the Holding Company Act to obtain the prior approval of the
Federal Reserve Board before it could acquire all or substantially all of the
assets of any bank, or acquiring ownership or control of any voting shares of
any bank other than Royal Bank, if, after such acquisition, the registrant would
own or control more than 5% of the voting shares of such bank. The Holding
Company Act has been amended by the Riegle-Neal Interstate Banking and Branching
Act of 1994, which authorizes bank holding companies subject to certain
limitations and restrictions to acquire banks located in any state.




                                       5
<PAGE>

         In 1995, the Code was amended to harmonize Pennsylvania law with the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 to enable
Pennsylvania institutions to participate fully in interstate banking and to
remove obstacles to the choice by banks from other states engaged in interstate
banking to select Pennsylvania as a head office location. Some of the more
salient features of the amendment are described below.

         A bank holding company located in Pennsylvania, another state, the
District of Columbia or a territory or possession of the United States may
control one or more banks, bank and trust companies, national banks, interstate
banks and, with the prior written approval of the Pennsylvania Department of
Banking, may acquire control of a bank and trust company or a national bank
located in Pennsylvania. A Pennsylvania-chartered institution may maintain
branches in any other state, the District of Columbia, or a territory or
possession of the United States upon the written approval of the Pennsylvania
Department of Banking.

         Finally, a banking institution existing under the laws of another
jurisdiction may establish a branch in Pennsylvania if the laws of the
jurisdiction in which it is located permit a Pennsylvania-chartered institution
or a national bank located in Pennsylvania to establish and maintain a branch in
such jurisdiction on substantially the same terms and conditions.

         A subsidiary bank of a holding company is subject to certain
restrictions imposed by the Federal Reserve Act, as amended, on any extensions
of credit to the bank holding company or its subsidiaries, on investments in the
stock or other securities of the bank holding company or its subsidiaries, and
on taking such stock or securities as collateral for loans. The Federal Reserve
Act, as amended, and Federal Reserve Board regulations also place certain
limitations and reporting requirements on extensions of credit by a bank to
principal shareholders of its parent holding company, among others, and to
related interests of such principal shareholders. In addition, such legislation
and regulations may affect the terms upon which any person who becomes a
principal shareholder of a holding company may obtain credit from banks with
which the subsidiary bank maintains a correspondent relationship.

         Federal law also prohibits the acquisition of control of a bank holding
company without prior notice to certain federal bank regulators. Control is
defined for this purpose as the power, directly or indirectly, to direct the
management or policies of the bank or bank holding company or to vote 25% or
more of any class of voting securities of the bank holding company.

         From time to time, various types of federal and state legislation have
been proposed that could result in additional regulation of, and restrictions
on, the business of Royal Bank. It cannot be predicted whether any such
legislation will be adopted or how such legislation would affect the business of
Royal Bank. As a consequence of the extensive regulation of commercial banking
activities in the United States, Royal Bank's business is particularly
susceptible to being affected by federal legislation and regulations that may
increase the costs of doing business.

         Under the Federal Deposit Insurance Act ("FDIC Act"), the FDIC
possesses the power to prohibit institutions regulated by it (such as Royal
Bank) from engaging in any activity that would be an unsafe and unsound banking
practice or in violation of applicable law. Moreover, the FDIC Act: (i) empowers
the FDIC to issue cease-and-desist or civil money penalty orders against Royal
Bank or its executive officers, directors and/or principal shareholders based on
violations of law or unsafe and unsound banking practices; (ii) authorizes the
FDIC to remove executive officers who have participated in such violations or
unsound practices; (iii) restricts lending by Royal Bank to its executive
officers, directors, principal shareholders or related interests thereof; (iv)
restricts management personnel of a bank from serving as directors or in other
management positions with certain depository institutions whose assets exceed a
specified amount or which have an office within a specified geographic area.
Additionally, the FDIC Act provides that no person may acquire control of Royal
Bank unless the FDIC has been given 60-days prior written notice and within that
time has not disapproved the acquisition or extended the period for disapproval.
In April 1995, regulators revised the Community Reinvestment Act ("CRA") with an
emphasis on performance over process and documentation. Under the revised rules,
the five-point rating scale is still utilized by examiners to assign a numerical
score for a bank's performance in each of three areas: lending, service and
investment.

         Under the CRA, the FDIC is required to: (i) assess the records of all
financial institutions regulated by it to determine if these institutions are
meeting the credit needs of the community (including low-and moderate-income
neighborhoods) which they serve, and (ii) take this record into account in its
evaluation of any application made by any such institutions for, among other
things, approval of a branch or other deposit facility, office relocation, a
merger or an acquisition of bank shares. The CRA also requires the federal
banking agencies to make public disclosures of their evaluation of each bank's
record of meeting the credit needs of its entire community, including low-and
moderate-income neighborhoods. This evaluation will include a descriptive rate
("outstanding," "satisfactory," "needs to improve" or "substantial
noncompliance") and a statement describing the basis for the rating. After its
most recent examination of Royal Bank under CRA, the FDIC gave Royal Bank a CRA
rating of satisfactory.




                                       6
<PAGE>

         Under the Bank Secrecy Act ("BSA"), banks and other financial
institutions are required to report to the Internal Revenue Service currency
transactions of more than $10,000 or multiple transactions in any one day of
which Royal Bank is aware that exceed $10,000 in the aggregate. Civil and
criminal penalties are provided under the BSA for failure to file a required
report, for failure to supply information required by the BSA or for filing a
false or fraudulent report.

         Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994.
Royal Bank believes that further merger activity within Pennsylvania is likely
to occur in the future, resulting in increased concentration levels in banking
markets within Pennsylvania and other significant changes in the competitive
environment. The Riegle-Neal allows adequately capitalized and managed bank
holding companies to acquire banks in any state starting one year after
enactment (September 29, 1995). Another provision of the Riegle-Neal Act allows
interstate merger transactions beginning June 1, 1997. States are permitted,
however, to pass legislation providing for either earlier approval of mergers
with out-of-state banks, or "opting-out" of interstate mergers entirely. Through
interstate merger transactions, banks will be able to acquire branches of
out-of-state banks by converting their offices into branches of the resulting
bank. The Riegle-Neal Act provides that it will be the exclusive means for bank
holding companies to obtain interstate branches. Under the Riegle-Neal Act,
banks may establish and operate a "de novo branch" in any State that "opts-in"
to de novo branching. Foreign banks are allowed to operate branches, either de
novo or by merger. These branches can operate to the same extent that the
establishment and operation of such branches would be permitted if the foreign
bank were a national bank or state bank. All these changes are expected to
intensify competition in local, regional and national banking markets. The
Pennsylvania Banking Code has been amended to enable Pennsylvania institutions
to participate fully in interstate banking (see discussion above).

         Management cannot anticipate what changes Congress may enact, or, if
enacted, their impact on Royal Bancshares' financial position and reported
results of operation. As a consequence of the extensive regulation of commercial
banking activities in the United States, Royal Bancshares and Royal Bank's
business is particularly susceptible to being affected by federal and state
legislation and regulations that may increase the costs of doing business.

Federal Deposit Insurance Corporation Improvement Act of 1991
-------------------------------------------------------------

         General. The Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDIC Improvement Act") includes several provisions that have a direct
impact on Royal Bank. The most significant of these provisions are discussed
below.

         The FDIC is required to conduct periodic full-scope, on-site
examinations of Royal Bank. In order to minimize losses to the deposit insurance
funds, the FDIC Improvement Act establishes a format to more monitor
FDIC-insured institutions and to enable prompt corrective action by the
appropriate federal supervisory agency if an institution begins to experience
any difficulty. The FDIC Improvement Act establishes five "capital" categories.
They are: (1) well capitalized, (2) adequately capitalized, (3)
undercapitalized, (4) significantly undercapitalized, and (5) critically
undercapitalized. The overall goal of these new capital measures is to impose
more scrutiny and operational restrictions on banks as they descend the capital
categories from well capitalized to critically undercapitalized.

         Under Current regulations, a "well-capitalized" institution would be
one that has at least a 10% total risk-based capital ratio, a 6% Tier 1
risk-based capital ratio, a 5% Tier 1 Leverage Ratio, and is not subject to any
written order or final directive by the FDIC to meet and maintain a specific
capital level. Royal Bank is presently categorized as a "well-capitalized"
institution.

         An "adequately capitalized" institution would be one that meets the
required minimum capital levels, but does not meet the definition of a
"well-capitalized" institution. The existing capital rules generally require
banks to maintain a Tier 1 Leverage Ratio of at least 4% and an 8% total
risk-based capital ratio. Since the risk-based capital requirement to be in the
form of Tier 1 capital, this also will mean that a bank would need to maintain
at least 4% Tier 1 risk-based capital ratio. An institution must meet each of
the required minimum capital levels in order to be deemed "adequately
capitalized."

         An "undercapitalized" institution is one that fails to meet one or more
of the required minimum capital levels for an "adequately capitalized"
institution. Under the FDIC Improvement Act, an "undercapitalized" institution
must file a capital restoration plan and is automatically subject to
restrictions on dividends, management fees and asset growth. In addition, the
institution is prohibited from making acquisitions, opening new branches or
engaging in new lines of business without the prior approval of its primary
federal regulator. A number of other restrictions may be imposed.




                                        7
<PAGE>

         A "critically undercapitalized" institution is one that has a tangible
equity (Tier 1 capital) ratio of 2% or less. In addition to the same
restrictions and prohibitions that apply to "undercapitalized" and
"significantly undercapitalized" institutions, any institution that becomes
"critically undercapitalized" is prohibited from taking the following actions
without the prior written approval of its primary federal supervisory agency:
engaging in any material transactions other than in the usual course of
business; extending credit for highly leveraged transactions; amending its
charter or bylaws; making any material changes in accounting methods; engaging
in certain transactions with affiliates; paying excessive compensation or
bonuses; and paying interest on liabilities exceeding the prevailing rates in
the institution's market area. In addition, a "critically undercapitalized"
institution is prohibited from paying interest or principal on its subordinated
debt and is subject to being placed in conservatorship or receivership if its
tangible equity capital level is not increased within certain mandated time
frames.

         Real Estate Lending Guidelines. Pursuant to the FDIC Improvement Act,
the FDIC has issued real estate lending guidelines that establish loan-to-value
("LTV") ratios for different types of real estate loans. A LTV ratio is
generally defined as the total loan amount divided by the appraised value of the
property at the time the loan is originated. If a bank does not hold a first
lien position, the total loan amount would be combined with the amount of all
senior liens when calculating the ratio. In addition to establishing the LTV
ratios, the FDIC's real estate guidelines require all real estate loans to be
based upon proper loan documentation and a recent independent appraisal of the
property.

         The FDIC's guidelines establish the following limits for LTV ratios:

                Loan Category                                     LTV Limit
                -------------                                     ---------

                Raw Land                                             65%
                Land Development
                Construction:
                    Commercial, Multifamily (includes
                    condos and co-ops), and other
                    Nonresidential                                   80%
                    Improved Property                                85%
                Owner occupied 1-4 Family and Home Equity
                    (without credit enhancements)                    90%

         The guidelines provide exceptions to the LTV ratios for
government-backed loans; loans facilitating the sale of real estate acquired by
the lending institution in the normal course of business; loans where Royal
Bank's decision to lend is not based on the offer of real estate as collateral
and such collateral is taken only out of an abundance of caution; and loans
renewed, refinanced, or restructured by the original lender to the same
borrower, without the advancement of new money. The regulation also allows
institutions to make a limited amount of real estate loans that do not conform
to the proposed LTV ratios. Under this exception, Royal Bank would be allowed to
make real estate loans that do not conform to the LTV ratio limits, up to an
amount not to exceed 100% of Royal Bank's total capital.

         Truth in Savings Act. The FDIC Improvement Act also contains the Truth
in Savings Act. The purpose of this Act is to require the clear and uniform
disclosure of the rates of interest that are payable on deposit accounts by
Royal Bank and the fees that are assessable against deposit accounts, so that
consumers can make a meaningful comparison between the competing claims of banks
with regard to deposit accounts and products. This Act requires Royal Bank to
include, in a clear and conspicuous manner, the following information with each
periodic statement of a deposit account: (1) the annual percentage yield earned,
(2) the amount of interest earned, (3) the amount of any fee and charges imposed
and (4) the number of days in the reporting period. This Act allows for civil
lawsuits to be initiated by customers if Royal Bank violates any provision or
regulation under this Act.

         Gramm-Leach-Bliley Act. On November 12, 1999, President Clinton signed
the Gramm-Leach-Bliley Act of 1999, the Financial services Modernization Act.
The Financial Services Modernization Act repeals the two affiliation provisions
of the Glass-Steagall Act:

         o  Section 20, which restricted the affiliation of Federal Reserve
            Member Banks with firms "engaged principally" in specified
            securities activities; and




                                        8
<PAGE>

         o  Section 32, which restricts officer, director, or employee
            interlocks between a member bank and any company or person
            "primarily engaged" in specified securities activities.

    In addition, the Financial Services Modernization Act contains provisions
that expressly preempt any state insurance law. The law establishes a
comprehensive framework to permit affiliations among commercial banks, insurance
companies, securities firms, and other financial service providers. It revises
and expands the framework of the Holding Company Act framework to permit a
holding company system to engage in a full range of financial activities through
a new entity known as a Financial Holding Company. "Financial activities" is
broadly defined to include not only banking, insurance and securities
activities, but also merchant banking and additional activities that the Federal
Reserve Board, in consultation with the Secretary of the Treasury, determines to
be financial in nature, incidental to such financial activities, or
complementary activities that do not pose a substantial risk to the safety and
soundness of depository institutions or the financial system generally.

         In general, the Financial Services Modernization Act:

         o  Repeals historical restrictions on, and eliminates many federal and
            state law barriers to, affiliations among banks, securities firms,
            insurance companies, and other financial service providers;

         o  Provides a uniform framework for the functional regulation of the
            activities of banks, savings institutions and their holding
            companies;

         o  Broadens the activities that may be conducted by national banks,
            banking subsidiaries of bank holding companies, and their financial
            subsidiaries;

         o  Provides an enhanced framework for protecting the privacy of
            consumer information;

         o  Adopts a number of provisions related to the capitalization,
            membership, corporate governance, and the other measures designed to
            modernize the Federal Home Loan Bank system;

         o  Modifies the laws governing the implementation of the CRA; and

         o  Addresses a variety of other legal and regulatory issues affecting
            both day-to-day operations and long-term activities of financial
            institutions.

         In order for the Royal Bancshares to take advantage of the ability to
affiliate with other financial service providers, Royal Bancshares must become a
"Financial Holding Company" as permitted under an amendment to the Holding
Company Act. To become a Financial Holding Company, a company must file a
declaration with the Federal Reserve, electing to engage in activities
permissible for Financial Holding Companies and certifying that it is eligible
to do so because all of its insured depository institution subsidiaries are
well-capitalized and well-managed. In addition, the Federal Reserve Board must
determine that each insured depository institution subsidiary of the company has
at least a satisfactory CRA rating. Royal Bancshares currently meets the
requirements to make an election to become a Financial Holding Company. The
Royal Bancshares management has not determined at this time whether it will seek
an election to become a Financial Holding Company. Royal Bancshares is examining
its strategic business plan to determine whether, based on market conditions,
the relative financial conditions of Royal Bancshares and its subsidiaries,
regulatory capital requirements, general economic conditions, and other factors,
Royal Bancshares desires to utilize any of its expanded powers provided in the
Financial Service Modernization Act.

         The Financial Services Modernization Act also includes a new section of
the FDIC Act governing subsidiaries of state banks that engage in "activities as
principal that would only be permissible" for a national bank to conduct in a
financial subsidiary. It expressly preserves the ability of a state bank to
retain all existing subsidiaries. Because Pennsylvania permits commercial banks
chartered by the state to engage in any activity permissible for national banks,
Royal Bank will be permitted to form subsidiaries to engage in the activities
authorized by the Financial Services Modernization Act, to the same extent as a
national bank. In order to form a financial subsidiary, Royal Bank must be
well-capitalized, and Royal Bank would be subject to the same capital deduction,
risk management and affiliate transaction rules as applicable to national banks.





                                        9
<PAGE>

         Royal Bancshares and Royal Bank do not believe that the Financial
Services Modernization Act will have a material adverse effect on its operations
in the near-term. However, to the extent that it permits banks, securities
firms, and insurance companies to affiliate, the financial services industry may
experience further consolidation. The Financial Services Modernization Act is
intended to grant to community banks certain powers as a matter of right that
larger institutions have accumulated on an ad hoc basis. Nevertheless, this act
may have the result of increasing the amount of competition that Royal
Bancshares and Royal Bank face from larger institutions and other types of
companies offering financial products, many of which may have substantially more
financial resources than Royal Bancshares and Royal Bank.

Recent Legislation
------------------

         USA Patriot Act of 2001. In October 2001, the USA Patriot Act of 2001
was enacted in response to the terrorist attacks in New York, Pennsylvania and
Washington D.C., which occurred on September 11, 2001. The Patriot Act is
intended to strengthen U.S. law enforcements' and the intelligence communities'
abilities to work cohesively to combat terrorism on a variety of fronts. The
potential impact of the Patriot Act on financial institutions of all kinds is
significant and wide ranging. The Patriot Act contains sweeping anti-money
laundering and financial transparency laws and imposes various regulations,
including standards for verifying client identification at account opening, and
rules to promote cooperation among financial institutions, regulators and law
enforcement entities in identifying parties that may be involved in terrorism or
money laundering.

         Sarbanes-Oxley Act of 2002. On July 30, 2002, President Bush signed in
law the Sarbanes-Oxley Act of 2002, or the SOA. The stated goals of the SOA are
to increase corporate responsibility, to provide for enhanced penalties for
accounting and auditing improprieties at publicly traded companies and to
protect investors by improving the accuracy and reliability of corporate
disclosures pursuant to the securities laws.

         The SOA is the most far-reaching U.S. securities legislation enacted in
some time. The SOA generally applies to all companies, both U.S. and non-U.S.,
that file or are required to file periodic reports with the SEC under the
Securities Exchange Act of 1934, or the Exchange Act. Given the extensive SEC
role in implementing rules relating to many of the SOA's new requirements, the
final scope of the requirements remains to be determined.

         The SOA addressed, among other matters:

         -  Audit committees for all reporting companies;

         -  Certification of financial statements by the chief executive officer
            and chief financial officer;

         -  The forfeiture of bonuses or other incentive-based compensation and
            profits from the sale of an issuer's securities by directors and
            senior officers in the twelve month period following initial
            publication of any financial statements that later require
            restatement;

         -  A prohibition on insider trading during pension plan black out
            periods;

         -  Disclosure of off-balance sheet transactions;

         -  A prohibition on personal loans to directors and officers; expedited
            filings requirements for Form S-4's;

         -  Disclosure of a code of ethics and filing a Form 8-K for a change or
            waiver of such code;

         -  "Real time" filing of periodic reports;

         -  The formation of a public accounting oversight board;

         -  Auditor independence; and

         -  Various increased criminal penalties for violations of securities
            laws.





                                       10
<PAGE>

         The SOA contains provisions which became effective upon enactment on
July 30, 2002 and provisions which will become effective from within 30 days to
one year from enactment. The SEC has been delegated the task of enacting rules
to implement various provisions with the respect to, among other matters,
disclosure in periodic filings pursuant to the Exchange Act.

         Regulation W. Transactions between a bank and its "affiliates" are
quantitatively and qualitatively restricted under the Federal Reserve Act. The
FDIC Act applies Section 23A and 23B to insured nonmember banks in the same
manner and to the same extent as if they were members of the Federal Reserve
System. The Federal Reserve Board has also recently issued Regulation W, which
codifies prior regulations under Section 23A and 23B of the Federal Reserve Act
and interpretative guidance with respect to affiliate transactions. Regulation W
incorporates the exemption from the affiliate transaction rules but expands the
exemption to cover the purchase of any type of loan or extension of credit from
an affiliate. Affiliates of a bank include, among other entities, the bank's
holding company and companies that are under common control with the bank. Royal
Bancshares is considered to be an affiliate of Royal Bank. In general, subject
to certain specified exemptions, a bank or its subsidiaries are limited in their
ability to engage in "covered transactions" with affiliates:

         -  To an amount equal to 10% of the bank's capital and surplus, in the
            case of covered transactions with any one affiliate; and

         -  To an amount equal to 20% of the bank's capital and surplus, in the
            case of covered transactions with all affiliates.

         In addition, a bank and its subsidiaries may engage in covered
transactions and other specified transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to the
bank or its subsidiary, as those prevailing at the time for comparable
transactions with nonaffiliated companies. A "covered transaction" includes:

         -  A loan or extension of credit to an affiliate;

         -  A purchase of, or an investment in, securities issued by an
            affiliate;

         -  A purchase of assets from an affiliate, with some exceptions;

         -  The acceptance of securities issued by an affiliate as collateral
            for a loan or extension of credit to any party; and

         -  This issuance of a guarantee, acceptance or letter of credit on
            behalf of an affiliate.

         In addition, under Regulation W:

         -  A bank and its subsidiaries may not purchase a low-quality asset
            from an affiliate;

         -  Covered transactions and other specified transactions between a bank
            or its subsidiaries and an affiliate must be on terms and conditions
            that are consistent with safe and sound bank practices; and

         -  With some exceptions, each loan or extension of credit by a bank to
            an affiliate must be secured by collateral with a market value
            ranging from 100% to 130%, depending on the type of collateral, of
            the amount of the loan or extension of credit.

         Regulation W generally excludes all non-bank and non-savings
association subsidiaries of banks from treatment as affiliates, except to the
extent that the Federal Reserve Board decides to treat these subsidiaries as
affiliates.

         Concurrently with the adoptions of Regulation W, the Federal Reserve
Board has proposed a regulation which would further limit the amount of loans
that could be purchased by a bank from an affiliate to not more than 100% of the
bank's capital and surplus.




                                       11
<PAGE>

Monetary Policy
---------------

         The earnings of Royal Bank are affected by the policies of regulatory
authorities including the Federal Reserve Board. An important function of the
Federal Reserve System is to influence the money supply and interest rates.
Among the instruments used to implement those objectives are open market
operations in United States government securities, changes in reserve
requirements against member bank deposits and limitations on interest rates that
member banks may pay on time and savings deposits. These instruments are used in
varying combinations to influence overall growth and distribution of bank loans,
investments and deposits, and their use may also affect rates charged on loans
or paid for deposits.

         The policies and regulations of the Federal Reserve Board have had and
will probably continue to have a significant effect on its reserve requirements,
deposits, loans and investment growth, as well as the rate of interest earned
and paid, and are expected to affect Royal Bank's operations in the future. The
effect of such policies and regulations upon the future business and earnings of
Royal Bank cannot be predicted.

Effects of Inflation
--------------------

         Inflation has some impact on Royal Bancshares' operating costs. Unlike
many industrial companies, however, substantially all of Royal Bancshares'
assets and liabilities are monetary in nature. As a result, interest rates have
a more significant impact on Royal Bancshares' performance than the general
level of inflation. Over short periods of time, interest rates may not
necessarily move in the same direction or in the same magnitude as prices of
goods and services.

Critical Accounting Policies, Judgments and Estimates
-----------------------------------------------------

         The accounting and reporting policies of the company conform with
accounting principles generally accepted in the United States of America and
general practices within the financial services industry. The preparation of
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.

         The company considers that the determination of the allowance for loan
losses involves a higher degree of judgment and complexity than its other
significant accounting policies. The allowance for loan losses is calculated
with the objective of maintaining a reserve level believed by management to be
sufficient to absorb estimated credit losses. Management's determination of the
adequacy of the allowance is based on periodic evaluations of the loan portfolio
and other relevant factors. However, this evaluation is inherently subjective as
it requires material estimates, including, among others, expected default
probabilities, loss given default, expected commitment usage, the amounts of
timing of expected future cash flows on impaired loans, mortgages, and general
amounts for historical loss experience. The process also considers economic
conditions, uncertainties in estimating losses and inherent risks in the loan
portfolio. All of these factors may be susceptible to significant change. To the
extent actual outcomes differ from management estimates, additional provisions
for loan losses may be required that would adversely impact earnings in future
periods.

         Royal Bancshares recognizes deferred tax assets and liabilities for the
future tax effects of temporary differences, net operating loss carry forwards
and tax credits. 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 company may be unable to realize all or part of
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.

         The accounting and reporting policies of Royal Bancshares conform to
accounting principles generally accepted in the United States of America and
general practices within the financial services industry. Critical accounting
policies, judgments and estimates relate to loans, the allowance for loan losses
and deferred tax assets. These policies which significantly affect the
determination of the company's financial position, results of operations and
cash flows, are summarized in Note A "Summary of Significant Accounting Polices"
of the Notes to Consolidated Financial Statements and are discussed in the
section captioned "Recent Accounting Pronouncements" of Management's Discussion
and Analysis of Financial Condition and Results of Operations, included in Items
7 and 8 of this Report, each of which is incorporated herein by reference.




                                       12
<PAGE>

Available Information
---------------------

         Upon a shareholder's written request, a copy of the company's Annual
Report on 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K,
as required to be filed with the SEC pursuant to Securities Exchange Act Rule
13a-1, may be obtained, without charge, on our website: RoyalBankPA.com or from
Jeffrey T. Hanuscin, Chief Financial Officer, Royal Bank 732 Montgomery Avenue,
Narberth, Pennsylvania 19072.

ITEM 2. PROPERTIES
------------------

         Royal Bank has sixteen banking offices, which are located in
Pennsylvania and Southern NJ.
<TABLE>
         <S>                            <C>                                 <C>
         Narberth Office (1)            Villanova Office                    King of Prussia Office (1)
         -------------------            ----------------                    --------------------------
         732 Montgomery Ave             801 East Lancaster Avenue           Rt. 202 at Wilson Road
         Narberth, PA 19072             Villanova, PA 19085                 King of Prussia, PA 19406

         Philadelphia Offices           Shillington Office                  Bridgeport Office (1)
         --------------------           ------------------                  ---------------------
         - One Penn Square West         516 East Lancaster Avenue           105 W. 4th Street
            30 South 15th Street        Shillington. PA 19607               Bridgeport, PA 19406
            Philadelphia, PA 19102
                                        Trooper Office(1)                   Upper Merion Office
         - 1340 Walnut Street           -----------------                   -------------------
            Philadelphia, PA 19107      Trooper & Egypt Roads               Beidler & Henderson Roads
                                        Trooper, PA 19401                   King of Prussia, PA 19406
         - 401 Fairmount Avenue (1)
            Philadelphia, PA 19123      Reading Office                      Phoenixville Office (1)
                                        --------------                      -----------------------
         - 6526 Castor Avenue           501 Washington Street               808 Valley Forge Road
            Philadelphia, PA 19149      Reading, PA 19601                   Phoenixville, PA 19460

                                        Philadelphia Loan Office (2)        Royal Bank America
         - 1650 Grant Avenue (1)        -----------------------------       ------------------
            Philadelphia, PA 19115      2 Penn Center                       3501 Black Horse Pike
                                        Philadelphia, PA 19102              Turnersville, NJ  08012
         Jenkintown Office (1)
         ---------------------          Narberth Training Ctr. (1) (3)
         600 Old York Road              ------------------------------
         Jenkintown, PA 19046           814 Montgomery Ave
                                        Narberth, PA 19072
</TABLE>
         (1) Owned
         (2) Residential Loan Office-Not a branch
         (3) Used for employee training

         Royal Bank owns nine of the above properties. One property is subject
to a mortgage. The remaining nine properties are leased with expiration dates
between 2004 and 2012. Royal Bank also leases storage warehouse space in
Bridgeport, PA. at an annual rate of $21,000. During 2003, Royal Bank made
aggregate lease payments of approximately $542,000. Royal Bank believes that all
of its properties are attractive, adequately insured, and well maintained and
are adequate for Royal Bank's purposes. Royal Bank also owns a property located
at 144 Narberth Avenue, Narberth, PA, which may serve as a site for future
expansion.

ITEM 3. LEGAL PROCEEDINGS
-------------------------

         Management, after consulting with Royal Bancshares's legal counsel, is
not aware of any litigation that would have a material adverse effect on the
consolidated financial position of Royal Bancshares. There are no proceedings
pending other than routine litigation incident to the business of Royal
Bancshares. In addition, no material proceedings are known to be contemplated by
governmental authorities against Royal Bancshares.



                                       13
<PAGE>



ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------

         None.

ITEM 5.  MARKET FOR THE BANK'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
-------------------------------------------------------------------------------

         On September 6, 1988 the Royal Bancshares' Class A Common Stock
commenced trading on the NASDAQ National Market System (NASDAQ/NMS). Royal
Bancshares' NASDAQ Symbol is RBPAA and is included in the NASDAQ National Market
Stock Table, which is published in most major newspapers. There is no market for
Royal Bancshares' Class B Common Stock, as such is prohibited by the terms of
the Class B Common Stock. The following table shows the range of high, low-end
and closing bid prices for Royal Bancshares' stock as reported by NASDAQ.
<TABLE>
<CAPTION>
                                              Bid Prices
                                              ----------

                  2003                                                  High        Low        Close
                  ----                                                  ----        ---        -----
                  <S>                                                  <C>        <C>         <C>
                  First Quarter ...............................        $21.127    $17.402     $19.078
                  Second Quarter ..............................         21.569     18.990      21.000
                  Third Quarter ...............................         26.912     20.520      26.324
                  Fourth Quarter ..............................         26.627     23.824      25.000

                  2002                                                  High        Low        Close
                  ----                                                  ----        ---        -----

                  First Quarter ...............................        $20.598    $18.132     $19.037
                  Second Quarter ..............................         20.227     18.561      20.379
                  Third Quarter ...............................         20.750     16.181      17.419
                  Fourth Quarter ..............................         20.893     16.828      20.369

                  (Source: This summary reflects information supplied by NASDAQ.)
</TABLE>
         The bid information shown above is derived from statistical reports of
the NASDAQ Stock Market and reflects inter-dealer prices without retail mark-up,
mark-down or commissions and may not necessarily represent actual transaction.
The bid prices reflect the 2% stock dividend that was declared on January 21,
2004. The NASDAQ Stock Market, Inc., is a wholly-owned subsidiary of National
Association of Securities Dealers, Inc.

         The approximate number of recorded holders of Royal Bancshares' Class A
and Class B Common Stock, as of February 29, 2004, is shown below:
<TABLE>
<CAPTION>
         Title of Class                              Number of Record Holders
         --------------                              ------------------------
         <S>                                         <C>
         Class A Common Stock                                   370
         Class B Common Stock                                   133
</TABLE>
         Because substantially all of the holders of Class B Common Stock are
also holders of Class A Common stock the number of record holders of the two
classes on a combined basis was approximately 417 as of February 29, 2004.



                                       14
<PAGE>



Securities Authorized for Issuance Under Equity Compensation Plans
------------------------------------------------------------------

         The following two tables discloses the number of outstanding options,
warrants and rights granted by the Company to participants in equity
compensation plans, as well as the number of securities remaining available for
future issuance under the plans. The tables provide this information separately
for equity compensation plans that have and have not been approved by security
holders.
<TABLE>
<CAPTION>
                                                                                                         (c)
                                                                                                Number of securities
                                                             (a)                               remaining available for
                                                   Number of securities to       (b)            future issuance under
                                                       be issued upon       Weighted-average     equity compensation
                                                   exercise of outstanding  exercise price of      plans (excluding
                                                   options, warrants and   outstanding options, securities reflected in
                                                           rights          warrants and rights         column (a))
                                                   ---------------------- ---------------------   ---------------------
         <S>                                       <C>                    <C>                     <C>
         Outside Directors Stock Option Plan
         -----------------------------------
         Equity compensation plan approved
         by stockholders                                           70,061                $15.21                  84,937

         Equity compensation plan not
         approved by stockholders                                      --                    --                      --
                                                   ----------------------                         ---------------------

         Total                                                     70,061                $15.21                  84,937
</TABLE>

<TABLE>
<CAPTION>
                                                                                                         (c)
                                                                                                Number of securities
                                                             (a)                               remaining available for
                                                   Number of securities to       (b)            future issuance under
                                                       be issued upon       Weighted-average     equity compensation
                                                   exercise of outstanding  exercise price of      plans (excluding
                                                   options, warrants and   outstanding options, securities reflected in
                                                           rights          warrants and rights         column (a))
                                                   ---------------------- ---------------------   ---------------------
         <S>                                       <C>                    <C>                     <C>
         Employees Stock Option Plan
         ---------------------------
         Equity compensation plan approved
         by stockholders                                          420,032                $16.08                 251,112

         Equity compensation plan not
         approved by stockholders                                      --                    --                      --
                                                   ----------------------                         ---------------------

         Total                                                    420,032                $16.08               251,112
</TABLE>

Dividends
---------

         Subject to certain limitations imposed by law, the Board of Directors
of Royal Bancshares may declare a dividend on shares of common stock.

         Stock dividends. On April 21, 1999, the Board of Directors of Royal
Bancshares declared a 4% stock dividend on both its Class A Common Stock and
Class B Common Stock shares payable May 14, 1999, to shareholders of record on
May 3, 1999. The stock dividend resulted in the issuance of 288,728 additional
shares of Class A Common Stock and 65,296 additional shares of Class B Common
Stock.

         On October 20, 1999, the Board of Directors of Royal Bancshares
declared a 5% stock dividend on both its Class A Common Stock and Class B Common
Stock shares payable on January 17, 2000, to shareholders of record on January
3, 2000. The stock dividend resulted in the issuance of 382,857 additional
shares of Class A Common Stock and 84,234 additional shares of Class B Common
Stock.




                                       15
<PAGE>

         On January 17, 2001, the Board of Directors of Royal Bancshares
declared a 5% stock dividend on both its Class A Common Stock and Class B Common
Stock shares payable on February 12, 2001, to shareholders of record on January
29, 2001. The stock dividend resulted in the issuance of 408,197 additional
shares of Class A Common Stock and 86,614 additional shares of Class B Common
Stock.

         On January 16, 2002, the Board of Directors of Royal Bancshares
declared a 6% stock dividend on both its Class A Common Stock and Class B Common
Stock shares payable on February 8, 2002, to shareholders of record on January
28, 2002. The stock dividend resulted in the issuance of 517,635 additional
shares of Class A common stock and 108,282 additional shares of Class B common
stock.

         On January 15, 2003, the Board of Directors of Royal Bancshares
declared a 3% stock dividend on both its Class A Common Stock and Class B Common
Stock shares payable on February 12, 2003, to shareholders of record on January
29, 2003. The stock dividend resulted in the issuance of 281,196 additional
shares of Class A common stock and 55,820 additional shares of Class B common
stock.

         On January 21, 2004, the Board of Directors of Royal Bancshares
declared a 2% stock dividend on both its Class A Common Stock and Class B Common
Stock shares payable on February 18, 2004, to shareholders of record on February
4, 2004. The stock dividend resulted in the issuance of 195,861 additional
shares of Class A common stock and 38,216 additional shares of Class B common
stock. Future stock dividends, if any, will be at the discretion of the Board of
Directors and will be dependent on the level of earnings and compliance with
regulatory requirements.

         Cash Dividends. Royal Bancshares paid cash dividends in each quarter of
2003 and 2002 for holders of Class A Common Stock and for holders of Class B
Common Stock. This resulted in a charge to retained earnings of approximately
$11.3 million and $10.6 million for 2003 and 2002, respectively. The following
table sets forth on a quarterly basis the dividend paid to holders of each Class
A and Class B Common Stock for 2003 and 2002, adjusted to give effect to the
stock dividends paid.
<TABLE>
<CAPTION>
                                                                             Cash Dividends Per Share
                                                                             ------------------------
         2003                                                                Class A          Class B
         ----                                                                -------          -------
         <S>                                                                 <C>              <C>
         First Quarter .......................................               $.2375           $.2731
         Second Quarter ......................................               $.2375           $.2731
         Third Quarter .......................................               $.2375           $.2731
         Fourth Quarter ......................................               $.2500           $.2875
</TABLE>

<TABLE>
<CAPTION>
                                                                             Cash Dividends Per Share
                                                                             ------------------------
         2002                                                                Class A          Class B
         ----                                                                -------          -------
         <S>                                                                 <C>              <C>
         First Quarter........................................               $.2300           $.2645
         Second Quarter.......................................               $.2300           $.2645
         Third Quarter........................................               $.2300           $.2645
         Fourth Quarter.......................................               $.2375           $.2731
</TABLE>

         Future dividends must necessarily depend upon net income, capital
requirements, appropriate legal restrictions and other factors relevant at the
time the Board of Directors of Royal Bancshares considers dividend policy. Cash
necessary to fund dividends available for dividend distributions to the
shareholders of Royal Bancshares must initially come from dividends paid by
Royal Bank to Royal Bancshares. Therefore, the restrictions on the Royal Bank's
dividend payments are directly applicable to Royal Bancshares. Under the
Pennsylvania Banking Code of 1965, as amended, Royal Bank places a restriction
on the availability of capital surplus for payment of dividends.

         Under the Pennsylvania Business Corporation Law of 1988, as amended,
Royal Bancshares may pay dividends only if after payment the Registrant would be
able to pay its debts as they become due in the usual course of business and the
total assets are greater than the sum of its total liabilities plus the amount
that would be needed if Royal Bancshares were to be dissolved at the time of the
dividend to satisfy the preferential rights upon dissolution of shareholders
whose preferential rights are superior to those receiving the dividend. See
Regulatory Matters Note to the Consolidated Financial Statements in Item 8 of
this report.



                                       16
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA
-------------------------------

         The following selected consolidated financial and operating information
for Royal Bancshares should be read in conjunction with ITEM 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and accompanying notes in ITEM 8:
<TABLE>
<CAPTION>
                                                                   Years ended December 31,
                                                            (in thousands, except per share data)
                                                      ---------------------------------------------
                                                      2003       2002      2001      2000      1999
                                                      ----       ----      ----      ----      ----
<S>                                                  <C>       <C>       <C>       <C>       <C>
Income Statement Data (in thousands)
------------------------------------
Interest income                                      $72,320   $77,104   $69,224   $58,875   $44,682
Interest expense                                      29,941    36,491    31,808    22,549    15,922
                                                     -------   -------   -------   -------   -------
Net interest income                                   42,379    40,613    37,416    36,326    28,760
Provision for loan losses                                674       250        --       250        --
                                                     -------   -------   -------   -------   -------
Net interest income after loan losses                 41,705    40,363    37,416    36,076    28,760
     Gains on sale of loans                              637       767       372        --        45
     Gains on sale of real estate                        568       455       188        53       350
     Gains (losses) on investment securities             719       790        60    (1,302)       --
     Other income                                      1,780     1,188     1,118     1,207     1,644
                                                     -------   -------   -------   -------   -------
Total other income                                     3,704     3,200     1,738       (42)    2,039
Income before other expenses & income taxes           45,410    43,563    39,154    36,034    30,799
Non-interest expense
     Salaries and benefits                             9,959     9,440    10,479     7,979     7,265
     Other                                             8,929     9,481     7,124     5,813     5,865
                                                     -------   -------   -------   -------   -------
Total operating expenses                              18,888    18,921    17,603    13,792    13,130
                                                     -------   -------   -------   -------   -------
Income before taxes                                   26,522    24,642    21,551    22,242    17,669
Incomes taxes                                          7,996     7,237     5,797     7,982     5,564
                                                     -------   -------   -------   -------   -------
Net income                                           $18,526   $17,405   $15,754   $14,260   $12,105
                                                     =======   =======   =======   =======   =======

Basic earnings per share (1)                         $  1.52   $  1.44   $  1.32   $  1.20   $  1.03
                                                     -------   -------   -------   -------   -------
Diluted earnings per share (1)                       $  1.52   $  1.41   $  1.30   $  1.18   $  1.02
                                                     -------   -------   -------   -------   -------
</TABLE>
(1)  Earnings per share has the weighted  average  number of shares used in the
     calculation  adjusted to reflect a 2% stock dividend in 2004, a 3% stock
     dividend in January 2003, a 6% stock dividend in 2002, a 5% stock dividend
     in 2001, a 5% stock dividend in 2000, and a 4% stock dividend in 1999.
<TABLE>
<CAPTION>
                                                                   As of December 31,
                                            ----------------------------------------------------------------
Balance Sheet Data (in thousands)              2003          2002           2001         2000         1999
---------------------------------              ----          ----           ----         ----         -----
<S>                                         <C>           <C>             <C>          <C>          <C>
Total assets                                $1,154,410    $1,088,484      $930,980     $630,081     $522,536
Total average assets                         1,160,354     1,048,875       788,419      573,780      469,193
Loans, net                                     503,288       564,264       634,347      411,973      343,081
Total deposits                                 791,059       820,840       701,860      472,582      381,286
Total long term debt                           212,000       124,500        70,225       30,000       30,000
Total stockholders equity                      134,833       121,331       108,449      103,502       95,835
Total average stockholders equity              127,728       114,655       105,072       99,746       94,824
Return on average assets                          1.6%          1.7%          2.0%         2.5%         2.6%
Return on average equity                         14.5%         15.2%         15.0%        14.3%        12.8%
Average equity to average assets                 11.0%         10.9%         13.3%        17.4%        20.2%
Cash dividend payout ratio                       61.1%         60.8%         56.9%        55.0%        70.3%
</TABLE>

                                       17
<PAGE>
Average Balances
----------------

         The following table represents the average daily balances of assets,
liabilities and shareholders' equity and the respective interest paid on
interest bearing assets and interest bearing liabilities, as well as average
rates for the periods indicated:
<TABLE>
<CAPTION>
                                                   2003                              2002                          2001
                                     -----------------------------      ----------------------------- -----------------------------
                                      Average               Yield/        Average             Yield/     Average            Yield/
Assets (In thousands)                 Balance     Interest   Rate         Balance   Interest   Rate      Balance  Interest   Rate
---------------------                ----------   --------   ----       ----------  --------   ----      -------  -------- --------
<S>                                  <C>          <C>        <C>        <C>         <C>        <C>       <C>      <C>      <C>
Interest bearing deposits            $   40,856   $   475    1.16%      $   32,760  $   682    2.08%     $ 18,230  $   533    2.92%
Federal funds                            13,598       142    1.04%          16,780      272    1.62%       18,468      752    4.07%
Investment securities
  Held to maturity                       46,302     3,087    6.67%          53,226    4,019    7.55%       97,055    7,610    7.84%
  Available for sale                    446,210    22,007    4.93%         297,457   18,817    6.33%       76,338    6,945    9.10%
                                     ----------   -------    -----      ----------  -------    -----     --------  ------- --------
Total investment securities             492,512    25,094    5.10%         350,683   22,836    6.51%      173,392   14,555    8.39%
Loans
  Commercial and Industrial             225,224    15,812    7.02%         230,556   17,020    7.38%      202,327   20,012    9.89%
  Real estate secured                   333,168    30,532    9.16%         383,816   36,070    9.40%      337,410   32,936    9.76%
  Other loans                             4,373       265    6.06%           2,784      224    8.05%        4,116      436   10.59%
                                     ----------   -------    -----      ----------  -------    -----     --------  ------- --------
        Total loans                     562,765    46,609    8.28%         617,156   53,314    8.64%      543,854   53,384    9.82%
                                     ----------   -------    -----      ----------  -------    -----     --------  ------- --------
Total interest earnings               1,109,731    72,320    6.52%       1,017,379   77,104    7.58%      753,944   69,224    9.18%
  assets
Non interest earnings assets
  Cash & due from banks                   8,348                              8,597                          5,432
  Other assets                           56,781                             38,039                         46,113
  Allowance for loan loss               (12,472)                           (12,108)                       (12,264)
  Unearned discount                      (2,033)                            (3,032)                        (4,806)
                                     ----------                         ----------                       --------
Total non-interest earning assets        50,624                             31,496                         34,475
                                     ----------                         ----------                       --------
Total assets                         $1,160,354                         $1,048,875                       $788,419
                                     ==========                         ==========                       ========



Liabilities & Shareholders' Equity
----------------------------------
Deposits:
    Savings                          $   23,714   $   182    0.77%      $   25,658  $   370    1.44%     $ 26,312  $   637    2.42%
    Now                                  32,510       339    1.04%          34,866      697    2.00%       38,353      869    2.27%
    Money market                        442,873     9,661    2.18%         270,454    8,491    3.14%      108,792    4,031    3.71%
    Time deposits                       269,293    12,011    4.46%         385,370   19,358    5.02%      369,680   22,237    6.02%
                                     ----------   -------    -----      ----------  -------    -----     --------  ------- --------
Total interest bearing deposits         768,390    22,193    2.89%         716,348   28,916    4.04%      543,137   27,774    5.11%

Federal funds                                --        --       --              --       --       --          334       15    4.49%
Borrowings                              183,339     7,748    4.23%         137,460    7,575    5.51%       68,129    4,019    5.90%
                                     ----------   -------    -----      ----------  -------    -----     --------  ------- --------
Total interest bearing liabilities      951,729    29,941    3.15%         853,808   36,491    4.27%      611,600   31,808    5.20%
                                     ----------   -------    -----      ----------  -------    -----     --------  ------- --------
    Non interest bearing deposits        56,814                             53,800                         49,903
    Other liabilities                    24,083                             26,612                         21,844
                                     ----------                         ----------                       --------
Total liabilities                     1,032,626                            934,220                        683,347
    Shareholders' equity                127,728                            114,665                        105,072
                                     ----------                         ----------                       --------
Total liabilities and
    Shareholders' equity             $1,160,354                         $1,048,875                       $788,419
                                     ==========                         ==========                       ========
Net interest income                               $42,379                           $40,613                        $37,416
                                                  =======                           =======                        =======
                                                             3.82%                             3.99%                          4.96%
                                                             =====                             =====                       ========
</TABLE>
(1) The indicated income and annual rate are presented in a taxable equivalent
    basis using the federal tax rate of 34% for all periods.
(2) Nonaccruing loans have been included in the appropriate average loan balance
    category, but interest on these loans has not been included.



                                       18
<PAGE>

Rate Volume
-----------

         The following table sets forth a rate/volume analysis, which segregates
in detail the major factors contributing to the change in net interest income
for the years ended, December 31, 2003 and 2002, as compared to respective
previous periods, into amounts attributable to both rate and volume variances.
<TABLE>
<CAPTION>
                                                          2003 Vs 2002                          2002 Vs 2001
                                                         Changes due to:                       Changes due to:
                                                 ------------------------------          ------------------------------
Interest income                                  Volume      Rate        Total           Volume     Rate        Total
---------------                                  -------    -------     -------          -------  --------     --------
                                                                              (In thousands)
                                                                               ------------
<S>                                              <C>        <C>         <C>              <C>      <C>          <C>
Interest bearing deposits in banks               $   142      ($349)      ($207)         $   335     ($186)    $   149
Federal funds sold                                   (45)       (85)       (130)             (63)     (417)       (480)
Investments securities
    Held to maturity                                (491)      (441)       (932)          (3,319)     (272)     (3,591)
    Available for sale                             7,972     (4,782)      3,190           14,579    (2,707)     11,872
                                                 -------    -------     -------          -------  --------     -------
Total investment securities                        7,481     (5,223)      2,258           11,260    (2,979)      8,281
Loans
    Commercial and industrial                       (387)      (821)     (1,208)           2,541    (5,533)     (2,992)
    Mortgages secured by real estate              (4,659)      (880)     (5,538)           4,397    (1,262)      3,135
    Other loans                                      106        (65)         41             (122)      (90)       (212)
                                                 -------    -------     -------          -------  --------     -------
Total loans                                       (4,940)    (1,766)     (6,705)           6,816    (6,885)        (69)
                                                 -------    -------     -------          -------  --------     -------
Total increase (decrease) in interest income       2,638     (7,423)     (4,784)          18,348   (10,467)      7,881

Interest expense
----------------

Deposits
    Savings                                         ($26)     ($162)      ($188)            ($15)    ($252)      ($267)
    Now and Money Market                           4,109     (3,297)        812            4,789      (501)      4,288
    Time deposits                                 (5,353)    (1,994)     (7,347)             913    (3,792)     (2,879)
                                                 -------    -------     -------          -------  --------     -------
           Total deposits                         (1,270)    (5,453)     (6,723)           5,687    (4,545)      1,142
    Federal funds purchase                            --         --          --               (7)       (8)        (15)
    Borrowings                                     2,182     (2,009)        173            3,837      (281)      3,556
                                                 -------    -------     -------          -------  --------     -------
Total increase (decrease) in interest expense        912     (7,462)     (6,550)           9,517    (4,834)      4,683

Total increase (decrease) in net interest income $ 1,726    $    39     $ 1,766          $ 8,831   ($5,633)    $ 3,198
                                                 =======    =======     =======          =======  ========     =======
</TABLE>



                                       19
<PAGE>

Loans
-----

         The following table reflects the composition of the loan portfolio of
Royal Bank and the percent of gross outstandings represented by each category at
the dates indicated.
<TABLE>
<CAPTION>
                                                                    As of December 31,
                                                                      (in thousands)
                               ------------------------------------------------------------------------------------------
                                       2003               2002              2001              2000             1999
                               ----------------   ---------------    ----------------   ---------------  ----------------
<S>                         <C>                   <C>                <C>                <C>               <C>
Loans
-----
Comm'l and Industrial          $225,268     44%   $241,373    42%    $218,498     34%   $193,398    45%   $168,329    47%
Real Estate Secured             286,997     55%    333,972    57%     417,028     64%    230,999    54%    189,459    52%
Other                             4,942      1%      3,509     1%      13,909      2%      4,561     1%      4,506     1%
                               --------  ------   --------  -----    --------   -----   --------  -----   --------  -----
    Total gross loans           517,207    100%    578,854   100%     649,435    100%    428,958   100%    362,294   100%
Unearned income                  (1,203)            (1,082)            (1,056)            (1,992)           (2,154)
Discount on loans purchased        (290)            (1,038)            (2,144)            (3,020)           (5,322)
                               --------           --------           --------           --------          --------
                                515,714            576,734            646,235            423,946           354,818
Allowance for loan loss         (12,426)           (12,470)          (11,888)            (11,973)         (11,737)
                               --------           --------           --------           --------          --------
   Total net loans             $503,288           $564,264           $634,347           $411,973          $343,081
                               ========           ========           ========           ========          ========
</TABLE>

Analysis of Allowance for Loan Loss
-----------------------------------
<TABLE>
<CAPTION>
                                                                      Year ending December 31,
                                                                           (in thousands)
                                                  ---------------------------------------------------------------
                                                     2003          2002         2001         2000         1999
                                                  ----------   -----------   ----------   ----------   ----------
<S>                                               <C>          <C>           <C>          <C>          <C>
Total Loans                                        $ 515,714    $  576,734    $ 646,235    $ 423,946    $ 354,818
                                                   =========    ==========    =========    =========    =========

Daily average loan balance                         $ 562,765    $  617,156    $ 543,854    $ 404,794    $ 320,544
                                                   =========    ==========    =========    =========    =========

Allowance for loan loss:
   Balance at the beginning of the year            $  12,470    $   11,888    $  11,973    $  11,737    $  11,919
   Charge offs by loan type:
      Commercial                                          22            47           82          523        1,062
      Real  estate                                       789           878          435          105           13
                                                   ---------    ----------    ---------    ---------    ---------
   Total charge offs                                     811           925          517          628        1,075
   Recoveries by loan type:
      Commercial                                          26            19          212          596          850
      Individual                                           2            32           32            4           36
      Real estate                                         65         1,206          188           14            7
                                                   ---------    ----------    ---------    ---------    ---------
   Total recoveries                                       93         1,257          432          614          893
                                                   ---------    ----------    ---------    ---------    ---------
   Net loan charge offs                                 (718)          332          (85)         (14)        (182)
      Provision for loan loss                            674           250           --          250           --
                                                   ---------    ----------    ---------    ---------    ---------

Balance at end of year                             $  12,426    $   12,470    $  11,888    $  11,973    $  11,737
                                                   =========    ==========    =========    =========    =========

Net charge offs to average loans                      (0.13%)        0.05%       (0.02%)          --       (0.06%)
                                                   =========    ==========    =========    =========    =========

Allowance to total loans at year end                   2.41%         2.16%        1.84%        2.82%        3.31%
                                                   =========    ==========    =========    =========    =========
</TABLE>
         The allowance for loan losses is established through provisions for
loan losses based on management's on-going evaluation of the risks inherent in
Royal Bank's loan portfolio. Factors considered in the evaluation process
include growth of the loan portfolio, risk characteristics of the types of loans
in the portfolio, geographic and large borrower concentrations, current regional
economic and real estate market conditions that could affect the ability of
borrowers to pay, the value of underlying collateral, and trends in loan
delinquencies and charge-offs.





                                       20
<PAGE>

         Royal Bank utilizes an internal rating system to monitor and evaluate
the credit risk inherent in its loan portfolio. All loans approved by the loan
committee, executive board committee and the Board of Directors are initially
assigned a rating of pass. The Vice President of Special Assets and the loan
review committee are expected to recommend changes in loan ratings when facts
come to their attention that warrant an upgrade or downgrade in a loan rating.
Problem and potential problem assets are assigned the three lowest ratings. Such
ratings coincide with the "Substandard", "Doubtful" and "Loss" classifications
used by federal regulators in their examination of financial institutions.
Generally, an asset is considered Substandard if it is inadequately protected by
the current net worth and paying capacity of the obligors and/or the collateral
pledged. Substandard assets have a well-defined weakness or weaknesses that
jeopardize the liquidation of the debt. Assets classified as Doubtful have all
the weaknesses inherent in those classified Substandard with the added
characteristics that the weaknesses present make collection or liquidation in
full, on the basis of currently existing facts, highly questionable and
improbable. Assets classified as Loss are those considered uncollectable and of
such little value that their continuance as assets is not warranted. On a
regular basis, the Loan Review Committee and senior management review the status
of each loan.

         While Royal Bank believes that it has established an adequate allowance
for loan losses, there can be no assurance that the regulators, in reviewing
Royal Bank's loan portfolio, will not request the company to materially increase
its allowances for loan losses. Although management believes that adequate
specific and general loan loss allowances have been established, actual losses
are dependant upon future events and, as such, further additions to the level of
specific and general loss allowances could become necessary.

Loans and Lease Financing Receivables
-------------------------------------

         The following table summarizes the loan portfolio by loan category and
amount that corresponds to the appropriate regulatory definitions.
<TABLE>
<CAPTION>
                                                                                 As of December 31,
                                                                                   (in thousands)
                                                                          --------------------------------
                                                                            2003        2002        2001
                                                                          --------    --------    --------
<S>                                                                       <C>         <C>         <C>
Loans secured by real estate
   Construction and land development                                      $107,463    $ 82,736    $ 64,551
   Secured by 1-4 family residential properties:
   Revolving, open-end loans secured by 1-4 family residential
         properties and extended under lines of credit                       5,854       7,564      35,367
      All other loans secured by 1-4 family residential properties:
         Secured by first liens                                             50,716     116,248     110,351
         Secured by junior liens                                             3,796       3,418       5,302
   Secured by multi family (5 or more) residential properties               21,728      33,017      35,718
   Secured by nonfarm nonresidential properties                             97,902      87,448     165,547
   Commercial and industrial loans to US addresses                         225,268     241,373     218,498
Loans to individuals for household, family, and other personal
      expenditures                                                           1,182       3,146      13,909
Obligations of state and political subdivisions in the US                    3,134       3,541         192
All other loans                                                                163         363          --
Less: Any unearned income on loans listed above                              1,492       2,120       3,200
                                                                          --------    --------    --------

   Total loans and leases, net of unearned income                         $515,714    $576,734    $646,235
                                                                          ========    ========    ========
</TABLE>



                                       21
<PAGE>

Credit Quality
--------------

         The following table presents the principal amounts of nonaccruing loans
and other real estate.
<TABLE>
<CAPTION>
                                                                         As of December 31,
                                                                           (in thousands)
                                                  ---------------------------------------------------------------
                                                     2003          2002         2001         2000         1999
                                                  ----------   -----------   ----------   ----------   ----------
<S>                                               <C>          <C>           <C>          <C>          <C>
Non-accruing loans (1)(2)                         $   11,328   $    11,908   $   10,794   $    3,548   $    1,209
Other real estate                                      4,371         1,444          884            -           19
                                                  ----------   -----------   -----------  ----------   ----------

         Total nonperforming assets               $   15,699   $    13,352   $   11,678   $    3,548   $    1,228
                                                  ==========   ===========   ==========   ==========   ==========

Nonperforming assets to total assets                   1.36%         1.23%        1.25%        0.56%        0.24%
                                                  ==========   ===========   ==========   ==========   ==========

Nonperforming loans to total loans                     2.20%         2.06%        1.67%        0.84%        0.34%
                                                  ==========   ===========   ==========   ==========   ==========

Allowance for loan loss to nonperforming loans       109.69%       104.72%      110.14%      337.46%      970.80%
                                                  ==========   ===========   ==========   ==========   ==========
</TABLE>
(1)  Generally a loan is placed on nonaccruing status when it has been
     delinquent for a period of 90 days or more unless the loan is both well
     secured and in the process of collection.
(2)  If interest had been accrued on these nonaccruing loans, such income would
     have approximated $401,000 for 2003, $473,000 for 2002, $526,000 for 2001,
     $319,000 for 2000, $109,000 for 1999.


Investments Securities
----------------------

         The contractual maturity distribution and weighted average rate of
Royal Bancshares' investments held to maturity and available for sale portfolios
at December 31, 2003 are presented in the following table. Weighted average rate
on tax-exempt obligations have been computed on a fully taxable equivalent basis
assuming a tax rate of 34%.
<TABLE>
<CAPTION>
                                                          As of December 31, 2003
                                                              (in thousands)
                      -----------------------------------------------------------------------------------------------
                                          After 1 year but   After 5 years, but
                        Within 1 year      within 5 years      within 10 years    After 10 years        Total
                      -----------------  -----------------  -------------------- ----------------   -----------------
                       Amount     Rate    Amount     Rate    Amount     Rate     Amount     Rate     Amount    Rate
                      --------   ------  --------   ------  --------   ------   --------   ------   --------  -------
<S>                   <C>        <C>     <C>        <C>     <C>        <C>      <C>       <C>      <C>       <C>
Securities held to maturity
---------------------------

M.B.S.                $      9     7.7%  $     60     7.6%  $     33    11.0%   $    238     5.8%   $    340     6.7%
Agencies                    --      --%        --      --%    49,282     4.5%     42,348     5.0%     91,630     4.8%
Other securities         4,131     6.8%    16,990     8.1%        --      --%         --      --%     21,121     7.8%
                      --------   ------  --------   ------  --------   ------   --------   ------   --------  -------
Total                 $  4,140     6.8%  $ 17,050     8.1%  $ 49,315     4.5%   $ 42,586     5.0%   $113,091     5.3%
                      ========   ======  ========   ======  ========   ======   ========   ======   ========  =======

Available for sale
------------------

M.B.S.                $     23     9.3%  $  6,492     5.5%  $     --      --%   $ 61,198     5.0%   $ 67,713     5.0%
CMO'S                       --      --%        --      --%        --      --%     44,162     5.0%     44,162     5.0%
Foreign                    266     8.8%    11,900     7.3%        --      --%         --      --%     12,166     7.3%
Trust Preferred             --      --%        --      --%        --      --%     37,139     9.7%     37,139     9.7%
Other securities        20,848     6.7%    138,626    6.3%    95,772     4.4%     35,819     4.9%    291,066     4.9%
                      --------   ------  --------   ------  --------   ------   --------   ------   --------  -------

         Total        $ 21,137     6.8%  $150,018     6.3%  $ 95,772     4.4%   $178,318     5.6%   $452,246     5.4%
                      ========   ======  ========   ======  ========   ======   ========   ======   ========  =======
</TABLE>
         The following tables presents the consolidated book values and
approximate fair value at December 31, 2003 and 2002, respectively, for each
major category of Royal Bancshares' investment securities portfolio for held to
maturity securities and available for sale securities.



                                       22
<PAGE>
<TABLE>
<CAPTION>
                                                                  As of December 31,
                                                                    (in thousands)
                                     ----------------------------------------------------------------------------
                                               2003                      2002                      2001
                                     -----------------------   ------------------------   -----------------------
                                      Amortized      Fair        Amortized      Fair       Amortized      Fair
                                        Cost         Value         Cost         Value        Cost         Value
                                     ----------   ----------   -----------   ----------   ----------   ----------
<S>                                  <C>          <C>          <C>           <C>          <C>          <C>
Securities held to maturity
---------------------------

Mortgage backed securities           $      340   $      340   $       538   $      538   $    1,077   $    1,078
US agencies                              91,630       91,333            --           --       35,000       34,679
Other securities                         21,121       22,602        30,076       32,207       56,826       58,868
                                     ----------   ----------   -----------   ----------   ----------   ----------

         Total                       $  113,091   $  114,275   $    30,614   $   32,745   $   92,903   $   94,625
                                     ==========   ==========   ===========   ==========   ==========   ==========

Securities available for sale
-----------------------------

Federal Home Loan Bank stock         $   11,407   $   11,407   $     8,949   $    8,949   $    4,875   $    4,875
Preferred and common stock                   40           55            56           56           39           54
Other securities                        431,080      440,784       405,667      409,311      128,888      124,826
                                     ----------   ----------   -----------   ----------   ----------   ----------

         Total                       $  442,527   $  452,246   $   414,672   $  418,316   $  133,802   $  129,755
                                     ==========   ==========   ===========   ==========   ==========   ==========
</TABLE>

Deposits
--------

         The average balance of Royal Bank's deposits by major classifications
for each of the last three years is presented in the following table.
<TABLE>
<CAPTION>
                                                                  As of December 31,
                                                                    (in thousands)
                                     --------------------------------------------------------------------------
                                               2003                      2002                      2001
                                     ----------------------    ----------------------     ---------------------
                                       Average                   Average                   Average
                                       Balance        Rate       Balance        Rate        Balance       Rate
                                     ----------      ------    -----------      -----     ----------      -----
<S>                                  <C>             <C>       <C>              <C>       <C>             <C>
Demand deposits:
   Non interest bearing              $   56,814         --%    $    53,800        --%     $   49,903        --%
   Interest bearing (NOW)                32,510       1.04%         34,866      2.00%         38,353      2.27%
Money market deposits                   442,873       2.18%        270,454      3.14%        108,792      3.71%
Savings deposits                         23,714       0.77%         25,658      1.44%         26,312      2.42%
Certificate of deposit                  269,293       4.46%        385,370      5.02%        369,680      6.02%
                                     ----------                -----------                ----------

         Total deposits              $  825,204                $   770,148                $  593,040
                                     ==========                ===========                ==========
</TABLE>

         The remaining maturity of Certificates of Deposit of $100,000 or
greater:
<TABLE>
<CAPTION>
                                                                                             As of December 31,
                                                                                              (in thousands)
                                                                                          -----------------------
Maturity                                                                                     2003         2002
--------                                                                                  ----------   ----------
<S>                                                                                       <C>          <C>
Three months or less                                                                      $    6,396   $   57,804
Over three months through twelve months                                                       47,549       28,694
Over twelve months through five years                                                         46,128       77,244
Over five years                                                                                4,050       17,236
                                                                                          ----------   ----------

         Total                                                                            $  104,123   $  180,978
                                                                                          ==========   ==========
</TABLE>


                                       23
<PAGE>

Short and Long Term Borrowings
------------------------------
<TABLE>
<CAPTION>
                                                                      Year ending December 31,
                                                                           (in thousands)
                                                  ---------------------------------------------------------------
                                                     2003          2002         2001         2000         1999
                                                  ----------   -----------   ----------   ----------   ----------
<S>                                               <C>          <C>           <C>          <C>          <C>
Short term borrowings                             $       --   $     3,000   $   30,000   $    3,000   $       --

Long term borrowings:
   Other borrowings                                       --            --        2,725           --           --
   FHLB advances                                     212,000       124,500       67,500       30,000       30,000
                                                  ----------   -----------   ----------   ----------   ----------

         Total  borrowings                        $  212,000   $   127,500   $  100,225   $   33,000   $   30,000
                                                  ==========   ===========   ==========   ==========   ==========
</TABLE>


ITEM 7. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
        OF OPERATIONS
        -------------

         The following discussion and analysis of financial condition and
results of operations should be read in conjunction with the Consolidated
Financial Statements of Royal Bancshares (see Item 8) and related notes included
herein.

Financial Condition
-------------------

         Total assets increased $66 million, or 6%, to $ 1.15 billion at
December 31, 2003 from $1.09 billion at year-end 2002.

         Cash and Cash Equivalents. Cash and cash equivalents are comprised of
cash on hand, and cash in interest bearing and non-interest bearing accounts in
banks, in addition to federal funds sold. Cash and cash equivalents decreased
$15.5 million, to $25.1 million at December 31, 2003. The average balance of
cash and cash equivalents was approximately $62.8 million for 2003 versus $58.1
million for 2002. The majority of this average balance is held in
interest-bearing accounts or invested daily in overnight fed funds. The average
balance of these funds that earn interest was $54.5 million in 2003. The
decrease in the balance of cash and cash equivalents at year end was primarily
due to re-investing cash on hand into higher yielding investments.

         Investment Securities Held to Maturity. Held to maturity ("HTM")
investment securities represents approximately 4% of average earning assets
during 2003 and are comprised of primarily government agency bonds and corporate
debt securities of investment grade quality, at the time of purchase. During
2003, HTM investment securities increased by $82.5 million to $113.1 million at
December 31, 2003, from $30.6 million at December 31, 2002.

         Investment Securities Available for Sale. AFS investment securities
represent 40% of average earning assets during 2003 and are primarily comprised
of government secured agency bonds and government secured mortgaged-backed
securities, capital trust security issues of regional banks, domestic corporate
debt and U.S. denominated foreign corporate debt. At December 31, 2003, AFS
investment securities were $452.2 million as compared to $418.3 million at
December 31, 2002, an increase of $33.9 million. This increase was primarily due
to the redeployment of excess cash on hand to achieve a higher rate of return.

         Loans. Royal Bancshares' primary earning assets are loans, representing
approximately 51% of average earning assets during 2003. The loan portfolio has
historically been comprised primarily of business demand loans and commercial
mortgages in roughly equal amounts, and to a significantly lesser extent,
consumer loans comprised of one to four family residential and home equity
loans. During 2003, total loans decreased $61.0 million from $576.7 million at
December 31, 2002 to $515.7 million at December 31, 2003 primarily due to an
increased number of loans being paid in full as compared to new originations. In
the current interest rate environment, Royal Bank has avoided lending in
transactions where its management perceived the risk/reward ratio to be too
high.




                                       24
<PAGE>

         Deposits. Royal Bancshares' deposits are the primary source of funding.
Total deposits decreased $29.7 million, or 4%, from $820.8 million at December
31, 2002 to $791.1 million at December 31, 2003. This decrease in deposits is
primarily due to maturities of higher costing brokered deposits that matured
were and replaced with lower costing FHLB advances. At December 31, 2003,
brokered deposits were $80.9 million as compared to $127 million at December 31,
2002. Certificate of deposit accounts decreased $93.3 million, or 28% from
$330.2 million at December 31, 2002 to $236.9 million at December 31, 2003.
Other deposit categories comprised of demand, NOW, money markets and savings
deposits increased $63.5 million during 2003 over their levels at December 31,
2002. The increase in all savings categories is primarily due to the competitive
rates offered.

         Borrowings. Borrowings are comprised of long-term borrowings (advances)
and short-term borrowings (overnight borrowings, advances). Long-term borrowings
increased $87.5 million to $212.0 million at December 31, 2003 from $124.5
million at December 31, 2002. At December 31, 2003 there was no short term
advances. The average balance of borrowings during 2003 was $183.3 million
versus $137.5 million for 2002.

         Shareholders' Equity. Shareholders' equity increased $13.5 million or
11% in 2003 to $134.8 million primarily due to net income of $18.5 million
partially offset by $11.3 million in cash dividends paid in 2003. Additionally,
shareholders' equity was affected by the increase in market value of AFS
investment securities during 2003, which resulted in an upward adjustment of $4
million.

Results of Operations
---------------------

         General. Royal Bancshares' results of operations depend primarily on
net interest income, which is the difference between interest income on interest
earning assets and interest expense on interest bearing liabilities. Interest
earning assets consist principally of loans and investment securities, while
interest bearing liabilities consist primarily of deposits. Net income is also
affected by the provision for loan losses and the level of non-interest income
as well as by non-interest expenses, including salary and employee benefits,
occupancy expenses and other operating expenses.

         Net Income. Net income in 2003 was $18.5 million as compared to $17.4
million in 2002 and $15.8 million in 2001. Basic earnings per share were $1.52,
$1.44 and $1.32 for 2003, 2002, and 2001, respectively. The $1.1 million
increase in net income for 2003 represents a 6% increase over 2002, and is
primarily attributable to the reduction of interest paid on deposits and
borrowings as compared to the interest income earned relating to loans and the
investment security portfolio, and to a lesser extent, non-recurring fee and
accretion income on loans. The increase in net income of $1.6 million for 2002
represents a 10% increase over 2001 and is primarily attributable to the
increase in interest income relating to loans and the investment security
portfolio.

         Net Interest Income. Net interest income is Royal Bancshares' primary
source of income. Its level is a function of the average balance of
interest-earning assets, the average balance of interest-bearing liabilities,
and the spread between the yield on assets and liabilities. In turn, these
factors are influenced by the pricing and mix of Royal Bancshares'
interest-earning assets and funding sources. Additionally, net interest income
is affected by market and economic conditions, which influence rates on loan and
deposit growth.

         Net interest income was $42.4 million in 2003 as compared to $40.6
million in 2002. The increase in 2003 of net interest income of $1.8 million is
primarily due to the reduction of interest paid on deposits and borrowings.
Interest paid on interest bearing liabilities decreased $6.6 million from $36.5
million in 2002, to $29.9 million in 2003. The reduction is primarily due the
reduction of rates offered during 2003.

         Net interest income was $40.6 million in 2002 compared to $37.4 million
in 2001. The increase in 2002 of net interest income of $3.2 million is
primarily due to an increase in the average earning assets in 2002 to $1.02
billion. This is an increase of $263 million, or 35% over the level for 2001.
This increase in average interest earning assets contributed to a $7.9 million
increase in interest income to $77.1 million in 2002, as compared to $69.2
million in 2001. Interest expense on interest bearing liabilities increased $4.7
million, to $36.5 million in 2002, from $31.8 million in 2001. The increase is
primarily due to an increase in the average balance of interest-bearing
liabilities, primarily deposits in 2002 to $853.8 million from $611.6 million in
2001.



                                       25
<PAGE>

Loans and Mortgages
-------------------
<TABLE>
<CAPTION>
                                                            2003              2002             2001
                                                            ----              ----             ----
         <S>                                            <C>               <C>              <C>
         Average loan outstandings                      $562,765,000      $617,156,000     $543,854,000
         Interest and fees on loans                      $46,609,000       $53,314,000      $53,384,000
         Average Yield                                      8.28%             8.64%            9.82%
</TABLE>

         Royal Bancshares continues to originate both fixed rate and variable
rate loans. At December 31, 2003 variable rate loans represented 55% of total
loans. Together with some matching funding of fixed rate deposits to fixed rate
loans, variable rate loans have helped Royal Bank manage interest rate risk.
However, the continued effects from the 12 interest rate cuts during 2002 and
2001 caused the variable rate loan portfolio to reprice faster than most
deposits, resulting in continued compression of the bank interest rate margin
versus prior years.

         In 2003, the average balance of loans decreased $54.3 million to $562.8
million primarily due a large amount of loans being paid off as interest rates
remained at historically low levels. The average yield on loans decreased 36
basis points in 2003 primarily due to interest rates re-pricing at lower levels
on variable rate loans.

         In 2002, the average balance of loans increased $73.3 million to $617.2
million primarily due to retaining a large amount of loans purchased from
Crusader Holding Corporation on June 22, 2001. The average yield on loans
decreased 118 basis points in 2002 primarily due to the continued decline of
interest rates during the year.


HTM Investment Securities
-------------------------
<TABLE>
<CAPTION>
                                                            2003              2002             2001
                                                            ----              ----             ----
         <S>                                             <C>               <C>              <C>
         Average HTM investment securities               $46,302,000       $53,226,000      $97,055,000
         Interest income                                 $3,087,000        $4,019,000       $7,610,000
         Average yield                                      6.67%             7.55%            7.84%
</TABLE>

         HTM investment securities are comprised primarily of taxable corporate
debt issues and US Treasuries and agencies. The corporate debt issues are
investment grade at the time of purchase, with maturities in the three to
fifteen year range. It is Royal Bancshares' expressed intention to hold these
securities to maturity.

         In 2003, the yield on HTM investment securities decreased 88 basis
points to 6.67% from 7.55% in 2002. This decrease was primarily due to higher
yielding investments that have maturing and being replaced with lower yielding
investments as a result of current market conditions.

         In 2002, the yield on HTM investment securities decreased 29 basis
points to 7.55% from 7.84% in 2001. This decrease was primarily due to higher
yielding investments that have matured.

AFS Investment Securities
-------------------------
<TABLE>
<CAPTION>
                                                            2003              2002             2001
                                                            ----              ----             ----
         <S>                                            <C>               <C>               <C>
         Average AFS investment securities              $446,210,000      $297,457,000      $76,338,000
         Interest and dividend income                    $22,007,000       $18,817,000      $6,945,000
         Average yield                                      4.93%             6.33%            9.10%
</TABLE>



                                       26
<PAGE>

         AFS investment securities are comprised primarily of government secured
mortgage-backed securities non-rated capital trust security issues of regional
banks, rated domestic and US denominated foreign corporate debt securities and
to a lesser extent preferred and common stock.

         In 2003, the average balance of AFS investment securities increased
$148.8 million to $446.2 million primarily due to the redeployment of excess
cash on hand to achieve a higher rate of return than overnight funds. The 140
basis point decrease in average yield is primarily due to the lower yields on
the new investment purchases.

         In 2002, the average balance of AFS investment securities increased
$221.1 million to $297.5 million primarily due to the redeployment of excess
cash on hand to achieve a higher rate of return and a change in investment
philosophy in classifying most new security investments as AFS. The 277 basis
point decrease in average yield is primarily due to the declining interest rate
environment.


Interest Expense on NOW and Money Market Deposits
-------------------------------------------------
<TABLE>
<CAPTION>
                                                            2003              2002             2001
                                                            ----              ----             ----
         <S>                                            <C>               <C>              <C>
         Average NOW & Money Market deposits            $475,383,000      $305,320,000     $147,145,000
         Interest expense                                $10,000,000       $9,188,000       $4,900,000
         Average cost of funds                              2.10%             3.01%            3.33%
</TABLE>

         In 2003 the average cost of funds on NOW and money market deposits
decreased 91 basis points to 2.10% from 3.01% in 2002 primarily due to a decline
in the interest rate paid on these deposits. In 2002, the average cost of funds
on NOW and money market deposits decreased 32 basis points to 3.01% from 3.33%
for 2001, primarily due to a decline in interest rate paid on these deposits.

Interest Expense on Time Deposits
---------------------------------
<TABLE>
<CAPTION>
                                                            2003              2002             2001
                                                            ----              ----             ----
         <S>                                            <C>               <C>              <C>
         Average time deposits                          $269,293,000      $385,370,000     $369,680,000
         Interest expense                                $12,011,000       $19,358,000      $22,237,000
         Average cost of funds                              4.46%             5.02%            6.02%
</TABLE>

         In 2003, the average balance of time deposits decreased $116.1 million
to $269.3 million. This decrease in average time deposits is primarily due to
the maturity of higher yielding brokered deposits. In 2002, the average balance
of time deposits increased $15.7 million to $385.4 million. This increase in
time deposits is primarily due to the asset and liability acquisition of
Crusader Holding Corporation on June 22, 2001, being reflected on the records of
Royal Bank for a full twelve months in 2002 as compared for six months during
2001.

         Although rates in general continued to move downward in 2003, the
reaction of deposits to rate changes (both increases and decreases) is slower
than the change in the prime rate because these time deposits must mature before
a rate adjustment would become effective. At December 31, 2003, 44% of time
deposits were comprised of certificates of deposits accounts with balances of
$100,000 or more, while in 2002, 55% of time deposits were comprised of
certificates of deposit accounts with balances of $100,000 or more. These types
of deposit have traditionally been considered more rate volatile than other
types of deposits, however Royal Bank's penalty for early redemption somewhat
mitigates this volatility.

Provision for Possible Loan Losses
----------------------------------

         The provision for loan losses is an amount charged to expense to
provide for future losses on existing loans. In order to determine the amount of
the provision for loan loss, Royal Bank conducts a quarterly review of the loan
portfolio to evaluate overall credit quality. This evaluation consists of an
analysis of individual loans and overall risk characteristics and size of the
loan, and takes into consideration current economic and market conditions,
changes in non-performing loans, the capability of specific borrowers to repay
loan obligations as well as current collateral values.




                                       27
<PAGE>

         In 2003, a provision for loan losses was recorded at $674 thousand, as
compared to $250 thousand in 2002 due to senior management assessment that the
level of loan loss reserve was not adequate. Net charge-offs were $718 thousand
in 2003 as compared to net recoveries of $332 thousand for 2002.

         In 2002, a provision for loan losses was recorded at $300 thousand, as
compared to no provision being taken in 2001 due to senior management assessment
that the level of loan loss reserve was not adequate. Net recoveries were $332
thousand in 2002 as compared to net charge-offs of $85 thousand for 2001.

         The allowance for possible loan loss at December 31, 2003 was $12.4
million, or 2.41% of net loans as compared to $12.5 million at December 31, 2002
or 2.16% of net loans, and $11.9 million at December 31, 2001, or 1.84% of net
loans.

Non-Interest Income
-------------------

         Non-interest income includes service charges on depositors' accounts,
safe deposit rentals and various services such as cashing checks, issuing money
orders and traveler's checks, and similar activities. In connection with the
acquisition of certain assets and liabilities held by Crusader Holding
Corporation, Royal Bank retained the residential mortgage department to
originate residential mortgages for resale in the secondary market. Most
components of non-interest income are a modest and stable source of income, with
exceptions of one-time gains and losses from the sale of investments securities
and other real estate owned, from period to period these sources of income may
vary considerably. Service charges on depositors' accounts, safe deposit rentals
and other fees are periodically reviewed by management to remain competitive
with other local banks.

         In 2003, total non-interest income increased $0.5 million primarily due
income earned on the purchase of Bank Owned Life Insurance ("BOLI") and the sale
of insurance products through an affiliation with the MONY Group.

         In 2002, total non-interest income increased $1.5 million primarily due
to gains on investment securities sold and the addition of residential mortgage
division. The residential mortgage division's primary function is to originate
residential mortgages for resale in the secondary market.


Non-Interest Expense
--------------------

         Non-interest expense includes compensation and employee benefits,
occupancy, advertising, FDIC insurance, state taxes, depreciation, and other
expenses such as auditing, automatic teller machines (ATMs), data processing,
legal, outside service charges, postage, printing and other expenses relating to
other real estate owned.

         Non-interest expense decreased $34 thousand to $18.9 million in 2003,
from $18.9 million in 2002. Salaries and employee benefits increased $519
thousand to $10.0 million in 2003, from $9.4 million in 2002. This was primarily
due to annual salary increases and an increase in pension cost. Occupancy
expense increased $151 thousand to $1.3 million in 2003 primarily due the
addition of our Turnersville Branch. Other operating expenses decreased $704
thousand to $7.6 million in 2003.

         Non-interest expense increased $1.3 million to $18.9 million in 2002,
from $17.6 million in 2001. This increase was offset by $1.0 million decrease in
salaries and employee benefits in 2002 primarily due to a reduced required
obligation to the companies stock appreciation rights program. Occupancy expense
increased $61 thousand to $1.2 million in 2002. Other operating expenses
increased $2.3 million to $8.3 million in 2002.

Accounting for Income Taxes
---------------------------

         The provision for federal income taxes was $8.0 million in 2003 as
compared to $7.2 million for 2002, and $5.8 million for 2001 representing an
effective tax rate of 30%, 29% and 27%, respectively. The $800 thousand increase
in the tax provision for 2003 was primarily due to the increased level of
earnings offset by the use of tax goodwill related to the acquisition of
Knoblauch State Bank in 1995.



                                       28
<PAGE>

Accounting for Debt and Equity Securities
-----------------------------------------

         Royal Bancshares accounts for investment securities in accordance with
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." This standard requires investments in securities to be classified
in one of three categories; held to maturity, trading or available for sale.
Debt securities that Royal Bank has the positive intent and ability to hold to
maturity are classified as held to maturity and are reported at amortized cost.
As Royal Bank does not engage in security trading, the balance of its debt
securities and any equity securities are classified as available for sale. Net
unrealized gains and losses for such securities, net of tax effect, are required
to be recognized as a separate component of shareholders' equity and excluded
from the determination of net income.

Asset Liability Management
--------------------------

         The primary functions of asset-liability management are to assure
adequate liquidity and maintain an appropriate balance between interest earning
assets and interest bearing liabilities. This process is overseen by the
Asset-Liability Committee ("ALCO") which monitors and controls, among other
variables, the liquidity, balance sheet structure and interest rate risk of the
consolidated company within policy parameters established and outlined in the
Funds, Cash Flow and Liquidity Policies and Procedures which are reviewed by the
Board of Directors at least annually. Additionally, the ALCO committee meets
periodically and reports on liquidity, interest rate sensitivity and projects
financial performance in various interest rate scenarios.

         Liquidity. Liquidity is the ability of the financial institution to
ensure that adequate funds will be available to meet its financial commitments
as they become due. In managing its liquidity position, the financial
institution evaluates all sources of funds, the largest of which is deposits.
Also taken into consideration is the repayment of loans. These sources provide
the financial institution with alternatives to meet its short-term liquidity
needs. Longer-term liquidity needs may be met by issuing longer-term deposits
and by raising additional capital.

    Royal Bancshares generally maintains a liquidity ratio equal to or greater
than 25% of total deposits and short-term liabilities. Liquidity is specifically
defined as the ratio of net cash, short term and marketable assets to net
deposits and short-term liabilities. The liquidity ratio for the years ended
December 31, 2003, 2002 and 2001 was 60%, 42% and 33%, respectively. Management
believes that Royal Bancshares' liquidity position continues to be adequate,
continues to be in excess of its peer group level and meets or exceeds the
liquidity target set forth in the Asset/Liability Management Policy. Management
believes that due to its financial position, it will be able to raise deposits
as needed to meet liquidity demands. However, any financial institution could
have unmet liquidity demands at any time.

         Contractual Obligations and Other Commitments. The following table sets
forth contractual obligations and other commitments representing required and
potential cash outflows as of December 31, 2003.
<TABLE>
<CAPTION>

                                                       Less than                                    More than 5
       (in thousands)                        Total       1 year          1-3 years    4-5 years        years
                                            -------------------------------------------------------------------
       <S>                            <C>             <C>         <C>              <C>          <C>
       FHLB Advances                        $212,000    $     --         $ 37,500      $    --        $174,500
       Operating leases                        2,038         511              656          443             428
       Standby letters of credit               5,099       5,066               33
       Time deposits                         236,902     132,710           79,125       19,451           5,616
                                            --------    --------         --------      -------        --------
            Total                           $456,039    $138,287         $117,314      $19,894        $180,544
                                            ========    ========         ========      =======        ========
</TABLE>
         Interest-Rate Sensitivity. Interest rate sensitivity is a function of
the repricing characteristics of the financial institution's assets and
liabilities. These include the volume of assets and liabilities repricing, the
timing of repricing, and the relative levels of repricing. Attempting to
minimize the interest rate sensitivity gaps is a continual challenge in a
changing rate environment. The interest sensitivity report examines the
positioning of the interest rate risk exposure in a changing interest rate
environment. Ideally the rate sensitive assets and liabilities will be
maintained in a matched position to minimize interest rate risk.

    The interest rate sensitivity analysis is an important management tool,
however, it does have some inherent shortcomings. It is a "static" analysis.
Although certain assets and liabilities may have similar maturities or
repricing, they may react in different degrees to changes in market interest
rates. Additionally, repricing characteristics of certain assets and liabilities
may vary substantially within a given period.



                                       29
<PAGE>

         The following table summarizes repricing intervals for interest earning
assets and interest bearing liabilities as of December 31, 2003, and the
difference or "gap" between them on an actual and cumulative basis for the
periods indicated. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities.
During a period of falling interest rates, a positive gap would tend to
adversely affect net interest income, while a negative gap would tend to result
in an increase in net interest income. During a period of rising interest rates,
a positive gap would tend to result in an increase in net interest income while
a negative gap would tend to affect net interest income adversely. At December
31, 2003, Royal Bancshares is in an asset sensitive positive of $69.4 million,
which indicates assets will reprice somewhat faster than liabilities within one
year.

Interest Rate Sensitivity
-------------------------
(in  millions)
<TABLE>
<CAPTION>
                                              Days
                                     ----------------------      1 to 5      Over 5        Non-rate
Assets (1)                            0 - 90       91 - 365      Years         Years      Sensitive        Total
                                     ------------------------------------------------------------------------------
<S>                                  <C>          <C>          <C>           <C>          <C>           <C>
Interest-bearing deposits in banks   $    10.1    $      --    $      --     $     --     $     7.4     $    17.5
Federal funds sold                         7.6           --           --           --            --           7.6
Investment securities:
   Available for sale                     38.3         20.8        301.3         91.8            --         452.2
   Held to maturity                       49.4          4.3         53.6          5.8            --         113.1
                                     ----------------------------------------------------------------------------
      Total investment securities         87.7         25.1        354.9         97.6            --         565.3
Loans:(2)
   Fixed rate                             25.7         45.0        149.5          5.2            --         225.4
   Variable rate                         195.0         75.6         19.7           --            --         290.3
                                     ----------------------------------------------------------------------------
      Total loans                        220.7        120.6        169.2          5.2                       515.7
   Other assets(3)                          --           --           --           --          48.3          48.3
                                     ----------------------------------------------------------------------------

   Total Assets                      $   326.1     $  145.7     $  524.1     $  102.8      $   55.7     $ 1,154.4
                                     ============================================================================

Liabilities & Capital
Deposits:
   Non interest bearing deposits     $      --    $      --    $      --     $     --     $    58.9     $    58.9
   Interest bearing deposits              58.1        174.4        259.8          0.0            --         492.3
   Certificate of deposits                27.1        105.8        101.4          5.6            --         239.9
                                     ----------------------------------------------------------------------------
      Total deposits                      85.2        280.2        361.2          5.6          58.9         791.1
Borrowings                                37.0           --        117.5         57.5            --         212.0
Other liabilities                           --           --           --           .3          16.2          16.5
Capital                                     --           --           --           --         134.8         134.8
                                     ----------------------------------------------------------------------------

      Total liabilities & capital    $   122.2    $   280.2    $   478.7     $   63.4     $   209.9     $ 1,154.4
                                     ============================================================================

Net interest rate GAP                $   203.9    $  (134.5)   $    45.4     $   39.4     $ (154.2)
                                     =============================================================

Cumulative interest rate GAP         $   203.9    $    69.4    $   114.8     $  154.2     $     --
                                     =============================================================

GAP to total assets                       18%         -12%
                                     =====================

GAP to total equity                      151%        -100%
                                     =====================

Cumulative GAP to total assets            18%           6%
                                     =====================

Cumulative GAP to total equity           151%          51%
                                     =====================
</TABLE>
(1)  Interest earning assets are included in the period in which the balances
     are expected to be repaid and/or repriced as a result of anticipated
     prepayments, scheduled rate adjustments, and contractual maturities.
(2)  Reflects principal maturing within the specified periods for fixed and
     repricing for variable rate loans; includes nonperforming loans.
(3)  For purposes of gap analysis, other assets include the allowance for
     possible loan loss; unamortized discount on purchased loans and deferred
     fees on loans.


                                       30
<PAGE>

         The method of analysis of interest rate sensitivity in the table above
has a number of limitations. Certain assets and liabilities may react
differently to changes in interest rates even though they reprice or mature in
the same time periods. The interest rates on certain assets and liabilities may
change at different times than changes in market interest rates, with some
changing in advance of changes in market rates and some lagging behind changes
in market rates. Also, certain assets have provisions, which limit changes in
interest rates each time the interest rate changes and for the entire term of
the loan. Additionally, prepayments and withdrawals experienced in the event of
a change in interest rates may deviate significantly from those assumed in the
interest rate sensitivity table. Additionally, the ability of some borrowers to
service their debt may decrease in the event of an interest rate increase.

Capital Adequacy
----------------

         The table shown below sets forth Royal Bancshares' consolidated capital
level and performance ratios:
<TABLE>
<CAPTION>
                                                                                               Regulatory
                                                     2003          2002           2001          Minimum
                                                  ---------      ---------      --------      ------------
         <S>                                      <C>            <C>            <C>           <C>
         Capital Level
         -------------
            Leverage ratio                           11.1%         11.4%          14.1%            3.0%
            Risk based capital ratio:
               Tier 1                                15.3%         14.6%          14.4%            4.0%
               Total                                 16.5%         15.9%          15.9%            8.0%

         Capital Performance
         -------------------
            Return on average assets                  1.6%          1.7%           2.0%              -
            Return on average equity                 14.5%         15.2%          15.0%              -
</TABLE>

         Royal Bancshares' sources of capital have been derived from the
issuance of stock as well as retained earnings. While Royal Bancshares has not
had a stock offering since 1986, total shareholders' equity has increased
primarily due to steady increases in retained earnings. At December 31, 2003,
Royal Bancshares had an average equity to average asset ratio of 11%. Royal
Bancshares has no current plans to raise capital through new stock offerings and
indeed, seeks ways to leverage its existing capital.

         In early 1989, each of the federal bank regulatory agencies issued
risk-based capital standards, which were phased in December 31, 1992. The new
standards place assets in various categories of risk with varying weights
assigned, and consider certain off-balance sheet activities, such as letters of
credit and loan commitments in the base for purposes of determining capital
adequacy. The principal objective of establishing the risk-based capital
framework is to achieve greater convergence in the measurement and assessment of
capital adequacy due to the divergence of asset mixes maintained from one
depository institution to the next. At December 31, 2003, Royal Bancshares'
ratio using these standards was 16.5%.

Management Options to Purchase Securities
-----------------------------------------

         In May 2001, the directors of the Royal Bancshares approved the amended
Royal Bancshares of Pennsylvania Non-qualified Stock Option and Appreciation
Right Plan (the Plan). The shareholders in connection with the formation of the
holding company reapproved the Plan. The Plan is an incentive program under
which Bank officers and other key employees may be awarded additional
compensation in the form of options to purchase up to 1,500,000 shares of the
Royal Bancshares' Class A common stock (but not in excess of 15% of outstanding
shares). The option price is equal to the fair market value at the date of the
grant. At December 31, 2003, 420,032 options have been granted which are
exercisable at 20% per year. At December 31, 2003, options covering 149,904
shares were exercisable by 98 employees.

         In May 2001, the directors of the Royal Bancshares approved an amended
non-qualified Outside Directors Stock Option Plan. The shareholders in
connection with the formation of the holding company reapproved the Plan. Under
the terms of the plan, 250,000 shares of Class A stock are authorized for
grants. Each director is entitled to 1,500 shares of stock annually, which is
exercisable one year from the grant date. The options were granted at the fair
market value at the date of the grant. At December 31, 2003, 70,061 options were
outstanding and options covering 54,761 shares were exercisable.



                                       31
<PAGE>



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
------------------------------------------------------------------

    A simulation model is used to estimate the impact of various changes, both
upward and downward, in market interest rates and volumes of assets and
liabilities on the net income. This model produces an interest rate exposure
report that forecast changes in the market value of portfolio equity under
alternative interest rate environment. The market value of portfolio is defined
as the present value of existing assets and liabilities. The calculated
estimates of changes in the market value of portfolio value are as follows:

                 As of December 31, 2003 (Dollars in Thousands)
                 ----------------------------------------------

                                          Market Value of           Percent of
             Changes in Rates            Portfolio Equity             Change
             ----------------            ----------------           ----------
             + 200 basis points               144,210                 -10.0%
             + 100 basis points               155,298                  -3.1%
             Flat rate                        160,217                     0%
             - 100 basis points               156,307                  -2.4%
             - 200 basis points               141,030                 -12.0%

         The assumptions used in evaluating the vulnerability of earnings and
capital to changes in interest rates are based on management's considerations of
past experience, current position and anticipated future economic conditions.
The interest rate sensitivity of assets and liabilities as well as the estimated
effect of changes in interest rates on the market value of portfolio equity
could vary substantially if different assumptions are used or actual experience
differs from what the calculations may be based.

                        RECENT ACCOUNTING PRONOUNCEMENTS
                        --------------------------------

         In December 2003, the Financial Accounting Standards Board (FASB)
issued SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," which requires additional disclosures about there
assets, obligations, cash flows and net periodic benefit costs of defined
benefit pension plans and defined benefit other post retirement plans.

         Royal Bancshares adopted FIN 45 "Guarantor's Accounting and Disclosure
Requirements for Guarantees, including Indirect Guarantees of Indebtedness of
Others" on January 1, 2003 ("FIN 45"). FIN 45 requires a guarantor entity, at
the inception of a guarantee covered by the measurement provisions of the
interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. Royal Bancshares has financial and
performance letters of credit. Financial letters of credit require a company to
make a payment if the customer's condition deteriorates, as defined in
agreements. Performance letters of credits require Royal Bancshares to make
payments if the customer fails to perform certain non-financial contractual
obligation. Royal Bancshares previously did not record a liability when
guaranteeing obligations unless it became probable that Royal Bancshares would
have to perform under the guarantee. FIN 45 applies prospectively to guarantees
Royal Bancshares issues or modifies subsequent to December 31, 2002. Royal
Bancshares defines the initial fair value of these letters of credit as the fee
received from the customer. The potential undiscounted amounts of future
payments of the letters of credit as of December 31, 2003 are $5.1 million and
they expire through August 2005. Amounts due under these letters of credit would
be reduced by any proceeds that Royal Bancshares would be able to obtain in
liquidating the collateral for the loans, which varies depending on the
customer.

         In January 2003, FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities ("FIN 46"). FIN 46 requires a variable interest
entity to be consolidated by a company if that company is subject to a majority
of the risk of loss from the variable interest entity's activities or entitled
to receive a majority of the entity's residual returns, or both. FIN 46 also
requires disclosures about variable interest entities that a company is not
required to consolidate, but in which it has a significant variable interest.
The consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. Subsequent to the issuance for FIN 46,
the FASB issued a revised interpretation, FIN 46(R), the provisions of which
must be applied to certain variable interest entities by March 31, 2004. Royal
Bancshares is in the process of determining what impact, if any, the adoption of
the provisions of FIN 46 will have upon its financial condition or results of
operation.





                                       32
<PAGE>

         Royal Bancshares adopted Statement of Financial Accounting Standard 149
(SFAS No. 149), Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, on July 1, 2003. SFAS No. 149 clarifies and amends SFAS No. 133 for
implementation issues raised by constituents or includes the conclusions reached
by the FASB on certain FASB Staff Implementation Issues. Statement 149 also
amends SFAS No. 133 to require a lender to account for loan commitments related
to mortgage loans that will be held for sale as derivatives. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003. Royal
Bancshares periodically enters into commitments with its customers, which it
intends to sell in the future. The adoption of SFAS No. 149 did not have a
material impact on Royal Bancshares' financial position or results of
operations.

         The FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, on May 15,
2003. SFAS No. 150 changes the classification in the statement of financial
position of certain common financial instruments from either equity or mezzanine
presentation to liabilities and requires an issuer of those financial statements
to recognize changes in fair value or redemption amount, as applicable, in
earnings. SFAS No. 150 is effective for public companies for financial
instruments entered into or modified after May 31, 2003 and is effective at the
beginning of the first interim period beginning after June 15, 2003. Management
has not entered into any financial instruments that would qualify under SFAS No.
150. The adoption of SFAS No. 150 did not have a material impact on Royal
Bancshares' financial position or results of operations.

         Royal Bancshares adopted EITF 03-1, The Meaning of Other than Temporary
Impairment and Its Applications to Certain Investments, as of December 31, 2003.
EITF 03-1 includes certain disclosures regarding quantitative and qualitative
disclosures for investment securities accounted for under FASB 115, "Accounting
for Certain Investments in Debt and Equity Securities", that are impaired at the
balance sheet date, but an other-than-temporary impairment has not been
recognized. The disclosures under EITF 03-1 are required for financial
statements for years ending after December 15, 2003 and are included in these
financial statements.

         In October 2003, the AICPA issued SOP 03-3, Accounting for Loans or
Certain Debt Securities Acquired in a Transfer. This statement addresses
accounting for differences between contractual cash flows and cash flows
expected to be collected from an investor's initial investment in loans or debt
securities ("loans") acquired in a transfer as result of credit quality
deterioration. The statement requires recognition of the excess of all cash
flows expected at acquisition over the investor's initial investment in the loan
as interest income on a level-yield basis over the life of the loan as the
accretable yield. The loan's contractual required payments receivable in excess
of the amount of its cash flows expected at acquisition (nonaccretable
difference) should not be recognized as an adjustment to yield, a loss accrual
or a valuation allowance for credit risk. This statement is effective for loans
acquired in fiscal years beginning after December 31, 2004. Early adoption is
permitted. Management is currently evaluating the provisions of SOP 03-3.




                                       33
<PAGE>




ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
---------------------------------------------------




                       FINANCIAL STATEMENTS AND REPORT OF
                    INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

                           December 31, 2003 and 2002





















                                       34
<PAGE>

                                                               [GRAPHIC OMITTED]





               Report of Independent Certified Public Accountants
               --------------------------------------------------


Board of Directors
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries


         We have audited the accompanying consolidated balance sheets of Royal
Bancshares of Pennsylvania, Inc. and Subsidiaries as of December 31, 2003 and
2002, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2003. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

         We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

         In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Royal
Bancshares of Pennsylvania, Inc. and Subsidiaries as of December 31, 2003 and
2002, and the consolidated results of their operations and their consolidated
cash flows for each of the three years in the period ended December 31, 2003 in
conformity with accounting principles generally accepted in the United States of
America.


/s/ Grant Thornton LLP

Philadelphia, Pennsylvania
January 22, 2004



                                       35
<PAGE>
<TABLE>
<CAPTION>
                             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

                                           Consolidated Balance Sheets




                                                                                            December 31,
                                                                                    ----------------------------
               ASSETS                                                                  2003               2002
                                                                                    -----------      -----------
                                                                                 (In thousands, except share data)
<S>                                                                                 <C>              <C>
Cash and due from banks                                                             $    17,470      $    27,081
Federal funds sold                                                                        7,600           13,490
                                                                                    -----------      -----------
               Total cash and cash equivalents                                           25,070           40,571
                                                                                    -----------      -----------
Investment securities held to maturity (fair value of $114,275
    and $32,745 in 2003 and 2002, respectively)                                         113,091           30,614
Investment securities available for sale - at fair value                                452,246          418,316
Total loans                                                                             515,714          576,734
    Less allowance for loan losses                                                       12,426           12,470
                                                                                    -----------      -----------
               Net loans                                                                503,288          564,264
Premises and equipment, net                                                               7,480            8,002
Accrued interest receivable                                                              16,353           13,778
Other assets                                                                             36,882           12,939
                                                                                    -----------      -----------
               Total assets                                                         $ 1,154,410      $ 1,088,484
                                                                                    ===========      ===========

               LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
    Deposits
       Non-interest bearing                                                         $    58,942      $    55,575
       Interest bearing                                                                 732,117          765,265
                                                                                    -----------      -----------
               Total deposits                                                           791,059          820,840
    Accrued interest payable                                                              7,733           11,406
    Other liabilities                                                                     7,920            6,682
    Borrowings                                                                          212,000          127,500
                                                                                    -----------      -----------
               Total liabilities                                                      1,018,712          966,428
                                                                                    -----------      -----------
Minority interest                                                                           865              726
Stockholders' equity
    Common stock
       Class A, par value $2.00 per share; authorized, 18,000,000 shares; issued,
         10,027,284 and 9,595,191 shares in 2003 and 2002, respectively                  20,055           19,190
       Class B, par value $0.10 per share; authorized, 2,000,000 shares; issued,
         1,909,742 and 1,860,668 shares in 2003 and 2002, respectively                      191              186
    Additional paid in capital                                                           85,448           76,984
    Retained earnings                                                                    24,989           24,819
    Accumulated other comprehensive income                                                6,415            2,416
                                                                                    -----------      -----------
                                                                                        137,098          123,595
    Treasury stock - at cost, 215,388 Class A shares in 2003 and 2002                    (2,265)          (2,265)
                                                                                    -----------      -----------
               Total stockholders' equity                                               134,833          121,330
                                                                                    -----------      -----------
               Total liabilities and stockholders' equity                           $ 1,154,410      $ 1,088,484
                                                                                    ===========      ===========
</TABLE>


The accompanying notes are an integral part of these statements.



                                       36
<PAGE>
<TABLE>
<CAPTION>
                              ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

                                         Consolidated Statements of Income



                                                                                  Year ended December  31,
                                                                          ----------------------------------------
                                                                              2003          2002          2001
                                                                          -----------   -----------    -----------
                                                                            (In thousands, except per share data)
<S>                                                                       <C>           <C>            <C>
Interest income
    Loans, including fees                                                   $  46,609     $  53,314      $  53,384
    Investment securities held to maturity                                      3,087         4,019          7,610
    Investment securities available for sale                                   22,007        18,817          6,945
    Deposits in banks                                                             475           682            533
    Federal funds sold                                                            142           272            752
                                                                            ---------     ---------      ---------
          TOTAL INTEREST INCOME                                                72,320        77,104         69,224
                                                                            ---------     ---------      ---------
Interest expense
    Deposits                                                                   22,193        28,916         27,774
    Borrowings and mortgage payable                                             7,748         7,575          4,019
    Federal funds purchased                                                         -             -             15
                                                                            ---------     ---------      ---------
          TOTAL INTEREST EXPENSE                                               29,941        36,491         31,808
                                                                            ---------     ---------      ---------
          NET INTEREST INCOME                                                  42,379        40,613         37,416
Provision for loan losses                                                         674           250              -
                                                                            ---------     ---------      ---------
          NET INTEREST INCOME AFTER PROVISION
              FOR LOAN LOSSES                                                  41,705        40,363         37,416
                                                                            ---------     ---------      ---------
Other income
    Service charges and fees                                                    1,217         1,124            966
    Gain on sale of investment securities available for sale                      719           790             60
    Gains on other real estate                                                    568           457            188
    Gains on sale of loans                                                        637           767            372
    Other income                                                                  563            62            152
                                                                            ---------     ---------      ---------
                                                                                3,704         3,200          1,738
                                                                            ---------     ---------      ---------
Other expenses
    Salaries and employee benefits                                              9,958         9,440         10,479
    Occupancy and equipment                                                     1,330         1,180          1,119
    Advertising                                                                   314           520            442
    Pennsylvania bank shares tax                                                  828           764            759
    Professional fees                                                             441           448            875
    Losses on investment partnership                                              514           461            267
    Travel                                                                        287           449            297
    Other operating expenses                                                    5,215         5,659          3,365
                                                                            ---------     ---------      ---------
                                                                               18,887        18,921         17,603
                                                                            ---------     ---------      ---------
          INCOME BEFORE INCOME TAXES                                           26,522        24,642         21,551
Income taxes                                                                    7,996         7,237          5,797
                                                                            ---------     ---------      ---------
          NET INCOME                                                        $  18,526     $  17,405      $  15,754
                                                                            =========     =========      =========
Per share data
    Net income - basic                                                      $    1.52     $    1.44      $    1.32
                                                                            =========     =========      =========
    Net income - diluted                                                    $    1.52     $    1.41      $    1.30
                                                                            =========     =========      =========
</TABLE>


The accompanying notes are an integral part of these statements.

                                       37
<PAGE>
<TABLE>
<CAPTION>
                                  ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

                                 Consolidated Statement of Changes in Stockholders' Equity

                                        Years ended December 31, 2003, 2002 and 2001

                                           (In thousands, except per share data)



                                                      Class A common stock  Class B common stock    Additional
                                                      --------------------  --------------------     paid in      Retained
                                                       Shares     Amount      Shares   Amount        capital      earnings
                                                      --------   -------     -------   ------        -------      --------
<S>                                                   <C>        <C>         <C>       <C>           <C>          <C>
Balance, January 1, 2001                               8,388     $16,775      1,731    $  173        $57,768      $ 31,640
    Net income for the year ended December 31, 2001        -           -          -         -              -        15,754
    Conversion of Class B common stock to Class A
      common stock                                        15          29        (13)       (1)             -           (28)
    5% stock dividends declared                          408         817         87         8          7,094        (7,919)
    Cash in lieu of fractional shares                      -           -          -         -              -            (6)
    Stock options exercised                               38          77          -         -            149             -
    Cash dividends on common stock                         -           -          -         -              -        (8,984)
    Other comprehensive income, net of
      reclassifications and taxes                          -           -          -         -              -             -
                                                       -----     -------      -----    ------        -------      --------

    Comprehensive income

Balance, December 31, 2001                             8,849      17,698      1,805       180         65,011        30,457
    Net income for the year ended December 31, 2002        -           -          -         -              -        17,405
    Conversion of Class B common stock to Class A
      common stock                                        60         120        (52)       (5)             -          (115)
    6% stock dividends declared                          518       1,036        108        11         11,285       (12,331)
    Cash in lieu of fractional shares                      -           -          -         -              -            (7)
    Stock options exercised                              168         336          -         -            688             -
    Cash dividends on common stock                         -           -          -         -              -       (10,590)
    Other comprehensive loss, net of
      reclassifications and taxes                          -           -          -         -              -             -
                                                       -----     -------      -----    ------        -------      --------

    Comprehensive income

Balance, December 31, 2002                             9,595      19,190      1,861       186         76,984        24,819
</TABLE>
                                                 [RESTUBBED TABLE]
<TABLE>
<CAPTION>
                                                       Accumulated
                                                         other
                                                      comprehensive  Treasury   Comprehensive
                                                      income (loss)    stock        income
                                                      -------------   -------      -------
<S>                                                   <C>             <C>          <C>
Balance, January 1, 2001                               $   (590)      $(2,265)
    Net income for the year ended December 31, 2001           -             -      $15,754
    Conversion of Class B common stock to Class A
      common stock                                            -             -            -
    5% stock dividends declared                               -             -            -
    Cash in lieu of fractional shares                         -             -            -
    Stock options exercised                                   -             -            -
    Cash dividends on common stock                            -             -            -
    Other comprehensive income, net of
      reclassifications and taxes                        (2,042)            -       (2,042)
                                                       --------       -------      -------

    Comprehensive income                                                           $13,712
                                                                                   =======
Balance, December 31, 2001                               (2,632)       (2,265)
    Net income for the year ended December 31, 2002           -             -      $17,405
    Conversion of Class B common stock to Class A
      common stock                                            -             -            -
    6% stock dividends declared                               -             -            -
    Cash in lieu of fractional shares                         -             -            -
    Stock options exercised                                   -             -            -
    Cash dividends on common stock                            -             -            -
    Other comprehensive loss, net of
      reclassifications and taxes                         5,047             -        5,047
                                                      ---------       -------      -------

    Comprehensive income                                                           $22,452
                                                                                   =======
Balance, December 31, 2002                                2,415        (2,265)
</TABLE>

                                   (Continued)


                                       38
<PAGE>



             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

      Consolidated Statement of Changes in Stockholders' Equity - Continued

                  Years ended December 31, 2003, 2002 and 2001

                      (In thousands, except per share data)


<TABLE>
<CAPTION>

                                                      Class A common stock  Class B common stock   Additional
                                                      --------------------  --------------------     paid in      Retained
                                                       Shares     Amount      Shares   Amount        capital      earnings
                                                      --------   -------     -------   ------        -------      --------
<S>                                                   <C>        <C>         <C>       <C>           <C>          <C>
Balance, January 1, 2003                                9,595    $19,190       1,861   $  186        $76,984      $ 24,819
    Net income for the year ended December 31, 2003         -          -           -        -              -        18,526
    Conversion of Class B common stock to Class A
      common stock                                          8         16          (7)      (1)             -           (15)
    3% stock dividends declared                           281        562          55        6          6,443        (7,011)
    Cash in lieu of fractional shares                       -          -           -        -              -            (8)
    Purchase of treasury stock                              -          -           -        -              -             -
    Stock options exercised                               143        286           -        -          2,021             -
    Cash dividends on common stock                          -          -           -        -              -       (11,321)
    Other comprehensive income, net of
      reclassifications and taxes                           -          -           -        -              -             -
                                                       ------    -------      ------   ------        -------      --------
    Comprehensive income

Balance, December 31, 2003                             10,027    $20,054       1,909   $  191        $85,448      $ 24,990
                                                       ======    =======      ======   ======        =======      ========
</TABLE>
                                                     [RESTUBBED TABLE]

<TABLE>
<CAPTION>
                                                       Accumulated
                                                         other
                                                      comprehensive  Treasury   Comprehensive
                                                      income (loss)    stock        income
                                                      -------------   -------      -------
<S>                                                   <C>             <C>          <C>
Balance, January 1, 2003                                $  2,415      $(2,265)
    Net income for the year ended December 31, 2003            -            -      $18,526
    Conversion of Class B common stock to Class A
      common stock                                             -            -            -
    3% stock dividends declared                                -            -            -
    Cash in lieu of fractional shares                          -            -            -
    Purchase of treasury stock                                 -            -            -
    Stock options exercised                                    -            -            -
    Cash dividends on common stock                             -            -            -
    Other comprehensive income, net of
      reclassifications and taxes                          4,000            -        4,000
                                                        --------      -------      -------
    Comprehensive income                                                           $22,526
                                                                                   =======
Balance, December 31, 2003                              $  6,415     $ (2,265)
                                                        ========     ========
</TABLE>


         The accompanying notes are an integral part of this statement.



                                       39
<PAGE>
<TABLE>
<CAPTION>
                              ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

                                       Consolidated Statements of Cash Flows

                                              Year ended December 31,




                                                                              2003          2002          2001
                                                                          -----------   -----------    -----------
                                                                             (In thousands, except per share data)
<S>                                                                       <C>           <C>            <C>

Cash flows from operating activities
    Net income                                                            $    18,526   $    17,405    $    15,754
    Adjustments to reconcile net income to
          net cash (used in) provided by operating activities
       Depreciation and amortization                                            1,035         1,297            865
       Provision for loan losses                                                  674           250             --
       Amortizations of premiums and discounts on loans,
          mortgage-backed securities and investments                              289        (1,495)        (3,527)
       Provision (benefit) for deferred income taxes                            2,078           (32)        (2,779)
       Gains on other real estate                                                (568)         (457)          (188)
       Gains on sale of loans                                                    (637)         (767)          (372)
       Gains (losses) on sales of investment securities
          available for sale                                                     (719)         (790)           (60)
       (Increase) in accrued interest receivable                               (2,575)       (2,082)        (4,667)
       Decrease (increase) in other assets                                    (26,021)          842         (3,421)
       Increase (decrease) in accrued interest payable                         (3,673)         (228)           364
       Increase (decrease) in other liabilities                                 1,238        (1,452)        (2,418)
                                                                            ---------     ---------      ---------

              Net cash (used in) provided by operating activities             (10,353)       12,491           (449)
                                                                            ---------     ---------      ---------

Cash flows from investing activities
    Proceeds from calls and maturities of investment
       securities held to maturity                                              9,982        60,563         78,194
    Purchases of investment securities held to maturity                       (89,310)           --        (85,000)
    Proceeds from calls, maturities and sales of investment securities
       available for sale                                                     201,341       309,710         21,169
    Proceeds from sales of investment securities
       available for sale                                                      91,339       115,250          4,850
    Redemption (purchase) of Federal Home Loan Bank stock                      (3,532)       (4,074)         1,420
    Cash paid for asset acquisition                                                --            --        (15,239)
    Cash borrowed for asset acquisition                                            --            --         26,548
    Purchases of investment securities available for sale                    (321,451)     (699,480)       (53,125)
    Net decrease in loans                                                      61,647        70,581         46,703
    Purchase of premises and equipment                                           (513)         (787)        (1,706)
                                                                            ---------     ---------      ---------

              Net cash provided by (used in) investing activities             (50,497)     (148,237)        23,814
                                                                            ---------     ---------      ---------
</TABLE>


                                   (Continued)



                                       40
<PAGE>

<TABLE>
<CAPTION>
                              ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

                                 Consolidated Statements of Cash Flows - Continued

                                              Year ended December 31,




                                                                              2003          2002          2001
                                                                          -----------   -----------    -------
                                                                           (In thousands, except per share data)
<S>                                                                       <C>           <C>            <C>
Cash flows from financing activities
    Net increase in non-interest bearing and
       interest bearing demand deposits and savings accounts                $  63,511     $ 253,560      $  44,974
    Net (decrease) increase in certificates of deposit                        (93,292)     (134,579)       (66,731)
    Principal payments on mortgage                                                (62)          (49)           (49)
    Cash dividends in lieu of fractional shares                                    (8)           (7)            (6)
    Proceeds from borrowings, net of repayments                                84,500        27,275          4,000
    Issuance of common stock under stock option plans                           2,021           688            227
    Cash dividends paid                                                       (11,321)      (10,589)        (8,984)
                                                                            ---------     ---------      ---------

          Net cash (used in) provided by financing activities                  45,349       136,299        (26,569)
                                                                            ---------     ---------      ----------

          Net increase (decrease) in cash and cash equivalents                (15,501)          553         (3,204)

Cash and cash equivalents at beginning of year                                 40,571        40,018         43,222
                                                                            ---------     ---------      ---------

Cash and cash equivalents at end of year                                    $  25,070     $  40,571      $  40,018
                                                                            =========     =========      =========

Supplemental disclosure of cash flow information
    Cash paid during the year for
       Interest                                                             $  33,615     $  36,719      $  31,412
                                                                            =========     =========      =========

       Income taxes                                                         $   7,000     $   5,650      $   6,800
                                                                            =========     =========      =========
</TABLE>












The accompanying notes are an integral part of these statements.



                                       41
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

                   Notes To Consolidated Financial Statements

                           December 31, 2003 and 2002




NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    Royal Bancshares of Pennsylvania, Inc. (the Company), through its subsidiary
    Royal Bank of Pennsylvania (the Bank), offers a full range of banking
    services to individual and corporate customers located in eastern
    Pennsylvania. The Bank competes with other banking and financial
    institutions in certain markets, including financial institutions with
    resources substantially greater than its own. Commercial banks, savings
    banks, savings and loan associations, credit unions and money market funds
    actively compete for savings and time deposits and for various types of
    loans. Such institutions, as well as consumer finance and insurance
    companies, may be considered competitors of the Bank with respect to one or
    more of the services it renders.

    1.  Basis of Financial Statement Presentation
        -----------------------------------------

    The accompanying consolidated financial statements include the accounts of
    the Company and its wholly-owned subsidiaries: Royal Equity Partners, Inc.
    and the Bank, including the Bank's subsidiaries, Royal Real Estate, Inc.,
    Royal Investment of Pennsylvania, LLC, and Crusader Servicing Corporation.
    On June 22, 2001, the Bank purchased a 60% ownership in Crusader Servicing
    Corporation from Crusader Holding Corporation. All significant intercompany
    transactions and balances have been eliminated.

    In preparing the consolidated financial statements, management is required
    to make estimates and assumptions that affect the reported amounts of assets
    and liabilities as of the date of the balance sheet and revenues and
    expenditures for the period. Therefore, actual results could differ
    significantly from those estimates.

    The principal estimate that is particularly susceptible to significant
    change in the near term relates to the allowance for loan losses. In
    connection with this estimate, when circumstances warrant, management
    obtains independent appraisals for significant properties. However, future
    changes in real estate market conditions and the economy could affect the
    Company's allowance for loan losses.

    In addition to being subject to competition from other financial
    institutions, the Company is subject to regulations of certain federal
    agencies and, accordingly, it is periodically examined by those regulatory
    authorities.

    Statement of Financial Accounting Standards (SFAS) No. 131, "Segment
    Reporting" establishes standards for the way public business enterprises
    report information about operating segments. Operating segments are
    components of an enterprise about which separate financial information is
    available that is evaluated regularly by the chief operating decision maker
    in deciding how to allocate resources and assess performance. The statement
    also requires that public enterprises report a measure of segment profit of
    loss, certain specific revenue and expense items and segment assets. The
    Company has one reportable segment, "Community Banking." All of the
    Company's activities are interrelated, and each activity is dependent and
    assessed based on how each of the activities of the Company supports the
    others. For example, commercial lending is dependent upon the ability of the
    Bank to fund itself with retail deposits and other borrowings and to manage
    interest rate and credit risk. This situation is also similar for consumer
    and residential mortgage lending. Accordingly, all significant operating
    decisions are based upon analysis of the Company as one operating segment or
    unit.

    In January 2003, FASB issued FASB Interpretation No. 46, Consolidation of
    Variable Interest Entities ("FIN 46"). FIN 46 requires a variable interest
    entity to be consolidated by a company if that company is subject to a
    majority of the risk of loss from the variable interest entity's activities


                                   (Continued)



                                       42
<PAGE>



             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2003 and 2002




NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    or entitled to receive a majority of the entity's residual returns, or both.
    FIN 46 also requires disclosures about variable interest entities that a
    company is not required to consolidate, but in which it has a significant
    variable interest. The consolidation requirements of FIN 46 apply
    immediately to variable interest entities created after January 31, 2003.
    Subsequent to the issuance of FIN 46, the FASB issued a revised
    interpretation, FIN 46(R), the provisions of which must be applied to
    certain variable interest entities by March 31, 2004. Royal Bancshares is in
    the process of determining what impact, if any, the adoption of the
    provisions of FIN 46 will have upon its financial condition or results of
    operation.

2.  Investment Securities
    ---------------------

    Investment securities are classified in one of three categories: held to
    maturity, available for sale or trading. Debt securities that the Company
    has the positive intent and ability to hold to maturity are classified as
    held to maturity and are reported at amortized cost. As the Company does not
    engage in security trading, the balance of its debt securities and any
    equity securities are classified as available for sale. Net unrealized gains
    and losses for such investment securities available for sale, net of tax
    effect, are required to be recognized as a separate component of
    stockholders' equity and excluded from the determination of net income.
    Gains or losses on disposition are computed by the specific identification
    method.

    Royal Bancshares adopted EITF 03-1, The Meaning of Other than Temporary
    Impairment and Its Applications to Certain Investments, as of December 31,
    2003. EITF 03-1 includes certain disclosures regarding quantitative and
    qualitative disclosures for investment securities accounted for under FASB
    115, "Accounting for Certain Investments in Debt and Equity Securities",
    that are impaired at the balance sheet date, but an other than-temporary
    impairment has not been recognized. The disclosures under EITF 03-1 are
    required for financial statements for years ending after December 15, 2003
    and are included in these financial statements.

      The Company adopted the provisions of SFAS No. 133, "Accounting for
    Derivative Instruments and Hedging Activities" (SFAS No. 133), as amended,
    as of January 1, 2001. The statement requires the Company to recognize all
    derivative instruments at fair value as either assets or liabilities.
    Financial derivatives are reported at fair value in other assets or other
    liabilities. The accounting for changes in the fair value of a derivative
    instrument depends on whether it has been designated and qualifies as part
    of a hedging relationship. For derivatives not designated as hedges, the
    gain or loss is recognized in current earnings.

    3. Loans held for sale
       -------------------

    Residential mortgage loans are only originated for sale to the secondary
    mortgage loans market. These loans have a prior sales commitment on a best
    efforts basis in place prior to the loan closing. These loans are classified
    as loans held for sale and are carried at the lower of cost or estimated
    fair value. Fair value is determined by the purchase price quoted in the
    sales agreement.

    The Company accounts for the transfer of financial assets in accordance with
    SFAS No. 140 "Accounting for Transfers and Servicing of Assets and
    Extinguishments of Liabilities." The standard is based on consistent
    application of a financial-components approach that recognizes the financial
    and servicing assets it controls and the liabilities it has incurred,
    derecognizes financial assets when control has been surrendered and
    derecognizes liabilities when extinguished. The standard provides consistent
    guidelines for distinguishing transfers of financial assets from transfers
    that are secured borrowings.


                                   (Continued)




                                       43
<PAGE>



             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2003 and 2002


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    4. Loans and Allowance for Loan Losses
       -----------------------------------

    Loans that management has the intent and ability to hold for the foreseeable
    future or until maturity or payoff are stated at the amount of unpaid
    principal, reduced by unearned income and an allowance for loan and lease
    losses. The allowance for loan losses is maintained at a level believed
    adequate by management to absorb potential losses in the loan portfolio.
    Management's determination of the adequacy of the allowance is based on an
    evaluation of the portfolio, past loan loss experience, current economic
    conditions, volume, growth, and composition of the loan portfolio, and other
    relevant factors. The allowance is increased by provisions for loan losses
    charged against income. Decreases in the allowance result from management's
    determination that the allowance for loan losses exceeds their estimates of
    potential loan loss.

    Royal Bancshares accounts for its impaired loans in accordance with SFAS No.
    114, "Accounting by Creditors for Impairment of a Loan", was amended by SFAS
    No. 118, "Accounting by Creditors for Impairment of a Loan - Income
    Recognition and Disclosure", which requires that a creditor measure
    impairment based on the present value of expected future cash flows
    discounted at the loan's effective interest rate, except that as a practical
    expedient, a creditor may measure impairment based on a loan's observable
    market price, or the fair value of the collateral if the loan is
    collateral-dependent. Regardless of the measurement method, a creditor must
    measure impairment based on the fair value of the collateral when the
    creditor determines that foreclosure is probable.

    Interest on loans is accrued and credited to operations based upon the
    principal amount outstanding. Accretion of unearned discounts on loans has
    been added to the related interest income. Accrual of interest is
    discontinued on a loan when management believes that the borrower's
    financial condition is such that collection of interest is doubtful and
    generally when a loan becomes 90 days past due as to principal or interest.
    When interest accruals are discontinued, interest credited to income in the
    current year is reversed and interest accrued in the prior year is charged
    to the allowance for loan losses.

    On July 6, 2001, the Securities and Exchange Commission (SEC) issued Staff
    Accounting Bulletin (SAB) No. 102 "Selected Loan Loss Allowance Methodology
    and Documentation Issues". SAB No. 102 provides guidance on the development,
    documentation, and application of a systematic methodology for determining
    the allowance for loans and leases in accordance with US GAAP and is
    effective upon issuance. The adoption of SAB No. 102 did not have a material
    impact on the Company's financial position or results of operations.

    In October 2003, the AICPA issued SOP 03-3, Accounting for Loans or Certain
    Debt Securities Acquired in a Transfer. This statement addresses accounting
    for differences between contractual cash flows and cash flows expected to be
    collected from an investor's initial investment in loans or debt securities
    ("loans") acquired in a transfer as result of credit quality deterioration.
    The statement requires recognition of the excess of all cash flows expected
    at acquisition over the investor's initial investment in the loan as
    interest income on a level-yield basis over the life of the loan as the
    accretable yield. The loan's contractual required payments receivable in
    excess of the amount of its cash flows expected at acquisition
    (nonaccretable difference) should not be recognized as an adjustment to
    yield, a loss accrual or a valuation allowance for credit risk. This
    statement is effective for loans acquired in fiscal years beginning after
    December 31, 2004. Early adoption is permitted. Management is currently
    evaluating the provisions of SOP 03-3.

    Royal Bancshares adopted FIN 45 "Guarantor's Accounting and Disclosure
    Requirements for Guarantees, including Indirect Guarantees of Indebtedness
    of Others" on January 1, 2003 ("FIN 45"). FIN 45 requires a guarantor
    entity, at the inception of a guarantee covered by the measurement


                                   (Continued)






                                       44
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2003 and 2002


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    provisions of the interpretation, to record a liability for the fair value
    of the obligation undertaken in issuing the guarantee. Royal Bancshares has
    financial and performance letters of credit. Financial letters of credit
    require a company to make a payment if the customer's condition
    deteriorates, as defined in agreements. Performance letters of credits
    require Royal Bancshares to make payments if the customer fails to perform
    certain non-financial contractual obligation. Royal Bancshares previously
    did not record a liability when guaranteeing obligations unless it became
    probable that Royal Bancshares would have to perform under the guarantee.

    5.  Other Real Estate
        -----------------

    Other real estate is recorded at the lower of the customer's loan balance or
    the adjusted fair market value of the real estate securing the loan. The
    adjusted fair market value is determined by reducing the fair market value
    by estimated costs for the disposition of the property. Costs relating to
    holding the property are expensed when incurred. Other real estate owned of
    approximately $4,371,000 and $1,444,000 at December 31, 2003 and 2002,
    respectively, is included in other assets on the consolidated balance
    sheets.

                                   (Continued)

















                                       45
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2003 and 2002




NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    6. Premises and Equipment
       ----------------------

    Premises and equipment are stated at cost less accumulated depreciation,
    which is computed principally on the MACRS method over the estimated useful
    lives of the assets. Leasehold improvements are amortized on the MACRS
    method over the shorter of the estimated useful lives of the improvements or
    the terms of the related leases.

    The Company adopted FASB issued SFAS No. 144, "Accounting for the Impairment
    or Disposal of Long-Lived Assets" on January 1, 2001. SFAS No. 144 retains
    the existing requirements to recognize and measure the impairment of
    long-lived assets to be held and used or to be disposed of by sale. The
    adoption of this statement did not have a significant impact on the
    financial condition or results of operations of the Company.

    7. Bank-Owned Life Insurance
       -------------------------

    Royal bank has purchased life insurance policies on certain executives.
    These policies are recorded in other assets at their cash surrender value,
    or the amount that can be realized. Income from these policies and changes
    in the cash surrender value are recorded in other income.

    8. 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 as measured by the enacted tax rates which
    will be in effect when these differences reverse. Deferred tax expense is
    the result of changes in deferred tax assets and liabilities. The principal
    types of differences between assets and liabilities for financial statement
    and tax return purposes are the allowance for loan losses, asset valuation
    reserves and net operating loss carryovers.

    9. Per Share Information
       ---------------------

    Basic EPS excludes dilution and is computed by dividing income available to
    common shareholders by the weighted average common shares outstanding during
    the period. Diluted EPS takes into account the potential dilution that could
    occur if securities or other contracts to issue common stock were exercised
    and converted into common stock.

    10. Stock Option Plans
        ------------------

    The Company accounts for stock options under SFAS No. 123, Accounting for
    Stock-Based Compensation, as Amended by SFAS No.148, which contains a fair
    value-based method for valuing stock-based compensation that entities may
    use, which measures compensation cost at the grant date based on fair value
    of the award. Compensation is recognized over service period, which is
    usually the vesting period. Alternatively, SFAS No. 123 permits entities to
    continue accounting for employee stock options and similar equity
    instruments under Accounting Principles Board (APB) Opinion 25, Accounting


                                   (Continued)



                                       46
<PAGE>



             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2003 and 2002


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    for Stock Issued to Employees. Entities that continue to account for stock
    options using APB Opinion 25 are required to make a proforma disclosures of
    net income and earnings per share, as if the fair value-based method of
    accounting defined in SFAS No. 123 had been applied.

    At December 31, 2003, the Company had both a director and employee
    stock-based compensation plan, which is more fully described in Note M. The
    Company accounts for that plan under the recognition and measurement
    principles of APB No. 25, "Accounting for Stock Issued to Employees", and
    related interpretations. Stock-based employee compensation cost are not
    reflected in net income, as all options granted under the plan had an
    exercise price equal to the market value under the underlying common stock
    of the date of the grant. The following table illustrates the effect on net
    loss and loss per share if the Company had applied the fair value
    recognition provisions of FASB No. 123, "Accounting for Stock-Based
    Compensation", to stock-based employee compensation.
<TABLE>
<CAPTION>
                                                                       2003              2002               2001
                                                                       ----             -------           -------
           <S>                                                        <C>               <C>               <C>
           Net income (loss), as reported                             $18,526           $17,405           $15,754
           Less: Stock-based compensation costs under
                    Fair value based method for all awards               (425)             (435)              (96)
                                                                      -------           -------           -------
           Pro forma net income (loss)                                 18,101            16,970            15,658

           Earnings per share -Basis        As Reported                 $1.52             $1.44             $1.32
                                              Pro forma                  1.49              1.40              1.32

           Earnings per share -Diluted      As Reported                  1.52              1.41              1.30
                                              Pro forma                  1.49              1.38              1.30
</TABLE>
    11. Benefit Plans
        -------------

    The Company has a noncontributory nonqualified, defined benefit pension plan
    covering certain eligible employees. Net pension expense consists of service
    costs, interest costs, return on pension assets and amortization of
    unrecognized initial net assets. The Company accrues pension costs as
    incurred.

    12. Cash and Cash Equivalents
        -------------------------

    For purposes of reporting cash flows, cash and cash equivalents include cash
    on hand, amounts due from banks, short-term investments and federal funds
    sold. Generally, federal funds are purchased and sold for one-day periods.

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

    SFAS No. 107, "Disclosures About Fair Value of Financial Instruments",
    requires all entities to disclose the estimated fair value of their assets
    and liabilities considered to be financial instruments. Financial
    instruments consist primarily of investment securities, loans and deposits.


                                   (Continued)


                                       47
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2003 and 2002


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    14. Advertising Costs
        -----------------

    The Company and the Bank expense advertising costs as incurred.

    15. Comprehensive Income
        --------------------

    The Company reports comprehensive income which includes net income as well
    as certain other items, which result in a change to equity during the
    period.

    The income tax effects allocated to comprehensive income is as follows (in
thousands):
<TABLE>
<CAPTION>
                                                                                  December 31, 2003
                                                                   ---------------------------------------------
                                                                                         Tax           Net of
                                                                    Before tax        (benefit)         tax
                                                                      amount           expense         amount
                                                                   -----------       -----------     -----------
      <S>                                                         <C>               <C>              <C>
       Unrealized gains on securities
          Unrealized holding gains arising during period          $      6,791       $     2,316     $     4,475
          Less reclassification adjustment for gains
              realized in net income                                       719               244             475
                                                                  ------------       -----------     -----------

          Other comprehensive gain, net                           $      6,072       $     2,072     $     4,000
                                                                  ============       ===========     ===========
</TABLE>
<TABLE>
<CAPTION>
                                                                                  December 31, 2002
                                                                   ----------------------------------------------
                                                                                         Tax           Net of
                                                                    Before tax        (benefit)         tax
                                                                      amount           expense         amount
                                                                   -----------       -----------     -----------
       <S>                                                         <C>               <C>             <C>
       Unrealized gains on securities
          Unrealized holding losses arising during period         $      8,436       $     2,868     $     5,568
          Less reclassification adjustment for gains
              realized in net income                                       790               269             521
                                                                  ------------       -----------     -----------

          Other comprehensive gain,  net                          $      7,646       $     2,599     $     5,047
                                                                  ============       ===========     ===========
</TABLE>
<TABLE>
<CAPTION>
                                                                                  December 31, 2001
                                                                   ---------------------------------------------
                                                                                         Tax            Net of
                                                                    Before tax         (benefit)         tax
                                                                      amount           expense          amount
                                                                   -----------       -----------     -----------
       <S>                                                         <C>               <C>             <C>
       Unrealized losses on securities
          Unrealized holding gains arising during period          $     (3,213)      $    (1,131)    $    (2,082)
          Less reclassification adjustment for losses
              realized in net income                                        60                20              40
                                                                  ------------       -----------     -----------

          Other comprehensive loss, net                           $     (3,153)      $    (1,111)    $    (2,042)
                                                                  ============       ===========     ===========
</TABLE>



                                   (Continued)



                                       48
<PAGE>


             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2003 and 2002


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    16. Reclassifications
        -----------------

    Certain reclassifications of prior year amounts have been made to conform to
    the current year presentation.

    17. Summary of accounting policies
        ------------------------------

    In January 2003, FASB issued FASB Interpretation No. 46, Consolidation of
    Variable Interest Entities ("FIN 46"). FIN 46 requires a variable interest
    entity to be consolidated by a company if that company is subject to a
    majority of the risk of loss from variable interest entity's activities or
    entitled to receive a majority of the entity's residual returns, or both.
    FIN 46 also requires disclosures about variable interest entities that a
    company is not required to consolidate, but in which it has a significant
    variable interest. The consolidation requirements of FIN 46 apply
    immediately to variable interest entities created after January 31, 2003.
    The consolidation requirements apply to existing entities in the first
    fiscal year or interim period beginning after June 15, 2003. The company is
    in the process of determining what impact, if any, the adoption of
    provisions of FIN 46 will have upon its financial condition or results of
    operation.

NOTE B - ACQUISITIONS

    As of June 22, 2001, Royal Bancshares of Pennsylvania completed its
    acquisition of the assets of Crusader Holding Corporation (Crusader). Under
    the terms of the acquisition, certain assets and liabilities were purchased
    for approximately $41,500,000, which represented the approximate fair value
    of the net assets acquired. Included in this purchase was approximately
    $331,300,000 of assets, of which $236,500,000 was related to the loan
    portfolio. The purchase also included the assumption of deposits in the
    approximate amount of $251,000,000. The purchase price was paid in cash.
    This transaction was accounted for under the purchase method of accounting.
    There was no goodwill recorded in connection with this transaction.

    The Financial Accounting Standards Board (FASB) issued SFAS No. 147,
    Acquisitions of Certain Financial Institutions: An amendment of FASB
    Statement No. 72 and 144 and FASB Interpretation No 9, which removes
    acquisitions of financial institutions from the scope of SFAS 72, Accounting
    for Certain Acquisitions of Banking or Thrift Institutions, except for
    transactions between mutual enterprises. SFAS No. 147 also requires that the
    acquisition of a less-than-whole financial institution, such as a branch, be
    accounted for as a business combination if the transferred assets and
    activities constitute a business. The adoption of SFAS No. 147 did not have
    a material impact on the Company's financial position or results of
    operations.


NOTE C - SEGMENT INFORMATION

    SFAS No. 131, Segment Reporting, establishes standards for public business
    enterprises to report information about operating segments in their annual
    financial statements and requires that those enterprises report selected
    information about operating segments in subsequent interim financial reports
    issued to shareholders. It also established standards for related disclosure
    about products and services, geographic areas, and major customers.
    Operating segments are components of an enterprise, which are evaluated
    regularly by chief operating decision maker in deciding how to allocate and
    assess resources and performance. The Company's chief operating decision
    maker is the President and Chief Executive Officer. The Company has
    identified its reportable operating segment as "Community Banking".

                                   (Continued)



                                       49
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2003 and 2002


NOTE C - SEGMENT INFORMATION - Continued

    The Company's community banking segment consists of commercial and retail
    banking. The community banking business segment is managed as a single
    strategic unit which generates revenue from a variety of products and
    services provided by the Banks. For example, commercial lending is dependent
    upon the ability of the Bank to fund itself with retail deposits and other
    borrowings and to manage interest rate and credit risk. This situation is
    also similar for consumer and residential mortgage lending.

    The Company's tax lien operation does not meet the quantitative thresholds
    for requiring disclosure, but has different characteristics to the community
    banking operation. The Company's tax lien operation consists of purchasing
    delinquent tax certificates from local municipalities at auction. The tax
    lien segment is managed as a single strategic unit which generates revenue
    from a nominal interest rate achieved at the individual auction along with
    periodic penalties imposed.

    The accounting policies used in this disclosure of business segments are the
    same as those described in the summary of significant accounting policies.
    The consolidating adjustments reflect certain eliminations of inter-segment
    revenues, cash and investments in subsidiaries.

    Selected segment information and reconciliations to consolidated financial
    information is as follows:
<TABLE>
<CAPTION>
                                                                      Community      Tax Lien
(in thousands)                                                          Bank        Operation       Consolidated
                                                                      ---------     ---------       ------------
<S>                                                                  <C>            <C>             <C>
December 31, 2003
  Total assets                                                       $1,103,619      $50,791         $1,154,410
  Total deposits                                                        791,059           --            791,059
  Net interest income                                                    38,273        3,432             41,705
  Total non-interest income                                               3,196          508              3,704
  Total non-interest expense                                             23,551        3,332             26,883
                                                                     ----------      -------         ----------
  Net Income                                                             17,918          608             18,526

December 31, 2002
  Total assets                                                       $1,040,389      $48,095         $1,088,484
  Total deposits                                                        820,840           --            820,840
  Net interest income                                                    37,185        3,178             40,363
  Total non-interest income                                               2,829          371              3,200
  Total non-interest expense                                             23,173        2,985             26,158
                                                                     ----------      -------         ----------
  Net Income                                                             16,841          564             17,405
</TABLE>

    Interest was paid to the Community Bank segment by the Tax Lien Operation
    was approximately $1,879,000 and $2,039,000 for the years ending December
    31, 2003 and 2002, respectively.



                                       50
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2003 and 2002


NOTE D - INVESTMENT SECURITIES

    The amortized cost, gross unrealized gains and losses, and fair value of the
    Company's investment securities held to maturity and available for sale are
    summarized as follows (in thousands):
<TABLE>
<CAPTION>
                                                                       2003
                                                 ----------------------------------------------
                                                                Gross        Gross
                                                 Amortized    unrealized   unrealized    Fair
                                                   cost         gains        losses      value
                                                 --------      -------      -------    --------
       <S>                                       <C>           <C>          <C>        <C>
       Investment securities held to maturity
          Corporate securities                   $ 21,121      $ 1,481      $    --    $ 22,602
          U.S. government agencies                 91,630          168         (465)     91,333
          Mortgage backed securities                  340           --           --         340
                                                 --------      -------      -------    --------
                                                 $113,091      $ 1,649      $  (465)   $114,275
                                                 ========      =======      =======    ========
</TABLE>

<TABLE>
<CAPTION>
                                                                       2003
                                                 ----------------------------------------------
                                                                Gross        Gross
                                                 Amortized    unrealized   unrealized    Fair
                                                   cost         gains       losses       value
                                                 --------      -------      -------    --------
       <S>                                       <C>           <C>          <C>        <C>
       Investment securities available for sale
          Federal Home Loan Bank stock           $ 11,407      $    --      $    --    $ 11,407
          Preferred and common stock                   40           15           --          55
          Corporate bonds                         148,487        8,474          (12)    156,949
          U.S. government agencies                122,785          139       (1,812)    121,112
          Trust preferred securities               36,251        3,049       (2,161)     37,139
          Foreign bonds                            11,363          803           --      12,166
          Mortgage backed securities              110,596        1,345          (66)    111,875
          Other securities                          1,598           --          (55)      1,543
                                                 --------      -------      -------    --------
                                                 $442,527      $13,825      $(4,106)   $452,246
                                                 ========      =======      =======    ========
</TABLE>
<TABLE>
<CAPTION>
                                                                      2002
                                                 ----------------------------------------------
                                                                Gross        Gross
                                                Amortized     unrealized   unrealized    Fair
                                                   cost         gains       losses       value
                                                 --------      -------      -------    --------
       <S>                                       <C>           <C>          <C>        <C>
       Investment securities held to maturity
          Corporate securities                   $ 30,076      $ 2,131      $    --    $ 32,207
          U.S. government agencies                     --           --           --          --
          Mortgage backed securities                  538           --           --         538
                                                 --------      -------      -------    --------
                                                 $ 30,614      $ 2,131      $    --    $ 32,745
                                                 ========      =======      =======    ========
</TABLE>



                                       51
<PAGE>




             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2003 and 2002


NOTE D - INVESTMENT SECURITIES - Continued
<TABLE>
<CAPTION>
                                                                        2002
                                                 --------------------------------------------------
                                                                 Gross        Gross
                                                 Amortized    unrealized    unrealized       Fair
                                                   cost         gains         losses         value
                                                 --------      --------      --------      --------
       <S>                                       <C>           <C>           <C>           <C>
       Investment securities available for sale
          Federal Home Loan Bank stock           $  8,949      $     --      $     --      $  8,949
          Preferred and common stock                   56            --            --            56
          Corporate bonds                         111,227         4,732          (221)      115,738
          Trust preferred securities               39,160           726        (2,557)       37,329
          Foreign bonds                            16,068           554          (259)       16,363
          Mortgage backed securities              235,965         1,155          (487)      236,633
          Other securities                          3,247             1            -          3,248
                                                 --------      --------      --------      --------
                                                 $414,672      $  7,168      $ (3,524)     $418,316
                                                 ========      ========      ========      ========
</TABLE>
    The amortized cost and estimated fair value of investment securities at
    December 31, 2003, by contractual maturity, are shown below (in thousands).
    Expected maturities will differ from contractual maturities because
    borrowers may have the right to call or prepay obligations with or without
    call or prepayment penalties.
<TABLE>
<CAPTION>
                                                                        2003
                                                 --------------------------------------------------
                                                    Held to maturity           Available for sale
                                                 ----------------------      ----------------------
                                                 Amortized       Fair        Amortized       Fair
                                                    cost         value         cost         value
                                                 --------      --------      --------      --------
       <S>                                       <C>           <C>           <C>           <C>
       Within 1 year                             $  4,140      $  4,326      $  9,268      $  9,675
       After 1 but within 5 years                  17,049        18,344       148,403       157,018
       After 5 but within 10 years                 49,315        48,850        96,796        95,773
       After 10 years                              42,587        42,755       176,613       178,318
       Federal Home Loan Bank stock                    --            --        11,407        11,407
       Preferred and common stocks                     --            --            40            55
                                                 --------      --------      --------      --------
                                                 $113,091      $114,275      $442,527      $452,246
                                                 ========      ========      ========      ========
</TABLE>
    Proceeds from the sale of investment securities available for sale during
    2003, 2002 and 2001 were $91,339,000, $115,250,000 and $4,850,000,
    respectively, resulting in gross realized gain (loss) of $719,000, $790,000
    and $60,000 during 2003, 2002 and 2001, respectively.

    As of December 31, 2003 and 2002, investment securities with a book value of
    $11,185,000 and $135,499,000, respectively, were pledged as collateral to
    secure public deposits and for other purposes required or permitted by law.



                                       52
<PAGE>



             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2003 and 2002


NOTE D - INVESTMENT SECURITIES - Continued

    The table below indicates the length of time individual securities have been
    in a continuous unrealized loss position at December 31, 2003:
<TABLE>
<CAPTION>
   Description of
   Securities                        Less than 12 months       12 months or longer           Total
                                                  Unrealized   Fair      Unrealized               Unrealized
                                 Fair Value         Losses     Value       Losses    Fair Value      Losses
                                 ----------------------------------------------------------------------------
                                 <S>         <C>            <C>       <C>          <C>         <C>
   US Agencies                     $126,998         $2,277     $  --        $  --    $126,998        $2,277
   MBS                               29,763             66        --           --      29,763            66
   Corporate Bonds                    2,058             91    20,074        2,137      22,132         2,228
                                 --------------------------------------------------------------------------
   Subtotal debt securities         158,819          2,434    20,074        2,137     178,893         4,571
   Common Stock                          --             --        --           --          --            --
                                 --------------------------------------------------------------------------
   Total temporarily
   impaired securities             $158,819         $2,434   $20,074       $2,137    $178,893        $4,571
</TABLE>

NOTE E - LOANS

    Major classifications of loans are as follows (in thousands):
<TABLE>
<CAPTION>
                                                                                      2003              2002
                                                                                  -------------    -------------
       <S>                                                                        <C>              <C>
       Commercial and industrial                                                   $   225,268      $   241,373
       Real Estate
           Construction and land development                                           107,463           82,736
           Residential                                                                  60,367          127,230
           Other                                                                       119,167          124,006
       Consumer                                                                          4,942            3,509
                                                                                   -----------      -----------
               Total gross loans                                                       517,207          578,854
       Less
          Unearned income                                                               (1,203)          (1,082)
          Unamortized discount on purchased loans                                         (290)          (1,038)
                                                                                   -----------      -----------
               Total loans                                                         $   515,714      $   576,734
                                                                                   ===========      ===========
</TABLE>
    Loans on which the accrual of interest has been discontinued or reduced
    amounted to approximately $11,328,000 and $11,908,000 at December 31, 2003
    and 2002, respectively. If interest had been accrued, such income would have
    been approximately $401,000, $473,000 and $526,000 for the years ended
    December 31, 2003, 2002 and 2001, respectively. Management believes it has
    adequate collateral to limit its credit risk with these loans.

    The Company granted loans to the officers and directors of the Company and
    to their associates. Related party loans are made on substantially the same
    terms, including interest rates and collateral, as those prevailing at the
    time for comparable transactions with unrelated persons and do not involve
    more than normal risk of collectibility. The aggregate dollar amount of
    these loans was $4,667,000 and $5,290,000 at December 31, 2003 and 2002,
    respectively. During 2003, two new loans in the amount $2,717,000 were made
    and repayments totaled $3,340,000.


                                   (Continued)



                                       53
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2003 and 2002


NOTE E - LOANS -Continued

    The balance of impaired loans, which include the loans on which the accrual
    of interest has been discontinued, was approximately $11,328,000 and
    $11,966,000 at December 31, 2003 and 2002, respectively. The Company has
    identified a loan as impaired when it is probable that interest and
    principal will not be collected according to the contractual terms of the
    loan agreements. The income recognized on impaired loans during 2003 was
    $1,000.

    Total cash collected on impaired loans during 2003 was $108,000 of which
    $107,000 was credited to the principal balance outstanding on such loans.
    Interest that would have been accrued on impaired loans during 2003 was
    $401,000. The Company's policy for interest income recognition on impaired
    loans is to recognize income on currently performing restructured loans
    under the accrual method. The Company recognizes income on non-accrual loans
    under the cash basis when the principal payments on the loans become current
    and the collateral on the loan is sufficient to cover the outstanding
    obligation to the Company. If these factors do not exist, the Company does
    not recognize income.

    The Company primarily grants commercial and real estate loans in the greater
    Philadelphia metropolitan area. The Company has concentrations of credit
    risk in real estate development loans at December 31, 2003. A substantial
    portion of its debtors' ability to honor these contracts is dependent upon
    the economic sector.


    Changes in the allowance for loan losses were as follows (in thousands):
<TABLE>
<CAPTION>
                                                                  2003       2002        2001
                                                                 -------    -------     -------
       <S>                                                       <C>        <C>         <C>
       Balance at beginning of year                              $12,470    $11,888     $11,973
          Charge-offs                                               (811)      (925)       (517)
          Recoveries                                                  93      1,257         432
                                                                 -------    -------     -------
          Net charge-offs                                           (718)       332         (85)
          Provision for loan losses                                  674        250          --
                                                                 -------    -------     -------

       Balance at end of year                                    $12,426    $12,470     $11,888
                                                                 =======    =======     =======
</TABLE>



                                   (Continued)



                                       54
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2003 and 2002


NOTE F - PREMISES AND EQUIPMENT

    Premises and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
                                                                  Estimated
                                                                 useful lives         2003              2002
                                                               ---------------    -------------    -------------
       <S>                                                     <C>                <C>              <C>
       Land                                                            -           $      2,396     $      2,396
       Buildings and leasehold improvements                      15 - 31.5 years          6,989            6,424
       Furniture and fixtures                                      3 - 7 years            5,605            5,748
                                                                                   ------------     ------------
                                                                                         14,990           14,568
       Less accumulated depreciation and amortization                                     7,510            6,566
                                                                                   ------------     ------------
                                                                                   $      7,480     $      8,002
                                                                                   ============     ============
</TABLE>

    Depreciation and amortization in expense was approximately $944,000,
    $1,296,000 and $865,000 for the years ended 2003, 2002 and 2001,
    respectively.


NOTE G - DEPOSITS

    Deposits are summarized as follows (in thousands):
<TABLE>
<CAPTION>
                                                                                      2003              2002
                                                                                  -------------    -------------
       <S>                                                                        <C>              <C>
       Demand                                                                      $     58,942     $     55,575
       NOW and money market                                                             471,140          412,860
       Savings                                                                           24,075           22,212
       Time, $100,000 and over                                                          104,123          180,977
       Other time                                                                       132,779          149,216
                                                                                   ------------     ------------
                                                                                   $    791,059     $    820,840
                                                                                   ============     ============
</TABLE>

    Maturities of certificates of deposit for the next five years and thereafter
are as follows (in thousands):
<TABLE>
       <S>                                                                                          <C>
       2004                                                                                         $    132,710
       2005                                                                                               58,371
       2006                                                                                               20,754
       2007                                                                                                8,196
       2008                                                                                               11,255
       Thereafter                                                                                          5,616
                                                                                                    ------------
                                                                                                    $    236,902
                                                                                                    ============
</TABLE>



                                   (Continued)


                                       55
<PAGE>


             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2003 and 2002


NOTE H - BORROWINGS

    1.  Advances from the Federal Home Loan Bank

    At December 31, 2003, advances from the Federal Home Loan Bank (FHLB)
    totaling $212,000,000 will mature within one to ten years. The advances are
    collateralized by FHLB stock and certain first mortgage loans and
    mortgage-backed securities. These advances had a weighted average interest
    rate of 3.90%.

       Outstanding borrowings mature as follows (in thousands):

              2004                                                   $       --
              2005                                                        7,500
              2006                                                       30,000
              2007                                                           --
              2008                                                           --
              Thereafter                                                174,500
                                                                     ----------

                                                                     $  212,000


NOTE I - LEASE COMMITMENTS

    The Company leases various premises under non-cancelable agreements, which
    expire through 2012 and require minimum annual rentals. The approximate
    minimum rental commitments under the leases are as follows for the year
    ended December 31, (in thousands):

                2004                                                 $      511
                2005                                                        405
                2006                                                        251
                2007                                                        229
                2008                                                        214
                Thereafter                                                  428
                                                                     ----------

                                                                     $    2,038


    Rental expense for all leases was approximately $612,000, $614,000 and
    $501,000 for the years ended December 31, 2003, 2002 and 2001, respectively.










                                   (Continued)



                                       56
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2003 and 2002



NOTE J - COMMON STOCK

    Each holder of Class A and Class B common stock is entitled to one vote for
    each Class A share and ten votes for each Class B share held. Holders of
    either class of common stock are entitled to equal per share dividends when
    declared.

    The Class B shares may not be transferred in any manner except to the
    holder's immediate family. Class B shares maybe converted to Class A shares
    at the rate of 1.15 to 1.

    Per share information and weighted average shares outstanding have been
    restated to reflect the 2% stock dividend of January 2004, the 3% stock
    dividend of January 2003, the 6% stock dividend of January 2002, and the 5%
    stock dividend of January 2001.

NOTE K - INCOME TAXES

    The components of the income tax expense (benefit) included in the
    consolidated statements of income are as follows (in thousands):
<TABLE>
<CAPTION>
                                                                     2003             2002              2001
                                                                -------------     -------------    -------------
       <S>                                                      <C>               <C>              <C>
       Income tax expense (benefit)
          Current                                                $      9,221      $      7,269     $      6,485
          Deferred federal tax                                         (1,225)              (32)          (1,560)
       Benefit applied to reduce goodwill                                  --                --              872
                                                                 ------------      ------------     ------------
                                                                 $      7,996      $      7,237     $      5,797
                                                                 ============      ============     ============
</TABLE>

    The difference between the applicable income tax expense and the amount
    computed by applying the statutory federal income tax rate of 35% in 2003,
    2002 and 2001 is as follows (in thousands):
<TABLE>
<CAPTION>
                                                                     2003             2002              2001
                                                                -------------     -------------    -------------
       <S>                                                      <C>               <C>              <C>
       Computed tax expense at statutory rate                    $      9,286      $      8,620     $      7,543
       Tax-exempt income                                                 (263)             (101)            (130)
       Low-income housing tax credit                                     (545)             (545)            (650)
       Other, net                                                        (482)             (737)            (966)
       Effect of 34% rate bracket                                           -               -                -
                                                                 ------------      ------------     ------------
       Applicable income tax expense                             $      7,996      $      7,237     $      5,797
                                                                 ============      ============     ============
</TABLE>





                                   (Continued)



                                       57
<PAGE>


             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2003 and 2002




NOTE K - INCOME TAXES - Continued

    Deferred tax assets and liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
                                                                                      2003              2002
                                                                                  -------------    -------------
       <S>                                                                        <C>              <C>
       Deferred tax assets
          Allowance for loan losses                                                  $    4,153       $    2,843
          Unrealized losses on investment securities available for sale                      --               --
          Accrued stock-based compensation                                                  149              194
          Asset valuation reserves                                                          812              812
          Other                                                                           1,671            1,458
          Net operating loss carryovers from Knoblauch State Bank                         7,107            7,277
                                                                                     ----------       ----------
                                                                                         13,892           12,584
       Less valuation allowance                                                          (7,107)          (7,277)
                                                                                     ----------       ----------
                                                                                          6,785            5,307
                                                                                     ----------       ----------

       Deferred tax liabilities
          Unrealized gains on investment securities available for sale                    3,304            1,199
          Other                                                                             975              722
                                                                                     ----------       ----------
                                                                                          4,279            1,921
                                                                                     ----------       ----------

              Net deferred tax asset, included in other assets                       $    2,506       $    3,386
                                                                                     ==========       ==========
</TABLE>
    The Company has approximately $21,000,000 of net operating loss carryovers
    from the acquisition of Knoblauch State Bank (KSB). These losses will fully
    expire in 2015. The utilization of these losses is subject to limitation
    under Section 382 of the Internal Revenue Code. As a result, a valuation
    allowance has been established to eliminate the deferred tax asset
    attributable to these net operating losses.

    During 2003, 2002 and 2001, the Company realized a tax benefit related to
    the net operating loss carryovers from the acquisition of KSB. The deferred
    tax asset associated with those loss carryovers is fully offset by a
    valuation allowance. Accordingly, the realized tax benefit is reflected as a
    reduction of the goodwill associated with the acquisition and a
    corresponding reduction of deferred income tax benefit for the year.













                                   (Continued)


                                       58
<PAGE>
             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2003 and 2002




NOTE K - INCOME TAXES - Continued

    In addition, the Company has approximately $15,700,000 of tax goodwill from
    the acquisition of KSB. The ability to deduct this goodwill for tax purposes
    will expire in 2015. The utilization of this goodwill for tax purposes was
    subject to the limitations under Section 382 of the Internal Revenue Code.
    For 2003, approximately $1,353,000 has been deducted for tax purposes.

    For 2001, the Company has taken a recovery of $550,000 from income tax
    payable and reduced its federal income tax expense accordingly in order to
    recapture a provision established for issues that arose concerning the low
    income housing tax credits acquired from the Kearsley limited partnership in
    1994. All issues regarding this tax credit were resolved favorably and as a
    result there is no need to maintain this tax reserve.

NOTE L - EARNINGS PER SHARE

    Basic and diluted EPS are calculated as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
                                                                                    2003
                                                                ----------------------------------------------
                                                                  Income        Average shares       Per share
                                                                (numerator)     (denominator)         amount
                                                                -----------     --------------       ---------
       <S>                                                      <C>             <C>                  <C>
       Basic EPS
          Income available to common shareholders               $    18,526             12,149       $    1.52

       Effect of dilutive securities
          Stock options                                                  --                 52              --
                                                                -----------     --------------       ---------

       Diluted EPS
          Income available to common shareholders
              plus assumed exercise of options                  $    18,526             12,188       $    1.52
                                                                ===========     ==============       =========
</TABLE>

    All options to purchase shares of common stock were included in the
    computation of 2003 diluted EPS because the exercise price was less than the
    average market price of the common stock.
<TABLE>
<CAPTION>
                                                                                    2002
                                                                ----------------------------------------------
                                                                   Income       Average shares       Per share
                                                                (numerator)      (denominator)        amount
                                                                -----------     --------------       ---------
       <S>                                                      <C>             <C>                  <C>
       Basic EPS
          Income available to common shareholders               $    17,405             12,082       $    1.44
       Effect of dilutive securities
          Stock options                                                   -                253           (0.03)
                                                                -----------     --------------       ---------
       Diluted EPS
          Income available to common shareholders
              plus assumed exercise of options                  $    17,405             12,335       $    1.41
                                                                ===========     ==============       =========
</TABLE>
    All options to purchase shares of common stock were included in the
    computation of 2002 diluted EPS because the exercise price was less than the
    average market price of the common stock.

                                   (Continued)



                                       59
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2003 and 2002



NOTE L - EARNINGS PER SHARE - Continued
<TABLE>
<CAPTION>
                                                                                      2001
                                                                ----------------------------------------------
                                                                   Income       Average shares       Per share
                                                                (numerator)      (denominator)         amount
                                                                -----------     --------------       ---------
       <S>                                                      <C>             <C>                  <C>
       Basic EPS
          Income available to common shareholders               $    15,754             11,904       $    1.32
       Effect of dilutive securities
          Stock options                                                   -                174           (0.02)
                                                                -----------     --------------       ---------
       Diluted EPS
          Income available to common shareholders
              plus assumed exercise of options                  $    15,754             12,079       $    1.30
                                                                ===========     ==============       =========
</TABLE>

    All options to purchase shares of common stock were included in the
    computation of 2001 diluted EPS because the exercise price was less than the
    average market price of the common stock.


NOTE M - STOCK OPTION PLANS

    The Company has two stock-based compensation plans, which are described
    below. The Company accounts for these plans under APB Opinion No. 25.

    1.  Outside Directors' Stock Option Plan

    The Company adopted a non-qualified outside Directors' Stock Option Plan
    (the Director's Plan). Under the terms of the Director's Plan, 250,000
    shares of Class A stock are authorized for grants. Each director is entitled
    to 1,500 shares of stock annually, which are exercisable one year after the
    grant date. The options were granted at the fair market value at the date of
    the grant.

    Stock option transactions consist of the following:
<TABLE>
<CAPTION>
                                                2003                     2002                     2001
                                      -----------------------   -----------------------   ----------------------
                                                   Weighted                  Weighted                 Weighted
                                                    average                  average                 average
                                                   exercise                  exercise                exercise
                                        Shares       price        Shares       price       Shares      price
                                       ---------  -----------   ---------   -----------   ---------  -----------
       <S>                             <C>        <C>           <C>         <C>           <C>        <C>
       Outstanding at beginning
             of year                     78,717    $ 13.18         73,820    $  11.70       62,593    $ 11.82
          Granted                        16,356      20.36         15,723       19.95       16,167      13.66
          Exercised                     (25,012)     12.27        (10,826)       9.85       (4,940)     10.09
          Cancelled                           -          -              -           -            -          -
                                        -------                   -------                   ------
       Outstanding at end of year        70,061      15.21         78,717    $  13.18       73,820    $ 11.82
                                        =======                   =======                   ======
       Weighted average fair value
          of options granted during
          the year                                 $  3.62                   $   8.70                 $  3.36
</TABLE>


                                   (Continued)



                                       60
<PAGE>



             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2003 and 2002


NOTE M - STOCK OPTION PLANS - Continued

    The following table summarizes information about options outstanding and
exercisable at December 31, 2003:
<TABLE>
<CAPTION>
                                        Options outstanding                      Options exercisable
                          -----------------------------------------------    ---------------------------
                                              Weighted
                                               average        Weighted                          Weighted
                                              remaining       average                           average
           Range of           Number         contractual      exercise            Number        exercise
        exercise prices    outstanding      life (years)        price           exercisable       price
        ---------------   -------------     ------------    -------------    ----------------    ------
        <S>               <C>               <C>             <C>              <C>                 <C>
        $5.33 - 7.25          5,641              1.2         $  6.09              5,641          $ 6.09
        $9.97 - 13.01        26,985              5.8           12.17             26,985           12.17
        $15.04 - 19.96       37,435              7.7           18.76             22,135           15.69
                             ------                                              ------
                             70,061                                              54,761
                             ======                                              ======
</TABLE>

    2. Employee Stock Option and Appreciation Right Plan
       -------------------------------------------------

    The Company adopted a Stock Option and Appreciation Right Plan (the Plan).
    The Plan is an incentive program under which Company officers and other key
    employees may be awarded additional compensation in the form of options to
    purchase up to 1,500,000 shares of the Company's Class A common stock (but
    not in excess of 15% of outstanding shares). At the time a stock option is
    issued, a stock appreciation right for an identical number of shares may
    also be granted. The option price is equal to the fair market value at the
    date of the grant. The options are exercisable at 20% per year beginning one
    year after the date of grant and must be exercised within ten years of the
    grant.

    Stock option transactions consist of the following:
<TABLE>
<CAPTION>
                                                2003                     2002                     2001
                                      -----------------------   -----------------------   ----------------------
                                                   Weighted                   Weighted                 Weighted
                                                    average                    average                  average
                                                   exercise                   exercise                 exercise
                                        Shares       price        Shares       price       Shares       price
                                       ---------  -----------   ---------   -----------   ---------  -----------
       <S>                             <C>        <C>           <C>         <C>           <C>        <C>
       Outstanding at beginning
             of year                     489,022   $ 14.40        502,362     $ 10.44       375,778     $ 9.34
             Granted                     154,334     20.36        160,336       19.95       174,577      13.66
             Exercised                  (118,148)    11.66       (157,623)       5.83       (33,488)      5.30
             Cancelled                  (105,176)    17.50        (16,053)      17.62       (14,505)     13.22
                                       ---------                ---------                 ---------

       Outstanding at end of year        420,032   $ 16.08        489,022     $ 14.40       502,362     $10.44
                                       =========                =========                 =========

       Weighted average fair value
       of options granted during
       the year                                    $  3.62                    $  8.70                   $ 3.36
</TABLE>


                                   (Continued)



                                       61
<PAGE>


             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2003 and 2002




NOTE M - STOCK OPTION PLANS - Continued

    The following table summarizes information about options outstanding and
exercisable at December 31, 2003:
<TABLE>
<CAPTION>
                                        Options outstanding                      Options exercisable
                          -----------------------------------------------    ---------------------------
                                              Weighted
                                               average        Weighted                          Weighted
                                              remaining       average                           average
           Range of           Number         contractual      exercise            Number        exercise
        exercise prices    outstanding      life (years)        price           exercisable       price
        ---------------   -------------     ------------    -------------    ----------------    ------
        <S>               <C>               <C>             <C>              <C>                 <C>
        $7.24 - 9.67         32,108              1.7         $  8.74              32,108       $    8.74
        $15.04 - 19.96      387,924              6.7           16.68             117,796           14.16
                            -------                                              -------
                            420,032                                              149,904
                            =======                                              =======
</TABLE>


NOTE N - PENSION PLAN

    The Company has a noncontributory nonqualified defined benefit pension plan
    covering certain eligible employees. The Company-sponsored pension plan
    provides retirement benefits under pension trust agreements and under
    contracts with insurance companies. The benefits are based on years of
    service and the employee's compensation during the highest five consecutive
    years during the last 10 years of employment. The Company's policy is to
    fund pension costs allowable for income tax purposes. The following table
    sets forth the plan's funded status and amounts recognized in the Company's
    consolidated balance sheets (in thousands):
<TABLE>
<CAPTION>
                                                                                      2003              2002
                                                                                  -------------    -------------
       <S>                                                                        <C>              <C>
       Change in benefit obligation
          Benefit obligation at beginning of year                                    $    3,048       $    2,377
          Service cost                                                                      317             (800)
          Interest cost                                                                     214              191
          Other changes                                                                      12            1,280
                                                                                     ----------       ----------
          Benefits obligation at end of year                                         $    3,591       $    3,048
                                                                                     ==========       ==========
</TABLE>

    Weighted-average assumptions used to determine benefit obligations, end of
    year


                                                                December 31
                                                           2003            2002
                                                           ----            ----
                  Discount rate                            7.00%           7.00%
                  Rate of compensation increase            4.00%           4.00%




                                   (Continued)



                                       62
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2003 and 2002


NOTE N - PENSION PLAN-Continued

    The asset allocation for the Company's pension plans ant the end of 2003 and
    2002 consists of insurance policies under the Company Owned Life Insurance
    program. The cash surrender value for these policies was approximately
    $993,000 and $761,000 for the years ended December 31, 2003 and 2002,
    respectively.

    Net pension cost included the following components (in thousands):
<TABLE>
<CAPTION>
                                                                     2003             2002              2001
                                                                -------------     -------------    -------------
       <S>                                                      <C>               <C>              <C>
       Service cost                                               $       410      $        208     $        553
       Interest cost                                                      214               191              124
                                                                  -----------      ------------     ------------
       Net periodic benefit cost                                  $       624      $        399     $        677
                                                                  ===========      ============     ============
</TABLE>

    The Company has a capital accumulation and salary reduction plan under
    Section 401(k) of the Internal Revenue Code of 1986, as amended. Under the
    plan, all employees are eligible to contribute from 1% to a maximum of 15%
    of their annual salary, with the Company matching 100% of any contribution
    between 1% and 5% subject to a $2,500 per employee annual limit. Matching
    contributions to the plan were approximately $199,000, $187,000 and $167,000
    for the years ended December 31, 2003, 2002 and 2001, respectively.

NOTE O - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS
         OF CREDIT RISK

    The Company is a party to financial instruments with off-balance-sheet risk
    in the normal course of business to meet the financing needs of its
    customers and to reduce its own exposure to fluctuations in interest rates.
    These financial instruments include commitments to extend credit and standby
    letters of credit. Such financial instruments are recorded in the financial
    statements when they become payable. Those instruments involve, to varying
    degrees, elements of credit and interest rate risk in excess of the amount
    recognized in the consolidated balance sheets. The contract amounts of those
    instruments reflect the extent of involvement the Company has in particular
    classes of financial instruments.
















                                   (Continued)



                                       63
<PAGE>


             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2003 and 2002




NOTE O - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS
         OF CREDIT RISK - Continued

    The Company's exposure to credit loss in the event of non-performance by the
    other party to commitments to extend credit and standby letters of credit is
    represented by the contractual amount of those instruments. The Company uses
    the same credit policies in making commitments and conditional obligations
    as it does for on-balance-sheet instruments.

    The contract amounts are as follows (in thousands):
<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                                  ------------------------------
                                                                                      2003              2002
                                                                                  -------------    -------------
       <S>                                                                        <C>              <C>
       Financial instruments whose contract amounts represent credit risk
          Commitments to extend credit                                             $     59,829     $     89,792
          Standby letters of credit and financial guarantees written                      5,099            5,188
</TABLE>

    Commitments to extend credit are agreements to lend to a customer as long as
    there is no violation of any condition established in the contract.
    Commitments generally have fixed expiration dates or other termination
    clauses and may require payment of a fee. Since many of the commitments are
    expected to expire without being drawn upon, and others are for staged
    construction, the total commitment amounts do not necessarily represent
    immediate cash requirements.

    The Company evaluates each customer's creditworthiness on a case-by-case
    basis. The amount of collateral obtained, if deemed necessary by the Company
    upon extension of credit, is based on management's credit evaluation.
    Collateral held varies but may include personal or commercial real estate,
    accounts receivable, inventory and equipment.

    Standby letters of credit are conditional commitments issued by the Company
    to guarantee the performance of a customer to a third party. Those
    guarantees are primarily issued to support public and private borrowing
    arrangements, including commercial paper, bond financing and similar
    transactions. Most guarantees extend for one year and expire in decreasing
    amounts through 2004. The credit risk involved in issuing letters of credit
    is essentially the same as that involved in extending loan facilities to
    customers. The Company holds personal or commercial real estate, accounts
    receivable, inventory and equipment as collateral supporting those
    commitments for which collateral is deemed necessary. The extent of
    collateral held for those commitments is 80%.

NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS

    SFAS No. 107 requires disclosure of the estimated fair value of an entity's
    assets and liabilities considered to be financial instruments. For the
    Company, as for most financial institutions, the majority of its assets and
    liabilities are considered financial instruments as defined in SFAS No. 107.
    However, many of such instruments lack an available trading market, as
    characterized by a willing buyer and seller engaging in an exchange
    transaction. Also, it is the Company's general practice and intent to hold
    its financial instruments to maturity and not to engage in trading or sales
    activities. Therefore, the Company had to use significant estimations and
    present value calculations to prepare this disclosure.

                                   (Continued)



                                       64
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2003 and 2002




NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued

    Changes in the assumptions or methodologies used to estimate fair value may
    materially affect the estimated amounts. Also, management is concerned that
    there may not be reasonable comparability between institutions due to the
    wide range of permitted assumptions and methodologies in the absence of
    active markets. This lack of uniformity gives rise to a high degree of
    subjectivity in estimating financial instrument fair value.

    Fair values have been estimated using data which management considered the
    best available and estimation methodologies deemed suitable for the
    pertinent category of financial instrument. The estimation methodologies,
    resulting fair values and recorded carrying amounts at December 31, 2003 and
    2002 were as follows:

    Fair values of loans and deposits with floating interest rates are generally
    presumed to approximate the recorded carrying amounts.

    Fair value of financial instruments actively traded in a secondary market
    has been estimated using quoted market prices as follows (in thousands):
<TABLE>
<CAPTION>
                                                               2003                             2002
                                                  ------------------------------    ------------------------------
                                                   Estimated                          Estimated
                                                     fair            Carrying           fair           Carrying
                                                     value            amount            value           amount
                                                 -------------    --------------    -------------   --------------
       <S>                                       <C>              <C>               <C>             <C>
       Cash and cash equivalents                 $      25,070    $       25,070    $      40,571   $       40,571
       Investment securities held to maturity          114,275           113,091           32,745           30,614
       Investment securities available for sale        452,246           452,246          418,316          418,316
</TABLE>

    Fair value of financial instruments with stated maturities has been
    estimated using present value cash flow, discounted at a rate approximating
    current market for similar assets and liabilities, as follows (in
    thousands):
<TABLE>
<CAPTION>
                                                               2003                             2002
                                                  ------------------------------    ------------------------------
                                                   Estimated                          Estimated
                                                     fair            Carrying           fair           Carrying
                                                     value            amount            value           amount
                                                 -------------    --------------    -------------   --------------
       <S>                                       <C>              <C>               <C>             <C>
       Deposits with stated maturities           $     245,409    $      236,902    $     319,551   $      330,193
       Long-term borrowings                            217,319           212,000          122,448          127,500
</TABLE>

    Fair value of financial instrument liabilities with no stated maturities has
    been estimated to equal the carrying amount (the amount payable on demand),
    totaling approximately $554,157,000 and $490,647,000 at December 31, 2003
    and 2002, respectively.

    Fair value of the net loan portfolio has been estimated using present value
    cash flow, discounted at the treasury rate adjusted for non-interest
    operating costs and giving consideration to estimated prepayment risk and
    credit loss factors, as follows (in thousands):



                                   (Continued)



                                       65
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2003 and 2002




NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
<TABLE>
<CAPTION>
                                                               2003                             2002
                                                  ------------------------------    ------------------------------
                                                   Estimated                          Estimated
                                                     fair            Carrying           fair           Carrying
                                                     value            amount            value           amount
                                                 -------------    --------------    -------------   --------------
       <S>                                       <C>              <C>               <C>             <C>
       Net loans                                 $     516,639    $      515,715    $     635,495   $      576,734
</TABLE>
    The fair value of commitments to extend credit is estimated based on the
    amount of unamortized deferred loan commitment fees. The fair value of
    letters of credit is based on the amount of unearned fees plus the estimated
    cost to terminate the letters of credit. Fair values of unrecognized
    financial instruments including commitments to extend credit and the fair
    value of letters of credit are considered immaterial.

    The Company's remaining assets and liabilities are not considered financial
    instruments. No disclosure of the relationship value of the Company's
    deposits is required by SFAS No. 107.

NOTE Q - REGULATORY MATTERS

    1. Payment of Dividends
       --------------------

    Under the Pennsylvania Business Corporation Law, the Company may pay
    dividends only if it is solvent and would not be rendered insolvent by the
    dividend payment. There are also restrictions set forth in the Pennsylvania
    Banking Code of 1965 (the Banking Code) and in the Federal Deposit Insurance
    Act (FDIA) concerning the payment of dividends by the Company. Under the
    Banking Code, no dividends may be paid except from "accumulated net
    earnings" (generally undivided profits). Under the FDIA, no dividend may be
    paid if a bank is in arrears in the payment of any insurance assessment due
    to the Federal Deposit Insurance Corporation (FDIC).

    2. Capital Ratios
       --------------

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

    Quantitative measures established by regulations to ensure capital adequacy
    require the Company and the Bank to maintain minimum amounts and ratios (set
    forth in the table below) of total and Tier I capital (as defined in the
    regulations) to risk-weighted assets (as defined), and of Tier I capital (as
    defined) to average assets (as defined). As of December 31, 2003, management
    believes that the Bank meets all capital adequacy requirements to which it
    is subject.


                                   (Continued)



                                       66
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2003 and 2002




NOTE Q - REGULATORY MATTERS - Continued

    As of December 31, 2003, the Bank met all regulatory requirements for
    classification as well capitalized under the regulatory framework for prompt
    corrective action. To be categorized as well capitalized, the Bank must
    maintain minimum total risk-based, Tier I risk-based and Tier I leverage
    ratios as set forth in the table. There are no conditions or events since
    that notification that management believes have changed the Bank's category.

    The Bank's actual capital amounts and ratios are also presented in the table
(in thousands).
<TABLE>
<CAPTION>
                                                                              2003
                                           -----------------------------------------------------------------------
                                                                                                  To be well
                                                                                               capitalized under
                                                                         For capital           prompt corrective
                                                   Actual             adequacy purposes        action provisions
                                           ----------------------  ----------------------   ----------------------
                                              Amount       Ratio      Amount       Ratio      Amount       Ratio
                                           -----------  ---------  -----------   --------   -----------  ---------
    <S>                                    <C>          <C>        <C>           <C>        <C>          <C>
    Total capital (to risk-weighted assets)
       Company (consolidated)              $  139,876     16.50%   $   67,792       8.00%        N/A         N/A
       Bank                                   113,922     13.73%       66,371       8.00%     $  82,964    10.00%

    Tier I capital (to risk-weighted assets)
       Company (consolidated)                 129,283     15.30%       33,896       4.00%        N/A         N/A
       Bank                                   103,523     12.47%       33,186       4.00%        49,778     6.00%

    Tier I capital
    (to average assets, leverage)
       Company (consolidated)                 129,283     11.10%       34,811       3.00%        N/A         N/A
       Bank                                   103,523      8.99%       34,556       3.00%        57,593     5.00%
</TABLE>

<TABLE>
<CAPTION>
                                                                              2002
                                           -----------------------------------------------------------------------
                                                                                                  To be well
                                                                                               capitalized under
                                                                         For capital           prompt corrective
                                                   Actual             adequacy purposes        action provisions
                                           ----------------------  ----------------------   ----------------------
                                              Amount       Ratio      Amount       Ratio      Amount       Ratio
                                           -----------  ---------  -----------   --------   -----------  ---------
    <S>                                    <C>          <C>        <C>           <C>        <C>          <C>
    Total capital (to risk-weighted assets)
       Company (consolidated)              $  129,873     15.91%   $   65,304       8.00%        N/A         N/A
       Bank                                    93,276     11.69%       63,815       8.00%    $   79,769    10.00%

    Tier I capital (to risk-weighted assets)
       Company (consolidated)                 119,641     14.61%       32,742       4.00%        N/A         N/A
       Bank                                    83,279     10.41%       32,006       4.00%        48,010     6.00%

    Tier I capital
    (to average assets, leverage)
       Company (consolidated)                 119,641     11.41%       31,466       3.00%        N/A         N/A
       Bank                                    83,279      8.10%       30,836       3.00%        51,393     5.00%
</TABLE>





                                       67
<PAGE>



             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2003 and 2002




NOTE R - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY

    Condensed financial information for the parent company only follows (in
thousands).

                            CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                                  ------------------------------
                                                                                      2003              2002
                                                                                  -------------    -------------
       <S>                                                                        <C>              <C>
       Assets
          Cash                                                                      $     4,775      $     2,527
          Investment in Royal Investments of Delaware, Inc. - at equity                  20,995           33,531
          Investment in Royal Bank of Pennsylvania - at equity                          109,063           84,960
          Other assets                                                                       --              312
                                                                                    -----------      -----------

                                                                                    $   134,833      $   121,330
                                                                                    ===========      ===========

          Stockholders' equity                                                          134,833          121,330
                                                                                    -----------      -----------

                                                                                    $   134,833      $   121,330
                                                                                    ===========      ===========
</TABLE>



                         CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
                                                                             Year ended December 31,
                                                                ------------------------------------------------
                                                                     2003             2002              2001
                                                                -------------     -------------    -------------
       <S>                                                      <C>               <C>              <C>
       Income
          Equity in undistributed net earnings of subsidiaries     $    7,241        $    6,840       $    6,796
          Dividends from subsidiary bank                               11,321            10,589            8,984
          Other income                                                     25                49               35
                                                                   ----------        ----------       ----------

              Total income                                             18,587            17,478           15,815
                                                                   ----------        ----------       ----------

       Expenses
          Other expenses                                                   81                85               75
          Income tax benefit                                              (20)              (12)             (14)
                                                                   ----------        ----------       ----------

              Total expenses                                               61                73               61
                                                                   ----------        ----------       ----------

              Net income                                           $   18,526        $   17,405       $   15,754
                                                                   ==========        ==========       ==========
</TABLE>





                                   (Continued)



                                       68
<PAGE>



             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2003 and 2002




NOTE R - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued

                       CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                             Year ended December 31,
                                                                ------------------------------------------------
                                                                     2003             2002              2001
                                                                -------------     -------------    -------------
       <S>                                                      <C>               <C>              <C>
       Cash flows from operating activities
       Net income                                                  $   18,526        $   17,405       $   15,754
       Adjustments to reconcile net income to net cash
              provided by operating activities
          Undistributed earnings from subsidiaries                     (7,241)           (6,840)          (6,796)
          Operating expenses                                               81                85               75
          Rental income                                                   (25)              (49)             (35)
          Non-cash income tax benefit                                     (20)              (12)             (14)
                                                                   ----------        ----------       ----------

              Net cash provided by operating activities                11,321            10,589            8,984
                                                                   ----------        ----------       ----------

       Cash flows from financing activities
       Cash dividends paid                                            (11,321)          (10,589)          (8,984)
       Other, net                                                       2,248             1,083               48
                                                                   ----------        ----------       ----------

              Net cash used in financing activities                    (9,073)           (9,506)          (8,936)
                                                                   ----------        ----------       ----------

              Net increase in cash                                      2,248             1,083               48

       Cash at beginning of year                                        2,527             1,444            1,396
                                                                   ----------        ----------       ----------

       Cash at end of year                                         $    4,775        $    2,527       $    1,444
                                                                   ==========        ==========       ==========
</TABLE>


NOTE S - SUMMARY OF QUARTERLY RESULTS (UNAUDITED)

    The following summarizes the consolidated results of operations during 2003
    and 2002, on a quarterly basis, for the Company (in thousands except per
    share data):
<TABLE>
<CAPTION>
                                                                                   2003
                                                           ------------------------------------------------------
                                                             Fourth          Third        Second          First
                                                             Quarter        Quarter       Quarter        Quarter
                                                           ----------     ----------    -----------    ----------
       <S>                                                 <C>            <C>           <C>            <C>
       Interest income                                     $   17,939     $   18,197    $    17,753    $   18,431
       Net interest income                                     10,885         10,967         10,123        10,404
       Provision for loan losses                                  160            197            167           150
       Income before income taxes                               7,325          6,984          5,879         6,334
       Net income                                               5,383          4,763          3,980         4,400

       Net income per share
          Basic                                            $     0.44     $     0.39    $      0.33    $     0.36
          Diluted                                          $     0.44     $     0.39    $      0.33    $     0.36
</TABLE>


                                   (Continued)



                                       69
<PAGE>


             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2003 and 2002




NOTE R - SUMMARY OF QUARTERLY RESULTS (UNAUDITED) - Continued
<TABLE>
<CAPTION>
                                                                                    2002
                                                           ------------------------------------------------------
                                                             Fourth          Third        Second          First
                                                             Quarter        Quarter       Quarter        Quarter
                                                           ----------     ----------    -----------    ----------
       <S>                                                 <C>            <C>           <C>            <C>
       Interest income                                     $   19,332     $   19,797    $    18,833    $   19,143
       Net interest income                                     10,540         10,543          9,605         9,926
       Provision for loan losses                                  -              -               50           200
       Income before income taxes                               6,308          6,930          5,428         5,976
       Net income                                               4,831          4,462          3,897         4,215

       Net income per share
          Basic                                            $     0.40     $     0.37    $      0.32    $     0.35
          Diluted                                          $     0.40     $     0.36    $      0.31    $     0.34
</TABLE>





                                       70
<PAGE>



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
-----------------------------------------------------------------------
        FINANCIAL DISCLOSURE
        --------------------

         None.

ITEM 9A. CONTROLS AND PROCEDURES
--------------------------------

         We maintain a system of controls and procedures designed to provide
reasonable assurance to the reliability of the financial statements and other
disclosures included in this report, as well as to safeguard assets from
unauthorized use or disposition. We evaluated the effectiveness of the design
and operation of our disclosure controls and procedures under supervision and
with the participation of management, including our Chief Executive Officer and
Chief Financial Officer, within 90 days prior to the filing date of this report.
Based upon that evaluation, our disclosure controls and procedures are effective
in timely alerting them of material information required to be included in our
periodic Securities and Exchange Commission filings. No significant changes were
made to our internal controls or other factors that could significantly affect
these controls subsequent to the date of their evaluation.


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
--------------------------------------------------------

         The information required in this Item, relating to directors, executive
officers, and control persons is set forth in Royal Bancshares' Proxy Statement
to be used in connection with the 2004 Annual Meeting of Shareholders under the
heading "Remuneration of Directors and Officers and Other Transactions", which
pages are incorporated herein by reference.

         Beneficial Ownership - Compliance. Section 16(a) of the Securities
Exchange Act of 1934, as amended, requires Royal Bancshares' officers and
directors, and persons who own more than 10 percent of the registered class of
Royal Bancshares' equity securities, to file reports of ownership and changes in
ownership with the SEC. Officers, directors and greater than 10 percent
shareholders are required by SEC regulation to furnish the Corporation copies of
all Section 16(a) forms they file.

         Based solely on its review of forms that were received from certain
reporting persons, Royal Bancshares believes that during the period January 1,
2003 through December 31, 2003, its officers and directors were in compliance
with all filing requirements applicable to them.


ITEM 11. EXECUTIVE COMPENSATION
-------------------------------

         The information required by this Item, relating to executive
compensation, is set forth in the Royal Bancshares' Proxy Statement to be used
in connection with the 2004 Annual Meeting of Shareholders, under the heading
"Remuneration of Directors and Officers and Other Transactions", which pages are
incorporated herein by reference.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
-----------------------------------------------------------------------

         The information required by this Item, relating to beneficial ownership
of the Registrant's Common Stock, is set forth in Royal Bancshares' Proxy
Statement to be used in connection with the 2004 Annual Meeting of Shareholders,
under the heading "Information About Nominees, Continuing Directors and
Executive Officers", which pages are incorporated herein by reference.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------------------------------------------------------

         The information required by this Item, relating to transactions with
management and others, certain business relationships and indebtedness of
management, is set forth in Royal Bancshares' Proxy Statement to be used in
connection with the 2004 Annual Meeting of Shareholders, under the heading
"Interest of Management and Others in Certain Transactions", which page are
incorporated herein by reference.




                                       71
<PAGE>


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
-----------------------------------------------

Information required by this item appears under the heading "AUDIT FEES" of the
Proxy Statement to be used in connection with the 2004 Annual Meeting of
Shareholders.


ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
-------------------------------------------------------------------------

a.       1. Financial Statements

            The following financial statements are included by reference in
            Part II, Item 8 hereof.
                  Report of Independent Certified Public Accountants.
                  Consolidated Balance Sheets.
                  Consolidated Statements of Income.
                  Consolidated Statements of Changes in Stockholders' Equity.
                  Consolidated Statement of Cash Flows.
                  Notes To Consolidated Financial Statements.

         2. Financial Statement Schedules

            Financial Statement Schedules are omitted because the required
            information is either not applicable, not required or is shown in
            the respective financial statements or in the notes thereto.

         3. The following Exhibits are files herewith or incorporated by
            reference as a part of this Annual Report.

                  2        Purchase and Assumption Agreement, dated as of March
                           12, 2001, among Royal Bank of Pennsylvania, Crusader
                           Holding Corporation, Crusader Savings Bank, F.S.B.
                           and Asset Investment Corporation. (Incorporated by
                           reference to Exhibit 2 to Registrant's Report on Form
                           8-K, filed with the Commission on March 15, 2001.)

                  3(i)     Articles of Incorporation. (Incorporated by reference
                           to Exhibit 3(i) to Registrant's Registration
                           Statement No. 0-26366 on Form S-4.)

                  3(ii)    By-laws. (Incorporated by reference to Exhibit 99 to
                           Registrant's Current Report on Form 8-K, filed with
                           the Commission on March 13, 2001.)

                  10.1     Stock Option and Appreciation Right Plan.
                           (Incorporated by reference to the Registrant's
                           Registration Statement N0. 333-25855, on form S-8
                           filed with the Commission on April 5, 1997).

                  10.2     Outside Directors' Stock Option Plan. (Incorporated
                           by reference to the Registrant's Registration
                           Statement N0. 333-25855, on form S-8 filed with the
                           Commission on April 5, 1997).

                  11.      Statement Re: Computation of Earnings Per Share.
                           Included at Item 8, hereof, Note A, "Per Share
                           Information".

                  12.      Statement re: Computation of Ratios. (Included at
                           Item 8 here of, Note Q, "Regulatory Matters.")

                  14.      Royal Bancshares of Pennsylvania, Inc. Code of
                           Ethics.

                  21.      Subsidiaries of Registrant.




                                       72
<PAGE>

                  23.    Consent of Independent Accountants.


                  31.1   Rule 13a-14(a)/15-d-14(a) Certification of Chief
                         Executive Officer
                  31.2   Rule 13a-14(a)/15-d-14(a) Certification of Chief
                         Financial Officer

                  32.1   Section 1350 Certification of Chief Executive Officer.
                  32.2   Section 1350 Certification of Chief Financial Officer.


(b)      Reports on Form 8-K was filed by the Registrant during the fourth
         quarter and through of this Form 10K filing are as follows:

         Royal Bancshares filed a report on Form 8-K with the Securities and
         Exchange Commission as of October 16, 2003 announcing the appointment
         of Robert R. Tabas as Chairman of the Board of Directors and the
         appointment of Linda Stempel to the Board of Directors.

         Royal Bancshares filed a report on Form 8-K with the Securities and
         Exchange Commission as of January 27, 2004, reporting its fourth
         quarter earnings and the declaration of 2% stock dividend along with
         its 35th consecutive cash dividend.

         Royal Bancshares filed a report on Form 8-K with the Securities and
         Exchange Commission as of February 26, 2004, announcing the opening of
         Royal Asian Bank, a division of Royal Bank of Pennsylvania.

(c)      The exhibits required to be filed by this Item are listed under Item
         14(a)3 above.

(d)      Not applicable.

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
         Exchange Act of l934, the Registrant has duly caused this report to be
         signed on its behalf by the undersigned, thereunto duly authorized.







                                       73
<PAGE>



                                   SIGNATURES

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


ROYAL BANCSHARES OF PENNSYLVANIA, INC.
--------------------------------------

/s/ Joseph P. Campbell
----------------------
Joseph P. Campbell
Chief Executive Officer
March 12, 2004.

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


             SIGNATURES
             ----------

By: /s/ Joseph P. Campbell                                      March 12, 2004.
-------------------------------------
Joseph P. Campbell
CEO/President/Director

By: /s/ Jeffrey T. Hanuscin                                     March 12, 2004.
-------------------------------------
Jeffrey T. Hanuscin
Chief Financial Officer

By: /s/ James J. McSwiggan                                      March 12, 2004.
-------------------------------------
James J. McSwiggan
Director/Executive Vice President

By: /s/Robert R. Tabas                                          March 12, 2004.
-------------------------------------
Robert R. Tabas
Chairman of the Board

By: /s/ Albert Ominsky                                          March 12, 2004.
-------------------------------------
Albert Ominsky
Director

By: /s/ Anthony J. Micale                                       March 12, 2004.
-------------------------------------
Anthony J. Micale
Director

By: /s/ Gregory T. Reardon                                      March 12, 2004.
-------------------------------------
Gregory T. Reardon
Director

By: /s/ Murray Stempel,III                                      March 12, 2004.
-------------------------------------
Murray Stempel, III
Director/ Senior Vice President

By: /s/ John M. Decker                                          March 12, 2004.
-------------------------------------
John M. Decker
Director/ Senior Vice President




                                       74
<PAGE>

By: /s/ Carl M. Cousins                                         March 12, 2004.
-------------------------------------
Carl M. Cousins
Director

By:                                                             March 12, 2004.
-------------------------------------
Lee E. Tabas
Director

By: /s/ Jack R. Loew                                            March 12, 2004.
-------------------------------------
Jack R. Loew
Director

By: /s/ Howard Wurzak                                           March 12, 2004.
-------------------------------------
Howard Wurzak
Director

By: /s/ Evelyn Rome Tabas                                       March 12, 2004.
-------------------------------------
Evelyn Rome Tabas
Director

By: /s/ Mitchell L. Morgan                                      March 12, 2004.
-------------------------------------
Mitchell L. Morgan
Director

By: /s/ Edward B. Tepper                                        March 12, 2004.
-------------------------------------
Edward B. Tepper
Director

By: /s/ Linda Tabas Stempel                                     March 12, 2004.
-------------------------------------
Linda Tabas Stempel
Director






                                       75
<PAGE>



                     ROYAL BANCSHARES OF PENNSYLVANIA, INC.
                           ANNUAL REPORT ON FORM 10-K
                                  EXHIBIT INDEX


         2.       Purchase and Assumption Agreement, dated as of March 12, 2001,
                  among Royal Bank of Pennsylvania, Crusader Holding
                  Corporation, Crusader Savings Bank, F.S.B. and Asset
                  Investment Corporation. (Incorporated by reference to Exhibit
                  2 to Registrant's Report on Form 8-K, filed with the
                  Commission on March 15, 2001.)

         3(i)     Articles of Incorporation. (Incorporated by reference to
                  Exhibit 3(i) to Registrant's Registration Statement No.
                  0-26366 on Form S-4.)

         3(ii)    By-laws. (Incorporated by reference to Exhibit 99 to
                  Registrant's Current Report on Form 8-K, filed with the
                  Commission on March 13, 2001.)

         10.1     Stock Option and Appreciation Right Plan. (Incorporated by
                  reference to the Registrant's Registration Statement N0.
                  333-25855, on form S-8 filed with the Commission on April 5,
                  1997).

         10.2     Outside Directors' Stock Option Plan. (Incorporated by
                  reference to the Registrant's Registration Statement N0.
                  333-25855, on form S-8 filed with the Commission on April 5,
                  1997).

         11.      Statement Re: Computation of Earnings Per Share. (Included at
                  Item 8, hereof, Note A, "Per Share Information".)

         12.      Statements re: Computation of Ratios. (Included at Item 8 here
                  of, Note Q, "Regulatory Matters.")

         14.      Royal Bancshares of Pennsylvania, Inc. Code of Ethics.

         21.      Subsidiaries of Registrant.

         23.      Consent of Independent Accountants.

         31.1     Rule 13a-14(a)/15-d-14(a) Certification of Chief Executive
                  Officer

         31.2     Rule 13a-14(a)/15-d-14(a) Certification of Chief Financial
                  Officer

         32.1     Section 1350 Certification of Chief Executive Officer.

         32.2     Section 1350 Certification of Chief Financial Officer.







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