SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                 --------------
                                    FORM 10-K
                        FOR ANNUAL AND TRANSITION REPORTS
                     PURSUANT TO SECTIONS 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

[X]   ANNUAL REPORT PURSUANT TO 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: 0-24168

                            TF FINANCIAL CORPORATION
                       ----------------------------------
             (Exact Name of Registrant as Specified in Its Charter)

           Delaware                                     74-2705050
-------------------------------             ------------------------------------
(State or Other Jurisdiction of             (I.R.S. Employer Identification No.)
Incorporation or Organization)


  3 Penns Trail, Newtown, Pennsylvania                                  18940
----------------------------------------                              ----------
(Address of Principal Executive Offices)                              (Zip Code)


Registrant's telephone number, including area code:     (215) 579-4000
                                                     -------------------

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

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

                     Common Stock, par value $.10 per share
                     --------------------------------------
                                (Title of Class)

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

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

Indicate by check mark whether the registrant is an accelerated filer as defined
in Exchange Act Rule 12b-2. YES    NO X
                               ---   ---

     The   aggregate   market  value  of  the  voting   common  equity  held  by
non-affiliates of the registrant, based on the closing price of the registrant's
Common Stock as quoted on the Nasdaq System on June 30, 2003,  was $65.6 million
(2,106,969 shares at $31.115 per share).

     As of March  22,  2004  there  were  outstanding  2,885,502  shares  of the
registrant's Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

1.   Portions  of the Annual  Report to  Stockholders  for the Fiscal Year Ended
     December 31, 2003. (Parts I, II and IV)
2.   Portions  of  the  Proxy   Statement   for  the  2004  Annual   Meeting  of
     Stockholders. (Part III)


<PAGE>
                                     PART I

     TF FINANCIAL CORPORATION (THE "COMPANY") MAY FROM TIME TO TIME MAKE WRITTEN
OR ORAL  "FORWARD-LOOKING  STATEMENTS",  INCLUDING  STATEMENTS  CONTAINED IN THE
COMPANY'S  FILINGS WITH THE SECURITIES AND EXCHANGE  COMMISSION  (INCLUDING THIS
ANNUAL  REPORT  ON FORM  10-K  AND  THE  EXHIBITS  HERETO),  IN ITS  REPORTS  TO
STOCKHOLDERS AND IN OTHER COMMUNICATIONS BY THE COMPANY,  WHICH ARE MADE IN GOOD
FAITH BY THE COMPANY  PURSUANT TO THE "SAFE  HARBOR"  PROVISIONS  OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.

     THESE FORWARD-LOOKING  STATEMENTS INVOLVE RISKS AND UNCERTAINTIES,  SUCH AS
STATEMENTS  OF THE  COMPANY'S  PLANS,  OBJECTIVES,  EXPECTATIONS,  ESTIMATES AND
INTENTIONS,  THAT ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS (SOME
OF WHICH ARE BEYOND THE COMPANY'S CONTROL). THE FOLLOWING FACTORS, AMONG OTHERS,
COULD CAUSE THE COMPANY'S  FINANCIAL  PERFORMANCE TO DIFFER  MATERIALLY FROM THE
PLANS,  OBJECTIVES,  EXPECTATIONS,  ESTIMATES AND  INTENTIONS  EXPRESSED IN SUCH
FORWARD-LOOKING STATEMENTS: THE STRENGTH OF THE UNITED STATES ECONOMY IN GENERAL
AND  THE  STRENGTH  OF  THE  LOCAL  ECONOMIES  IN  WHICH  THE  COMPANY  CONDUCTS
OPERATIONS;  THE EFFECTS OF, AND CHANGES IN,  MONETARY  AND FISCAL  POLICIES AND
LAWS,  INCLUDING INTEREST RATE POLICIES OF THE BOARD OF GOVERNORS OF THE FEDERAL
RESERVE SYSTEM, INFLATION, INTEREST RATES, MARKET AND MONETARY FLUCTUATIONS; THE
TIMELY DEVELOPMENT OF AND ACCEPTANCE OF NEW PRODUCTS AND SERVICES OF THE COMPANY
AND THE  PERCEIVED  OVERALL  VALUE OF THESE  PRODUCTS  AND  SERVICES  BY  USERS,
INCLUDING THE FEATURES,  PRICING AND QUALITY  COMPARED TO COMPETITORS'  PRODUCTS
AND SERVICES;  THE IMPACT OF CHANGES IN FINANCIAL SERVICES' LAWS AND REGULATIONS
(INCLUDING  LAWS   CONCERNING   TAXES,   BANKING,   SECURITIES  AND  INSURANCE);
TECHNOLOGICAL  CHANGES;  ACQUISITIONS;  CHANGES IN CONSUMER  SPENDING AND SAVING
HABITS;  AND THE SUCCESS OF THE COMPANY AT  MANAGING  THE RISKS  INVOLVED IN THE
FOREGOING.

     THE COMPANY  CAUTIONS THAT THE FOREGOING  LIST OF IMPORTANT  FACTORS IS NOT
EXCLUSIVE.  THE  COMPANY  DOES  NOT  UNDERTAKE  TO  UPDATE  ANY  FORWARD-LOOKING
STATEMENT,  WHETHER WRITTEN OR ORAL, THAT MAY BE MADE FROM TIME TO TIME BY OR ON
BEHALF OF THE COMPANY.

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

                             BUSINESS OF THE COMPANY

     On July 13, 1994, the Company consummated its public offering for 5,290,000
shares of its common stock and acquired Third Federal  Savings Bank (the "Bank")
as part of the Bank's mutual-to-stock  conversion.  The Company was incorporated
under  Delaware  law in March 1994.  The  Company is a savings and loan  holding
company and is subject to  regulation by the Office of Thrift  Supervision  (the
"OTS"),  the  Federal  Deposit  Insurance   Corporation  (the  "FDIC")  and  the
Securities and Exchange  Commission  (the "SEC").  The Company does not transact
any material  business other than through its direct and indirect  subsidiaries:
Third Federal  Savings  Bank,  TF  Investments  Corporation,  Teragon  Financial
Corporation, Penns Trail Development Corporation and Third Delaware Corporation.
At  December  31,  2003,  the Company had total  assets of $607  million,  total
liabilities of $551 million and stockholders' equity of $56 million.

                              BUSINESS OF THE BANK

     The Bank is a federally-chartered  stock savings bank, which was originally
chartered in 1921 as a Pennsylvania-chartered building and loan association. The
Bank's deposits are insured up to the maximum amount allowable by the FDIC.

     The Bank is a community oriented savings institution  offering a variety of
financial  services  to meet  the  needs of the  communities  it  serves.  As of
December  31,  2003 the Bank  operated  fourteen  branch  offices  in Bucks  and
Philadelphia counties, Pennsylvania and in Mercer County, New Jersey.


                                       2

<PAGE>

     The Bank attracts  deposits from the general public and uses such deposits,
together  with  borrowings  and other funds  primarily  to originate or purchase
loans  secured  by  first  mortgages  on  owner-occupied,  one-  to  four-family
residences in its market area and to invest in  mortgage-backed  and  investment
securities. At December 31, 2003, one- to four-family residential mortgage loans
totaled  $277 million or 68% of the Bank's  total loan  portfolio.  At that same
date, the Bank had approximately $130 million or 21% of total assets invested in
mortgage-backed  securities  and $25 million or 4% of total assets in investment
securities.  To a lesser extent, the Bank also originates commercial real estate
and multi-family,  construction and consumer loans. The Bank has one subsidiary,
Third Delaware  Corporation,  which was  incorporated in 1998 for the purpose of
holding and managing  mortgage-backed  securities and investment  securities for
the Bank.

Market Area

     The Bank  offers a wide range of  consumer  and  business  products  at its
fourteen full service branch offices located in Bucks and Philadelphia  Counties
in Pennsylvania, and Mercer County in New Jersey. Five of the branch offices are
located in Bucks County.,  the third wealthiest  county in  Pennsylvania.  Bucks
County is a growing  region  offering  opportunity  for growth for the Bank. Six
branches are located in the northeast section of Philadelphia where the Bank was
founded.  Although  Philadelphia County is experiencing  population decline, the
Bank's branches in this section of Philadelphia  represent a deposit stronghold.
The  remaining  three  branches  are in Mercer  County,  New Jersey which has an
expanding population and represents another growth area for the Bank.

Competition

     The  Bank  faces  varying   degrees  of   competition   from  local  thrift
institutions  and  credit  unions  at its  various  branch  locations.  Stronger
competition has come from local and very large regional  commercial  banks based
in and around the Philadelphia area.  Commercial banks hold approximately 78% of
the deposit market in Philadelphia County, 65% in Bucks County and 77% in Mercer
County. The Bank's share of the deposit market in Philadelphia, Bucks and Mercer
Counties is 0.7%, 1.6% and 1.2%, respectively.

Lending Activities

     General.  The Bank's  loan  portfolio  composition  consists  primarily  of
conventional adjustable-rate ("ARM") and fixed-rate first mortgage loans secured
by one- to four-family  residences.  The Bank also makes  commercial real estate
and  multi-family  loans,  construction  loans and consumer and other loans.  At
December 31, 2003, the Bank's mortgage loans  outstanding were $358 million,  of
which $277  million  were  secured  by first  mortgages  on one- to  four-family
residential  property.  Of the one- to  four-family  residential  mortgage loans
outstanding at that date, 13% were ARM's and 87% were  fixed-rate  loans.  Total
ARM loans in the Bank's portfolio at December 31, 2003,  amounted to $88 million
or  22%  of  total  loans.  At  that  same  date,  commercial  real  estate  and
multi-family  residential  and  construction  loans  totaled  $74 million and $7
million, respectively.

     Consumer  and other  loans held by the Bank  totaled  $48 million or 12% of
total  loans  outstanding  at  December  31,  2003,  of which $25 million or 52%
consisted  of home  equity and second  mortgages.  At that same date  commercial
business  loans,  leases and other loans totaled $15 million,  $1 million and $7
million, respectively.








                                       3

<PAGE>

     The following table sets forth the composition of the Bank's loan portfolio
and mortgage-backed  and related securities  portfolios in dollar amounts and in
percentages of the respective portfolios at the dates indicated.

<TABLE>
<CAPTION>
                                                                              At December 31,
                                         -----------------------------------------------------------------------------------------
                                               2003              2002              2001              2000              1999
                                         ----------------- ----------------- ----------------- ----------------- -----------------
                                                  Percent           Percent           Percent           Percent           Percent
                                          Amount  of Total  Amount  of Total  Amount  of Total  Amount  of Total  Amount  of Total
                                         -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
                                                                           (Dollars in thousands)
<S>                                    <C>       <C>     <C>       <C>     <C>       <C>     <C>       <C>     <C>       <C>
Loans:
 Mortgage loans
  One- to four-family .................  $276,849  68.22%  $227,953  61.33%  $222,016  58.42%  $211,065  57.89%  $168,057  58.00%
  Commercial real estate and
    multi-family ......................    74,109  18.26     85,493  23.00     93,572  24.62     77,486  21.25     65,346  22.55
  Construction ........................     6,591   1.62     12,026   3.23      9,824   2.59     13,950   3.82     12,074   4.16
                                         -------- ------   -------- ------   -------- ------   -------- ------   -------- ------
       Total mortgage loans ...........   357,549  88.10    325,472  87.56    325,412  85.63    302,501  82.96    245,477  84.71
Consumer and other loans:
  Home equity and second mortgage .....    25,199   6.21     25,480   6.87     25,640   6.75     20,887   5.73     16,816   5.81
  Commercial business .................    15,185   3.74      8,005   2.15      9,285   2.44     14,630   4.01      9,339   3.22
  Leases ..............................     1,371   0.34      2,246   0.60      3,544   0.93      3,493   0.96      3,195   1.10
  Other ...............................     6,532   1.61     10,490   2.82     16,154   4.25     23,113   6.34     14,945   5.16
                                         -------- ------   -------- ------   -------- ------   -------- ------   -------- ------
       Total consumer and other loans .    48,287  11.90     46,221  12.44     54,623  14.37     62,123  17.04     44,295  15.29
                                         -------- ------   -------- ------   -------- ------   -------- ------   -------- ------
       Total loans ....................   405,836 100.00%   371,693 100.00%   380,035 100.00%   364,624 100.00%   289,772 100.00%
                                         -------- ======   -------- ======   -------- ======   -------- ======   -------- ======
Less:
  Unearned discount,(premium),
    deferred loan fees, net............      (924)             (446)              428             1,104              (124)
  Allowance for loan losses............     2,111             2,047             1,972             1,714             1,917
                                         --------          --------          --------          --------          --------
      Total loans, net......             $404,649          $370,092          $377,635          $361,806          $287,979
                                         ========          ========          ========          ========          ========

Mortgage-backed securities
 held-to-maturity:
  FHLMC................................  $  8,407  35.58%  $ 21,870  40.10%  $ 35,000  37.50%  $ 45,971  34.03%  $ 52,625  32.91%
  FNMA.................................     7,205  30.49     11,781  21.60     15,739  16.90     20,756  15.36     24,983  15.63
  GNMA.................................     8,007  33.88     18,278  33.40     29,877  32.00     41,090  30.41     46,651  29.18
  Real estate investment mortgage
   conduit.............................        11   0.05      2,519   4.60     12,550  13.40     27,043  20.02     35,271  22.06
  Other mortgage-backed securities.....        --     --        144   0.30        201   0.20        282   0.18        358   0.22
                                         -------- ------   -------- ------   -------- ------   -------- ------   -------- ------
    Total mortgage-backed and  related
      securities held-to-maturity......  $ 23,630 100.00%  $ 54,592 100.00%  $ 93,367 100.00%  $135,142 100.00%  $159,888 100.00%
                                         ======== ======   ======== ======   ======== ======   ======== ======   ======== ======

Mortgage-backed securities
 available-for-sale:
    FHLMC..............................  $  8,525   7.98%  $    699   0.60%  $  1,108   1.10%  $  1,431   1.46%  $  7,233   5.46%
    FNMA...............................    18,385  17.22     11,878  10.30     22,459  22.50     25,679  26.23     27,963  21.10
    GNMA...............................        --     --         --     --      5,515   5.50      7,561   7.72      8,338   6.29
    Real estate investment mortgage
     conduit...........................    79,864  74.80    102,666  89.10     70,681  70.90     63,243  64.59     88,981  67.15
                                         -------- ------   -------- ------   -------- ------   -------- ------   -------- ------
      Total............................  $106,774 100.00%  $115,243 100.00%  $ 99,763 100.00%  $ 97,914 100.00%  $132,515 100.00%
                                         ======== ======   ======== ======   ======== ======   ======== ======   ======== ======
</TABLE>


                                       4
<PAGE>

     Loan Maturity and  Repricing  Information.  The following  table sets forth
certain  information at December 31, 2003,  regarding the dollar amount of loans
maturing in the Bank's loan and mortgage-backed  securities  portfolios based on
their maturity date. Demand loans, loans having no stated schedule of repayments
and no stated  maturity,  overdrafts  and  delinquent  loans  maturing  prior to
December 31, 2004,  are reported as due in one year or less.  The table does not
include prepayments or scheduled principal repayments.


<TABLE>
<CAPTION>
                                             Due 1/1/04 -    Due 1/1/05 -     Due After
                                               12/31/04        12/31/08       12/31/08
                                             -------------   -------------   ------------
                                                            (In thousands)

<S>                                         <C>              <C>              <C>
Available for sale:
  Mortgage-backed securities ..............   $     48         $  4,238         $102,488

Held to Maturity:
  One-to-four family ......................   $    162         $  3,712         $272,975
  Commercial real estate and multi-family..      1,318           16,800           55,991
  Construction ............................      4,423            2,168               --
  Consumer and other ......................     21,209           11,326           15,752
                                              --------         --------         --------
  Total loans receivable ..................     27,112           34,006          344,718
  Mortgage-backed securities ..............         21            2,533           21,076
                                              --------         --------         --------
  Total....................................   $ 27,133         $ 36,539         $365,794
                                              ========         ========         ========
</TABLE>

     The  following  table  sets  forth  the  dollar  amount  of all  loans  and
mortgage-backed securities due after December 31, 2004, which have predetermined
interest   rates  and  which  have  floating  or  adjustable   interest   rates.

                                              Predetermined       Floating or
                                                  Rates         Adjustable Rate
                                              -------------     ---------------
                                                      (In thousands)

Available for sale:
  Mortgage-backed securities ...............      $106,726         $     --
                                                  --------         --------
  Total.....................................      $106,726         $     --
                                                  ========         ========

Held to Maturity:
  One-to-four family .......................      $239,324         $ 37,363
  Commercial real estate and multi-family...        17,350           55,441
  Construction .............................            --            2,168
  Consumer and other .......................        16,026           11,052
                                                  --------         --------
  Total loans receivable ...................       272,700          106,024
  Mortgage-backed securities ...............        23,538               71
                                                  --------         --------
  Total.....................................      $296,238         $106,095
                                                  ========         ========

     One- to Four-Family  Mortgage Lending. The Bank offers first mortgage loans
secured by one- to four-family residences in the Bank's lending area. Typically,
such residences are  single-family  homes that serve as the primary residence of
the owner.  The Bank  generally  originates  and invests in one- to  four-family
residential  mortgage  loans in amounts up to 80% of the lesser of the appraised
value or selling price of the mortgaged  property.  Loans  originated in amounts
over 80% of the lesser of the appraised  value or selling price of the mortgaged
property,  other  than  loans to  facilitate  the sale of real  estate  acquired
through foreclosure,  must be owner-occupied and private mortgage insurance must
be provided on the amount in excess of 80%.


                                       5

<PAGE>

     Loan originations are obtained from existing or past customers,  members of
the local community, and referrals from established builders and realtors within
the Bank's  lending area using direct  advertising in local  newspapers,  branch
signage and promotions, and word of mouth referrals.

     The Bank offers a variety of ARM loans with terms of 30 years which  adjust
at the end of 6 months,  one, three,  five,  seven and ten years and adjust by a
maximum of 1 to 2% per  adjustment  with a lifetime cap of 5 to 6% over the life
of the loan.

     The Bank  offers  fixed-rate  mortgage  loans with terms of 10 to 30 years,
which are payable monthly.  Interest rates charged on fixed-rate  mortgage loans
are competitively  priced based on market  conditions.  The origination fees for
fixed-rate  loans range from 0% to 3% depending on the  underlying  loan coupon.
Generally,  the Bank's standard  underwriting  guideline for fixed-rate mortgage
loans conform to the FHLMC and FNMA  guidelines and may be sold in the secondary
market.  While  it does not  presently  do so,  the Bank has in the past  sold a
portion of its conforming  fixed-rate  mortgage loans in the secondary market to
FHLMC and FNMA while retaining the servicing  rights on certain loans. The Bank,
however,  has been  primarily a portfolio  lender.  As of December 31, 2003, the
Bank's  portfolio of loans serviced for FHLMC or FNMA totaled  approximately  $2
million.

     Beginning in December 2003 the Bank initiated a mortgage lending department
that is separate as to its sales  efforts from the consumer  lending area of the
Bank. In connection with this initiative,  the Bank has hired a mortgage lending
manager and several  commissioned  loan  officers.  The Bank will now offer,  in
addition to its standard portfolio loan products,  other types of mortgage loans
that will be  originated in the name of, or sold on a servicing  released  basis
to, third party  investors.  The mortgage  loan officers will support the Bank's
branches and customers,  and  additionally  engage in calling  efforts  directed
toward  realtors,  builders,  and others that can be sources of lending business
for the Bank.  The Company  expects to grow this line of business in the future,
and may resume selling loans to FHLMC,  FNMA, or others on a servicing  retained
basis.

     Commercial Real Estate and Multi-Family  Lending. The Bank originates loans
secured by  commercial  real estate  including  non-owner  occupied  residential
multi-family  dwelling  units  (more  than  four  units)  primarily  secured  by
professional  office  buildings  and  apartment  complexes.  The Bank  generally
originates  commercial  real  estate  and  multi-family  loans  up to 75% of the
appraised value of the property securing the loan.  Currently,  it is the Bank's
philosophy to originate  commercial real estate and  multi-family  loans only to
borrowers known to the Bank and on properties in its market area. The commercial
real  estate  and  multi-family   loans  in  the  Bank's  portfolio  consist  of
fixed-rate,  ARM and balloon loans which were  originated  at prevailing  market
rates for terms of up to 25 years.  The Bank's  current  policy is to  originate
commercial  real  estate  and  multi-family  loans as ARM's  that are  generally
amortized  over a period of 20 years or as balloon  loans which  generally  have
terms of 5 to 10 years, with 20-25 year amortization.

     Loans  secured by  commercial  and  multi-family  real estate are generally
larger and involve a greater degree of risk than one- to four-family residential
mortgage loans. Of primary  concern in commercial and  multi-family  real estate
lending is the borrower's  creditworthiness  and the  feasibility  and cash flow
potential of the  project.  Loans  secured by income  properties  are  generally
larger  and  involve  greater  risks than  residential  mortgage  loans  because
payments on loans secured by income properties are often dependent on successful
operation or management of the properties.  As a result, repayment of such loans
may be subject to a greater extent than residential real estate loans to adverse
conditions  in the real estate  market or the economy.  In order to monitor cash
flows on income properties,  the Bank requires borrowers and loan guarantors, if
any,  to provide  annual  financial  statements  and rent rolls on  multi-family
loans.  At  December  31,  2003,  the five  largest  commercial  real estate and
multi-family  loans  totaled  $22.2 million with no single loan larger than $6.5
million.  At December 31, 2003,  all such loans were current and the  properties
securing such loans are in the Bank's market area.

     Construction  Lending.  At December  31,  2003,  the Bank had $7 million of
construction  loans  or 2% of the  Bank's  total  loan  portfolio.  Construction
financing is  generally  considered  to involve a higher  degree of risk of loss
than long-term  financing on improved,  occupied real estate.  Risk of loss on a
construction loan is dependent largely upon the accuracy of the initial estimate
of the property's  value at completion of  construction  or development  and the
estimated cost (including  interest) of  construction.  During the  construction
phase,  a number of factors  could  result in delays and cost  overruns.  If the
estimate of construction costs proves to be inaccurate, the Bank may be required
to advance funds beyond the amount originally  committed to permit completion of
the development.  If the estimate of


                                       6
<PAGE>

value proves to be inaccurate,  the Bank may be  confronted,  at or prior to the
maturity of the loan,  with a project  having a value which is  insufficient  to
assure full repayment.

     Consumer and Other Lending.  The Bank also offers  consumer and other loans
in the form of home equity and second  mortgage  loans  (referred to hereinafter
collectively as "second mortgage loans"),  commercial business loans, automobile
loans and student  loans.  These loans  totaled $48 million or 12% of the Bank's
total loan portfolio at December 31, 2003. Federal  regulations permit federally
chartered thrift institutions to make secured and unsecured consumer loans up to
35% of an  institution's  assets.  In  addition,  a federal  thrift has  lending
authority  above  the  35%  category  for  certain   consumer  loans,   property
improvement  loans, and loans secured by savings  accounts.  The Bank originates
consumer  loans in order to provide a wide range of  financial  services  to its
customers and because the shorter terms and normally  higher  interest  rates on
such loans help maintain a profitable  spread between its average loan yield and
its cost of funds.

     In  connection  with  consumer  loan  applications,  the Bank  verifies the
borrower's  income  and  reviews  a  credit  bureau  report.  In  addition,  the
relationship  of the loan to the  value of the  collateral  is  considered.  All
automobile  loan  applications  are reviewed and approved by the Bank.  The Bank
reviews the credit report of the borrower as well as the value of the unit which
secures the loan.

     The Bank focuses on the origination of consumer loans.  Consumer loans tend
to be originated at higher interest rates than conventional residential mortgage
loans and for  shorter  terms  which  benefits  the  Bank's  interest  rate risk
management.  Consumer loans, however, tend to have a higher risk of default than
residential mortgage loans. At December 31, 2003, $225,000 or 0.5% of the Bank's
consumer loans were delinquent more than 90 days.

     The Bank offers second mortgage loans on one- to four-family residences. At
December 31, 2003, second mortgage and home equity loans totaled $25 million, or
6% of the Bank's  total loan  portfolio.  Second  mortgage  loans are offered as
fixed-rate loans for a term not to exceed 15 years.  Such loans are only made on
owner-occupied one- to four-family  residences and are subject to a 75% combined
loan to value ratio.  The  underwriting  standards for second mortgage loans are
the same as the Bank's standards  applicable to one- to four-family  residential
loans.

     Business Lending. Federal thrift institutions are permitted to make secured
or unsecured loans for commercial, corporate, business or agricultural purposes,
including  the issuance of letters of credit  secured by real  estate,  business
equipment,  inventories, accounts receivable and cash equivalents. The aggregate
amount  of such  loans  outstanding  may not  exceed  10% of such  institution's
assets.

     The Bank makes  commercial  business loans on a secured basis. The terms of
such loans generally do not exceed five years.  The majority of these loans have
floating interest rates which adjust with changes in market driven indices.  The
Bank's  commercial  business  loans  primarily  consist of short-term  loans for
equipment, working capital, business expansion and inventory financing. The Bank
customarily  requires a personal  guaranty of payment by the  principals  of any
borrowing entity and reviews the financial  statements and income tax returns of
the  guarantors.  At December 31, 2003, the Bank had  approximately  $15 million
outstanding in commercial business loans, which represented  approximately 4% of
its total loan portfolio.

     Prior to 2002 the Bank purchased  commercial leases;  however,  the Bank no
longer  engages in this  activity.  These  lessees are  generally  small medical
practitioners  located throughout the United States. The average lease amount is
less than $100,000.  At December 31, 2003 the purchased lease portfolio  totaled
$1 million or 0.3% of total assets.

     Loan  Approval  Authority and  Underwriting.  The Board of Directors of the
Bank sets the  authority  to approve  loans  based on the  amount,  type of loan
(i.e., secured or unsecured) and total exposure to the borrower. Where there are
one or more  existing  loans to a borrower,  the level of  approval  required is
governed by the proposed  total  exposure  including the new loan. The Board has
approved loan authority and limits for certain of the bank's  lending  personnel
and senior  officers,  including the president of the bank.  Approval  authority
ranges from  $25,000 to $500,000  for secured  loans,  and $5,000 to $25,000 for
unsecured loans.  Members of an in-house loan committee comprising the four most
senior members of management  approve all loans over  $500,000.  Any two members
may  combine  their  lending  authority.  A majority  of the members may approve
secured loans up to $1.5 million and unsecured  loans up to $200,000.  All loans
of $1.5  million  through  $5  million  require  the  approval  of a Board  Loan
Committee  composed of


                                       7
<PAGE>

four members of the Board of Directors of the Bank. All loans over $5 million or
loans that cause the aggregate lending relationship to exceed $5 million must be
approved by the Bank's Board of Directors.

     One- to four-family  residential mortgage loans are generally  underwritten
according to FHLMC and FNMA  guidelines.  For all loans  originated by the Bank,
upon receipt of a completed  loan  application  from a prospective  borrower,  a
credit report is ordered,  income and certain other information is verified and,
if necessary, additional financial information is requested. An appraisal of the
real estate  intended to secure the proposed loan is required which currently is
performed by an independent  appraiser  designated and approved by the Bank. The
Bank makes construction/permanent loans on individual properties. Funds advanced
during  the  construction  phase  are  held  in a  loan-in-process  account  and
disbursed based upon various stages of completion.  The independent appraiser or
loan  officer  determines  the  stage of  completion  based  upon  its  physical
inspection  of the  construction.  It is  the  Bank's  policy  to  obtain  title
insurance or a title opinion on all real estate first mortgage loans.  Borrowers
must also obtain hazard or flood  insurance (for loans on property  located in a
flood zone) prior to closing the loan. For loans in excess of 80% of the loan to
value ratio,  borrowers  are  generally  required to advance  funds on a monthly
basis  together with each payment of principal and interest to an escrow account
from which the Bank makes  disbursements for items such as real estate taxes and
hazard insurance premiums.

     Loans to One Borrower.  Current  regulations limit loans to one borrower in
an amount equal to 15% of unimpaired capital and retained income on an unsecured
basis and an additional  amount equal to 10% of unimpaired  capital and retained
income if the loan is  secured  by  readily  marketable  collateral  (generally,
financial  instruments,  not real  estate)  or  $500,000,  whichever  is higher.
Penalties for violations of the  loan-to-one  borrower  statutory and regulatory
restrictions  include cease and desist  orders,  the imposition of a supervisory
agreement and civil money  penalties.  The Bank's maximum  loan-to-one  borrower
limit was approximately $7.0 million as of December 31, 2003.

     At  December  31,  2003,   the  Bank's  five  largest   aggregate   lending
relationships  had balances  ranging from $4.8 to $6.6 million.  At December 31,
2003, all of these loans were current.

Mortgage-Backed Securities

     To  supplement  lending   activities,   the  Bank  invests  in  residential
mortgage-backed securities. Although the majority of such securities are held to
maturity,  they can serve as collateral for borrowings and, through  repayments,
as a source of liquidity.

     The mortgage-backed securities portfolio as of December 31, 2003, consisted
of  pass-through   certificates   issued  by  the  Federal  Home  Loan  Mortgage
Corporation  ("FHLMC") ($17 million),  Government National Mortgage  Association
("GNMA"),  ($8 million)  Federal  National  Mortgage  Association  ("FNMA") ($25
million),  and real estate  mortgage  investment  conduits  formed by these same
agencies ("REMICs") ($80 million.).

     At December 31, 2003,  the  amortized  cost of  mortgage-backed  securities
totaled  $131  million,  or 22% of total  assets,  and the market  value of such
securities totaled approximately $132 million.

     The Bank's mortgage-backed  securities are so-called  "pass-throughs" which
represent a participation  interest in a pool of  single-family  or multi-family
mortgages,  the  principal  and  interest  payments on which are passed from the
mortgage  originators,   through  intermediaries  (generally  quasi-governmental
agencies)  that pool and  repackage the  participation  interests in the form of
securities,  to investors such as the Bank.  Such  quasi-governmental  agencies,
which  guarantee the payment of principal  and interest to investors,  primarily
include FHLMC, FNMA and GNMA. The REMIC securities are composed of the same loan
types as the pass through certificates,  but offer differing  characteristics as
to  their  expected  cash  flows  depending  on the  class  of  such  securities
purchased.  The Bank's REMICs are primarily "planned  amortization  classes" and
"very accurately defined maturity classes" that, when purchased,  offered a high
probability of predictable cash flows.


                                       8


<PAGE>

     The  following   table  sets  forth  the  carrying   value  of  the  Bank's
mortgage-backed securities held in portfolio at the dates indicated.

                                                        At December 31,
                                                        ---------------
                                                  2003        2002        2001
                                                --------    --------    --------
                                                        (In thousands)

Held to maturity:
  GNMA-fixed rate ..........................    $  8,007    $ 18,278    $ 29,877
  FHLMC ARMs ...............................          71          91         131
  FHLMC-fixed rate .........................       8,336      21,779      34,869
  FNMA-fixed rate ..........................       7,205      11,781      15,739
  REMICs ...................................          11       2,519      12,550
  Other mortgage-backed securities .........          --         144         201
                                                --------    --------    --------
    Total mortgage-backed securities
      held to maturity .....................    $ 23,630    $ 54,592    $ 93,367
                                                ========    ========    ========
Available-for-sale:
  FHLMC ....................................    $  8,525    $    699    $  1,108
  FNMA .....................................      18,385      11,878      22,459
  GNMA .....................................          --          --       5,515
  REMICs ...................................      79,864     102,666      70,681
                                                --------    --------    --------
    Total mortgage-backed securities
      available-for-sale ...................    $106,774    $115,243    $ 99,763
                                                ========    ========    ========

     Mortgage-Backed  Securities  Maturity.  The following  table sets forth the
maturity and the weighted  average coupon ("WAC") of the Bank's  mortgage-backed
securities  portfolio at December 31, 2003. The table does not include estimated
prepayments.  Adjustable-rate  mortgage-backed  securities are shown as maturing
based on contractual maturities.

<TABLE>
<CAPTION>
                                                                      Contractual
                                        Contractual Held               Available
                                          To Maturity                  -For-Sale
                                         Maturities Due     WAC      Maturities Due      WAC
                                         --------------     ---      --------------      ---
                                                           (Dollars in thousands)

<S>                                       <C>              <C>       <C>              <C>
Less than 1 year .....................      $     21         9.25%     $     49         7.00%
1 to 3 years .........................            78         7.89         3,828         4.00
3 to 5 years .........................         2,456         7.36           410         7.16
5 to 10 years ........................         1,428         7.13        38,116         5.71
10 to 20 years .......................         2,283         5.66        42,932         4.74
Over 20 years ........................        17,364         6.51        21,439         4.71
                                            --------         ----      --------         ----
Total mortgage-backed securities .....      $ 23,630         6.56%     $106,774         5.06%
                                            ========         ====      ========         ====
</TABLE>


                                       9

<PAGE>

Non-Performing and Problem Assets

     Loan  Collection.  When a borrower  fails to make a  required  payment on a
loan, the Bank takes a number of steps to have the borrower cure the delinquency
and  restore the loan to current  status.  In the case of  residential  mortgage
loans and consumer loans, the Bank generally sends the borrower a written notice
of  non-payment  after the loan is 15 days past due. In the event payment is not
then received, additional letters and phone calls are made. If the loan is still
not brought current and it becomes  necessary for the Bank to take legal action,
which  typically  occurs after a loan is delinquent  more than 90 days, the Bank
will commence foreclosure proceedings against any real property that secures the
loan and attempt to  repossess  any  personal  property  that secures a consumer
loan. If a foreclosure action is instituted and the loan is not brought current,
paid in full,  or  refinanced  before the  foreclosure  sale,  the real property
securing the loan generally is sold at foreclosure.

     In  the  case  of  commercial  real  estate  and  multi-family  loans,  and
construction  loans,  the Bank  generally  attempts to contact  the  borrower by
telephone  after any loan payment is ten days past due and a senior loan officer
reviews all collection efforts made if payment is not received after the loan is
30 days past due.  Decisions  as to when to  commence  foreclosure  actions  for
commercial real estate and multi-family loans and construction loans are made on
a case by case basis.  The Bank may consider  loan  work-out  arrangements  with
these types of borrowers in certain circumstances.

     On mortgage  loans or loan  participations  purchased by the Bank, the Bank
receives monthly reports from its loan servicers with which it monitors the loan
portfolio.  Based upon servicing  agreements with the servicers of the loan, the
Bank  relies  upon  the  servicer  to  contact  delinquent  borrowers,   collect
delinquent amounts and to initiate foreclosure proceedings,  when necessary, all
in accordance with applicable  laws,  regulations and the terms of the servicing
agreements  between the Bank and its servicing  agents. At December 31, 2003 the
Bank used  third-party  servicers to service  $94.3  million in mortgage  loans,
including  one  servicer  that  serviced  $73.4  million.   All  of  the  Bank's
third-party mortgage loan servicers are regulated financial  institutions or are
approved by either HUD, FNMA, or FHLMC to service loans on their behalf.

     Delinquent Loans. Generally,  the Bank reserves for uncollected interest on
loans  past due more  than 90 days;  these  loans are  included  in the table of
nonaccrual  loans below.  Loans also are placed on a nonaccrual  status when, in
the judgment of management,  the probability of collection of interest is deemed
to be  insufficient  to  warrant  further  collection.  When a loan is placed on
nonaccrual  status,  previously  accrued but unpaid  interest  is deducted  from
interest income and the further accrual of interest ceases unless the underlying
facts  that  prompted a  nonaccrual  determination  are deemed to have  improved
significantly.

     Non-Performing Assets. The following table sets forth information regarding
non-accrual loans and real estate owned by the Bank at the dates indicated.  The
Bank had no loans  contractually  past due more than 90 days for  which  accrued
interest has been recorded.



                                       10


<PAGE>

<TABLE>
<CAPTION>
Non-performing assets                                          At December 31,
                                                ------------------------------------------
                                                 2003     2002     2001     2000     1999
                                                ------   ------   ------   ------   ------
                                                          (Dollars in thousands)

<S>                                           <C>      <C>      <C>      <C>      <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
  One- to four-family .......................   $1,549   $1,013   $1,821   $  869   $  880
  Commercial real estate and multi-family ...      296    1,677    1,725      180       24

Consumer and other ..........................      503    1,132      230      421      413
                                                ------   ------   ------   ------   ------
   Total non-accrual loans ..................    2,348    3,822    3,776    1,470    1,317
                                                ------   ------   ------   ------   ------

Real estate owned, net ......................      868       84       30      176      546
                                                ------   ------   ------   ------   ------
Total non-performing assets .................   $3,216   $3,906   $3,806   $1,646   $1,863
                                                ======   ======   ======   ======   ======
Total non-accrual loans to loans.............    0.58%    1.03%    0.99%    0.41%    0.45%
                                                ======   ======   ======   ======   ======
Total non-accrual loans to total assets......    0.39%    0.53%    0.53%    0.20%    0.18%
                                                ======   ======   ======   ======   ======
Total non-performing assets to total assets..    0.53%    0.54%    0.54%    0.23%    0.26%
                                                ======   ======   ======   ======   ======
</TABLE>

     At  December  31,  2003,  the  Bank  had  no  foreign  loans  and  no  loan
concentrations  exceeding  10% of total loans not  disclosed in above the table.
"Loan concentrations" are considered to exist when there are amounts loaned to a
multiple number of borrowers engaged in similar activities that would cause them
to be similarly impacted by economic or other conditions.  Loans recorded in the
category  of other  real  estate  owned are valued at the lower of book value of
loans outstanding or fair market value less cost of disposal.

     At December 31, 2003, the Bank was not aware of any potential problem loans
that are not  otherwise  included in the  foregoing  table.  "Potential  problem
loans" are loans where  information  about possible credit problems of borrowers
has caused  management to have serious  doubts about the  borrowers'  ability to
comply with present repayment terms.

     Classified Assets. OTS regulations provide for a classification  system for
problem assets of insured  institutions  which covers all problem assets.  Under
this  classification   system,   problem  assets  of  insured  institutions  are
classified  as  "substandard,"  "doubtful,"  or "loss."  An asset is  considered
"substandard"  if it is  inadequately  protected  by the  current  net worth and
paying  capacity  of  the  obligor  or  of  the  collateral   pledged,  if  any.
"Substandard"  assets include those characterized by the "distinct  possibility"
that the insured  institution  will sustain "some loss" if the  deficiencies are
not  corrected.  Assets  classified  as  "doubtful"  have all of the  weaknesses
inherent in those classified  "substandard," with the added  characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently  existing  facts,  conditions  and values,  "highly  questionable  and
improbable."  Assets  classified as "loss" are those considered  "uncollectible"
and  of  such  little  value  that  their  continuance  as  assets  without  the
establishment  of a specific loss reserve is not  warranted.  Assets  designated
"special  mention" by  management  are assets  included  on the Bank's  internal
watchlist  because  of  potential  weakness  but that do not  currently  warrant
classification in one of the aforementioned categories.



                                       11
<PAGE>


     When an insured institution classifies problem assets as either substandard
or doubtful,  it may establish  general  allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been  established  to recognize the inherent risk  associated  with lending
activities,  but which, unlike specific  allowances,  have not been allocated to
particular  problem  assets.  When an insured  institution  classifies  all or a
portion of a problem  asset as  "loss," it is  required  either to  establish  a
specific  allowance  for  losses  equal to 100% of that  portion of the asset so
classified or to charge off such amount.  An  institution's  determination as to
the  classification of its assets and the amount of its valuation  allowances is
subject to review by the OTS,  which may order the  establishment  of additional
general or  specific  loss  allowances.  A portion of  general  loss  allowances
established to cover possible losses related to assets classified as substandard
or doubtful may be included in determining an institution's  regulatory capital,
while specific valuation  allowances for loan losses generally do not qualify as
regulatory capital.

     The following  table provides  further  information in regard to the Bank's
classified assets as of December 31, 2003.

                                               At December 31, 2003
                                               --------------------
                                                  (In thousands)

           Special mention assets .............        $5,662
           Substandard ........................         3,073
           Doubtful assets ....................           146
           Loss ...............................            --
                                                       ------
              Total classified assets..........        $8,881
                                                       ======

     Real  Estate  Owned.  Real  estate  acquired  by the  Bank as a  result  of
foreclosure,  judgment or by deed in lieu of  foreclosure  is classified as real
estate owned ("REO") until it is sold.  When property is acquired it is recorded
at the  lower of fair  value,  minus  estimated  cost to sell,  or cost.  If the
property  subsequently  decreases in estimated  value from the initial  recorded
amount,  the Bank will  provide an  additional  valuation  allowance,  through a
charge to earnings, if the decrease is judged by management to be temporary,  or
the Bank will write the property down, through a charge to earnings,  to the new
estimated value if the decrease is judged by management to be permanent.

     The Bank  records  loans as in substance  foreclosures  if the borrower has
little or no equity in the property based upon its documented current fair value
and if the borrower has effectively  abandoned  control of the collateral or has
continued  to retain  control  of the  collateral  but  because  of the  current
financial  status of the borrower it is doubtful  the  borrower  will be able to
repay  the  loan  in the  foreseeable  future.  In  substance  foreclosures  are
accounted for as loans until such time that title to the  collateral is acquired
by the Bank. There may be significant  other expenses  incurred such as attorney
and other extraordinary servicing costs involved with in substance foreclosures.

     Allowances  for Loan Losses.  The Bank provides  valuation  allowances  for
estimated losses from uncollectible loans. Management determines the adequacy of
the  allowance on a quarterly  basis to ensure that a provision  for loan losses
has been  charged  against  earnings  in an amount  necessary  to  maintain  the
allowance  at a level that is  appropriate  based on  management's  estimate  of
probable losses. Several sources of data are used in making the evaluation as to
the  appropriateness of the allowance.

     The Bank's  watch list  contains  all loans which  because of past  payment
history, a review of recent financial information,  or other facts regarding the
credit, pose a higher than normal amount of perceived risk of collection. Once a
loan is deemed to pose other than a normal level of risk of collection, it moves
to the classified asset list as either special mention,  substandard,  doubtful,
or loss as required by regulatory guidelines. Classified assets also include all
loans over 90 days past due according to the contractual  repayment terms. These
loans are automatically  considered at least  substandard.  All loans not on the
classified  asset  list  are  assigned  a  reserve  factor  that is based on the
Corporation's  actual loss  experience  over the last three years,  with a small
factor  assigned  to loans  current  as to their  contractual  payments,  and an
increased  factor if the loan is 30 of 60 days past due.  Classified  loans with
balances  under  $100,000 are  typically  pooled  according to their  underlying
collateral,  and a reserve factor assigned based on historical loss  experience.
Classified  loans  are  evaluated  on an  individual  basis if the loan  balance
exceeds $100,000. In such a case, the value of the underlying collateral,  which
is ordinarily real estate because of the nature of the Corporation's


                                       12
<PAGE>

predominant past lending activities, the cost of collection and disposition, and
other factors are considered and an estimated  reserve level is established.  In
establishing  estimated  reserves,  current and projected economic conditions as
they may affect the borrower and the  collateral  are  considered.  If prospects
appear poor with respect to  collateral  disposition,  for  example,  because of
economic  factors,  a lower  disposition  value and thus a higher  reserve level
would be established.  Similarly, the credit may be guaranteed by a governmental
agency, or the collateral value may greatly exceed the loan balance such that no
reserve is indicated for these loans that are nevertheless considered classified
assets because of their delinquency.  If a loan or a portion of a loan is judged
to be  unrecoverable,  that  amount  is  charged  off.  The  calculated  reserve
determined  using the  methodologies  described  above is compared to the actual
level of reserves;  the difference  reflects the imprecision of the multitude of
assumptions  that are made combined with the  variability  that can occur with a
relatively  small amount of troubled  assets,  and the reserve is  maintained at
reasonable  levels by adjusting the provision  that is charged to earnings.

         The  following table sets forth  information with respect to the Bank's
allowance for loan losses at the dates and for the periods indicated:


<TABLE>
<CAPTION>
                                                    For the Years Ended December 31,
                                          --------------------------------------------------
                                          2003       2002       2001       2000       1999
                                          ----       ----       ----       ----       ----
                                                      (Dollars in thousands)

<S>                                   <C>        <C>        <C>        <C>        <C>
Balance at beginning of period.......   $ 2,047    $ 1,972    $ 1,714    $ 1,917    $ 1,909
Provision for loan losses ...........       330        988        500        410        300
Charge-offs:
  One- to four-family ...............       (16)       (13)        --         --         --
  Commercial and multi-family
    real estate loans ...............        --         --         --         --         --
  Consumer and other loans ..........      (541)      (928)      (430)      (634)      (296)
Recoveries:
  One- to four-family ...............        --          3         --         --         --
  Commercial and multi-family
    real estate loans ...............        --         --         --         --         --
  Consumer and other loans ..........       291         25        188         21          4
                                        -------    -------    -------    -------    -------
Balance at end of year ..............   $ 2,111    $ 2,047    $ 1,972    $ 1,714    $ 1,917
                                        =======    =======    =======    =======    =======

Ratio of net charge-offs during
  the period to average loans
  outstanding during the period......     0.07%      0.25%      0.07%      0.20%      0.10%
Ratio of allowance for loan
  losses to non-performing
  loans at the end of the period.....    89.91%     53.56%     52.22%     116.0%     145.6%
Ratio of allowance for loan
  losses to loans receivable
  at the end of the period...........     0.52%      0.55%      0.52%      0.47%      0.66%
Ratio of allowance for loan
  losses and foreclosed real
  estate to total non-performing
  assets at the end of the period....    92.63%     52.41%     52.60%     114.8%     132.2%
</TABLE>


                                       13


<PAGE>

     The following  table sets forth the allocation of the Bank's  allowance for
loan losses by loan  category and the percent of loans in each category to total
loans  receivable,  gross, at the dates indicated.  The portion of the loan loss
allowance allocated to each loan category does not represent the total available
for future losses which may occur within the loan category  since the total loan
loss allowance is a valuation reserve applicable to the entire loan portfolio.

<TABLE>
<CAPTION>
                                                                       At December 31,
                         ------------------------------------------------------------------------------------------------------
                                 2003                 2002                 2001                 2000                 1999
                         ------------------   ------------------   ------------------   ------------------   ------------------
                                Percent of           Percent of           Percent of           Percent of           Percent of
                                 Loans to             Loans to             Loans to             Loans to             Loans to
                         Amount Total Loans   Amount Total Loans   Amount Total Loans   Amount Total Loans   Amount Total Loans
                         ------ -----------   ------ -----------   ------ -----------   ------ -----------   ------ -----------
                                                                  (Dollars in thousands)
<S>                    <C>       <C>        <C>        <C>        <C>       <C>       <C>       <C>        <C>       <C>
At end of period
 allocated to:
One- to four-family ..   $  277    68.2%      $  119     61.3%      $  216    58.4%     $   97     57.9%     $  242     58.0%
Commercial real estate
 and multi-family ....    1,230    18.3        1,021     23.0        1,100    24.6         835     21.3         676     22.6
Construction .........      109     1.6           90      3.2           74     2.6         105      3.8         172      4.2
Consumer and other
  loans ..............      495    11.9          817     12.5          582    14.4         677     17.0         826     15.2
                         ------   -----       ------    -----       ------   -----      ------    -----      ------    -----
Total allowance ......   $2,111   100.0%      $2,047    100.0%      $1,972   100.0%     $1,714    100.0%     $1,916    100.0%
                         ======   =====       ======    =====       ======   =====      ======    =====      ======    =====

</TABLE>

                                       14
<PAGE>



Investment Activities

     The  investment  policy of the Bank,  which is  established by the Board of
Directors  and  implemented  by  the  Asset  Liability  Committee,  is  designed
primarily to provide and maintain  liquidity,  to generate a favorable return on
investments  without  incurring  undue  interest  rate and credit  risk,  and to
complement  the  Bank's  lending  activities.  In  establishing  its  investment
strategies,  the Bank  considers  its  business and growth  plans,  the economic
environment,  the types of  securities to be held and other  factors.  Federally
chartered savings  institutions have the authority to invest in various types of
assets,  including  U.S.  Treasury  obligations,  securities of various  federal
agencies,   certain  certificates  of  deposit  of  insured  banks  and  savings
institutions,  certain  bankers  acceptances,  repurchase  agreements,  loans on
federal  funds,  and,  subject to certain  limits,  commercial  paper and mutual
funds.

     The following table sets forth certain information  regarding the amortized
cost and fair values of the Bank's investments at the dates indicated.

<TABLE>
<CAPTION>
                                                                     At December 31,
                                          -------------------------------------------------------------------
                                                   2003                    2002                    2001
                                          -------------------    --------------------     -------------------
                                          Amortized    Fair      Amortized     Fair       Amortized    Fair
                                            Cost       Value       Cost        Value        Cost       Value
                                          ---------   -------    ---------    -------     ---------   -------
                                                                   (In thousands)

<S>                                     <C>         <C>         <C>         <C>         <C>         <C>
Interest-earning deposits .............   $   508     $   508     $93,143     $93,143     $58,157     $58,157
                                          =======     =======     =======     =======     =======     =======

Investment securities held-to-maturity:
  U.S. government and agency
    obligations .......................   $ 2,000     $ 2,011     $ 4,000     $ 4,125     $    --     $    --
  State and political subdivisions ....     1,609       1,735       3,700       3,880       5,743       5,787
  Corporate debt securities ...........     6,780       7,069       6,863       7,182       4,123       4,043
                                          -------     -------     -------     -------     -------     -------
    Total .............................   $10,389     $10,815     $14,563     $15,187     $ 9,866     $ 9,830
                                          =======     =======     =======     =======     =======     =======

Securities available-for-sale:
  U.S. government and agency
    obligations .......................   $ 2,972     $ 2,947     $15,964     $16,084     $11,018     $10,929
  State and political subdivisions ....    10,677      10,493         453         464          --          --
  Corporate Debt Securities ...........     1,000         993      10,034      10,197      11,070      11,245
  Mutual funds ........................        --          --         500         498         500         497
                                          -------     -------     -------     -------     -------     -------
    Total .............................   $14,649     $14,433     $26,951     $27,243     $22,588     $22,671
                                          =======     =======     =======     =======     =======     =======
</TABLE>



                                       15


<PAGE>

Investment Portfolio Maturities

     The following table sets forth certain information  regarding the amortized
cost, weighted average yields and maturities of the Bank's investment securities
portfolio,  exclusive of interest-earning deposits, at December 31, 2003. Yields
on tax exempt obligations have been computed on a tax equivalent basis.

<TABLE>
<CAPTION>
                           One Year or Less  One to Five Years Five to Ten Years  More than Ten Years Total Investment Securities(1)
                           ----------------- ----------------- ------------------ ------------------- ------------------------------
                           Amortized Average Amortized Average Amortized  Average Amortized   Average Amortized    Average    Fair
                             Cost     Yield    Cost     Yield     Cost     Yield    Cost       Yield    Cost        Yield     Value
                             ----     -----    ----     -----     ----     -----    ----       -----    ----        -----    -------
                                                                             (Dollars in thousands)

<S>                      <C>               <C>        <C>    <C>                 <C>                <C>           <C>      <C>
U.S. government agency...  $    --      --%  $  4,972   4.14%  $    --       --%   $     --       --% $  4,972      4.14%    $ 4,957
Municipal obligations....       --      --      1,394   9.17       611     4.05      10,281     5.41    12,286      5.77      12,229
Corporate obligations....    1,004    4.03      6,776   4.23        --       --          --       --     7,780      4.21       8,062
                           -------    ----   --------   ----   -------     ----    --------     ----  --------      ----     -------
  Total..................  $ 1,004    4.03%  $ 13,142   4.72%  $   611     4.05%   $ 10,281     5.41% $ 25,038      4.96%    $25,248
                           =======    ====   ========   ====   =======     ====    ========     ====  ========      ====     =======
</TABLE>

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

(1)  Includes   $14.433  million  of  U.S.   government   agency  and  corporate
     obligations which are carried as  available-for-sale  at December 31, 2003.
     Investment securities available-for-sale are carried at fair value.







                                       16
<PAGE>

Sources of Funds

     General.  Deposits,  borrowings,  loan  repayments and cash flows generated
from  operations are the primary sources of the Bank's funds for use in lending,
investing and other general purposes.

     Deposits.  The Bank offers a variety of deposit  accounts having a range of
interest  rates and terms.  The  Bank's  deposits  consist  of regular  savings,
non-interest  bearing  checking,  NOW checking,  money market,  and  certificate
accounts.  Of the deposit  accounts,  $31 million or 7% consist of IRA, Keogh or
SEP retirement accounts at December 31, 2003.

     The flow of  deposits  is  influenced  significantly  by  general  economic
conditions,   changes  in  money  market  and  prevailing   interest  rates  and
competition.  The Bank's deposits are primarily  obtained from areas surrounding
its offices, and the Bank relies primarily on customer service and long-standing
relationships with customers to attract and retain these deposits.  The Bank has
maintained a high level of core deposits  consisting of regular  savings,  money
market,  non-interest-bearing  checking, and NOW checking, which has contributed
to a low  cost-of-funds.  At December 31, 2003, core deposits amounted to 68% of
total deposits.

     The  following  table sets  forth the  distribution  of the Bank's  deposit
accounts at the dates indicated and the weighted  average nominal interest rates
on each  category  of  deposits  presented.  The Bank does not have  significant
amount of deposits from out-of-state  sources.  Management does not believe that
the use of year  end  balances  instead  of  average  balances  resulted  in any
material difference in the information presented.

<TABLE>
<CAPTION>
                                                                At December 31,
                            --------------------------------------------------------------------------------------------
                                      2003                           2002                             2001
                            ----------------------------   ------------------------------   ----------------------------
                                                Weighted                         Weighted                       Weighted
                                     Percent    Average             Percent of   Average             Percent    Average
                                     of Total   Nominal              Total       Nominal             of Total   Nominal
                            Amount   Deposits    Rate      Amount   Deposits      Rate      Amount   Deposits    Rate
                            ------   --------   --------   ------   ----------   --------   ------   --------   --------
                                                                 (Dollars in thousands)
<S>                       <C>        <C>       <C>      <C>         <C>         <C>      <C>         <C>       <C>
Transaction Accounts
Interest-bearing
 checking accounts ......   $ 52,647   11.46     0.47%    $ 48,496    10.96       0.60%    $ 46,990    11.13     0.75%
Money market accounts ...     44,688    9.73     0.91       43,677     9.87       1.00       42,557    10.08     2.54
Non-interest-bearing
 checking accounts ......     26,375    5.74     0.00       20,810     4.70       0.00       18,200     4.31     0.00
                            --------  ------     ----     --------   ------       ----     --------   ------     ----
   Total transaction
    accounts ............    123,710   26.93               112,983    25.53                 107,747    25.52

 Passbook accounts ......    188,673   41.07     0.94      182,813    41.31       1.51      169,576    40.18     2.52

Certificates of deposit .    146,960   32.00     2.43      146,762    33.16       2.84      144,729    34.30     4.29
                            --------  ------     ----     --------   ------       ----     --------   ------     ----
Total deposits ..........   $459,343  100.00%    1.31%    $442,558   100.00%      1.73%    $422,052   100.00%    2.82%
                            ========  ======     ====     ========   ======       ====     ========   ======     ====
</TABLE>


                                       17


<PAGE>

     At December 31, 2003, the Bank had  outstanding  certificates of deposit in
amounts of $100,000 or more maturing as follows:

                                                       Amount
                                                       ------
Maturing Period                                    (In thousands)
---------------
Three months or less........................        $    2,806
Over three through six months...............             2,343
Over six through 12 months..................             7,018
Over 12 months..............................            10,038
                                                    ----------
    Total...................................        $   22,205
                                                    ==========
Borrowings

     Deposits  are the  primary  source  of  funds  of the  Bank's  lending  and
investment activities and for its general business purposes. The Bank may obtain
advances from the FHLB of Pittsburgh to supplement its supply of lendable funds.
Advances  from the FHLB of Pittsburgh  are typically  secured by a pledge of the
Bank's  stock  in the FHLB of  Pittsburgh  and a  portion  of the  Bank's  first
mortgage loans and certain other assets.  The Bank, if the need arises, may also
access the Federal Reserve Bank discount window.  The following tables set forth
the maximum  month-end  balance,  period ending  balance,  and weighted  average
balance of outstanding FHLB advances at the dates and for the periods indicated,
together with the applicable weighted average interest rates.

<TABLE>
<CAPTION>
                                                                At December 31,
                                                    ---------------------------------------
                                                       2003          2002           2001
                                                       ----          ----           ----
                                                             (Dollars in thousands)

<S>                                               <C>            <C>            <C>
FHLB advances and other borrowings..............    $  86,853      $ 207,359      $ 223,359
                                                    =========      =========      =========

Weighted average interest rate..................        2.98%          5.46%          5.46%
</TABLE>


<TABLE>
<CAPTION>
                                                              Years Ended December 31,
                                                    ---------------------------------------
                                                       2003          2002           2001
                                                       ----          ----           ----
                                                             (Dollars in thousands)
<S>                                               <C>            <C>            <C>
Maximum balance of FHLB advances and
  other borrowings outstanding.................     $ 207,359      $ 222,359      $ 259,821
                                                    =========      =========      =========
Weighted average balance of FHLB
  advances and other borrowings
  outstanding...................................    $ 162,695      $ 218,578      $ 229,473
                                                    =========      =========      =========

Weighted average interest rate of FHLB
  advances and other borrowings.................        5.08%          5.46%          5.53%
                                                        ====           ====           ====
</TABLE>




                                       18



<PAGE>

Subsidiary Activity

     The Bank is permitted to invest up to 2% of its assets in the capital stock
of,  or  secured  or  unsecured  loans  to,  subsidiary  corporations,  with  an
additional  investment  of 1% of  assets  when  such  additional  investment  is
utilized primarily for community development  purposes.  Under such limitations,
as of December 31, 2003, the Bank was  authorized to invest up to  approximately
$12.1 million in the stock of, or loans to, service corporations (based upon the
2% limitation). In addition, the Bank can designate a subsidiary as an operating
subsidiary,  in which there is no percentage of assets investment limitation, if
it engages only in activities in which it would be  permissible  for the Bank to
engage.  At December  31,  2003,  the Bank had one  subsidiary,  Third  Delaware
Corporation.  Third Delaware Corporation is a wholly-owned  operating subsidiary
of the Bank and was formed in 1998 for the purpose of  investing  in  marketable
securities.  At December 31, 2003,  the Bank had $118 million  invested in Third
Delaware Corporation.

Personnel

     As of  December  31,  2003,  the Bank had 161  full-time  and 20  part-time
employees.  None  of  the  Bank's  employees  are  represented  by a  collective
bargaining  group. The Bank believes that its relationship with its employees is
good.

Executive Officers of the Registrant

     Executive Officers of the Company and the Bank:

     Kent C. Lufkin currently serves as President and Chief Executive Officer of
the Company and the Bank and was  appointed to such offices  effective  June 30,
2003.  Mr.  Lufkin  joined the Bank in 2000 and  formerly  served as Senior Vice
President and Retail  Banking  Officer.  Prior to that, Mr. Lufkin was President
and Chief Executive Officer of Roebling Bank in Roebling, New Jersey since 1996.

     Dennis R. Stewart has been  Executive  Vice  President and Chief  Financial
Officer of the Bank and the Company since July 2003,  and Senior Vice  President
and Chief  Financial  Officer of the Bank and the Company  since 1999.  Prior to
that, Mr. Stewart served as Executive Vice President and Chief Financial Officer
of First Coastal Bank in Virginia  Beach,  Virginia,  where he had been employed
since 1990.

     Elizabeth Davidson Maier is Senior Vice President and Secretary of the Bank
and the  Company and has been with the Bank since  1964.  Ms.  Maier has been an
officer of the Bank since 1974. Prior to that, Ms. Maier held various  positions
at the Bank.

     Floyd P. Haggar has been with the Bank since  1998.  Mr.  Haggar  currently
serves as Senior Vice President and Chief Lending Officer of the Bank. His prior
experience  includes four years as Senior Vice President and Senior Loan Officer
at Carnegie Bank in Princeton, New Jersey.

     Cynthia G. Mullen has been Senior Vice President and Retail Banking Officer
of the Bank since July 2003.  Previously she was a twenty-three year employee of
Commonwealth Bank in Norristown,  Pennsylvania,  holding a variety of positions,
including Vice President of Traditional Banking.

     The remaining  information  relating to Directors and Executive Officers of
the Registrant is  incorporated  herein by reference to the  Registrant's  Proxy
Statement for the 2004 Annual Meeting of Stockholders.





                                       19

<PAGE>

                                   REGULATION

     Set forth below is a brief description of all material laws and regulations
which relate to the regulation of the Bank and the Company. The description does
not purport to be complete  and is  qualified  in its  entirety by  reference to
applicable laws and regulations.

     On July 30, 2002,  President Bush signed into law the Sarbanes-Oxley Act of
2002 (the  "Act").  The  Securities  and  Exchange  Commission  (the  "SEC") has
promulgated  new  regulations  pursuant  to the Act and may  continue to propose
additional implementing or clarifying regulations as necessary in furtherance of
the Act.  The  passage  of the Act by  Congress  and the  implementation  of new
regulations by the SEC subject publicly-traded  companies to additional and more
cumbersome  reporting  regulations and  disclosure.  Compliance with the Act and
corresponding regulations may increase the Company's expenses.

Company Regulation

     General.  The Company is a unitary savings and loan holding company subject
to regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation  and  examination  by
the OTS. In addition, the OTS has enforcement authority over the Company and its
non-savings association subsidiaries,  should such subsidiaries be formed, which
also permits the OTS to restrict or prohibit  activities  that are determined to
be a serious risk to the subsidiary  savings  association.  This  regulation and
oversight is intended primarily for the protection of the depositors of the Bank
and not for the  benefit of  stockholders  of the  Company.  The Company is also
required to file certain reports with, and otherwise  comply with, the rules and
regulations of the OTS and the SEC.

     Financial   Modernization.   The  Gramm-Leach-Bliley  Act  ("GLB")  permits
qualifying  bank holding  companies to become  financial  holding  companies and
thereby  affiliate with securities  firms and insurance  companies and engage in
other activities that are financial in nature. GLB defines "financial in nature"
to include securities underwriting, dealing and market making; sponsoring mutual
funds and investment  companies;  insurance  underwriting  and agency;  merchant
banking activities; and activities that the Federal Reserve Board has determined
to be closely  related to banking.  A qualifying  national bank also may engage,
subject to  limitations  on  investment,  in  activities  that are  financial in
nature,   other  than  insurance   underwriting,   insurance  company  portfolio
investment,  real  estate  development,  and real estate  investment,  through a
financial subsidiary of the bank.

     GLB also prohibits new unitary  thrift  holding  companies from engaging in
nonfinancial  activities or from  affiliating with a nonfinancial  entity.  As a
grandfathered  unitary  thrift  holding  company,  the Company has  retained its
authority to engage in nonfinancial activities.

     QTL Test.  As a unitary  savings  and loan  holding  company,  the  Company
generally is not subject to activity  restrictions,  provided the Bank satisfies
the QTL test. If the Company acquires control of another savings  association as
a separate  subsidiary,  it would  become a multiple  savings  and loan  holding
company,  and the activities of the Company and any of its  subsidiaries  (other
than  the Bank or any  other  SAIF-insured  savings  association)  would  become
subject to restrictions  applicable to bank holding  companies unless such other
associations  each also  qualify  as a QTL and were  acquired  in a  supervisory
acquisition.

Bank Regulation

     General. As a federally chartered,  SAIF-insured  savings association,  the
Bank is  subject  to  extensive  regulation  by the OTS  and the  FDIC.  Lending
activities and other  investments must comply with various federal statutory and
regulatory   requirements.   The  Bank  is  also  subject  to  certain   reserve
requirements promulgated by the Federal Reserve Board.

     The OTS, in  conjunction  with the FDIC,  regularly  examines  the Bank and
prepares  reports for the  consideration of the Bank's Board of Directors on any
deficiencies that they find in the Bank's  operations.  The Bank's  relationship
with its depositors and borrowers is also regulated to a great extent by federal
law,  especially  in such matters as the  ownership of savings  accounts and the
form and content of the Bank's mortgage documents.


                                       20

<PAGE>

     The  Bank  must  file  reports  with the OTS and the  FDIC  concerning  its
activities  and  financial  condition,   in  addition  to  obtaining  regulatory
approvals  prior to entering into certain  transactions  such as mergers with or
acquisitions  of other savings  institutions.  This  regulation and  supervision
establishes a comprehensive  framework of activities in which an institution can
engage and is intended  primarily for the protection of the SAIF and depositors.
The  regulatory  structure  also  gives  the  regulatory  authorities  extensive
discretion in connection with their  supervisory and enforcement  activities and
examination  policies,  including policies with respect to the classification of
assets and the  establishment  of adequate  loan loss  reserves  for  regulatory
purposes.  Any change in such  regulations,  whether by the OTS, the FDIC or the
Congress could have a material adverse impact on the Company, the Bank and their
operations.  The Company is also  required to file  certain  reports  with,  and
otherwise comply with, the rules and regulations of the OTS and the SEC.

     Insurance of Deposit  Accounts.  The Bank's deposit accounts are insured by
the SAIF to a maximum of $100,000 for each insured member (as defined by law and
regulation).  The FDIC has the  authority,  should it  initiate  proceedings  to
terminate an institution's  deposit  insurance,  to suspend the insurance of any
such institution without tangible capital. However, if a savings association has
positive capital when it includes qualifying  intangible assets, the FDIC cannot
suspend deposit  insurance unless capital declines  materially,  the institution
fails to enter into and remain in  compliance  with an approved  capital plan or
the institution is operating in an unsafe or unsound manner.

     Regardless of an institution's capital level,  insurance of deposits may be
terminated by the FDIC upon a finding that the institution has engaged in unsafe
or  unsound  practices,  is  in an  unsafe  or  unsound  condition  to  continue
operations  or has violated  any  applicable  law,  regulation,  rule,  order or
condition  imposed  by the  FDIC or the  institution's  primary  regulator.  The
management of the Bank is unaware of any practice,  condition or violation  that
might lead to termination of its deposit insurance.

     The FDIC charges an annual  assessment  for the insurance of deposits based
on the risk a particular  institution  poses to its deposit insurance fund. This
risk  classification is based on an institution's  capital group and supervisory
subgroup assignment.

     Regulatory Capital  Requirements.  OTS capital  regulations require savings
institutions to meet three capital standards: (1) tangible capital equal to 1.5%
of total adjusted assets,  (2) a leverage ratio (core capital) equal to at least
4% of total adjusted assets and (3) a risk-based  capital  requirement  equal to
8.0% of total  risk-weighted  assets.  In  addition,  the OTS prompt  corrective
action  regulation  provides  that a  savings  institution  that has a  leverage
capital  ratio  of less  than  4% (3% for  institutions  receiving  the  highest
examination rating) will be deemed to be  "undercapitalized"  and may be subject
to certain restrictions.

     At December 31, 2003, the Bank was in compliance with all of its regulatory
capital requirements.

     Dividend  and  Other  Capital  Distribution  Limitations.  The Bank may not
declare or pay a cash dividend on its capital stock if the effect  thereof would
be to reduce the  regulatory  capital of the Bank below the amount  required for
the liquidation  account  established at the time of the Bank's  mutual-to-stock
conversion.

     Savings  associations  that would  remain at least  adequately  capitalized
following the capital distribution,  and that meet other specified requirements,
are not required to file a notice or application for capital distributions (such
as cash dividends) declared below specified amounts.  Savings associations which
are eligible for  expedited  treatment  under  current OTS  regulations  are not
required  to file an  application  with the OTS if (i) the  savings  association
would remain at least adequately  capitalized following the capital distribution
and (ii) the amount of capital  distribution  does not exceed an amount equal to
the  savings  association's  net income for that year to date,  plus the savings
association's  retained net income for the previous  two calendar  years.  Thus,
only  undistributed  net  income for the prior two years may be  distributed  in
addition to the current year's undistributed net income without the filing of an
application  with  the  OTS.  Savings  associations  which  do not  qualify  for
expedited treatment or which desire to make a capital  distribution in excess of
the specified amount, must file an application with, and obtain the approval of,
the OTS prior to making the capital distribution.  A savings association such as
the Bank that is a subsidiary of a savings and loan holding  company,  and under
certain  other  circumstances,  must file a notice  with OTS prior to making the
capital distribution.


                                       21
<PAGE>

     Qualified  Thrift  Lender  Test.  The Home Owners'  Loan Act  ("HOLA"),  as
amended, requires savings institutions to meet a QTL test. If the Bank maintains
an appropriate  level of Qualified  Thrift  Investments  (primarily  residential
mortgages and related investments, including certain mortgage-backed securities)
("QTIs")  and  otherwise  qualifies  as a QTL,  it will  continue  to enjoy full
borrowing  privileges  from the FHLB of Pittsburgh.  The required  percentage of
QTIs is 65% of portfolio assets (defined as all assets minus intangible  assets,
property used by the  institution  in conducting  its business and liquid assets
equal to 10% of total  assets).  Certain  assets  are  subject  to a  percentage
limitation of 20% of portfolio  assets.  In addition,  savings  associations may
include  shares of stock of the FHLBs,  FNMA and FHLMC as qualifying  QTIs.  The
FDICIA also amended the method for measuring  compliance with the QTL test to be
on a monthly  basis in nine out of every 12 months,  as opposed to on a daily or
weekly average of QTIs. As of December 31, 2003, the Bank was in compliance with
its QTL requirement with 78% of its assets invested in QTIs.

     Federal  Home  Loan  Bank  System.  The  Bank is a  member  of the  FHLB of
Pittsburgh,  one of 12 regional FHLBs that administer the home financing  credit
function of savings associations.  Each FHLB serves as a reserve or central bank
for its members within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated  obligations of the FHLB System.  It makes
loans to members  (i.e.,  advances) in accordance  with policies and  procedures
established by the Board of Directors of the FHLB.

     As a member,  the Bank is required to purchase  and  maintain  stock in the
FHLB of  Pittsburgh  in an amount equal to at least 1% of its  aggregate  unpaid
residential  mortgage loans, home purchase  contracts or similar  obligations at
the beginning of each year.  At December 31, 2003,  the Bank had $6.8 million in
FHLB stock, which was in compliance with this requirement.

     Federal Reserve  System.  The Federal Reserve Board requires all depository
institutions  to maintain  non-interest  bearing  reserves at  specified  levels
against  their  transaction  accounts  (primarily  checking,  NOW and  Super NOW
checking  accounts) and non-personal time deposits.  The balances  maintained to
meet the reserve  requirements  imposed by the Federal Reserve Board may be used
to satisfy the liquidity  requirements  that are imposed by the OTS. At December
31, 2003, the Bank's total transaction accounts required a reserve level of $4.7
million which was offset by the Bank's vault cash on hand and cash on deposit at
the Federal Reserve Bank of Philadelphia.

     Savings associations have authority to borrow from the Federal Reserve Bank
"discount  window,"  but  Federal  Reserve  policy  generally  requires  savings
associations  to exhaust  all OTS  sources  before  borrowing  from the  Federal
Reserve System. The Bank had no such borrowings at December 31, 2003.


                                       22
<PAGE>

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

     The Company is located and conducts its business at 3 Penns Trail, Newtown,
Pennsylvania.  At December 31, 2003,  the Bank operated from its  administrative
offices and fourteen branch offices located in Philadelphia  and Bucks Counties,
Pennsylvania  and Mercer County,  New Jersey.  The Bank also owns two parcels of
land and a building  behind its Doylestown  branch  office.  The parcel with the
building is available to be leased to a third-party and the other parcel is used
as a parking lot for  employees of the Bank and  tenants.  The net book value of
the two lots was $100,000. In addition, a subsidiary of the Company, Penns Trail
Development Corporation, owns investment property with a book value of $761,000.

     The  following  table sets forth certain  information  regarding the Bank's
operating properties:

<TABLE>
<CAPTION>
                                      Leased or                                           Leased or
    Location                            Owned               Location                        Owned
    --------                          --------              --------                      ---------

<S>                                 <C>             <C>                                  <C>
ADMINISTRATIVE OFFICE                                 OPERATIONS OFFICE
  Newtown Office                                      Operations Center
  3 Penns Trail                                       62 Walker Lane
  Newtown, PA 18940                   Owned           Newtown, PA  18940(1)                 Owned

BRANCH OFFICES
  Frankford Office                                    Newtown Office
  4625 Frankford Avenue                               950 Newtown Yardley Road
  Philadelphia, PA 19124              Leased          Newtown, PA 18940                     Leased

  Ewing Office                                        Mayfair Office
  2075 Pennington Road                                Roosevelt Blvd. at Unruh
  Ewing, NJ 08618                     Owned           Philadelphia, PA 19149                Owned

  Hamilton Office                                     Doylestown Office
  1850 Route 33                                       60 North Main Street
  Hamilton Square, NJ 08690           Owned           Doylestown, PA 18901                  Owned

  Fishtown Office                                     Feasterville Office
  York & Memphis Streets                              Buck Hotel Complex
  Philadelphia, PA 19125              Owned           Feasterville, PA 19053                Leased

  Cross Keys Office                                   Quakerbridge Office
  834 North Easton Highway                            590 Lawrence Square Blvd.
  Doylestown, PA 18901                Owned           Lawrenceville, NJ 08648               Leased

  Bridesburg Office                                   Woodhaven Office
  Orthodox & Almond Streets                           Knights Road Center
  Philadelphia, PA 19137              Owned           4014 Woodhaven Road
                                                      Philadelphia, PA 19154                Leased

  New Britain Office                                  Northern Liberties Office
  600 Town Center                                     905 North 2nd Street
  New Britain, PA 18901               Leased          Philadelphia, PA 19123                Leased
</TABLE>


(1) This office serves as the computer operations center, check processing area,
training center, mail processing and storage center for the Bank.


                                       23

<PAGE>

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

     Neither the Company nor its  subsidiaries are involved in any pending legal
proceedings,  other than routine legal matters  occurring in the ordinary course
of  business,  which in the  aggregate  involve  amounts  which are  believed by
management to be immaterial to the consolidated  financial  condition or results
of operations of the Company.

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

     None.

                                     PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters
------------------------------------------------------------------------------

     Information  relating  to the market  for  Registrant's  common  equity and
related  stockholder  matters appears under the section  captioned "Stock Market
Information"  in the  Registrant's  2003 Annual  Report to  Stockholders  and is
incorporated herein by reference.

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

     The  above-captioned   information  appears  under  the  section  captioned
"Selected  Financial and Other Data" in the  Registrant's  2003 Annual Report to
Stockholders and is incorporated herein by reference.

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

     The information  under the section captioned  "Management's  Discussion and
Analysis of Financial  Condition and Results of Operations" in the  Registrant's
2003 Annual Report to Stockholders is incorporated herein by reference.

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

Asset and Liability Management

     Managing  Interest  Rate  Risk.  Interest  rate  risk  is  defined  as  the
sensitivity of the Bank's current and future  earnings as well as its capital to
changes in the level of market interest  rates.  The Bank's exposure to interest
rate risk results  from,  among other  things,  the  difference in maturities in
interest-earning  assets  and  interest-bearing  liabilities.  Since the  Bank's
assets  currently  have a longer  maturity  than  its  liabilities,  the  Bank's
earnings could be negatively  impacted  during a period of rising interest rates
and conversely,  positively  impacted during a period of falling interest rates.
The relationship  between the interest rate sensitivity of the Bank's assets and
liabilities is continually  monitored by  management.  In this regard,  the Bank
emphasizes  the  origination  of  shorter  term or  adjustable  rate  assets for
portfolio.

     The Bank utilizes its investment and mortgage-backed security portfolios to
generate  additional  interest  income  and in  managing  its  liquidity.  These
securities  are readily  marketable and provide the Bank with a cash flow stream
to fund asset growth or liability maturities.

     A  significant  portion  of the  Bank's  assets  has been  funded  with CDs
including jumbo CDs. Unlike other deposit  products such as checking and savings
accounts,  CDs carry a high degree of interest rate sensitivity and,  therefore,
their  renewal  will vary based on the  competitiveness  of the Bank's  interest
rates. At December 31, 2003, approximately 32% of the Bank's deposits were CDs.

     The Bank  utilizes  borrowings  from the FHLB in managing its interest rate
risk and as a tool to augment  deposits in funding  asset  growth.  The Bank may
utilize these funding  sources to better match its longer term repricing  assets
(i.e., between one and five years).


                                       24
<PAGE>

     The nature of the Bank's current  operations is such that it is not subject
to foreign currency exchange or commodity price risk. Additionally,  neither the
Company nor the Bank owns any trading assets. At December 31, 2003, the Bank did
not have any hedging transactions in place such as interest rate swaps, caps, or
floors.

     As part of its interest  rate risk  management,  the Bank uses the Interest
Rate Risk Exposure Report,  which is generated quarterly by the OTS. This report
forecasts  changes in the Bank's market value of portfolio equity ("MVPE") under
alternative  interest rate environments.  The MVPE is defined as the net present
value  of  the  Bank's  existing  assets,   liabilities  and  off-balance  sheet
instruments. The calculated estimates of change in MVPE at December 31, 2003 are
as follows:

                                     MVPE
  -------------------------------------------------
  Change in Interest Rates (1)        Amount              % Change
  ----------------------------        ------              --------
                                  (In Thousands)

  +300 Basis Points                  $ 43,395               -44%
  +200 Basis Points                  $ 54,954               -29%
  +100 Basis Points                  $ 66,554               -14%
    Flat Rates                       $ 77,479                 0%
  -100 Basis Points                  $ 83,333                +8%

---------------------
(1)  The -200 and -300 bp scenarios  are not shown due to the low interest  rate
     environment.

     Management believes that the assumptions  utilized by OTS in evaluating the
vulnerability  of the  Company's  capital  to  changes  in  interest  rates  are
reasonable;  however,  the interest  rate  sensitivity  of the Bank's assets and
liabilities as well as the estimated effect of changes in interest rates on MVPE
could vary substantially if different  assumptions are used or actual experience
differs from the experience on which the assumptions were based.

     In the event the Bank should  measure an  excessive  decline in its MVPE as
the result of an  immediate  and  sustained  change in interest  rate,  it has a
number of options  which it could  utilize to remedy  that  situation.  The Bank
could  restructure  its  investment   portfolio  through  sale  or  purchase  of
securities  with more favorable  repricing  attributes.  It could also emphasize
loan products with appropriate  maturities or repricing attributes,  or it could
attract deposits or obtain borrowings with desired maturities.

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

     The Consolidated  Financial Statements of TF Financial  Corporation and its
subsidiaries included in the Registrant's 2003 Annual Report to Stockholders are
incorporated herein by reference.

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

         None.

Item 9A.  Controls and Procedures
---------------------------------

     (a)  Evaluation  of  disclosure  controls  and  procedures.  Based on their
          -----------------------------------------------------
evaluation of the Company's  disclosure  controls and  procedures (as defined in
Rule 13a-15(e) under the Securities  Exchange Act of 1934 (the "Exchange Act")),
the Company's  principal  executive officer and principal financial officer have
concluded that as of the end of the period covered by this Annual Report on Form
10-K such  disclosure  controls  and  procedures  are  effective  to ensure that
information  required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded,  processed,  summarized and reported
within the time periods  specified in Securities and Exchange  Commission  rules
and forms.


                                       25

<PAGE>

     (b) Changes in internal control over financial  reporting.  During the last
quarter of the year under report there was no change in the  Company's  internal
control over financial reporting that has materially affected,  or is reasonably
likely to materially  affect,  the  Company's  internal  control over  financial
reporting.

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant
------------------------------------------------------------

     The  information  contained  under the  sections  captioned  "Proposal  1 -
Election of Directors -- General  Information and Nominees" and "-- Biographical
Information" and "Additional  Information About Directors and Executive Officers
-- Section 16(a) Beneficial Ownership Reporting  Compliance" in the Registrant's
definitive  proxy  statement  for  the  Registrant's   2004  Annual  Meeting  of
Stockholders (the "Proxy Statement") is incorporated herein by reference.

     Additional  information  concerning  executive  officers is included  under
"Item 1. Business -- Executive Officers of the Registrant."

     The  Company has  adopted a Code of Ethics  that  applies to its  principal
executive officer,  principal financial officer, principal accounting officer or
persons  performing such functions.  The Code of Ethics can be obtained  without
charge by sending a written  request to the  Corporate  Secretary,  TF Financial
Corporation, 3 Penns Trail, Newtown, Pennsylvania 18940.

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

     The information  relating to executive  compensation is incorporated herein
by reference to the information  contained under the section captioned "Director
and Executive Officer Compensation" in the Registrant's Proxy Statement.

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

     (a)  Security Ownership of Certain Beneficial Owners

          Information  required by this item is incorporated herein by reference
          to the Section  captioned  "Voting  Securities  and Principal  Holders
          Thereof" in the Registrant's Proxy Statement.

     (b)  Security Ownership of Management

          Information  required by this item is incorporated herein by reference
          to the section captioned  "Proposal 1 -- Election of Directors" in the
          Registrant's Proxy Statement.

     (c)  Management  of the Company  knows of no  arrangements,  including  any
          pledge by any person of  securities  of the Company,  the operation of
          which may at a  subsequent  date  result in a change in control of the
          registrant.

     (d)  Securities Authorized for Issuance Under Equity Compensation Plans






                                       26

<PAGE>

     Set forth  below is  information  as of December  31, 2003 with  respect to
compensation   plans  under  which  equity  securities  of  the  Registrant  are
authorized for issuance.



                      EQUITY COMPENSATION PLAN INFORMATION

<TABLE>
<CAPTION>
                                                     (a)                    (b)                       (c)

                                                                                              Number of securities
                                            Number of securities      Weighted-average       remaining available for
                                              to be issued upon       exercise price of    future issuance under equity
                                                exercise of              outstanding            compensation plans
                                            outstanding options,      options, warrants        (excluding securities
                                            warrants and rights          and rights          reflected in column (a))
                                            -------------------          ----------          ------------------------

<S>                                              <C>                     <C>                         <C>
Equity compensation plans
  approved by shareholders(1).........             560,714                 $15.43                      695

Equity compensation plans
  not approved by shareholders(2).....              25,000                  14.75                       --
                                                   -------                 ------                      ---

     TOTAL............................             585,714                 $15.40                      695
                                                   =======                 ======                      ===
</TABLE>

------------
(1)  Plans approved by stockholders include: TF Financial Corporation 1994 Stock
     Option Plan, TF Financial Corporation 1997 Stock Option Plan.
(2)  Plans not approved by stockholders  include: TF Financial  Corporation 1996
     Directors Stock Option Plan For information regarding the material features
     of  these  plans,  see  Note A8 to the  Consolidated  Financial  Statements
     included as part of Exhibit 13 to this report.


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

     The information relating to certain  relationships and related transactions
is  incorporated  herein by reference  to the  information  contained  under the
section captioned "Additional Information About Directors and Executive Officers
-- Certain  Relationships  and Related  Transactions" in the Registrant's  Proxy
Statement.

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

     The information  relating to this item is incorporated  herein by reference
to the information  contained under the section captioned "Principal  Accounting
Firm Fees" in the Registrant's Proxy Statement.



                                       27

<PAGE>

                                     PART IV

Item 15.  Exhibits, Financial Statements and Reports on Form 8-K
----------------------------------------------------------------

(a)  The following documents are filed as a part of this report:

     (1) The following  financial  statements and the report of the  independent
auditor  of the  Company  included  in  the  Company's  2003  Annual  Report  to
Stockholders are incorporated herein by reference.

     Independent Auditors' Report
     Consolidated Statements of Financial Position as of December 31,
       2003 and 2002
     Consolidated Statements of Earnings For the Years Ended December 31,
       2003, 2002 and 2001
     Consolidated Statement of Changes in Stockholders' Equity and
       Comprehensive Income for the Years Ended December 31, 2003, 2002
       and 2001
     Consolidated Statements of Cash Flows for the Years Ended December 31,
       2003, 2002 and 2001
     Notes to Consolidated Financial Statements

     The remaining information appearing in the Annual Report to Stockholders is
not  deemed to be filed as part of this  report,  except as  expressly  provided
herein.

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

     (3) Exhibits

     (a) The following exhibits are filed as part of this report.

          3.1   Certificate of Incorporation of TF Financial Corporation (1)
          3.2   Bylaws of TF Financial Corporation (1)
          4.0   Stock Certificate of TF Financial Corporation (1)
          4.1   The Company's Rights Agreement dated November 22, 1995 (2)
         10.1   Third Federal Savings and Loan Association Management Stock
                  Bonus Plan (1)
         10.2   TF Financial Corporation 1994 Stock Option Plan (1)
         10.3   Third Federal Savings Bank Directors Consultation and Retirement
                  Plan (3)
         10.4   TF Financial Corporation Incentive Compensation Plan (3)
         10.5   Severance Agreement with Kent C. Lufkin (4)
         10.6   Severance Agreement with Floyd P. Haggar (4)
         10.7   Severance Agreement with Dennis R. Stewart (5)
         10.8   TF Financial Corporation 1997 Stock Option Plan (6)
         10.9   Severance Agreement with Robert N. Dusek (7)
         10.10  TF Financial Corporation 1996 Directors Stock Option Plan (8)
         10.11  Retirement and Non-Competition Agreement with John R. Stranford
         10.12  Employment Agreement with John R. Stranford
         13.0   2003 Annual Report to Stockholders
         21.0   Subsidiary Information
         23.0   Consent of Independent Auditor
         31.0   Certification pursuant to Section 302 of the Sarbanes-Oxley Act
                  of 2002
         32.0   Certification pursuant to Section 906 of the Sarbanes-Oxley Act
                  of 2002



                                       28

<PAGE>

---------------
(1)  Incorporated   herein  by   reference   from  the  Exhibits  to  Form  S-1,
     Registration Statement, File No. 33-76960.
(2)  Incorporated herein by reference to the Registrants Form 8-A filed with the
     Securities and Exchange Commission on November 22, 1995.
(3)  Incorporated  herein by reference to the Registrant's Annual Report on Form
     10-K for the fiscal year ended December 31, 1995.
(4)  Incorporated  herein by reference to the Registrant's Annual Report on Form
     10-K for the fiscal year ended December 31, 2000.
(5)  Incorporated  herein by reference to the Registrant's Annual Report on Form
     10-K for the fiscal year ended December 31, 1999.
(6)  Incorporated  herein by reference to the Registrant's Annual Report on Form
     10-K for the fiscal year ended December 31, 1997.
(7)  Incorporated  herein by reference to the Registrant's Annual Report on Form
     10-K for the fiscal year ended December 31, 2001.
(8)  Incorporated  herein by reference to the Registrant's Annual Report on Form
     10-K for the fiscal year ended December 31, 2002.


     (b)  Reports on Form 8-K.

     On October 28, 2003 the Company filed Form 8-K wherein the Company included
     the press release  announcing the Company's  earnings for the third quarter
     of 2003.




                                       29

<PAGE>

                                   SIGNATURES

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

                                         TF FINANCIAL CORPORATION



Dated:  March 26, 2004                   By:  /s/ Kent C. Lufkin
                                              -------------------------------
                                              Kent C. Lufkin
                                              President, Chief Executive Officer
                                              (Duly Authorized Representative)


     Pursuant to the  requirements  of the  Securities  Exchange Act of 1934, as
amended, this Report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated as of March 26, 2004.

By:  /s/ Kent C. Lufkin                   By:  /s/ Dennis R. Stewart
     ----------------------------------        ---------------------------------
     Kent C. Lufkin                            Dennis R. Stewart
     President, Chief Executive Officer        Executive Vice President, Chief
     (Principal Executive Officer)             Financial Officer and Treasurer
                                               (Principal Financial and
                                                 Accounting Officer)


By:  /s/ Carl F. Gregory                  By:  /s/ Robert N. Dusek
     ----------------------------------        ---------------------------------
     Carl F. Gregory                           Robert N. Dusek
     Director                                  Chairman of the Board



By:  /s/ Dennis L. McCartney              By:  /s/ George A. Olsen
     ----------------------------------        ---------------------------------
     Dennis L. McCartney                       George A. Olsen
     Director                                  Director


By:  /s/ Albert M. Tantala                By:  /s/ John R. Stranford
     ----------------------------------        ---------------------------------
     Albert M. Tantala                         John R. Stranford
     Director                                  Director





                                       30