TF FINANCIAL CORPORATION   2003 ANNUAL REPORT

BOARD OF DIRECTORS

Dennis L. McCartney
John R. Stranford
Robert N. Dusek (Chairman)
George A. Olsen
Carl F. Gregory
Albert M. Tantala

CONTENTS


1        To Our Stockholders

2        Corporate Profile and Related Information

3        Selected Financial Information and Other Data

5        Management's Discussion and Analysis
         of Financial Position and Results of Operations

15       Report of Independent Certified Public Accountants

16       Consolidated Statements of Financial Position


17       Consolidated Statements of Operations

18       Consolidated Statement of Changes
                  in Stockholders' Equity

19       Consolidated Statements of Cash Flows

21       Notes to Consolidated Financial Statements

48       Board of Directors and Management Team

49       Office Locations

<PAGE>

TO OUR STOCKHOLDERS

The past year has been one of significant  developments  at our Company.  As you
read about these  events,  I would like you to know that we have a renewed focus
in our mission to produce a solid, sustainable stream of earnings and dividends,
build value by  continuing to invest a portion of earnings back into the banking
franchise, and establish a reputation throughout our Company and the communities
we serve so as to make our  employees  proud to work for us,  and our  customers
proud to do business with us. In our view,  pride creates loyalty and loyalty is
the cornerstone of highly successful community banking franchises.

As you likely know, there has been a change in leadership at the Company and its
banking subsidiary,  Third Federal Bank. As of June 30th, Jack Stranford retired
after over thirty-five years of service.  The Board and I thank Jack for guiding
the Company through its first ten years as a public  company,  and he remains on
TF Financial's  Board of Directors.  On July 1st, I was appointed  President and
Chief Executive  Officer of TF Financial and Third Federal Bank.  After 30 years
in this industry, I am privileged to be able to use my varied banking background
under the guidance of your Board of Directors to achieve our mission.  Long-time
director  George Olsen  assumed the position of Chairman at Third  Federal Bank.
Earlier in the year,  directorship  of the  Company  was  strengthened  with the
addition of Albert  Tantala  and Dennis  McCartney.  Finally,  it was with great
regret that the Company  accepted the  resignation of Thomas Gola from the Board
for health reasons. His wit and wisdom will be missed by us all.

Regarding  the  business of the  Company,  the most  significant  event to occur
during the year was the debt  refinancing.  After  months of  deliberation,  the
management and Board of the Company made the very difficult  decision to incur a
sizeable expense in order to eliminate what would have been a tremendous drag on
the Company's  financial  performance for years.  After repaying and refinancing
nearly $188  million in high-cost  borrowings,  we emerged as a smaller and much
more profitable  Company, as borne out by our fourth quarter 2003 core earnings,
with higher regulatory capital ratios. Shareholder and customer reaction to this
event was  overwhelmingly  positive,  and we thank  them for their  support  and
understanding.  We truly believe that we have "reset the clock" as it were,  and
established the platform from which we intend to grow future earnings.

The commitment of the Board and management to be a highly  successful  community
bank is stronger  than ever. In order to achieve this goal, we know that we need
to establish a reputation  as a banking  organization  that  provides a complete
array of products and services to both personal and business customers.  We also
know that we must deliver  fast,  high-quality  service in order to set us apart
from our competitors.  So, during the year, we added to and improved our product
delivery,  technology and customer service, and these efforts will continue into
2004. We also expanded our product  offerings for both deposit account customers
and loan prospects. Perhaps most importantly, we strengthened our sales force by
adding key people and new  initiatives  in our  commercial  banking and mortgage
lending  areas.  Further  enhancements  are underway  that will  strengthen  our
marketing efforts, improve the training of our employees, increase our community
involvement, add to our lending sales force, and further improve the quality and
efficiency of our product delivery systems.

Much is occurring in our markets,  but these events and  challenges are actually
opportunities  for us to achieve  our  mission.  Mergers  and  acquisitions  are
occurring all around us, but they often  displace  good  employees and customers
looking  to  realign  themselves  with  a  high-quality  community  bank.  There
continues to be a substantial number of new regulatory requirements that reshape
our  industry.  While these new laws and  regulations  often  impose  costly and
complex  changes,  companies such as ours, with the ability to react quickly and
readily adapt technology and operations, will be rewarded.

While  all of these  events  have  been  going  on in and  around  the  Company,
shareholders in TF Financial Corporation enjoyed a 41% total return during 2003.
While it may be  unreasonable  to expect these  returns  every year,  we believe
that,  over  the  long  run,  stockholders  will  continue  to  benefit  from an
investment in our stock,  provided that your Board and  management  achieve what
they fully  intend to achieve:  building  value and  earnings  by  creating  and
maintaining a highly regarded, successful retail banking franchise. We thank you
in advance for your continued support.

/s/Kent C. Lufkin

Kent C. Lufkin
President and Chief Executive Officer

                                                                               1
<PAGE>
TF FINANCIAL CORPORATION & SUBSIDIARIES
================================================================================

Corporate Profile and Related Information

TF Financial  Corporation (the "Company") is the parent company of Third Federal
Savings Bank ("Third  Federal" or the "Savings  Bank") and its subsidiary  Third
Delaware Corporation, TF Investments Corporation,  Teragon Financial Corporation
and Penns Trail Development Corporation. At December 31, 2003, total assets were
approximately  $606.8 million.  The Company was formed as a Delaware corporation
in March 1994 at the direction of the Savings Bank to acquire all of the capital
stock that Third  Federal  issued upon its  conversion  from the mutual to stock
form of ownership (the "Conversion") and concurrent $52.9 million initial public
offering  effective  July 13, 1994.  At December 31, 2003,  total  stockholders'
equity was  approximately  $55.5 million.  The Company is a unitary  savings and
loan holding company which, under existing laws,  generally is not restricted in
the types of business  activities  in which it may engage,  provided  that Third
Federal retains a specified amount of its assets in housing-related investments.

Third  Federal is a federally  chartered  stock  savings bank  headquartered  in
Newtown,  Pennsylvania,  which was  originally  chartered in 1921 under the name
"Polish  American  Savings  Building  and Loan  Association."  Deposits of Third
Federal have been federally  insured since 1935 and are currently  insured up to
the maximum amount allowable by the Federal Deposit  Insurance  Corporation (the
"FDIC").  Third Federal is a  community-oriented  savings institution offering a
variety  of  financial  services  to meet the needs of the  communities  that it
serves.  During the first quarter of 2003 the Savings Bank opened its fourteenth
branch office in the Northern  Liberties  neighborhood  in  Philadelphia.  As of
December  31,  2003  Third  Federal   operated   branch  offices  in  Bucks  and
Philadelphia counties, Pennsylvania and Mercer County, New Jersey.

Third Federal attracts  deposits  (approximately  $459.3 million at December 31,
2003) from the general public and uses such deposits,  together with  borrowings
mainly  from the  Federal  Home Loan  Bank of  Pittsburgh  (approximately  $86.9
million at  December  31,  2003) and other  funds,  primarily  to  originate  or
purchase loans secured by first mortgages on owner-occupied,  one-to-four family
residences,  or purchase  securities  secured by such loans.  Third Federal also
originates  and  purchases   commercial  real  estate  and  multi-family  loans,
construction   loans  and  consumer  loans,   and  purchases  other   investment
securities.

Stock Market Information

Since its issuance in July 1994,  the Company's  common stock has been traded on
the Nasdaq National Market.  The daily stock quotation for the Company is listed
in the  Nasdaq  National  Market  published  in The  Wall  Street  Journal,  The
Philadelphia  Inquirer, and other leading newspapers under the trading symbol of
"THRD."

The number of  shareholders  of record of common stock as of March 22, 2004, was
approximately  550.  This does not reflect the number of persons or entities who
held stock in nominee or "street" name through various brokerage firms.

Dividend Policy

The Company's ability to pay dividends to stockholders is dependent in part upon
the dividends it receives from Third  Federal.  Among other  limitations,  Third
Federal may not declare or pay a cash dividend on any of its stock if the effect
thereof would cause Third Federal's  regulatory  capital to be reduced below (1)
the amount required for the liquidation  account  established in connection with
Third  Federal's  conversion  from mutual to stock form,  or (2) the  regulatory
capital  requirements imposed by the Office of Thrift Supervision ("OTS"). It is
the Company's  policy to pay dividends  when it is deemed  prudent to do so. The
Board of Directors will consider the payment of a dividend on a quarterly basis,
after giving  consideration to the level of profits for the previous quarter and
other relevant information.

Stock Price and Dividend History

Quarter ended              Quoted market price       Dividend paid
                           High     Low              per share
December 31, 2003          $35.27   $31.50           $0.15
September 30, 2003         $31.97   $28.01           $0.15
June 30, 2003              $32.75   $25.00           $0.15
March 31,2003              $25.95   $24.50           $0.15
December 31, 2002          $25.51   $20.33           $0.15
September 30, 2002         $23.71   $19.70           $0.15
June 30, 2002              $24.80   $22.07           $0.15
March 31, 2002             $23.50   $21.05           $0.15

2
<PAGE>
                                                              2003 ANNUAL REPORT
================================================================================

Selected  Financial  Information  and Other Data
<TABLE>
<CAPTION>
                                                              At  December  31,
(Dollars in thousands, except per share data)
Financial Position                              2003         2002        2001        2000        1999
                                             ----------------------------------------------------------
<S>                                        <C>          <C>         <C>         <C>         <C>
Total assets                                 $ 606,752    $ 721,032   $ 711,204   $ 723,297   $ 721,874
Loans receivable, net                          404,649      370,092     377,635     361,806     287,979
Mortgage-backed securities available
  for sale, at fair value                      106,774      115,243      99,763      97,914     132,515
Mortgage-backed securities held to
  maturity, at amortized cost                   23,630       54,592      93,367     135,142     159,888
Investment securities available for sale,
  at fair value                                 14,443       27,243      22,671      18,865      21,930
Investment securities held to maturity,
  at amortized cost                             10,389       14,563       9,866      63,461      66,760
Cash and cash equivalents(1)                     8,241      100,580      69,139      10,618      16,715
Deposits                                       459,343      442,558     422,052     400,851     401,698
Advances from the Federal Home Loan
  Bank and other borrowings                     86,853      207,359     222,359     259,821     264,299
Retained earnings                               52,626       59,978      56,370      52,061      48,905
Total stockholders' equity                      55,480       62,840      57,975      53,109      48,447
Book value per common share                  $   21.37    $   25.31   $   23.51   $   21.32   $   18.81
Tangible book value per common share         $   19.56    $   23.34   $   21.44   $   18.99   $   16.26
                                             ----------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                           At or for the year ended December 31,
Summary of Operations                             2003         2002        2001        2000        1999
                                             ----------------------------------------------------------
<S>                                        <C>          <C>         <C>         <C>         <C>
Interest income                              $  32,377    $  40,455   $  46,747   $  48,708   $  47,022
Interest expense                                15,252       22,660      26,908      28,921      27,974
Net interest income                             17,125       17,795      19,839      19,787      19,048
Provision for loan losses                          330          988         500         410         300
Non-interest income                              2,690        3,304       3,172       1,432       1,589
Non-interest expense                            28,703       13,414      14,708      14,404      13,529
Net income (loss)                            $  (5,834)   $   5,092   $   5,733   $   4,482   $   4,422
Earnings (loss) per common share - basic     $   (2.30)   $    2.06   $    2.32   $    1.76   $    1.60
Earnings (loss) per common share - diluted   $   (2.30)   $    1.91   $    2.19   $    1.72   $    1.54
                                             ----------------------------------------------------------

                                                                                             (Continued)
</TABLE>
                                                                               3
<PAGE>
TF FINANCIAL CORPORATION & SUBSIDIARIES
================================================================================

Selected Financial Information and Other Data - Continued

<TABLE>
Performance Ratios and Other Selected Data                2003       2002       2001       2000       1999
                                                       ----------------------------------------------------
<S>                                                   <C>         <C>        <C>       <C>        <C>
Return on average assets                                  n. m.      0.71%      0.82%      0.63%      0.62%
Return on average equity                                  n. m.      8.47%     10.42%      9.18%      8.60%
Average equity to average assets                          9.01%      8.34%      7.83%      6.86%      7.17%
Average interest rate spread                              2.55%      2.42%      2.74%      2.70%      2.54%
Non-performing loans to total assets                      0.38%      0.53%      0.53%      0.20%      0.18%
Non-performing loans to total loans                       0.56%      1.03%      0.99%      0.41%      0.45%
Allowance for loan losses to non-performing loans        92.51%     53.86%     52.22%    115.97%    145.56%
Allowance for loan losses to total loans                  0.52%      0.54%      0.52%      0.47%      0.66%

Savings Bank regulatory capital
Core                                                      7.29%      6.85%      6.95%      6.18%      5.76%
Tangible                                                  7.29%      6.85%      6.95%      6.18%      5.76%
Risk based                                               14.47%     15.25%     14.95%     11.97%     12.83%
Dividend payout ratio(2)                                  n. m.     31.41%     26.48%     30.23%     31.82%
                                                       ----------------------------------------------------
</TABLE>

n. m. = not meaningful
(1)  Consists  of cash,  cash due from  banks,  interest-bearing  deposits  with
     original maturities of less than three months, and federal funds sold.
(2)  Payout  ratio is  dividends  paid for the period  divided by  earnings  per
     common share.

4
<PAGE>
                                                              2003 ANNUAL REPORT
================================================================================

           Management's Discussion and Analysis of Financial Position
                            and Results of Operations

General

The following  discussion and analysis  should be read in  conjunction  with the
Company's  consolidated  financial  statements  and is  intended  to  assist  in
understanding  and  evaluating  the major changes in the financial  position and
results of  operations  of the  Company  with a primary  focus on an analysis of
operating  results.

This  document  contains  statements  that project the future  operations of the
Company which involve risks and uncertainties.  The Company's actual results may
differ  significantly  from  the  results  discussed  in  these  forward-looking
statements.  Statements  concerning future  performance,  developments,  events,
expectations for growth and market  forecasts,  and any other guidance on future
periods,  constitute forward-looking statements which are subject to a number of
risks and uncertainties, including interest rate fluctuations and government and
regulatory  actions which might cause actual results to differ  materially  from
stated  expectations or estimates.  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.

The Company's income on a consolidated  basis is derived  substantially from its
investment  in its  subsidiary,  Third  Federal.  The earnings of Third  Federal
depend primarily on its net interest income.  Net interest income is affected by
the interest  income that Third Federal  receives from its loans and investments
and  by the  interest  expense  that  Third  Federal  incurs  on  its  deposits,
borrowings and other sources of funds.  In addition,  the mix of Third Federal's
interest-bearing  assets and liabilities can have a significant  effect on Third
Federal's  net  interest  income;   loans  generally  have  higher  yields  than
securities;  retail  deposits  generally  have lower  interest  rates than other
borrowings.

Third  Federal  also  receives  income from  service  charges and other fees and
occasionally  from sales of investment  securities and real estate owned.  Third
Federal incurs expenses in addition to interest  expense in the form of salaries
and benefits,  deposit insurance premiums,  property operations and maintenance,
advertising and other related business expenses.

Changes to Financial Position

Assets.  The Company's total assets at December 31, 2003 were $606.8 million,  a
decrease of $114.3 million  during the year.  This decrease in total assets is a
direct result of a debt refinancing transaction, which occurred during the third
quarter of 2003. At that time,  the Company  completed a series of  transactions
(the "debt  refinancing")  that  resulted in the repayment  and  refinancing  of
$187.4  million of Federal Home Loan Bank  borrowings  which  carried a weighted
average  interest rate of 5.46%. $80 million of these borrowings were refinanced
at 3.23%;  the remaining  $107.4  million was repaid.  A prepayment fee of $13.8
million was  assessed by the Federal Home Loan Bank. A portion of the funds used
to repay  these  borrowings  came from the sale of $70.2  million of  investment
securities  available  for sale and $9.5 million of  mortgage-backed  securities
available for sale,  which had been yielding a combined  1.93%.  The loss on the
sale of these  securities was $0.4 million.  Management  believed that it was in
the best interest of the  Company's  shareholders  and the Bank's  employees and
customers  to  replace  these  high-cost  borrowings  in  order to  improve  the
Company's future net interest income and thus its overall financial performance.
Subsequently,  the  Company's  net interest  income was $5.5 million  during the
fourth quarter of 2003, an increase of $1.4 million when compared with the third
quarter of 2003.  Management  expects the higher level of net interest income to
continue into 2004.

                               [GRAPHIC OMITTED]

                                                                               5
<PAGE>
TF FINANCIAL CORPORATION & SUBSIDIARIES
================================================================================

The  Company's  loans  receivable  portfolio  at  December  31,  2003 was $404.6
million,  a $34.6 million or 9.3% increase since December 31, 2002.  During 2003
there were $165.9  million of  prepayments  of existing  mortgages  in the loans
receivable portfolio;  however, offsetting this reduction was the origination of
$178.6 million in predominately consumer and single-family  residential mortgage
loans,  and the  purchase of $24.2  million in newly  originated,  single-family
residential mortgage loans.

Mortgage-backed  securities  available for sale decreased by $8.5 million during
2003.  During the first six  months of 2003 the  Company  sold $14.5  million of
mortgage-backed securities available for sale, generating gains of $0.6 million.
An additional  $9.5 million were sold as part of the debt  refinancing.  Further
reduction  of  the  mortgage-backed  securities  available  for  sale  portfolio
occurred due to $62.2 million in repayments  throughout  2003.  Offsetting these
reductions were the purchases of $82.4 million of such securities. The remaining
net change in the portfolio was caused by $1.7 million  amortization of purchase
premiums and a $3.0 million reduction in the fair value of such securities.

Investment  securities  available for sale decreased by $12.8 million during the
year. During the first six months of 2003 the Company purchased $91.1 million of
such  securities  in order to  redeploy  its  cash  and  cash  equivalents  into
interest-bearing assets with higher yields. During the third quarter of 2003 the
Company sold $70.2 million of these securities as part of the debt  refinancing,
plus an  additional  $0.5  million.  During  the  fourth  quarter,  the  Company
purchased  $7.6  million  in  investment  securities  available  for  sale.  The
remaining  net change in the portfolio was caused by $40.0 million in maturities
and redemptions, and $0.5 million decrease in the fair value of such securities.

Mortgage-backed  securities held to maturity decreased by $31.0 million or 56.7%
during 2003. This large decrease occurred due to the high prepayment rate of the
underlying  mortgages  comprising the  securities,  which was the result of near
record low mortgage rates throughout  2003,  resulting in an increased number of
mortgagors refinancing their mortgages into lower interest rates.

The Company's cash and cash equivalents  decreased $92.3 million to $8.2 million
at  December  31,  2003.  It is the  Company's  intent  to keep  cash  and  cash
equivalents at this minimal level and use its line of credit at the Federal Home
Loan Bank to fund its day-to-day cash needs, if necessary.

Liabilities. The Company's total liabilities were $551.3 million at December 31,
2003,  a decrease of $106.9  million  during 2003.

Deposits  increased by $16.8 million;  certificates of deposit increased by $0.2
million,  while the remaining or "core"  deposit  categories  increased by $16.6
million.  Management believes that deposit growth occurred mainly as a result of
successful sales initiatives and focused  advertising  campaigns  implemented by
the  Company,  but also due to external  factors that caused  deposit  growth to
occur throughout the community banking industry.

Advances from the Federal Home Loan Bank  decreased by $120.5  million,  largely
the result of the debt refinancing, which caused a $107.4 million net reduction.
It is the  intent  of the  Company  to fund a  portion  of its  interest-bearing
assets, not funded by deposits,  with longer term advances from the Federal Home
Loan Bank, and fund its day-to-day cash needs and shorter term  interest-bearing
assets not otherwise funded with deposits using draws on its line of credit with
the  Federal  Home Loan Bank.  At December  31,  2003 the Saving  Bank's line of
credit was $30 million of which $9.9  million was drawn.

Stockholders'  equity.  Total consolidated  stockholders'  equity decreased $7.3
million to $55.5  million at  December  31,  2003.  The  decrease is largely the
result of a $5.8 million net loss, a $2.3 million decrease in accumulated  other
comprehensive  income,  and $1.5 million in cash dividends paid to the Company's
common  stockholders.  Offsetting these decreases was a $2.3 million increase in
stockholders'  equity  attributable  to the exercise of stock options for 92,092
shares,  and the  allocation of 20,549 shares to  participants  in the Company's
employee stock ownership plan.

6
<PAGE>
                                                              2003 ANNUAL REPORT
================================================================================

Average Balance Sheet

The following table sets forth  information  (dollars in thousands)  relating to
the Company's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated.  The yields and costs are
computed   by   dividing   income  or   expense  by  the   average   balance  of
interest-earning  assets or interest-bearing  liabilities,  respectively for the
periods indicated.

<TABLE>
<CAPTION>
                                      2003                          2002                           2001
                         --------------------------------------------------------------------------------------------
                           Average             Average    Average            Average   Average               Average
                           balance  Interest  yld/cost    balance  Interest  yld/cost  balance   Interest    yld/cost
                         --------------------------------------------------------------------------------------------
<S>                    <C>         <C>         <C>    <C>         <C>       <C>     <C>        <C>          <C>
ASSETS
Interest-earning assets:
Loans receivable(1)       $378,414    23,372      6.18%  $362,104    25,662    7.09%   $359,928   $28,443      7.90%
Mortgage-backed
  securities               154,721     6,725      4.35%   200,316    11,423    5.70%    212,951    13,749      6.46%
Investment securities       62,747     1,806      2.88%    50,072     2,271    4.54%     51,384     3,015      5.87%
Other interest-
  earning assets(2)         45,590       474      1.04%    74,058     1,099    1.48%     49,206     1,540      3.13%
                          --------   -------             --------   -------            --------   -------
Total interest-
  earning assets           641,472    32,377      5.05%   686,550    40,455    5.89%    673,469    46,747      6.94%
                                     -------                        -------                       -------
Non interest-
  earning assets            33,839                         34,494                        29,202
                          --------                       --------                      --------
Total assets              $675,311                       $721,044                      $702,671
                          ========                       ========                      ========

LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-bearing liabilities
Deposits                   449,925     7,044      1.57%   433,522    10,506    2.42%    409,688    14,043      3.43%
Advances from the FHLB
  and borrowings           160,325     8,208      5.12%   219,797    12,154    5.53%    230,078    12,865      5.59%
                          --------   -------             --------   -------            --------   -------
Total interest-bearing
  liabilities              610,250    15,252      2.50%   653,319    22,660    3.47%    639,766    26,908      4.20%
                                     -------                        -------                       -------
Non interest-bearing
  liabilities                4,195                          7,603                         7,865
                          --------                       --------                      --------
Total liabilities          614,445                        660,922                       647,631
Stockholders' equity        60,866                         60,122                        55,040
                          --------                       --------                      --------
Total liabilities and
  stockholders' equity    $675,311                       $721,044                      $702,671
                          ========                       ========                      ========
Net interest income                  $17,125                        $17,795                       $19,839
                                     =======                        =======                       =======
Interest rate spread(3)                           2.55%                      2.42%                             2.74%
Net yield on interest-
  earning assets(4)                               2.67%                      2.59%                             2.95%
Ratio of average interest-
  earning assets to
  average interest-
  bearing liabilities                              105%                       105%                              105%
</TABLE>


(1)  Nonaccrual loans have been included in the appropriate average loan balance
     category,  but  interest  on  nonaccrual  loans has not been  included  for
     purposes of determining interest income.
(2)  Includes interest-bearing deposits in other banks.
(3)  Interest rate spread represents the difference between the average yield on
     interest-earning   assets  and  the   average   cost  of   interest-bearing
     liabilities.
(4)  Net yield on  interest-earning  assets  represents net interest income as a
     percentage of average interest-earning assets.

                                                                               7
<PAGE>
TF FINANCIAL CORPORATION & SUBSIDIARIES
================================================================================

Rate/Volume Analysis

The following table presents, for the periods indicated,  the change in interest
income and interest  expense (in thousands)  attributed to (i) changes in volume
(changes in the weighted average balance of the total interest-earning asset and
interest-bearing  liability  portfolios  multiplied by the prior year rate), and
(ii) changes in rate (changes in rate multiplied by prior year volume).  Changes
attributable  to the  combined  impact  of volume  and rate have been  allocated
proportionately based on the absolute value of changes due to volume and changes
due to rate.

<TABLE>
<CAPTION>
                                          2003 vs 2002                       2002 vs 2001
                                    Increase (decrease) due to         Increase (decrease) due to
                                -------------------------------------------------------------------
                                 Volume      Rate          Net        Volume     Rate        Net
                                -------------------------------------------------------------------
<S>                           <C>        <C>           <C>        <C>        <C>        <C>
Interest income:
Loans receivable, net           $ 1,117    $(3,407)      $(2,290)   $   171    $(2,952)   $(2,781)
Mortgage-backed securities       (2,298)    (2,400)       (4,698)      (784)    (1,542)    (2,326)
Investment securities               489       (954)         (465)       (75)      (669)      (744)
Other interest-earning assets      (351)      (274)         (625)       577     (1,018)      (441)
                                -------------------------------------------------------------------
Total interest-earning assets    (1,043)    (7,035)       (8,078)      (111)    (6,181)    (6,292)
                                -------------------------------------------------------------------
Interest expense:
Deposits                            384     (3,846)       (3,462)       777     (4,314)    (3,537)
Advances from the FHLB
  and borrowings                 (3,097)      (849)       (3,946)      (570)      (141)      (711)
                                -------------------------------------------------------------------
Total interest-bearing
  liabilities                    (2,713)    (4,695)       (7,408)       207     (4,455)    (4,248)
                                -------------------------------------------------------------------
Net change in net
  interest income               $ 1,670    $(2,340)      $  (670)   $  (318)   $(1,726)   $(2,044)
                                ===================================================================

</TABLE>

Comparison of Years Ended December 31, 2003 and December 31, 2002

Net Income.  Net loss was $5.8  million for the fiscal year ended  December  31,
2003.  Net income was $5.1 million for the year ended  December  31,  2002.  The
difference in net income of $10.1 million when comparing the year 2003 with 2002
is largely  attributable to the debt refinancing,  which produced a net loss for
2003 of $9.3 million after  considering  the income tax benefit  associated with
the transaction.

Pre-tax loss was $9.2 million for 2003.  After  adjusting  for the $14.2 million
pre-tax cost of the debt  refinancing,  pre-tax income was $5.0 million compared
to pre-tax income of $6.7 million during 2002.  This $1.7 million  difference is
mainly  attributable to a $1.5 million increase in non-interest  expense,  after
adjusting  for the $13.8  million debt  repayment  fee, as described  more fully
below.

Total  Interest  Income.  For the year ended  December 31, 2003,  total interest
income  decreased to $32.4 million  compared to $40.5 million for the year ended
December 31, 2002. The $8.1 million  decrease in interest  income was mainly the
result of the repayment of $165.9 million in higher  yielding loans  receivable,
which were replaced and  supplemented  by the origination and purchase of $202.8
million in loans at  substantially  lower  yields.  In addition,  the  Company's
adjustable  rate loans continued to adjust  downward,  also due to the continued
decrease  in market  interest  rates.  As a  result,  the  overall  yield on the
Company's  loan  portfolio  decreased by 91 basis points  during 2003. A similar
result of low market interest rates combined with high loan  prepayments  caused
the average  yield on the  Company's  mortgage-backed  securities  portfolios to
decrease by 135 basis  points.  At December 31, 2003 the rate of  prepayment  of
mortgage-related earning assets had decreased.

Mortgage-related  loan repayments during 2003 caused an average of $45.6 million
to be maintained in cash and cash  equivalents  during 2003,  earning an average
interest  rate of 1.04%,  which is  substantially  less than  these  funds  were
earning while invested in loans and mortgage-backed securities. However, by year
end  2003 the  Company's  cash and cash  equivalents  had been  reduced  to $8.2
million from $100.6 million at December 31, 2002 largely as a result of the debt
refinancing,  but  also  due  to the  Company's  increased  lending  activities,
particularly during the second half of 2003.

Total Interest  Expense.  Total interest expense decreased to $15.3 million from
$22.7  million  for the year ended  December  31, 2003  compared  to 2002.  $3.5
million of this decrease is primarily the result of lower market  interest rates
during the period  and,  consequently,  lower  rates paid on the  Company's  new
certificates  of deposit;  in addition,  the Company  lowered the interest rates
paid on several of its other deposit products in order to keep them in line with
short-term market interest rates.

In addition,  the interest paid on Federal Home Loan Bank advances  decreased by
$3.9  million  during  2003  compared  with  2002,  largely  because of the debt
refinancing transaction.

8
<PAGE>
                                                              2003 ANNUAL REPORT
================================================================================

Allowance for Loan Losses.  The allowance for loan losses was approximately $2.1
million  at  December  31,  2003 and $2.0  million at  December  31,  2002.  The
provision for loan losses was $330,000 during 2003 compared with $988,000 during
2002.  Charge-offs  were $266,000  during 2003 compared to $913,000 during 2002.
Charge-offs  during  2002  included  approximately  $625,000  during  the second
quarter  attributable  to a default by the servicer of the  Company's  purchased
lease portfolio. While management maintains Third Federal's allowance for losses
at a level which it  considers  to be adequate to provide for  probable  losses,
there  can be no  assurance  that  further  additions  will  not be  made to the
allowance and that such losses will not exceed the estimated amounts.

Non-Interest  Income.  Total  non-interest  income was $2.7 million  during 2003
compared with $3.3 million during 2002.  During the first six months of 2003 the
Company sold $14.5 million in  mortgage-backed  securities and recorded gains of
$0.6 million.  The debt refinancing  during the third quarter of 2003 produced a
loss on sale of  securities  of $0.4  million.  During  2002  the  Company  sold
approximately $37.2 million  mortgage-backed and investment securities available
for sale and realized  gains of $1.2 million.  Service fees and other  operating
income  increased by $0.3 million largely due to the introduction of new deposit
account services during the year. However, fee income also includes $0.2 million
of loan prepayment fees, largely  attributable to large commercial loans, which,
because of the nature of the fee, are  non-recurring in nature.  Gain on sale of
real estate of $0.1 million resulted from the sale of operating  property during
2003 while there were no such gains during 2002.

Non-Interest Expense.  Total non-interest  expense,  excluding the $13.8 million
debt  prepayment  fee,  increased by $1.5 million  during 2003 compared to 2002.

Employee compensation and benefits increased by $557,000 during 2003 compared to
2002: expense related to the employee stock ownership plan increased by $326,000
due to an increase in the shares allocated to plan  participants and an increase
in the per share cost  associated  with these  allocations;  the  expense of the
Company's defined benefit plan increased by $126,000;  and, finally, there was a
$66,000 one-time expense  associated with the retirement of the Bank's president
at June 30, 2003. The remaining  increase in  compensation is due to the cost of
staffing  a new  branch,  opened  during the first  quarter of 2003,  and normal
salary increases.

Professional  fees  increased  by $201,000  during 2003 due to  increased  legal
expense,  in  part  related  to the  retirement  of  the  Bank's  president  and
appointment  of  new  senior  officers  at the  Bank,  and  in  part  due to the
evaluation  and  adoption of various  policies  and  procedures  required by the
Sarbanes-Oxley  Act of 2002.  Also,  during the second  half of 2003 the Company
engaged  an  outside  firm  to  completely  review  and  then  provide  on-going
assistance with the Bank's regulatory compliance requirements.

Other  operating  expenses  increased  by $511,000  during 2003.  Loan  expenses
increased by $219,000  due to increased  loan  production.  Other  miscellaneous
expenses  include  $113,000  attributable  to estimated  and realized  losses on
foreclosed  real estate,  and $110,000  attributable  to various  deposit  item,
robbery, and reconciling item losses that occurred throughout the year.

Income Tax  Expense.  The  Company's  effective  tax rate was 36.7%  during 2003
compared to 24.0% during 2002.  The apparent  increase in the effective tax rate
during  2003 is due to the  pre-tax  loss  for the  year,  produced  by the debt
refinancing,  which produces a tax benefit at a 34% rate,  further  increased by
the  elimination  of net  non-taxable  income from the pre-tax loss. The Company
expects the effective tax rate to return to a rate below the marginal  effective
rate of 34%  during  2004.

       Comparison of Years Ended December 31, 2002 and December 31, 2001

Net Income.  Net income was $5.1 million for the fiscal year ended  December 31,
2002,  a decrease of $0.6 or 11.2%  compared  with the year ended  December  31,
2001.

The  Company's  pre-tax  income  decreased  by $1.1  million  during 2002
compared with 2001: net interest  income  decreased by $2.0 million;  provisions
for possible loan losses increased by $488,000; non-interest income increased by
$132,000;  and non-interest  expenses  decreased by $1.3 million.

The  Company's  diluted  earnings  per share were  $1.91  during  2002,  a 12.8%
decrease  from $2.19  diluted  earnings  per share  reported  during  2001.  The
percentage  decrease in diluted  earnings per share is slightly  larger than the
percentage  decrease in net income  because a rising common stock price combined
with outstanding stock options created an additional 26,700 dilutive shares.

Total  Interest  Income.  For the year ended  December 31, 2002,  total interest
income  decreased to $40.4 million  compared to $46.7 million for the year ended
December 31, 2001. The $6.3 million  decrease in interest  income was mainly the
result of the repayment of $147.3 million in higher  yielding loans  receivable,
net of the origination and purchase of $140.9 million in loans at  substantially
lower yields.  In addition,  the Company's  adjustable  rate loans  continued to
adjust downward, also due to the continued decrease in market interest rates. As
a result,  the overall yield on the  Company's  loan  portfolio  decreased by 81
basis points during 2002. A similar result of low market interest rates combined
with  high  loan   prepayments   caused  the  average  yield  on  the  Company's
mortgage-backed securities portfolios to decrease by 76 basis points.

These  mortgage-related loan repayments caused an average of $74.1 million to be
maintained in cash and cash equivalents during 2002, earning an average interest
rate of 1.48%,  which is substantially  less than these funds were earning while
invested in loans and  mortgage-backed  securities.  At year-end 2002,  cash and
cash  equivalents  totaled $100.6 million and was earning the federal funds rate
minus 25 basis points or approximately 1.00%.

Total Interest  Expense.  Total interest expense decreased to $22.7 million from
$26.9  million  for the year ended  December  31, 2002  compared  to 2001.  This
decrease is the result of lower  market  interest  rates  during the period and,
consequently,  lower rates paid on the Company's new certificates of deposit; in
addition,  the Company  lowered the interest  rates paid on several of its other
deposit  products in order to keep them in line with short-term  market interest
rates.

                                                                               9
<PAGE>
TF FINANCIAL CORPORATION & SUBSIDIARIES
================================================================================

Allowance  for Loan  Losses.  The  allowance  for loan losses was  approximately
$2.047 million at December 31, 2002 and $1.972 million at December 31, 2001. The
provision for loan losses was $988,000 during 2002 compared with $500,000 during
2001.  Charge-offs  were $913,000  during 2002 compared to $242,000 during 2001.
Charge-offs  during  2002  included  approximately  $625,000  during  the second
quarter  attributable  to a default by the servicer of the  Company's  purchased
lease portfolio.

Non-Interest  Income.  Total  non-interest  income was $3.3 million  during 2002
compared  with  $3.2  million   during  2001.   During  2002  the  Company  sold
approximately $37.2 million  mortgage-backed and investment securities available
for sale and realized gains of $1.2 million.  During 2001 the Company recorded a
one-time  gain of $1.1 million  related to the sale of $10.8 million in deposits
and the  related  closure of its  Warminster,  Pennsylvania  branch  office.  In
addition,  during 2001 the Company recorded a $444,000 non-recurring gain on the
sale of $1.3  million  of land  that had been  held as a  potential  site for an
administrative  facility.   Finally,  Third  Federal  purchased  $9  million  in
bank-owned  life insurance in September 2001. This asset produced an increase in
its cash  surrender  value,  which is included  in other  operating  income,  of
$520,000 during 2002 compared with $174,000 during 2001.

Non-Interest  Expense.  Total  non-interest  expense  decreased  by $1.3 million
during 2002 compared to 2001. This decrease occurred from a $426,000 decrease in
employee  compensation and benefits,  and occupancy and equipment expenses that,
in turn,  is largely  related to the sale of a branch office at the end of 2001.
In  addition,  during 2002 the Company  decreased  by $236,000  other  operating
expenses,  $110,000 of which related to bank service charges because the Company
ceased  drawing  checks on and using a  third-party  bank for its  corporate and
customer  item  processing  activities,  and rather used its own  personnel  and
technology. Finally, the Company's amortization of goodwill and other intangible
assets  decreased  by  $488,000  upon the  required  adoption  of  Statement  of
Financial Accounting Standards No. 147 as of January 1, 2002.

Income Tax  Expense.  The  Company's  effective  tax rate was 24.0%  during 2002
compared to 26.5% during 2001. The decrease  occurred as a result of certain tax
reduction efforts initiated during 2001 and 2000, including the effect of a full
year of income during 2002 related to bank-owned life insurance.

                        Liquidity and Capital Resources

Liquidity.  The  Savings  Bank's  liquidity  is a measure of its ability to fund
loans,  pay  withdrawals  of deposits,  and other cash outflows in an efficient,
cost-effective manner. The Savings Bank's primary sources of funds are deposits,
borrowings,   and   scheduled   amortization   and   prepayment   of  loan   and
mortgage-backed security principal.  Loan prepayments,  maturing investments and
mortgage-backed  security prepayments are greatly influenced by general interest
rates,  economic conditions and competition.  During the past several years, the
Savings Bank has used such funds  primarily to fund maturing time deposits,  pay
savings  withdrawals,  fund  lending  commitments,   purchase  new  investments,
repurchase  its common stock,  and increase the Savings  Bank's,  along with the
Company's, liquidity.

The Savings Bank is currently  able to fund its  operations  internally but has,
when  deemed  prudent,  borrowed  funds from the Federal  Home Loan Bank.  As of
December 31, 2003,  such borrowed  funds totaled  $86.9  million.  The amount of
these  borrowings  that will mature during the twelve months ending December 31,
2004 is $22.3  million.  At December 31, 2003 the Savings Bank had a $30 million
line of credit,  $20.1 million of which was unused, and up to approximately $299
million of additional  collateral-based  borrowing  capacity at the Federal Home
Loan Bank.

The amount of  certificate  accounts  that are  scheduled  to mature  during the
twelve months ending December 31, 2004, is approximately  $100.5 million. To the
extent that these deposits do not remain at the Savings Bank upon maturity,  the
Savings Bank  believes  that it can replace  these funds with  deposits,  excess
liquidity,  Federal Home Loan Bank advances or other borrowings. It has been the
Savings Bank's  experience that substantial  portions of such maturing  deposits
remain at the Savings Bank.

At December 31, 2003, the Savings Bank had outstanding  commitments to originate
loans or fund unused lines of credit of $76.0 million. The loan commitments will
be funded during the twelve months ending December 31, 2004. The unused lines of
credit can be funded at any time. Funds required to fill these  commitments will
be derived primarily from current excess liquidity,  deposit inflows or loan and
security  repayments.  Approximately  $39 million of these  unused lines are not
expected to be funded. At December 31, 2003, the Savings Bank had no outstanding
commitments to sell loans.

The Company also has obligations under lease agreements. Payments required under
such lease  agreements  will be  approximately  $215,000  during the year ending
December 31, 2004.

10
<PAGE>
                                                              2003 ANNUAL REPORT
================================================================================

The  following  table  combines  the  Company's   contractual   obligations  and
commitments to make future payments as of December 31, 2003.

<TABLE>
<CAPTION>
                                                   (in thousands)
                           Total    Less than 1 year  1-3 years   4-5 years  After 5 years
                          ----------------------------------------------------------------
<S>                     <C>           <C>           <C>          <C>           <C>
Contractual obligations:                       Payments due by period
FHLB advances             $ 86,853      $ 22,268      $ 25,993     $ 27,725      $10,867
Time deposits              146,960       100,450        34,097       12,081          332
Operating leases           643,232       214,902       255,960      172,370           --
                          --------      --------      --------     --------      -------
Total contractual
  obligations             $877,045      $337,620      $316,050     $212,176      $11,199
                          ========      ========      ========     ========      =======

Commitments:                        Amount of commitment expirations by period
Extensions of credit       $74,716       $28,593       $24,231          $39      $21,853
Letters of credit            1,276         1,156           120           --           --
Loans sold with recourse       113            --            --           --          113
                           -------       -------       -------          ---      -------
Total commitments          $76,105       $29,749       $24,351          $39      $21,966
                           =======       =======       =======          ===      =======
</TABLE>

Capital.  Under  current  regulations,  the Savings  Bank must have core capital
equal to 4% of  adjusted  total  assets and  risk-based  capital  equal to 8% of
risk-weighted assets, of which 1.5% must be tangible capital, excluding goodwill
and certain other intangible  assets. On December 31, 2003, the Savings Bank met
its three regulatory capital requirements.

Management  believes  that under  current  regulations,  the  Savings  Bank will
continue to meet its minimum capital  requirements  in the  foreseeable  future.
However,  events  beyond the  control of the  Savings  Bank,  such as  increased
interest  rates or a downturn in the economy in areas in which the Savings  Bank
operates, could adversely affect future earnings and as a result, the ability of
the Savings Bank to meet its future minimum capital requirements.

                         Asset and Liability Management

The Savings Bank has established an Asset/Liability  Management Committee (ALCO)
for the purpose of monitoring and managing market risk,  which is defined as the
risk of loss of net interest  income or economic  value  arising from changes in
market interest rates and prices.

The type of market risk which most affects the Company's  financial  instruments
is interest rate risk,  which is best  quantified by measuring the change in net
interest  income  that would  occur under  specific  changes in interest  rates.
Substantially all of the Savings Bank's  interest-bearing assets and liabilities
are exposed to interest  rate risk.  Loss of  economic  value is measured  using
reports  generated  by the OTS  wherein the current  market  value of  portfolio
equity, or economic value, is measured at different  hypothetical  interest rate
levels centered on the current term structure of interest rates. Gap reports are
used to measure the amount of, and  expected  change  during a one-year  forward
period,  the net  amount of assets and  liabilities  repricing,  pre-paying  and
maturing during future periods.

Because the Company's bank  subsidiary is a savings bank and is regulated by the
OTS, it has policies or procedures  in place for  measuring  interest rate risk.
These policies and procedures stipulate acceptable levels of interest rate risk.

Interest  Rate  Risk  Measurements.  In  order to  measure  interest  rate  risk
internally,  the Company uses computer  programs which enable it to simulate the
changes that will occur to the Savings  Bank's net interest  income ("NII") over
several  interest  rate  scenarios  which are  developed  by  "shocking"  market
interest rates (i.e. moving them immediately and permanently) up and down in 100
basis point  increments  from their current  levels,  and by "ramping"  interest
rates in such a manner as to adversely affect the Savings Bank's simulated NII.
In  addition  to the  level of  interest  rates,  the most  critical  assumption
regarding  the  estimated  amount  of the  Savings  Bank's  NII is the  expected
prepayment speed of the Savings Bank's 1-4 family residential loans, and related
mortgage-backed  securities, the book value of which comprises approximately 67%
of the Company's total assets.  For this prepayment speed assumption the Company
uses median expected  prepayment speeds which are obtained from a reliable third
party source.  The Company also incorporates into its simulations the effects of
the interest rate caps and interest rate floors that are part of the majority of
the Savings Bank's variable rate loans.

The  Company  uses its  business  planning  forecast  as the  basis  for its NII
simulations.  Therefore,  planned business  activities are incorporated into the
measurement  horizon.  Such activities include assumptions about substantial new
loan and deposit volumes,  the pricing of loan and deposit  products,  and other
assumptions about future activities that may or may not be realized. In order to
quantify the Company's NII exposure at December 31, 2003, the Company focused on
the  simulation  of net interest  income in the "ramped up 200 basis points" and
"shocked down 50 basis points"  scenarios.  The Company also used the results of
the most recently  available  OTS model's  forecast of market value of portfolio
equity  under  different  interest  rate  scenarios.  In  addition,  the Company
prepared  current  period and one-year  forward  "gap"  reports in order to show
potential  mis-matches of repricing or cash flows from the Company's current and
projected  interest  rate-sensitive  assets and liabilities.  ALCO evaluated the
simulation  results,  the OTS model  results and the "gap" reports and will make
adjustments to the Savings  Bank's planned  activities if in its view there is a
need to do so.

                                                                              11
<PAGE>
TF FINANCIAL CORPORATION & SUBSIDIARIES
================================================================================

At December 31, 2003,  the most adverse  change in net interest  income over the
two-year  horizon  commencing  January  1, 2004  using the  "ramped up 200 basis
points" and "shocked down 50 basis points"  simulation  methodologies was a $5.8
million or a 14% decrease in expected net interest income. The Company estimated
its  one-year  gap (i.e.  assets  repricing/maturing  in  excess of  liabilities
repricing/maturing  is a  positive  gap) to be  negative  $69.2  million  in the
"ramped  up 200 basis  points"  scenario,  and  positive  $63.7  million  in the
"shocked  down 50 basis  points"  scenario,  compared to a positive $9.5 million
under the "rates unchanged" interest rate scenario.  Essentially,  the Company's
net interest  income is highly  sensitive to the movement of long-term  interest
rates because of the resulting effect on the prepayment  speeds of the Company's
mortgage-related  earning assets. In addition, the Company's deposits are highly
insensitive  to the  downward  movement  in short term  market  rates due to the
perceived  inability of the Company to move core  deposit  rates much lower from
where they are at December  31, 2003.  However,  these  measurements  are highly
subjective  in nature  and are not  intended  to be a forecast  of net  interest
income under any rate scenario for the years 2004, 2005 or for any other period.

                    Impact of Inflation and Changing Prices

The  consolidated  financial  statements  and related data have been prepared in
accordance with accounting principles generally accepted in the United States of
America  which  require the  measurement  of financial  position  and  operating
results in terms of historical dollars, without consideration for changes in the
relative purchasing power of money over time caused by inflation.

Unlike  industrial  companies,  nearly all of the assets  and  liabilities  of a
financial institution are monetary in nature. As a result, interest rates have a
more significant  impact on a financial  institution's  performance than general
levels  of  inflation.  Interest  rates  do not  necessarily  move  in the  same
direction  or in the same  magnitude as the price of goods and  services,  since
such goods and services are affected by inflation.  In the current interest rate
environment,  liquidity and the maturity  structure of the Savings Bank's assets
and  liabilities  are  critical to the  maintenance  of  acceptable  performance
levels.

                          Critical Accounting Policies

Certain  critical  accounting  policies  of  the  Company  require  the  use  of
significant  judgment  and  accounting  estimates  in  the  preparation  of  the
consolidated  financial  statements  and  related  data  of the  Company.  These
accounting  estimates require  management to make assumptions about matters that
are highly  uncertain at the time the  accounting  estimate is made.  Management
believes  that  the  most  critical  accounting  policy  requiring  the  use  of
accounting estimates and judgment is the determination of the allowance for loan
losses.  If the  financial  position of a significant  amount of debtors  should
deteriorate  more than the  Company has  estimated,  present  reserves  for loan
losses may be  insufficient  and  additional  provisions  for loan losses may be
required. The allowance for loan losses was $2,111,000 at December 31, 2003.

                        Recent Accounting Pronouncements

The Company adopted FIN 45, "Guarantor's  Accounting and Disclosure Requirements
for  Guarantees,  including  Indirect  Guarantees of Indebtedness of Others," on
January 1, 2003.  FIN 45  requires a guarantor  entity,  at the  inception  of a
guarantee covered by the measurement provisions of the interpretation, to record
a  liability  for the fair value of the  obligation  undertaken  in issuing  the
guarantee.  The Company  issues  financial  and  performance  letters of credit.
Financial  letters  of  credit  require  the  Company  to  make  payment  if the
customer's  financial  condition  deteriorates,  as defined  in the  agreements.
Performance  letters  of credit  require  the  Company to make  payments  if the
customer fails to perform identified non-financial contractual obligations.  FIN
45 applies prospectively to guarantees the Company issues or modifies subsequent
to December 31, 2002.

The Company defines the initial fair value of these letters of credit as the fee
received from the customer.  The maximum potential undiscounted amount of future
payments on these  letters of credit as of December 31, 2003 is $1.3 million and
they expire through 2005. The amounts due under these letters of credit would be
reduced by any proceeds that the Company would be able to obtain in  liquidating
the collateral  for these loans.  The adoption of FIN 45 did not have a material
impact  on  the  Company's   consolidated   financial  position  or  results  of
operations.

In January 2003, the FASB issued FASB Interpretation 46 (FIN 46), "Consolidation
of Variable  Interest  Entities." FIN 46 clarifies the application of Accounting
Research Bulletin 51, "Consolidated  Financial Statements," for certain entities
that do not  have  sufficient  equity  at risk for the  entity  to  finance  its
activities without additional  subordinated financial support from other parties
or in which equity  investors  do not have the  characteristics  of  controlling
financial interest  ("variable interest  entities").  Variable interest entities
within the scope of FIN 46 will be required to be  consolidated by their primary
beneficiary.  The primary beneficiary of a variable interest is determined to be
the party that absorbs a majority of the entity's  expected  losses,  receives a
majority  of its  expected  returns,  or both.  FIN 46  applies  immediately  to
variable  interest  entities  created  after  January 31, 2003,  and to variable
interest  entities in which an enterprise  obtains and interest after that date.
Subsequent to the issuance of FIN 46, the FASB issued a revised  interpretation,
FIN 46(R), the provisions of which must be applied to certain variable  interest
entities by March 31, 2004.  The Company does not  anticipate a material  impact
from the adoption of FIN 46, which will occur in the first quarter of 2004.

12
<PAGE>
                                                              2003 ANNUAL REPORT
================================================================================

On April  30,  2003 the  Financial  Accounting  Standards  Board  (FASB)  issued
Statement No. 149,  "Amendment of Statement  133 on Derivative  Instruments  and
Hedging   Activities."  The  Statement  amends  and  clarifies   accounting  for
derivative  instruments,  including certain derivative  instruments  embedded in
other  contracts,  and for  hedging  activities  under  Statement  133.  The new
guidance  amends  Statement 133 for decisions  made: as part of the  Derivatives
Implementation  Group process that effectively  required amendments to Statement
133, in connection with other FASB projects dealing with financial  instruments,
and regarding implementation issues raised in relation to the application of the
definition   of  a  derivative,   particularly   regarding  the  meaning  of  an
"underlying"  and the  characteristics  of a derivative that contains  financing
components. This Statement clarifies under what circumstances a contract with an
initial net investment meets the  characteristic of a derivative as discussed in
Statement 133. In addition,  it clarifies when a derivative contains a financing
component  that  warrants  special  reporting  in the  statement  of cash flows.
Statement 149 amends  certain other existing  pronouncements.  This Statement is
effective for contracts  entered into or modified after June 30, 2003, except as
stated below and for hedging  relationships  designated after June 30, 2003. The
guidance should be applied prospectively.  The provisions of this Statement that
relate to  Statement  133  Implementation  Issues that have been  effective  for
fiscal quarters that began prior to June 15, 2003, should continue to be applied
in  accordance  with their  respective  effective  dates.  In addition,  certain
provisions  relating to forward purchases or sales of when-issued  securities or
other securities that do not yet exist,  should be applied to existing contracts
as well as new contracts  entered into after June 30, 2003. The adoption of SFAS
No. 149 did not have a material  effect on the Company's  financial  position or
results of operations.

On May 15, 2003 the Financial Accounting Standards Board (FASB) issued Statement
No. 150,  "Accounting for Certain Financial  Instruments with Characteristics of
both Liabilities and Equity." The Statement  improves the accounting for certain
financial  instruments that, under previous guidance,  issuers could account for
as equity.  The new Statement  requires that those  instruments be classified as
liabilities  in  statements of financial  position.  Statement 150 affects three
types of freestanding financial instruments:  (1) mandatorily redeemable shares,
which the issuing company is obligated to buy back in exchange for cash or other
assets;  (2)  instruments  that do or may require the issuer to buy back some of
its shares in  exchange  for cash or other  assets,  including  put  options and
forward purchase contracts; and (3) obligations that can be settled with shares,
the monetary value of which is fixed, tied solely or predominantly to a variable
such as a market  index,  or varies  inversely  with the  value of the  issuer's
shares.  Statement  150  does not  apply to  features  embedded  in a  financial
instrument  that is not a derivative  in its  entirety.  Most of the guidance in
Statement  150 is  effective  for  all  financial  instruments  entered  into or
modified  after May 31, 2003 and  otherwise is effective at the beginning of the
first interim  period  beginning  after June 15, 2003. The adoption of Statement
150 did not have a  material  effect  on the  Company's  consolidated  financial
position, results of operations or cash flows.

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

In  December  2003,  the FASB  issued  SFAS 132  (revised  2003) in  response to
requests by users of financial  statements  for more  transparent  disclosure of
pension plan  assets,  obligations,  benefit  payments,  contributions,  and net
benefit cost. In light of certain  similarities  between defined benefit pension
arrangements  and  arrangements  for other  post-retirement  benefits,  SFAS 132
requires similar disclosures for both. This Statement replaces the original SFAS
132  and  revises   employers'   disclosures   about  pension  plans  and  other
post-retirement  benefit  plans to require more  information  about the economic
resources  and  obligations  of such plans.  SFAS 132 (revised  2003) amends the
disclosure  requirements  of SFAS  87,  SFAS  88,  and SFAS  106,  however,  the
measurement and recognition guidance is not affected. SFAS 132 (revised 2003) is
effective  for  financial  statements  of public  companies for the fiscal years
ending  after  December  15,  2003,  except  estimated  future  benefit  payment
disclosures and disclosures of certain  information  about foreign plans are not
required  until fiscal years  ending  after June 15,  2004.  The  interim-period
disclosures are effective for  interim-period  financial reports beginning after
December  15,  2003.  Disclosures  for  earlier  annual  periods  presented  for
comparative  purposes are required to be restated  for the  percentages  of each
major category of plan assets held, the accumulated benefit obligation, and plan
assumptions.   The  disclosures  for  earlier  interim  periods   presented  for
comparative purposes need to be restated for the components of net benefit cost.
The  adoption of the  relevant  provisions  of SFAS 132  (revised  2003) and the
expected  adoption of the  remaining  provisions  did not and is not expected to
have a  material  impact on the  Company's  financial  position  or  results  of
operations.

In June 2003,  the Accounting  Standards  Executive  Committee  (AcSEC) issued a
proposed  SOP,  "Allowance  for  Credit  Losses,"  to  provide  guidance  on how
creditors  should determine the allowance for credit losses related to all loans
in  accordance  with SFAS 5, SFAS 114, and FIN 14. The proposed  guidance  would
apply to all creditors of loans (except for governmental  entities) and not just
financial  institutions.  AcSEC  began its  deliberations  and will  continue to
deliberate the proposed SOP in 2004. Based on informal discussions with the FASB
in early 2004,  AcSEC decided to revise the scope of the proposed SOP to provide
guidance related to disclosures only.

The Bank adopted EITF 03-1, "The Meaning of Other than Temporary  Impairment and
Its  Application  to Certain  Investments,"  as of December 31, 2003.  EITF 03-1
includes certain disclosures regarding quantitative and qualitative  disclosures
for investment  securities  accounted for under FAS 115, "Accounting for Certain
Investments  in Debt and Equity  Securities,"  that are  impaired at the balance
sheet  date,  but for  which  an  other-than-temporary  impairment  has not been
recognized.   The  disclosures  under  EITF  03-4  are  required  for  financial
statements  for years  ending  after  December  15, 2003 and are included in the
Company's consolidated financial statements.

                                                                              13

<PAGE>

                      [THIS PAGE INTENTIONALLY LEFT BLANK

14
<PAGE>
                                                              2003 ANNUAL REPORT
================================================================================

Accountants and Management Consultants
The US Member Firm of                                      Grant Thornton [LOGO]
Grant Thornton International                               GRANT THONRTON LLP



               Report of Independent Certified Public Accountants


Board of Directors
TF Financial Corporation

         We have audited the accompanying  consolidated  statements of financial
position of TF Financial  Corporation  and  Subsidiaries as of December 31, 2003
and 2002,  and the related  consolidated  statements of  operations,  changes in
stockholders'  equity and cash  flows for each of the three  years in the period
ended December 31, 2003. These financial  statements are the  responsibility  of
the  Corporation's  management.  Our  responsibility is to express an opinion on
these financial statements based on our audits.

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

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

         As discussed in Note A6 to the consolidated  financial statements,  the
Corporation adopted Statement of Financial  Standards No. 147,  "Acquisitions of
Certain Financial Institutions," effective January 1, 2002.


/s/Grant Thornton LLP

Philadelphia, Pennsylvania
January 23, 2004

Suite 3100
Two Commerce Square
2001 Market Street
Philadelphia, PA 19103-7080
Tel:     215 561-4200
Fax:     215 561-1066

                                                                              15
<PAGE>
TF FINANCIAL CORPORATION & SUBSIDIARIES
================================================================================

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
                                                                                      December 31
                                                                               ----------------------
                  ASSETS                                                            2003         2002
                                                                               ----------------------
                                                                                     (in thousands)
<S>                                                                          <C>          <C>
Cash and cash equivalents                                                      $   8,241    $ 100,580
Certificates of deposit in other financial institutions                              155          220
Investment securities available for sale - at fair value                          14,433       27,243
Investment securities held to maturity
  (fair value of $10,815 and $15,187 as of
  December 31, 2003 and 2002, respectively)                                       10,389       14,563
Mortgage-backed securities available for sale -
  at fair value                                                                  106,774      115,243
Mortgage-backed securities held to maturity
  (fair value of $24,774 and $57,346 as of
  December 31, 2003 and 2002, respectively)                                       23,630       54,592
Loans receivable, net                                                            404,649      370,092
Federal Home Loan Bank stock - at cost                                             6,825       11,424
Accrued interest receivable                                                        2,671        3,576
Premises and equipment, net                                                        6,268        6,742
Core deposit intangible asset, net of accumulated
  amortization of $2,456 and $2,271 as of
  December 31, 2003 and 2002, respectively                                           368          553
Goodwill, net of accumulated amortization of $2,328                                4,324        4,324
Other assets                                                                      18,025       11,880
                                                                               ----------------------
                  TOTAL ASSETS                                                 $ 606,752    $ 721,032
                                                                               ======================

                  LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
  Deposits                                                                     $ 459,343    $ 442,558
  Advances from the Federal Home Loan Bank                                        86,853      207,359
  Advances from borrowers for taxes and insurance                                  1,738        1,330
  Accrued interest payable                                                         1,908        2,897
  Other liabilities                                                                1,430        4,048
                                                                               ----------------------
                  Total liabilities                                              551,272      658,192
                                                                               ----------------------
Stockholders' equity
  Preferred stock, no par value; 2,000,000 shares authorized
    at December 31, 2003 and 2002, none issued                                        --           --
  Common stock, $0.10 par value; 10,000,000 shares authorized,
    5,290,000 shares issued, 2,596,037 and 2,482,586 shares
    outstanding at December 31, 2003 and 2002, respectively,
    net of shares in treasury: 2003 - 2,474,366; 2002 - 2,567,268                    529          529
  Retained earnings                                                               52,626       59,978
  Additional paid-in capital                                                      51,982       51,647
  Unearned ESOP shares                                                            (2,196)      (2,401)
  Treasury stock - at cost                                                       (47,043)     (48,809)
  Accumulated other comprehensive income                                            (418)       1,896
                                                                               ----------------------
                  Total stockholders' equity                                      55,480       62,840
                                                                               ----------------------
                  TOTAL LIABILITIES AND
                  STOCKHOLDERS' EQUITY                                         $ 606,752    $ 721,032
                                                                               ======================
</TABLE>

The accompanying notes are an integral part of these statements

16

<PAGE>
                                                              2003 ANNUAL REPORT
================================================================================

CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                                          Year ended December 31,
                                                                    ----------------------------------
                                                                        2003        2002       2001
                                                                    ----------------------------------
                                                                 (in thousands, except per share data)
<S>                                                                <C>         <C>        <C>
Interest income
  Loans, including fees                                              $ 23,372    $ 25,662   $ 28,443
  Mortgage-backed securities                                            6,725      11,423     13,749
  Investment securities                                                 1,806       2,271      3,015
  Interest-bearing deposits and other                                     474       1,099      1,540
                                                                    ----------------------------------
         TOTAL INTEREST INCOME                                         32,377      40,455     46,747
                                                                    ----------------------------------
Interest expense
  Deposits                                                              7,044      10,506     14,043
  Borrowings                                                            8,208      12,154     12,865
                                                                    ----------------------------------
         TOTAL INTEREST EXPENSE                                        15,252      22,660     26,908
                                                                    ----------------------------------
         NET INTEREST INCOME                                           17,125      17,795     19,839
                                                                    ----------------------------------
Provision for possible loan losses                                        330         988        500
         NET INTEREST INCOME AFTER PROVISION FOR
           POSSIBLE LOAN LOSSES                                        16,795      16,807     19,339
                                                                    ----------------------------------
Non-interest income
  Service fees, charges and other operating income                      2,372       2,114      1,734
  Gain on sale of deposits                                                 --          --      1,092
  Gain on sale of real estate                                             110          --        444
  Gain (loss) on sale of investment and mortgage-backed securities        208       1,190       (126)
  Gain on sale of loans                                                    --          --         28
                                                                    ----------------------------------
         TOTAL NON-INTEREST INCOME                                      2,690       3,304      3,172
                                                                    ----------------------------------
Non-interest expense
  Employee compensation and benefits                                    8,186       7,629      7,865
  Occupancy and equipment                                               2,488       2,303      2,493
  Federal deposit insurance premium                                        72          75         75
  Professional fees                                                       609         408        486
  Advertising                                                             551         441        507
  Other operating                                                       2,847       2,336      2,572
  Amortization of core deposit intangible asset                           185         222        266
  Amortization of goodwill                                                 --          --        444
  Debt prepayment fee                                                  13,765          --         --
                                                                    ----------------------------------
         TOTAL NON-INTEREST EXPENSE                                    28,703      13,414     14,708
                                                                    ----------------------------------
         INCOME (LOSS) BEFORE INCOME TAXES                             (9,218)      6,697      7,803
Income taxes (benefit)                                                 (3,384)      1,605      2,070
                                                                    ----------------------------------
         NET INCOME (LOSS)                                           $ (5,834)   $  5,092   $  5,733
                                                                    ==================================
Earnings (loss) per share - basic                                    $  (2.30)   $   2.06   $   2.32
                                                                    ==================================
Earnings (loss) per share - diluted                                  $  (2.30)   $   1.91   $   2.19
                                                                    ==================================
</TABLE>

The accompanying notes are an integral part of these statements.

                                                                              17
<PAGE>
TF FINANCIAL CORPORATION & SUBSIDIARIES
================================================================================

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                        Years ended December 31, 2003, 2002 and 2001
                          ----------------------------------------------------------------------------------------------------------
                                                                (in thousands, except share data)
                                                                                                        Accumulated
                                                                                                          Other
                               Common stock    Additional  Unearned   Shares                           Comprehensive       Compre-
                                         Par     paid-in     ESOP  acquired by  Treasury   Retained      income            hensive
                             Shares     value    capital    shares     MSBP      stock     earnings      (loss)    Total    income
                          ----------------------------------------------------------------------------------------------------------
<S>                     <C>           <C>     <C>       <C>          <C>    <C>          <C>            <C>     <C>
Balance at
  January 1, 2001          2,491,454     $529    $51,704   $(2,644)     $(4)   $(48,173)    $52,061        $(364)  $53,109
Allocation of
  ESOP shares                 12,156       --        112       121       --          --          --           --       233
Amortization of
  MSBP expense                    --       --          3        --        4          --          --           --         7
Purchase of treasury stock   (60,900)      --         --        --       --      (1,110)         --           --    (1,110)
Cash dividends -
  common stock                    --       --         --        --       --          --      (1,424)          --    (1,424)
Exercise of options           23,276       --       (167)       --       --         445          --           --       278
Other comprehensive income,
  net of taxes                    --       --         --        --       --          --          --        1,149     1,149   $1,149
Net income for the
  year ended
December 31, 2001                 --       --         --        --       --          --       5,733           --     5,733    5,733
                          ----------------------------------------------------------------------------------------------------------
Comprehensive income                                                                                                         $6,882
                          ----------------------------------------------------------------------------------------------------------
Balance at
December 31, 2001          2,465,986     $529    $51,652   $(2,523)    $ --    $(48,838)    $56,370       $  785   $57,975
                          ----------------------------------------------------------------------------------------------------------
Allocation of ESOP shares     12,156       --        151       122       --          --          --           --       273
Amortization of MSBP expense      --       --         --        --       --          --          --           --        --
Purchase of treasury stock   (16,894)      --         --        --       --        (376)         --           --      (376)
Cash dividends -
  common stock                    --       --         --        --       --          --      (1,484)          --    (1,484)
Exercise of options           21,338       --       (156)       --       --         405          --           --       249
Other comprehensive
  income, net of taxes            --       --         --        --       --          --          --        1,111     1,111   $1,111
Net income for the
  year ended
December 31, 2002                 --       --         --        --       --          --       5,092           --     5,092    5,092
                          ----------------------------------------------------------------------------------------------------------
Comprehensive income                                                                                                         $6,203
                          ----------------------------------------------------------------------------------------------------------
Balance at
December 31, 2002          2,482,586     $529    $51,647   $(2,401)    $ --    $(48,809)    $59,978       $1,896   $62,840
                          ----------------------------------------------------------------------------------------------------------
Allocation of ESOP shares     20,549       --        401       205       --          --          --           --       606
Cash dividends -
  common stock                    --       --         --        --       --          --      (1,518)          --    (1,518)
Exercise of options           92,902       --       (618)       --       --       1,766          --           --     1,148
Income tax benefit
  arising from stock
  compensation                    --       --        552        --       --          --          --           --       552
Other comprehensive
  income (loss),
  net of taxes                    --       --         --        --       --          --          --       (2,314)   (2,314) $(2,314)
Net income (loss) for
  the year ended
December 31, 2003                 --      - -         --        --       --          --      (5,834)          --    (5,834)  (5,834)
                          ----------------------------------------------------------------------------------------------------------
Comprehensive
  income (loss)                                                                                                             $(8,148)
                          ----------------------------------------------------------------------------------------------------------
Balance at
December 31, 2003          2,596,037     $529    $51,982   $(2,196)    $ --    $(47,043)    $52,626       $ (418)  $55,480
                          ----------------------------------------------------------------------------------------------------------
</TABLE>

The accompanying notes are an integral part of this statement.

18
<PAGE>
                                                              2003 ANNUAL REPORT
================================================================================

CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                       Year ended December 31,
                                                              -----------------------------------
                                                                   2003         2002         2001
                                                              -----------------------------------
                                                                           (in thousands)
<S>                                                         <C>          <C>          <C>
OPERATING ACTIVITIES
Net income (loss)                                             $  (5,834)   $   5,092    $   5,733
Adjustments to reconcile net income to net cash provided
    by operating activities
  Amortization of
    Mortgage loan servicing rights                                   11           14           14
    Deferred loan origination fees                                 (259)        (201)        (387)
    Premiums and discounts on
      investment securities, net                                    170          108           36
    Premiums and discounts on
      mortgage-backed securities and loans, net                   1,941          758          (72)
    Goodwill and other intangibles                                  185          222          710
  Deferred income taxes                                             596          (19)        (172)
  Provision for loan losses and provision for
    losses on real estate                                           443          988          510
  Depreciation of premises and equipment                          1,041        1,014        1,092
  Increase in value of bank-owned life insurance                   (553)        (520)        (174)
  Stock-based benefit programs                                      606          273          240
  Tax benefit arising from stock compensation                       552           --           --
  (Gain) loss on sale of
    Investment and mortgage-backed securities                      (208)      (1,190)         126
    Real estate acquired through foreclosure                        (23)         (60)         (27)
    Property, equipment and real estate held for investment          --           --         (444)
    Real estate                                                    (110)          --           --
    Loans receivable                                                 --           --          (28)
    Deposits                                                         --           --       (1,092)
  (Increase) decrease in
    Accrued interest receivable                                     905          578        1,369
    Other assets                                                 (3,924)         (89)         248
  Increase (decrease) in
    Accrued interest payable                                       (989)        (865)        (908)
    Other liabilities                                            (1,427)        (318)        (470)
                                                              -----------------------------------
         NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES        (6,877)       5,785        6,304
                                                              -----------------------------------

INVESTING ACTIVITIES
  Loan originations                                            (178,578)     (80,943)     (48,526)
  Purchases of loans                                            (24,176)     (59,926)     (74,647)
  Loan principal payments                                       165,855      147,296      106,019
  Principal repayments on mortgage-backed securities
    held to maturity                                             31,013       41,499       41,456
  Principal repayments on mortgage-backed securities
    available for sale                                           62,169       39,005       22,415
  Proceeds from loan sales                                           --           --        1,480
  Purchases and maturities of certificates of deposit in
    other financial institutions, net                                65          (26)          (3)

                                                                     (Continued)

                                                                              19
</TABLE>

<PAGE>
TF FINANCIAL CORPORATION & SUBSIDIARIES
================================================================================

CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
<TABLE>
<CAPTION>
                                                                              Year ended December 31,
                                                                       ------------------------------------
                                                                            2003         2002         2001
                                                                       ------------------------------------
                                                                                    (in thousands)
<S>                                                                  <C>          <C>           <C>
  Purchases of investment and mortgage-backed securities
    held to maturity                                                   $      --    $  (9,650)    $     --
  Purchase of investment securities and mortgage-backed
    securities available for sale                                       (181,058)    (103,201)     (47,364)
  Purchase of bank-owned life insurance                                   (1,500)          --       (9,000)
  Proceeds from maturities of investment securities
    held to maturity                                                       4,105        2,060       51,233
  Proceeds from maturities of investment securities
    available for sale                                                    40,000        8,000       18,501
  Proceeds from the sale of investment and mortgage-backed
    securities available for sale                                         95,193       38,380        4,890
  (Purchase) redemption of Federal Home Loan Bank stock                    4,599          (56)       1,674
  (Purchase) sale of property, equipment and real estate
    held for investment                                                        8         (769)       1,635
  Proceeds from sale of real estate                                        1,277          275          163
  Purchase of premises and equipment                                        (751)        (272)        (357)
                                                                       ------------------------------------
         NET CASH PROVIDED BY (USED IN)
         INVESTING ACTIVITIES                                             18,221       21,672       69,569
                                                                       ------------------------------------

FINANCING ACTIVITIES
  Net increase (decrease) in demand deposit/NOW
    accounts, passbook savings accounts and certificates
    of deposit                                                            16,785       20,506       31,989
  Funding of sale of deposits                                                 --           --       (9,706)
  Net decrease in advances from Federal Home Loan Bank                  (120,506)     (15,000)     (22,500)
  Net decrease in securities sold under agreements
    to repurchase                                                             --           --      (14,962)
  Net increase (decrease) in advances from borrowers for
    taxes and insurance                                                      408           89           83
  Treasury stock acquired                                                     --         (376)      (1,110)
  Exercise of stock options                                                1,148          249          278
  Common stock dividends paid                                             (1,518)      (1,484)      (1,424)
                                                                       ------------------------------------
         NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES            (103,683)       3,984      (17,352)
                                                                       ------------------------------------
         NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS            (92,339)      31,441       58,521
Cash and cash equivalents at beginning of year                           100,580       69,139       10,618
                                                                       ------------------------------------
Cash and cash equivalents at end of year                               $   8,241    $ 100,580    $  69,139
                                                                       ====================================
Supplemental disclosure of cash flow information
  Cash paid for
    Interest on deposits and advances from Federal Home Loan Bank      $  16,241    $  23,525    $  27,816
    Income taxes                                                       $     250    $   2,050    $   2,495
  Non-cash transactions
    Transfers from loans to real estate acquired through foreclosure   $   1,857    $      --    $      --
</TABLE>


The accompanying notes are an integral part of these statements.

20
<PAGE>
                                                              2003 ANNUAL REPORT
================================================================================

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
TF Financial  Corporation  (the "Company") is a unitary savings and loan holding
company,  organized under the laws of the State of Delaware,  which conducts its
consumer banking operations primarily through its wholly owned subsidiary, Third
Federal  Savings Bank (Third Federal or the Bank).  Third Federal is a federally
chartered-stock   savings  bank  insured  by  the  Federal   Deposit   Insurance
Corporation.  Third Federal is a  community-oriented  savings  institution  that
conducts  operations  from its main  office  in  Newtown,  Pennsylvania,  eleven
full-service   branch  offices  located  in  Philadelphia  and  Bucks  counties,
Pennsylvania,  and three  full-service  branch offices located in Mercer County,
New Jersey.  The Bank competes with other banking and financial  institutions in
its primary market communities,  including financial institutions with resources
substantially greater than its own. Commercial banks, savings banks, savings and
loan  associations,  credit unions and money market funds  actively  compete for
savings and time  deposits  and loans.  Such  institutions,  as well as consumer
finance and insurance companies,  may be considered competitors of the Bank with
respect to one or more of the services it renders.

The Bank is subject to  regulations  of certain state and federal  agencies and,
accordingly,   those  regulatory  authorities  periodically  examine  it.  As  a
consequence of the extensive  regulation of commercial banking  activities,  the
Bank's  business  is  particularly  susceptible  to being  affected by state and
federal legislation and regulations.

1. Principles of Consolidation and Basis of Presentation

The consolidated  financial  statements  include the accounts of the Company and
its wholly owned subsidiaries:  TF Investments,  Teragon Financial  Corporation,
Penns Trail  Development  Corporation  and Third  Federal,  and its wholly owned
subsidiary,  Third  Delaware  Corporation  (collectively,  the  "Company").  All
material   intercompany  balances  and  transactions  have  been  eliminated  in
consolidation.

The  accounting  policies  of  the  Company  conform  to  accounting  principles
generally  accepted in the United  States of America  (US GAAP) and  predominant
practices within the banking industry.  The preparation of financial  statements
in conformity with US GAAP requires management to make estimates and assumptions
that affect the reported  amounts of assets and  liabilities  and  disclosure of
contingent assets and liabilities at the date of the financial  statements,  and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual  results  could  differ  from  those  estimates.   The  more  significant
accounting policies are summarized below.

2. Cash and Cash Equivalents

The  Company   considers   cash,   due  from  banks,   federal  funds  sold  and
interest-bearing  deposits in other financial institutions,  with original terms
to maturity of less than three  months,  as cash  equivalents  for  presentation
purposes in the consolidated statements of financial position and cash flows.

3. Investment and Mortgage-Backed Securities

The Company accounts for investment and mortgage-backed securities in accordance
with Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain  Investments in Debt and Equity  Securities." The Company classifies its
investment,  mortgage-backed  and marketable  equity  securities in one of three
categories:  held to maturity,  trading, or available for sale. The Company does
not presently engage in security trading activities.

Investment,  mortgage-backed and marketable equity securities available for sale
are stated at fair value,  with net  unrealized  gains and losses  excluded from
income and reported in other comprehensive income.  Realized gains and losses on
the sale of securities are recognized using the specific identification method.

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

Investment and mortgage-backed  securities held to maturity are carried at cost,
net of  unamortized  premiums and  discounts,  which are  recognized in interest
income  using  the  interest  method.  The  Company  has the  ability  and it is
management's intention to hold such assets to maturity.

The Company  adopted the provisions of SFAS No. 133,  "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133), as amended, as of January 1,
2001. The statement requires the Company to recognize all derivative instruments
at fair value as either assets or liabilities.  Financial derivative instruments
are reported at fair value in other assets or other liabilities.  The accounting
for changes in the fair value of a derivative  instrument  depends on whether it
has been designated and qualifies as part of a hedging relationship.

                                                                       Continued

                                                                              21
<PAGE>
TF FINANCIAL CORPORATION & SUBSIDIARIES
================================================================================

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

                           December 31, 2003 and 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

4. Loans Receivable

Loans receivable are stated at unpaid principal  balances less the allowance for
loan losses and net deferred loan  origination  fees and  unamortized  premiums.
Loan origination  fees and unamortized  premiums on mortgage loans are amortized
to income using the interest  method over the  remaining  period to  contractual
maturity, adjusted for actual prepayments.

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

The Bank  provides an allowance  for accrued but  uncollected  interest when the
loan becomes more than ninety days past due or is  identified  as impaired.  The
allowance is  established  by a charge to interest  income equal to all interest
previously  accrued,  and income is  subsequently  recognized only to the extent
that cash payments are received until, in management's  judgment, the borrower's
ability to make periodic interest and principal  payments is no longer impaired,
in which case the loan is returned to accrual status.

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

The Bank  identifies a loan as impaired  when it is probable  that  interest and
principal will not be collected  according to the contractual  terms of the loan
agreement.  The  accrual  of  interest  is  discontinued  on such loans and cash
payments received are applied to reduce principal.

Loan  impairment  is measured by estimating  the expected  future cash flows and
discounting  them at the  respective  effective  interest rate or by valuing the
underlying  collateral.  When  necessary an  allowance  for loan losses has been
established for all loans identified as impaired.

The Company adopted FIN 45, "Guarantor's  Accounting and Disclosure Requirements
for  Guarantees,  including  Indirect  Guarantees of Indebtedness of Others," on
January 1, 2003.  FIN 45  requires a guarantor  entity,  at the  inception  of a
guarantee covered by the measurement provisions of the interpretation, to record
a  liability  for the fair value of the  obligation  undertaken  in issuing  the
guarantee.  The  Bank  issues  financial  and  performance  letters  of  credit.
Financial  letters of credit  require the Bank to make payment if the customer's
financial  condition  deteriorates,  as defined in the  agreements.  Performance
letters of credit  require the Bank to make  payments if the  customer  fails to
perform  identified  non-financial  contractual  obligations.   FIN  45  applied
prospectively  to guarantees the Bank issued or modified  subsequent to December
31, 2002.

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

5. Premises and Equipment

Land is carried at cost.  Buildings  and  furniture,  fixtures and equipment are
carried at cost less accumulated  depreciation.  Depreciation is provided by the
straight-line method over the estimated useful lives of the assets.

                                                                       Continued

22
<PAGE>
                                                              2003 ANNUAL REPORT
================================================================================

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

                           December 31, 2003 and 2002

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

6. Goodwill and Other Intangible Assets

In 1996 the Bank acquired  three Mercer  County,  New Jersey offices and related
deposits of Cenlar  Federal  Savings Bank.  The Bank assumed  $137.6  million in
deposits in exchange for $126.5 million in cash. As a result of the acquisition,
the Bank recorded  core deposit  intangible of $2.8 million and goodwill of $6.7
million.  The  core  deposit  intangible  acquired  is  being  amortized  on  an
accelerated  basis over 10 years. The goodwill acquired from the acquisition was
recorded as an  unidentifiable  intangible asset under SFAS No. 72,  "Accounting
for Certain Acquisitions of Banking or Thrift Institutions."

On January 1, 2002, the Company  adopted  Financial  Accounting  Standards Board
(FASB) Statement of Financial  Accounting  Standards  (SFAS) No. 141,  "Business
Combinations," SFAS No. 142, "Goodwill and Intangible Assets," and SFAS No. 144,
"Accounting  for the Impairment or Disposal of Long-Lived  Assets." The adoption
of these statements did not have a material impact on the financial condition or
results of operations of the Company.

On  October  1, 2002 the FASB  issued  SFAS No.  147,  "Acquisitions  of Certain
Financial  Institutions."  Except for  transactions  between  two or more mutual
enterprises,  SFAS No. 147 removes the  acquisitions  of financial  institutions
from the scope of both SFAS No. 72 and FASB  Interpretation  No. 9 and  requires
that those  transactions  be accounted for in  accordance  with SFAS No. 141 and
SFAS  No.  142.  Thus,  the  requirement  of  SFAS  No.  72  to  recognize  (and
subsequently  amortize) any excess of the fair value of liabilities assumed over
the fair value of tangible and identifiable intangible assets acquired ("SFAS 72
goodwill") as an  unidentifiable  intangible no longer  applies to  acquisitions
within the scope of SFAS No. 147. In addition, SFAS No. 147 amends SFAS No. 144,
"Accounting  for the  Impairment or Disposal of  Long-Lived  Assets," to include
within its scope long-term customer relationship  intangible assets of financial
institutions such as  depositor-relationship  intangible  assets.  Consequently,
those  intangible  assets are subject to undiscounted  cash flow  recoverability
tests and impairment loss recognition and measurement provisions.  Finally, SFAS
No. 147 provides that branch acquisitions that meet the definition of a business
should be accounted  for as a business  combination.  SFAS No. 147 was effective
October 1, 2002, although earlier application was permitted. The Company elected
to apply SFAS No. 147 as of January 1, 2002.

The Company had  $4,324,000  of SFAS 72 goodwill  and  $553,000 of core  deposit
intangible   assets  at  December  31,  2001  remaining  from  the  1996  branch
acquisition that management of the Company concluded was a business  combination
in  accordance  with SFAS No.  147.  In  addition,  the  Company  has tested the
goodwill and core deposit  intangible  assets for impairment prior to its fiscal
year ending December 31, 2003. No impairment has been recognized.

7. Transfers of Financial Assets

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

8. Benefit Plans

The Company has  established  an Employee Stock  Ownership Plan (ESOP)  covering
eligible  employees  with six months of  service,  as  defined by the ESOP.  The
Company  accounts  for the ESOP in  accordance  with the  American  Institute of
Certified  Public  Accountants'  Statement of Position  (SOP) 93-6,  "Employers'
Accounting  for  Employee  Stock  Ownership   Plans."  SOP  93-6  addresses  the
accounting for shares of stock issued to employees by an ESOP. SOP 93-6 requires
that the employer  record  compensation  expense in the amount equal to the fair
value of shares committed to be released from the ESOP to employees.

The Company has several fixed stock option plans that allow the Company to grant
options to employees and directors for up to 794,000 shares of common stock. The
options,  which have a term of 10 years when issued,  vest either immediately or
over a three- to five-year period.  The exercise price of each option equals the
market price of the Company's stock on the date of grant.  The Company  accounts
for stock-based  compensation  in accordance with SFAS No. 123,  "Accounting for
Stock-Based  Compensation," which contains a fair value-based method for valuing
stock-based compensation that entities may use, which measures compensation cost
at the grant date based on the fair  value of the  award.  Compensation  is then
recognized  over the  service  period,  which is  usually  the  vesting  period.
Alternatively, the standard permits entities to continue accounting for employee
stock options and similar  instruments  under Accounting  Principles Board (APB)
Opinion  No. 25,  "Accounting  for Stock  Issued to  Employees."  Entities  that
continue to account for stock  options  using APB Opinion No. 25 are required to
make pro forma  disclosures of net income and earnings per share, as if the fair
value-based method of accounting  defined in SFAS No. 123 had been applied.  The
Company's  employee  stock option plans are  accounted  for using the  intrinsic
value method under APB Opinion No. 25. No  stock-based  compensation  expense is
reflected in net income,  as all options granted under the plans had an exercise
price equal to the market  value of the  underlying  common stock on the date of
the grant.

                                                                       Continued

                                                                              23
<PAGE>
TF FINANCIAL CORPORATION & SUBSIDIARIES
================================================================================

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

                           December 31, 2003 and 2002

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Had  compensation  cost for the plans been determined based on the fair value of
options  at the  grant  dates  consistent  with  the  method  of SFAS  No.  123,
"Accounting for Stock-Based Compensation," the Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below.

<TABLE>
<CAPTION>
                                                                       2003       2002       2001
                                                                   -----------------------------
<S>                                                              <C>         <C>       <C>
Net income (loss) (in thousands)
         As reported                                               $ (5,834)   $ 5,092   $ 5,733
         Deduct: stock-based compensation expense determined
         using the fair value method, net of related tax effects         53         58        64
                                                                   -----------------------------
         Pro forma                                                 $ (5,887)   $ 5,034   $ 5,669
                                                                   =============================
Basic earnings (loss) per share
         As reported                                               $  (2.30)   $  2.06   $  2.32
         Deduct: stock-based compensation expense determined
         using the fair value method, net of related tax effects       0.02       0.02      0.02
                                                                   -----------------------------
         Pro forma                                                 $  (2.32)   $  2.04   $  2.30
                                                                   =============================
Diluted earnings (loss) per share
         As reported                                               $  (2.30)   $  1.91   $  2.19
         Deduct: stock-based compensation expense determined
         using the fair value method, net of related tax effects       0.03       0.01      0.01
                                                                   -----------------------------
         Pro forma                                                 $  (2.33)   $  1.90   $  2.18
                                                                   =============================
Weighted average fair value of options granted during the year     $   9.50    $  6.60   $  5.49
</TABLE>

The fair value of each option  grant is estimated on the date of grant using the
Black-Scholes   option-pricing   model  with  the  following   weighted  average
assumptions  used for grants in 2003,  2002 and 2001,  respectively:  a dividend
yield of 2.09%,  2.78%,  and 3.23%;  expected  volatility  of 32%, 29%, and 30%;
risk-free  interest rate of 3.40%,  2.78%;  and 5.02%; and expected lives of six
years for all options.

9. Income Taxes

The Company  accounts for income taxes under the liability  method  specified in
SFAS No. 109,  "Accounting  for Income Taxes" whereby  deferred income taxes are
recognized  for the tax  consequences  of  "temporary  differences"  by applying
enacted  statutory tax rates  applicable to future years to differences  between
the financial  statement  carrying  amounts and the tax bases of existing assets
and  liabilities.  The  effect  on  deferred  taxes of a change  in tax rates is
recognized in income in the period that includes the enactment date.

10. Advertising Costs

The Company expenses advertising costs as incurred.

11. Earnings Per Share

The Company follows the provisions of SFAS No. 128,  "Earnings Per Share." Basic
earnings  per  share  excludes  dilution  and is  computed  by  dividing  income
available  to  common   shareholders  by  the  weighted  average  common  shares
outstanding during the period. Diluted earnings per share takes into account the
potential  dilution that could occur if  securities or other  contracts to issue
common stock were exercised and converted into common stock.

                                                                       Continued

24
<PAGE>
                                                              2003 ANNUAL REPORT
================================================================================

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

                           December 31, 2003 and 2002

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

12. Comprehensive Income

The Company follows SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes  standards to provide prominent  disclosure of comprehensive  income
items.  Comprehensive  income is the change in equity of a  business  enterprise
during a period  from  transactions  and other  events  and  circumstances  from
non-owner  sources.  The Company's  other  comprehensive  income consists of net
unrealized  gains  and  losses  on  investment  securities  available  for sale.
Comprehensive   income  (loss)  for  2003,  2002  and  2001  was   $(8,148,000),
$6,203,000, and $6,882,000,  respectively. The components of other comprehensive
income are as follows:

<TABLE>
<CAPTION>
                                                              December 31, 2003
                                                      -----------------------------------
                                                     Before tax  Tax (expense)  Net of tax
                                                       amount      benefit        amount
                                                      -----------------------------------
                                                               (in thousands)
<S>                                                 <C>           <C>           <C>
Unrealized losses on securities
  Unrealized holding (losses) arising during period   $(3,297)      $ 1,120       $(2,177)
Reclassification adjustment for gains realized
  in net income                                          (208)           71          (137)
                                                      -----------------------------------
Other comprehensive income (loss), net                $(3,505)      $ 1,191       $(2,314)
                                                      ===================================
</TABLE>

<TABLE>
<CAPTION>
                                                              December 31, 2002
                                                      -----------------------------------
                                                     Before tax  Tax (expense)  Net of tax
                                                       amount      benefit        amount
                                                      -----------------------------------
                                                               (in thousands)
<S>                                                 <C>           <C>           <C>
Unrealized gains on securities
  Unrealized holding gains arising during period      $ 2,872       $  (976)      $ 1,896
Reclassification adjustment for gains realized
  in net income                                        (1,190)          405          (785)
                                                      -----------------------------------
Other comprehensive income, net                       $ 1,682       $  (571)      $ 1,111
                                                      ===================================
</TABLE>

<TABLE>
<CAPTION>
                                                              December 31, 2001
                                                      -----------------------------------
                                                     Before tax  Tax (expense)  Net of tax
                                                       amount      benefit        amount
                                                      -----------------------------------
                                                               (in thousands)
<S>                                                 <C>           <C>           <C>
Unrealized gains on securities
  Unrealized holding gains arising during period      $ 1,615       $  (549)      $ 1,066
Reclassification adjustment for losses realized in
  net income                                              126           (43)           83
                                                      -----------------------------------
Other comprehensive income, net                       $ 1,741       $  (592)      $ 1,149
                                                      ===================================
</TABLE>
                                                                       Continued

                                                                              25
<PAGE>
TF FINANCIAL CORPORATION & SUBSIDIARIES
================================================================================

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

                           December 31, 2003 and 2002

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

13. Segment Reporting

The Company follows SFAS No. 131,  "Disclosures  about Segments of an Enterprise
and Related  Information." SFAS No. 131 established standards for the way public
business  enterprises  report  information  about  operating  segments in annual
financial  statements  and  requires  that  those  enterprises  report  selected
information  about operating  segments in subsequent  interim  financial reports
issued to  shareholders.  It also establishes  standards for related  disclosure
about  products  and  services,  geographic  areas,  and  major  customers.  The
statement  requires  that a public  business  enterprise  report  financial  and
descriptive  information  about its  reportable  operating  segments.  Operating
segments  are  components  of  an  enterprise  about  which  separate  financial
information  is  available  that is evaluated  regularly by the chief  operating
decision-maker in deciding how to allocate resources and assess performance. The
statement  also  requires  that public  enterprises  report a measure of segment
profit or loss,  certain  specific revenue and expense items and segment assets.
It also requires that  information be reported  about revenues  derived from the
enterprises'  products  or  services,  or  about  the  countries  in  which  the
enterprises  earn  revenues  and  holds  assets,   and  about  major  customers,
regardless of whether that information is used in making operating decisions.

The  Company  has  one  reportable  segment,  "Community  Banking."  All  of the
Company's  activities  are  interrelated,  and each  activity is  dependent  and
assessed based on how each of the activities of the Company supports the others.
For example,  commercial  lending is  dependent  upon the ability of the Bank to
fund itself with retail  deposits and other  borrowings  and to manage  interest
rate  and  credit  risk.  This  situation  is  also  similar  for  consumer  and
residential mortgage lending.  Accordingly,  all significant operating decisions
are based upon analysis of the Company as one operating segment or unit.

14.  Reclassifications

Certain  prior year  amounts  have been  reclassified  to conform to the current
period presentation.

NOTE B - CASH AND CASH  EQUIVALENTS

Cash and cash equivalents consist of the following:

                                                               December 31,
                                                            -------------------
                                                              2003        2002
                                                            -------------------
                                                               (in thousands)
Cash and due from banks                                     $7,888       $6,657
Interest-bearing deposits in other financial institutions      353       93,823
Federal funds sold                                              --          100
                                                            -------------------
                                                            $8,241     $100,580
                                                            ===================

26
<PAGE>
                                                              2003 ANNUAL REPORT
================================================================================

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

                           December 31, 2003 and 2002

NOTE C - INVESTMENT AND MORTGAGE-BACKED SECURITIES

The amortized cost,  gross  unrealized  gains and losses,  and fair value of the
Company's  investment  and  mortgage-backed  securities at December 31, 2003 and
2002, are summarized as follows:

<TABLE>
<CAPTION>
                                                           December 31, 2003
                                             -----------------------------------------------
                                                           Gross       Gross
                                              Amortized  unrealized  unrealized       Fair
                                                cost       gains       losses         value
                                             -----------------------------------------------
                                                             (in thousands)
<S>                                        <C>         <C>          <C>          <C>
Investment securities held to maturity
  State and political subdivisions           $   1,609   $     126    $      --    $   1,735
  U.S. Government and federal agencies           2,000          11           --        2,011
  Corporate debt securities                      6,780         289           --        7,069
                                             -----------------------------------------------
                                                10,389         426           --       10,815
Mortgage-backed securities held
  to maturity                                   23,630       1,195          (51)      24,774
                                             -----------------------------------------------
                                             $  34,019   $   1,621    $     (51)   $  35,589
                                             ===============================================
Investment securities available for sale
  U.S. Government and federal agencies       $   2,972        $ --    $     (25)   $   2,947
  Corporate debt securities                      1,000          --           (7)         993
  State and political subdivisions              10,677          34         (218)      10,493
                                             -----------------------------------------------
                                                14,649          34         (250)      14,433
Mortgage-backed securities
  available for sale                           107,192         541         (959)     106,774
                                             -----------------------------------------------
                                             $ 121,841   $     575    $  (1,209)   $ 121,207
                                             ===============================================

</TABLE>

<TABLE>
<CAPTION>
                                                           December 31, 2002
                                           -----------------------------------------------
                                                         Gross       Gross
                                            Amortized  unrealized  unrealized       Fair
                                              cost       gains       losses         value
                                           -----------------------------------------------
                                                           (in thousands)
<S>                                      <C>         <C>          <C>          <C>
Investment securities held to maturity
  State and political subdivisions         $   3,700   $     180         $ --    $   3,880
  U.S. Government and federal agencies         4,000         125           --        4,125
  Corporate debt securities                    6,863         319           --        7,182
                                           -----------------------------------------------
                                              14,563         624           --       15,187
Mortgage-backed securities held
  to maturity                                 54,592       2,754           --       57,346
                                           -----------------------------------------------
                                           $  69,155   $   3,378         $ --    $  72,533
                                           ===============================================
Investment securities available for sale
  U.S. Government and federal agencies     $  15,964   $     120         $---    $  16,084
  Corporate debt securities                   10,034         163           --       10,197
  State and political subdivisions               453          11           --          464
  Mutual funds                                   500          --           (2)         498
                                           -----------------------------------------------
                                              26,951         294           (2)      27,243
Mortgage-backed securities available
  for sale                                   112,663       2,634          (54)     115,243
                                           -----------------------------------------------
                                           $ 139,614   $   2,928    $     (56)   $ 142,486
                                           ===============================================
</TABLE>

                                                                     (Continued)

                                                                              27
<PAGE>
TF FINANCIAL CORPORATION & SUBSIDIARIES
================================================================================

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

                           December 31, 2003 and 2002

NOTE C - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued

Gross realized gains were $725,000,  $1,190,000,  and $7,000 for the years ended
December 31, 2003,  2002 and 2001,  respectively.  These gains resulted from the
sale of  investment  and  mortgage-backed  securities  of $22.6  million,  $37.2
million,  and  $507,000 for the years ended  December  31, 2003,  2002 and 2001,
respectively.

Gross  realized  losses  were  $517,000,  $0, and  $133,000  for the years ended
December 31, 2003, 2002 and 2001,  respectively.  These losses resulted from the
sale of investment and mortgage-backed  securities of $72.4 million, $0 million,
and $4.4  million  for the  years  ended  December  31,  2003,  2002  and  2001,
respectively.

The amortized cost and fair value of investment and mortgage-backed  securities,
by contractual maturity, are shown below.

<TABLE>
<CAPTION>
                                                     December 31, 2003
                                         ------------------------------------------
                                         Available for sale     Held to maturity
                                         ------------------------------------------
                                         Amortized     Fair    Amortized     Fair
                                            cost       value     cost        value
                                         ------------------------------------------
                                                  (in thousands)
<S>                                     <C>        <C>        <C>        <C>
Investment securities
  Due in one year or less                 $     --   $     --   $  1,004   $  1,017
  Due after one year through five years      3,971      3,939      9,170      9,576
  Due after five years through 10 years        611        613         --         --
  Due after 10 years                        10,067      9,881        215        222
                                          -----------------------------------------
                                            14,649     14,433     10,389     10,815
Mortgage-backed securities                 107,192    106,774     23,630     24,774
                                          -----------------------------------------
                                          $121,841   $121,207   $ 34,019   $ 35,589
                                          =========================================
</TABLE>

The amortized cost,  gross  unrealized  gains and losses,  and estimated  market
value of mortgage-backed securities, by issuer, are summarized as follows:

<TABLE>
<CAPTION>
                                                               December 31, 2003
                                               -----------------------------------------------
                                                             Gross       Gross
                                                Amortized  unrealized  unrealized       Fair
                                                  cost       gains       losses         value
                                               -----------------------------------------------
                                                                 (in thousands)
<S>                                            <C>         <C>          <C>          <C>
Mortgage-backed securities held to maturity
  FHLMC certificates                            $   8,407   $     544    $      --    $   8,951
  FNMA certificates                                 7,205         211          (50)       7,366
  GNMA certificates                                 8,007         440           --        8,447
  Real estate mortgage investment conduit              11          --           (1)          10
  Other mortgage-backed securities                     --          --           --           --
                                                -----------------------------------------------
                                                $  23,630   $   1,195    $     (51)   $  24,774
                                                ===============================================
Mortgage-backed securities available for sale
  FHLMC certificates                            $   8,523   $      23    $     (21)   $   8,525
  FNMA certificates                                18,522          14         (151)      18,385
  GNMA certificates                                    --          --           --           --
  Real estate mortgage investment conduit          80,147         504         (787)      79,864
                                                -----------------------------------------------
                                                $ 107,192   $     541    $    (959)   $ 106,774
                                                ===============================================
</TABLE>

                                                                     (Continued)

28
<PAGE>
                                                              2003 ANNUAL REPORT
================================================================================

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

                           December 31, 2003 and 2002

NOTE C - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued

<TABLE>
<CAPTION>
                                                               December 31, 2002
                                                -----------------------------------------------
                                                             Gross       Gross
                                                Amortized  unrealized  unrealized       Fair
                                                  cost       gains       losses         value
                                                -----------------------------------------------
                                                                 (in thousands)
<S>                                            <C>         <C>          <C>          <C>
Mortgage-backed securities held to maturity
  FHLMC certificates                            $  21,870   $   1,399    $      --    $  23,269
  FNMA certificates                                11,781         480           --       12,261
  GNMA certificates                                18,278         852           --       19,130
  Real estate mortgage investment conduit           2,519          23           --        2,542
  Other mortgage-backed securities                    144          --           --          144
                                                -----------------------------------------------
                                                $  54,592   $   2,754    $      --    $  57,346
                                                ===============================================
Mortgage-backed securities available for sale
  FHLMC certificates                            $     663   $      36    $      --    $     699
  FNMA certificates                                11,385         493           --       11,878
  GNMA certificates                                    --          --           --           --
  Real estate mortgage investment conduit         100,615       2,105          (54)     102,666
                                                -----------------------------------------------
                                                $ 112,663   $   2,634    $     (54)   $ 115,243
                                                ===============================================
</TABLE>

Investment  securities having an aggregate  amortized cost of approximately $3.0
and $5.0 million were pledged to secure public deposits at December 31, 2003 and
2002, respectively.

There were no  securities  held other than U.S.  Government  and agencies from a
single issuer that represented more than 10% of stockholders' equity.

The table  below  indicates  the  length  of time  individual  securities,  both
held-to-maturity and  available-for-sale,  have been in a continuous  unrealized
loss position at December 31, 2003:

<TABLE>
<CAPTION>
                                           Less than 12 months      12 months or longer            Total
----------------------------------------------------------------------------------------------------------------
Description of             Number of       Fair     Unrealized      Fair     Unrealized      Fair     Unrealized
Securities                 securities      value       loss         value       loss         value        loss
----------------------------------------------------------------------------------------------------------------
                                                                    (in thousands)
<S>                         <C>       <C>         <C>         <C>         <C>           <C>         <C>
Agency                        1         $  2,947     $    (25)   $     --    $     --      $  2,947    $    (25)
Corporate                     1              993           (7)         --          --           993          (7)
Municipals                    9            7,582         (218)         --          --         7,582        (218)
MBS                          21           59,778       (1,004)         56          (6)       59,834      (1,010)
----------------------------------------------------------------------------------------------------------------
Total temporarily
impaired investments         32         $ 71,300     $ (1,254)   $     56    $     (6)     $ 71,356    $ (1,260)
================================================================================================================
</TABLE>

Management  has  concluded  that the  unrealized  losses above are  temporary in
nature since they are  primarily  related to market  interest  rates and are not
related to the  underlying  credit  quality of the  issuers.  Additionally,  the
Company  has the intent  and  ability  to hold  these  investments  for the time
necessary to recover the amortized cost.

                                                                              29

<PAGE>
TF FINANCIAL CORPORATION & SUBSIDIARIES
================================================================================

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

                           December 31, 2003 and 2002

NOTE D - LOANS RECEIVABLE

Loans receivable are summarized as follows:

                                                              December 31,
                                                       ----------------------
                                                            2003         2002
                                                       ----------------------
                                                            (in thousands)

First mortgage loans (principally conventional)
  Secured by one-to-four family residences             $ 276,849    $ 227,953
  Secured by other non-residential properties             74,109       85,493
  Construction loans                                       6,591       12,026
                                                       ----------------------
                                                         357,549      325,472
Net deferred loan origination cost (fees) and
  unamortized premiums                                       903          377
                                                       ----------------------
         Total first mortgage loans                      358,452      325,849
                                                       ----------------------
Consumer and other loans
  Commercial                                              15,185        8,005
  Home equity and second mortgage                         25,199       25,480
  Leases                                                   1,371        2,246
  Other                                                    6,532       10,490
                                                       ----------------------
                                                          48,287       46,221
Unamortized premiums                                          21           69
                                                       ----------------------
         Total consumer and other loans                   48,308       46,290
                                                       ----------------------
  Less allowance for loan losses                          (2,111)      (2,047)
                                                       ----------------------
         Total loans receivable                        $ 404,649    $ 370,092
                                                       ======================


Activity in the allowance for loan losses is summarized as follows:

                                                   December 31,
                                    ---------------------------------------
                                       2003            2002            2001
                                    ---------------------------------------
                                                  (in thousands)

Balance at beginning of year        $ 2,047         $ 1,972         $ 1,714
Provision charged to income             330             988             500
Charge-offs, net                       (266)           (913)           (242)
                                    ---------------------------------------
Balance at end of year              $ 2,111         $ 2,047         $ 1,972
                                    =======================================

Non-performing  loans, which include  non-accrual loans for which the accrual of
interest has been  discontinued and loan balances past due over 90 days that are
not on a non-accrual  status but that management expects will eventually be paid
in full,  totaled  approximately  $2.3  million and $3.8 million at December 31,
2003 and 2002, respectively. Interest income that would have been recorded under
the original terms of such loans totaled approximately  $171,000,  $307,000, and
$284,000 for the years ended December 31, 2003, 2002 and 2001, respectively.  No
interest income has been recognized on non-accrual  loans for any of the periods
presented.

The  Bank  has no  concentration  of  loans  to  borrowers  engaged  in  similar
activities  that  exceeded  10% of loans at December  31, 2003 and 2002.  In the
ordinary  course of business,  the Bank has granted  loans to certain  executive
officers, directors and their related interests. Related party loans are made on
substantially  the same  terms as those  prevailing  at the time for  comparable
transactions with unrelated persons and do not involve more than the normal risk
of collectibility.  The aggregate dollar amount of these loans was approximately
$1,291,000,  and $987,000 at December 31, 2003 and 2002,  respectively.  For the
year ended December 31, 2003, principal repayments of approximately $37,000 were
received and $24,000 was  disbursed to  executive  officers,  directors or their
related interests.

30
<PAGE>
                                                              2003 ANNUAL REPORT
================================================================================

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

                           December 31, 2003 and 2002

NOTE E - LOAN SERVICING

Mortgage  loans  serviced  for  others  are  not  included  in the  accompanying
consolidated  statements of financial position. The unpaid principal balances of
these loans are summarized as follows:

                                                         December 31,
                                                      -------------------
                                                        2003         2002
                                                      -------------------
                                                        (in thousands)
Mortgage loan servicing portfolios
  FHLMC                                               $2,018       $3,758
  Other investors                                      5,367        8,203
                                                      -------------------
                                                      $7,385      $11,961
                                                      ===================

Custodial  balances  maintained in connection  with the foregoing loan servicing
totaled  approximately  $80,000,  and  $149,000 at  December  31, 2003 and 2002,
respectively. The net servicing revenue on mortgage loans serviced for others is
immaterial for all periods presented.

NOTE F - PREMISES  AND  EQUIPMENT

Premises and equipment are summarized as follows:

                                                        December 31,
                                    Estimated       -----------------------
                                    useful lives        2003          2002
                                    ---------------------------------------
                                                         (in thousands)
Buildings                            30 years          $6,046       $ 6,483
Leasehold improvements                5 years           1,266         1,264
Furniture, fixtures and equipment   3-7 years           8,932         8,390
                                                      ---------------------
                                                       16,244        16,137
Less accumulated depreciation                          11,668        11,238
                                                      ---------------------
                                                        4,576         4,899
Land                                                    1,692         1,843
                                                      ---------------------
                                                      $ 6,268       $ 6,742
                                                      =====================

                                                                              31
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

                           December 31, 2003 and 2002

NOTE G - GOODWILL AND CORE DEPOSIT INTANGIBLE ASSET

A  reconciliation  of net income  and  earnings  per share to amounts  excluding
goodwill amortization is as follows:

<TABLE>
<CAPTION>
                                                                    2003         2002        2001
                                                                ----------------------------------
                                                              (in thousands except per share amounts)
<S>                                                           <C>          <C>         <C>
  Reported net income (loss)                                    $  (5,834)   $   5,092   $   5,733
  Add back: goodwill amortization, net of related tax benefit          --           --         293
                                                                ----------------------------------
  Adjusted net income (loss)                                    $  (5,834)   $   5,092   $   6,026
                                                                ==================================
Basic earnings (loss) per share
  Reported net income (loss)                                    $   (2.30)   $    2.06   $    2.32
  Add back: goodwill amortization, net of related tax benefit          --           --        0.12
                                                                ----------------------------------
  Adjusted net income (loss)                                    $   (2.30)   $    2.06   $    2.44
                                                                ==================================
Diluted earnings (loss) per share
  Reported net income (loss)                                    $   (2.30)   $    1.91   $    2.19
  Add back: goodwill amortization, net of related tax benefit          --           --        0.11
                                                                ----------------------------------
  Adjusted net income (loss)                                    $   (2.30)   $    1.91   $    2.30
                                                                ==================================
</TABLE>

Core deposit  intangible  amortization for each of the three years subsequent to
December 31, 2003 is estimated to be as follows:

                            Year ending December 31,
                            -------------------------
                                 (in thousands)
                            2004                 $155
                            2005                  129
                            2006                   84
                            -------------------------
                                                 $368
                            =========================

NOTE H - DEPOSITS

Deposits are summarized as follows:

                                                              December 31,
                                                         -------------------
                                                             2003       2002
                                                         -------------------
                                                             (in thousands)
Deposit type
Demand                                                   $ 26,375   $ 20,810
NOW                                                        52,647     48,496
Money Market                                               44,688     43,677
Passbook savings                                          188,673    182,813
                                                         -------------------
Total demand, transaction and passbook deposits           312,383    295,796
Certificates of deposit                                   146,960    146,762
                                                         -------------------
                                                         $459,343   $442,558
                                                         ===================

                                                                       Continued

32

<PAGE>
                                                              2003 ANNUAL REPORT
================================================================================

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

                           December 31, 2003 and 2002

NOTE H - DEPOSITS - Continued

The aggregate  amount of certificates of deposit with a minimum  denomination of
$100,000 was approximately  $22.2 million and $19.7 million at December 31, 2003
and 2002, respectively.

At December 31, 2003,  scheduled  maturities of  certificates  of deposit are as
follows:

                            Year ending December 31,
-------------------------------------------------------------------------------
  2004        2005       2006       2007       2008     Thereafter      Total
-------------------------------------------------------------------------------
                                       (in  thousands)

$100,450     $29,827     $4,270     $6,131     $5,950     $    332     $146,960
===============================================================================


NOTE I - ADVANCES FROM THE FEDERAL HOME LOAN BANK AND OTHER BORROWINGS

Advances from the Federal Home Loan Bank consist of the following:

                                                  December 31,
                          ------------------------------------------------------
                                    2003                               2002
                          --------------------------------------------------
                                     Weighted                     Weighted
                           Amount   average rate      Amount    average rate
                          --------------------------------------------------
                                                 (in thousands)
Principal payments
due during
2003                     $     --         --%        $ 27,000         5.70%
2004                       22,268       2.38           52,000         5.23
2005                       12,787       3.23            5,000         6.58
2006                       13,206       3.23           25,000         5.44
2007                       13,639       3.23               --           --
Thereafter                 24,953       3.23           98,359         5.46
                          ------------------------------------------------
                          $86,853       3.01%        $207,359         5.46%
                          ================================================

The  advances  are  collateralized  by Federal  Home Loan Bank stock and certain
first mortgage loans and mortgage-backed  securities.  Unused lines of credit at
the Federal Home Loan Bank were $20 million at December 31, 2003.

NOTE J - BENEFIT PLANS

The  Bank  maintains  a  401(k)  profit-sharing  plan  for  eligible  employees.
Participants may contribute up to 15% of pre-tax eligible compensation. The Bank
makes matching  discretionary  contributions  equal to 75% of the initial $1,000
deferral. Contributions to the 401(k) plan totaled $58,000, $52,000, and $48,000
in 2003, 2002 and 2001, respectively.

The  Bank  has  a   non-contributory   defined  benefit  pension  plan  covering
substantially all full-time employees meeting certain eligibility  requirements.
The  benefits  are based on each  employee's  years of  service  and an  average
earnings formula. An employee becomes fully vested upon completion of five years
of qualifying  service.  It is the policy of the Bank to fund the maximum amount
allowable  under the individual  aggregate cost method to the extent  deductible
under existing federal income tax regulations.

                                                                       Continued

                                                                              33
<PAGE>
TF FINANCIAL CORPORATION & SUBSIDIARIES
================================================================================

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

                           December 31, 2003 and 2002

NOTE J - BENEFIT PLANS - Continued

The following tables sets forth the projected benefit obligation,  funded status
of  the  defined  benefit  pension  plan  and  the  amounts   reflected  in  the
consolidated  statements of financial position,  and fair value of assets of the
plan.

                                                       December 31,
                                                   ------------------
                                                      2003       2002
                                                   ------------------
                                                      (in thousands)

Reconciliation of Projected Benefit Obligation
  Benefit obligation at beginning of year          $ 2,612    $ 1,991
  Service cost                                         191        172
  Interest cost                                        185        163
  Plan amendments                                       --         42
  Actuarial (gain) loss                                388        405
  Benefits paid                                       (348)      (161)
                                                   ------------------
  Benefits obligation at end of year               $ 3,028    $ 2,612
                                                   ==================
Reconciliation of Fair Value of Assets
  Fair value of plan assets at beginning of year   $ 2,726    $ 2,323
  Actual return on plan assets                         390        114
  Employer contribution                                 --        450
  Benefits paid                                       (348)      (161)
                                                   ------------------
  Fair value of plan assets at end of year         $ 2,768    $ 2,726
                                                   ==================
Reconciliation of Funded Status
  Funded status                                    $  (260)   $   114
  Unrecognized transition obligation                     4          9
  Unrecognized net actuarial loss (gain)               527        325
  Unrecognized prior service cost                      281        344
                                                   ------------------
  Prepaid (accrued) benefit cost at end of year    $   552    $   792
                                                   ==================

The accumulated  benefit obligation at December 31, 2003 and 2002 was $2,511,000
and $2,155,000  respectively.

Employer  contributions  and benefits paid in the above table include only those
amounts  contributed  directly  to, or paid  directly  from,  plan  assets.  The
expected employer contribution for 2004 is $0.

                                                     2003          2002
                                                     ------------------
Weighted-average assumptions used to
  determine benefit obligations, end of year
Discount rate                                        6.25%         6.75%
Rate of compensation increase                        4.00          4.00
Expected long-term return of plan assets             8.00          8.00

                                                                       Continued

34
<PAGE>
                                                              2003 ANNUAL REPORT
================================================================================

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

                           December 31, 2003 and 2002

NOTE J - BENEFIT PLANS - Continued

<TABLE>
<CAPTION>

                                                            2003      2002      2001
                                                           -------------------------
<S>                                                      <C>       <C>       <C>
Components of net periodic benefit cost
  Service cost                                             $ 191     $ 172     $ 114
  Interest cost                                              185       163       194
  Expected return on plan assets                            (217)     (185)     (231)
  Amortization of prior service cost                          63        63        58
  Amortization of transition obligation (asset)                4         4        --
  Recognized net actuarial (gain) loss                        13        --        --
                                                           -------------------------
  Net periodic benefit cost                                $ 239     $ 217     $ 135
                                                           =========================
</TABLE>

<TABLE>
<CAPTION>
                                                            2003      2002      2001
                                                           -------------------------
<S>                                                       <C>       <C>       <C>
Weighted-average assumptions used to determine net costs
  as of December 31
  Discount rate                                             6.25%     6.75%     7.00%
  Expected return on plan assets                            8.00      8.00      8.00
  Rate of compensation increase                             4.00      4.00      4.00
</TABLE>

The  long-term  rate of return on  assets  was  developed  through  analysis  of
historical  market  returns,  current  market  conditions  and the  fund's  past
experience.  Estimates of future market returns by asset category are lower than
actual  long-term   historical  returns  in  order  to  reflect  current  market
conditions.

Estimated future benefits payments are as follows:

                                           (in thousands)
                                    --------------------------------
                                    2004                     $  300
                                    2005                        309
                                    2006                        335
                                    2007                        186
                                    2008                        215
                                    2009-2013                 1,255


                                                                       Continued

                                                                              35
<PAGE>
TF FINANCIAL CORPORATION & SUBSIDIARIES
================================================================================

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

                           December 31, 2003 and 2002

NOTE J - BENEFIT PLANS - Continued

The asset  allocation  for the Bank's pension plans at the end of 2003 and 2002,
and the target allocation for 2004, by asset category,  follows.  The fair value
of plan  assets for these plans is $2.8  million and $2.8  million at the end of
2003 and 2002 respectively.


                                    Percentage of plan assets at year end
                                    -------------------------------------
                                     2004            2003            2002
Asset Category
  Equity securities                   40%             41%             31%
  Fixed income securities             30%             14%             20%
  Cash                                30%             45%             49%
                                    -------------------------------------
  Total                              100%            100%            100%
                                    =====================================

The Bank's  pension  plan assets are managed by the  Trustees of the  Retirement
Plan of the Bank.  Assets are rebalanced at the end of each quarter.  The Bank's
investment  strategy with respect to pension assets is to maximize  return while
protecting  principal.  The Trustees  have the  flexibility  to adjust the asset
allocation  and move funds to the asset class that  offers the most  opportunity
for investment returns.

The Company also maintains the following benefit plans:

1. Employee Stock Ownership Plan

The Company established an internally  leveraged ESOP for eligible employees who
have completed six months of service with the Company or its  subsidiaries.  The
ESOP  borrowed  $4.2 million from the Company to purchase  423,200  newly issued
shares of common stock.  The Company makes  discretionary  contributions  to the
ESOP in order to service the ESOP's  debt.  Any  dividends  received by the ESOP
will be used to pay debt  service.  The ESOP shares  initially  were  pledged as
collateral  for its  debt.  As the debt is  repaid,  shares  are  released  from
collateral and allocated to qualifying employees based on the proportion of debt
service paid in the year. The Company  accounts for its ESOP in accordance  with
SOP  93-6.  As  shares  are  released  from  collateral,   the  Company  reports
compensation  expense equal to the current  market price of the shares,  and the
allocated  shares are  included in  outstanding  shares for  earnings  per share
computations.  ESOP compensation expense was $523,000, $197,000, and $162,000 in
2003, 2002 and 2001, respectively.


                                                     2003             2002
                                                  ---------------------------
Allocated shares                                     144,600          133,200
Unreleased shares                                    218,400          240,100
                                                  ---------------------------
         Total ESOP shares                           363,000          373,300
                                                  ---------------------------
Fair value of unreleased shares                   $7,472,100       $5,933,900
                                                  ===========================

                                                                       Continued

36
<PAGE>
                                                              2003 ANNUAL REPORT
================================================================================

NOTES TO  CONSOLIDATED  FINANCIAL  STATEMENTS - Continued

                           December 31, 2003 and 2002

NOTE J - BENEFIT PLANS - Continued

2. Stock Option Plans

A summary of the status of the Company's fixed stock option plans as of December
31, 2003, and changes for each of the years in the three-year  period then ended
is as follows:

<TABLE>
<CAPTION>
                                           2003                        2002                       2001
                                    -----------------------------------------------------------------------------
                                                 Weighted                   Weighted                   Weighted
                                                 average                    average                    average
                                     Number      exercise       Number      exercise       Number      exercise
                                        of       price per         of       price per        of        price per
                                     shares        share        shares        share        shares        share
                                    -----------------------------------------------------------------------------
<S>                                <C>           <C>          <C>           <C>          <C>           <C>
Outstanding at beginning of year     658,973       $14.11       652,443       $13.52       659,759       $13.23
Options granted                       40,248        32.42        32,150        24.77        24,275        20.30
Options exercised                    (92,902)       12.34       (21,338)       11.66       (23,276)       11.81
Options forfeited                    (20,605)       21.09        (4,282)       15.93        (8,315)       15.03
                                     -------                    -------                    -------
Outstanding at end of year           585,714       $15.40       658,973       $14.11       652,443       $13.52
                                     =======                    =======                    =======
</TABLE>

The following table summarizes  information  about stock options  outstanding at
December 31, 2003:

<TABLE>
<CAPTION>
                           Options outstanding                         Options exercisable
----------------------------------------------------------------------------------------------------
                                       Weighted
                     Number            average          Weighted          Number           Weighted
                     outstanding at    remaining        average           exercisable at   average
Range of exercise    December 31,      contractual      exercise          December 31,     exercise
prices               2003              life (years)      price               2003           price
----------------------------------------------------------------------------------------------------
<S>                <C>               <C>              <C>                <C>             <C>
$10.83 - 14.30       313,508           1.16 years       $11.64             304,908         $11.59
$14.31 - 18.00       180,957           3.11 years        15.98             176,761          16.01
$18.01 - 34.14        91,249           8.53 years        27.17              23,296          22.75
</TABLE>


NOTE K - INCOME TAXES

The components of income tax expense are summarized as follows:

<TABLE>
<CAPTION>
                                                                    Year ended December 31,
                                                                -----------------------------
                                                                   2003       2002       2001
                                                                -----------------------------
                                                                         (in thousands)
<S>                                                           <C>        <C>        <C>
Federal
  Current                                                       $(4,364)   $ 1,623    $ 2,257
  Charge in lieu of income tax relating to stock compensation       379         --          3
  Deferred                                                          596        (19)      (172)
                                                                -----------------------------
                                                                 (3,389)     1,604      2,088
State and local - current                                             5          1        (18)
                                                                -----------------------------
Income tax provision (benefit)                                  $(3,384)   $ 1,605    $ 2,070
                                                                =============================
</TABLE>

                                                                       Continued

                                                                              37

<PAGE>
TF FINANCIAL CORPORATION & SUBSIDIARIES
================================================================================

NOTES TO  CONSOLIDATED  FINANCIAL  STATEMENTS - Continued

                           December 31, 2003 and 2002

NOTE K - INCOME TAXES - Continued

The Company's effective income tax rate was different than the statutory federal
income tax rate as follows:

                                              Year ended December 31,
                                         ----------------------------------
                                         2003          2002           2001
                                         ----------------------------------
                                                  (in thousands)
Statutory federal income tax (benefit)  (34.0)%         34.0%          34.0%
Increase (decrease) resulting from
  Tax-exempt income                      (2.6)          (8.3)          (5.3)
  State tax, net of federal benefit      (0.0)           0.0            0.0
  Other                                  (0.1)          (1.7)          (2.2)
                                        -----------------------------------
                                        (36.7)%         24.0%          26.5%
                                        ===================================

Deferred  taxes are  included in the  accompanying  consolidated  statements  of
financial  position at December 31, 2003 and 2002, for the estimated  future tax
effects of  differences  between the financial  statement and federal income tax
bases of assets and liabilities according to the provisions of currently enacted
tax laws.  No valuation  allowance was recorded  against  deferred tax assets at
December 31, 2003 and 2002. The Company's net deferred tax asset  (liability) at
December 31, 2003 and 2002, was composed of the following:

                                                        December 31,
                                                       ----------------
                                                        2003      2002
                                                       ----------------
                                                        (in thousands)

Deferred tax assets
  Deferred loan origination fees                      $   --    $   12
  Deferred compensation                                  230       330
  Allowance for loan losses, net                         650       746
  Amortization                                            70       221
  Unrealized loss on securities AFS                      215        --
  Other                                                    3        --
                                                      ----------------
                                                       1,168     1,309
Deferred tax liabilities
  Accrued pension expense                                492       492
  Unrealized gain on securities available for sale        --       976
  Other                                                  272        32
                                                      ----------------
                                                         764     1,500
                                                      ----------------
  Deferred tax (liability) asset                      $  404    $ (191)
                                                      ================

The  Company  files its  income  tax  returns  on the basis of a fiscal tax year
ending June 30.

The Bank is required, beginning in 1998, to recapture approximately $2.4 million
of its total tax bad debt  reserve of  approximately  $8.1  million into taxable
income over a six-year  period.  Deferred tax  liabilities  have been accrued in
respect of the amount of the reserve to be recaptured.

The Bank is not required to recapture  approximately $5.7 million of its tax bad
debt reserve,  attributable to bad debt deductions taken by it prior to 1988, as
long as the Bank  continues to operate as a bank under  federal tax law and does
not use the reserve for any other purpose.  In accordance with SFAS No. 109, the
Bank has not recorded any deferred tax  liability on this portion of its tax bad
debt reserve.  The tax that would be paid were the Bank  ultimately  required to
recapture  that  portion  of the  reserve  would  amount to  approximately  $1.9
million.

38

<PAGE>
                                                              2003 ANNUAL REPORT
================================================================================

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

                           December 31, 2003 and 2002

NOTE L - REGULATORY MATTERS

The Bank is subject to minimum regulatory  capital standards  promulgated by the
Office of Thrift Supervision (OTS). Failure to meet minimum capital requirements
can initiate certain mandatory - and possible additional discretionary - actions
by regulators  that, if undertaken,  could have a direct  material effect on the
Company's consolidated  financial statements.  Under capital adequacy guidelines
and the regulatory  framework for prompt corrective  action,  the Bank must meet
specific  capital  guidelines that involve  quantitative  measures of the Bank's
assets,  liabilities,  and certain  off-balance  sheet items as calculated under
regulatory   accounting   practices.   The   Company's   capital   amounts   and
classification are also subject to qualitative judgments by the regulators about
components,  risk weightings,  and other factors. Such minimum capital standards
generally require the maintenance of regulatory  capital sufficient to meet each
of three tests,  hereinafter described as the tangible capital requirement,  the
core capital  requirement and the risk-based capital  requirement.  The tangible
capital   requirement   provides  for  minimum   tangible  capital  (defined  as
stockholders' equity less all intangible assets) equal to 1.5% of adjusted total
assets. The core capital requirement provides for minimum core capital (tangible
capital  plus  certain  forms  of  supervisory  goodwill  and  other  qualifying
intangible assets) equal to 4% of adjusted total assets at December 31, 2003.

As of  December  31,  2003,  management  believes  that the Bank met all capital
adequacy requirements to which it was subject.

<TABLE>
<CAPTION>
                                                                     Regulatory capital
                                                                     December 31, 2003
                                         ---------------------------------------------------------------------
                                                Tangible                 Core                Risk-based
                                          Capital      Percent    Capital     Percent     Capital      Percent
                                         ---------------------------------------------------------------------
<S>                                    <C>            <C>      <C>            <C>      <C>            <C>
Capital under generally
  accepted accounting principles         $ 48,241       8.00%    $ 48,241       8.00%    $ 48,241       15.15%
Unrealized gain on certain
  available-for-sale securities               418       0.07          418       0.07          418        0.13
Goodwill and other intangible assets       (4,692)     (0.78)      (4,692)     (0.78)      (4,692)      (1.47)
Additional capital items
General valuation allowances - limited         --         --           --         --        2,111        0.66
                                         ---------------------------------------------------------------------
Regulatory capital computed                43,967       7.29       43,967       7.29       46,078       14.47
Minimum capital requirement                 9,047       1.50       24,127       4.00       25,483        8.00
                                         ---------------------------------------------------------------------
Regulatory capital - excess              $ 34,920       5.79%    $ 19,840       3.29%    $ 20,595        6.47%
                                         ====================================================================
</TABLE>

<TABLE>
<CAPTION>
                                                                     Regulatory capital
                                                                     December 31, 2002
                                         ---------------------------------------------------------------------
                                                Tangible                 Core                Risk-based
                                          Capital      Percent    Capital     Percent     Capital      Percent
                                         ---------------------------------------------------------------------
<S>                                    <C>            <C>      <C>            <C>      <C>            <C>
Capital under generally
  accepted accounting principles         $ 55,712       7.80% $ 55,712       7.80% $ 55,712       16.66%
Unrealized loss on certain
  available-for-sale securities            (1,896)     (0.27)   (1,896)     (0.27)   (1,896)      (0.57)
Goodwill and other intangible assets       (4,877)     (0.68)   (4,877)     (0.68)   (4,877)      (1.46)
Additional capital items
  General valuation allowances - limited       --         --        --         --     2,047        0.62
                                         ---------------------------------------------------------------------
Regulatory capital computed                48,939       6.85    48,939       6.85    50,986       15.25
Minimum capital requirement                10,712       1.50    28,565       4.00    26,746        8.00
                                         ---------------------------------------------------------------------
Regulatory capital - excess              $ 38,227       5.35% $ 20,374       2.85% $ 24,240        7.25%
                                         ====================================================================
</TABLE>

                                                                       Continued

                                                                              39
<PAGE>
TF FINANCIAL CORPORATION & SUBSIDIARIES
================================================================================

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

                           December 31, 2003 and 2002

NOTE L - REGULATORY MATTERS - Continued

At  December  31,  2003,   the  Bank  met  all   regulatory   requirements   for
classification  as  a  "well-capitalized"   institution.   A  "well-capitalized"
institution  must have  risk-based  capital  of 10% and core  capital of 5%. The
Bank's capital  exceeded the minimum required  amounts for  classification  as a
"well-capitalized"  institution.  There are no  conditions  or events  that have
occurred that management  believes have changed the Bank's  classification  as a
"well-capitalized" institution.

The Bank  maintains a  liquidation  account for the benefit of eligible  savings
account  holders  who  maintained  deposit  accounts  in the Bank after the Bank
converted to a stock form of  ownership.  The Bank may not declare or pay a cash
dividend on or repurchase  any of its common shares if the effect  thereof would
cause the  Bank's  stockholders'  equity to be reduced  below  either the amount
required for the liquidation account or the regulatory capital  requirements for
insured institutions.

NOTE M - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

The Company is a party to financial instruments with  off-balance-sheet  risk in
the normal  course of business  to meet the  financing  needs of its  customers.
These  financial  instruments  are  primarily  commitments  to extend credit and
standby  letters of credit.  Such  financial  instruments  are  recorded  in the
consolidated  financial statements when they become receivable or payable. Those
instruments  involve,  to varying degrees,  elements of credit and interest rate
risk in  excess of the  amount  recognized  in the  consolidated  statements  of
financial  position.  The  contract  or  notional  amounts of those  instruments
reflect the extent of the Bank's  involvement in particular classes of financial
instruments.

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

Unless noted  otherwise,  the Company requires  collateral to support  financial
instruments with credit risk.

Financial instruments,  the contract amounts of which represent credit risk, are
as follows:

                                                       December 31,
                                            ----------------------------------
                                               2003                       2002
                                            ----------------------------------
                                                      (in thousands)
Commitments to extend credit                $74,716                    $35,983
Standby letters of credit                     1,276                      1,548
Loans sold with recourse                        113                        163
                                            ----------------------------------
                                            $76,105                    $37,694
                                            ==================================

Commitments  to extend  credit are  agreements  to lend to a customer as long as
there is no violation of any condition established in the contract.  Commitments
generally  have fixed  expiration  dates or other  termination  clauses  and may
require payment of a fee. The Company evaluates each customer's creditworthiness
on a  case-by-case  basis.  The amount of collateral  obtained,  if it is deemed
necessary by the Company  upon  extension  of credit,  is based on  management's
credit   evaluation  of  the  borrower.   Collateral  held  generally   includes
residential and some commercial property.

Standby  letters of credit  are  conditional  commitments  issued by the Bank to
guarantee  the  performance  of a customer  to a third  party.  The credit  risk
involved in issuing  letters of credit is essentially  the same as that involved
in extending loan facilities to customers. Typically, the Bank issues letters of
credit to other financial institutions and generally does not require collateral
for standby letters of credit.

40

<PAGE>
                                                              2003 ANNUAL REPORT
================================================================================

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

                           December 31, 2003 and 2002

NOTE N - COMMITMENTS AND CONTINGENCIES

The Bank had no  commitments to sell mortgage loans to investors at December 31,
2003 and 2002.

The Bank leases  branch  facilities  and office space for periods  ranging up to
seven years. These leases are classified as operating leases and contain options
to renew for  additional  periods.  Rental expense was  approximately  $304,000,
$279,000,  and $316,000,  for the years ended December 31, 2003,  2002 and 2001,
respectively.

The  minimum  annual  rental  commitments  of the Bank under all  non-cancelable
leases with terms of one year or more are as follows:

                           Year ending December 31,
                           -------------------------
                           2004            $214,902
                           2005             143,817
                           2006             112,143
                           2007             113,645
                           2008              58,725
                           Thereafter            --
                           -------------------------
                                           $643,232
                           =========================

The Company has agreements  with certain key executives  that provide  severance
pay benefits if there is a change in control of the Company. The agreements will
continue  in effect  until  terminated  or not  renewed  by the  Company  or key
executives.  Upon a change in control, the Company shall make a lump-sum payment
or  continue  to pay the  key  executives'  salaries  per  the  agreements,  and
reimburse  the  executive  for  certain  benefits  for  one  year.  The  maximum
contingent liability under the agreements at December 31, 2003 was approximately
$994,900.

From  time-to-time,  the  Company  and its  subsidiaries  are parties to routine
litigation  that  arises in the normal  course of  business.  In the  opinion of
management,  the resolution of these lawsuits would not have a material  adverse
effect  on  the  Company's   consolidated   financial  position  or  results  of
operations.

NOTE O - SIGNIFICANT CONCENTRATIONS OF CREDIT RISK

The Bank is  principally  engaged in  originating  and investing in  one-to-four
family residential and commercial real estate loans in eastern  Pennsylvania and
New Jersey. The Bank offers both fixed and adjustable rates of interest on these
loans that have amortization  terms ranging to 30 years. The loans are generally
originated or purchased on the basis of an 80%  loan-to-value  ratio,  which has
historically  provided the Bank with more than adequate  collateral  coverage in
the event of default.  Nevertheless,  the Bank, as with any lending institution,
is  subject  to the risk that  residential  real  estate  values in the  primary
lending areas will deteriorate,  thereby potentially impairing collateral values
in the primary lending areas. However,  management believes that residential and
commercial real estate values are presently  stable in its primary lending areas
and that loan loss  allowances  have been  provided for in amounts  commensurate
with its current perception of the foregoing risks in the portfolio.

NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

                                                                       Continued

                                                                              41
<PAGE>
TF FINANCIAL CORPORATION & SUBSIDIARIES
================================================================================

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

                           December 31, 2003 and 2002

NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued

Fair values have been estimated using data which management  considered the best
available, as generally provided by estimation methodologies deemed suitable for
the pertinent category of financial  instrument.  The estimation  methodologies,
resulting fair values and recorded carrying amounts are as follows:

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

Fair value of financial  instruments  actively traded in a secondary  market has
been estimated using quoted market prices.

<TABLE>
<CAPTION>
                                                     December 31,
                                    -------------------------------------------------
                                           2003                         2002
                                    -------------------------------------------------
                                      Fair     Carrying           Fair       Carrying
                                      value     value             value       value
                                    -------------------------------------------------
                                                     (in thousands)
<S>                               <C>        <C>               <C>         <C>
Cash and cash equivalents           $  8,241   $  8,241          $100,580    $100,580
Investment securities                 25,248     24,822            42,430      41,806
Mortgage-backed securities           131,548    130,404           172,589     169,835
</TABLE>

The  fair  value  of  financial  instruments  with  stated  maturities  has been
estimated   using  the  present  value  of  cash  flows,   discounted  at  rates
approximating current market rates for similar assets and liabilities.

<TABLE>
<CAPTION>
                                                        December 31,
                                       --------------------------------------------
                                                2003                 2002
                                       --------------------------------------------
                                          Fair      Carrying    Fair      Carrying
                                          value      value      value      value
                                       --------------------------------------------
                                                     (in thousands)
<S>                                      <C>        <C>        <C>        <C>
Assets
  Interest-bearing deposits with banks   $    155   $    155   $    220   $    220
Liabilities
  Deposits with stated maturities         147,937    146,960    149,033    146,762
  Borrowings with stated maturities        86,618     86,853    225,738    207,359
</TABLE>

The fair value of financial instrument  liabilities with no stated maturities is
generally  presumed to  approximate  the carrying  amount (the amount payable on
demand).

<TABLE>
<CAPTION>
                                                        December 31,
                                       --------------------------------------------
                                                2003                 2002
                                       --------------------------------------------
                                          Fair      Carrying    Fair      Carrying
                                          value      value      value      value
                                       --------------------------------------------
                                                     (in thousands)
<S>                                      <C>        <C>        <C>        <C>
Deposits with no stated maturities        $312,383    $312,383  $295,796   $295,796
                                          =========================================
</TABLE>

                                                                       Continued

42
<PAGE>
                                                              2003 ANNUAL REPORT
================================================================================

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

                           December 31, 2003 and 2002

NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued

The fair value of the net loan  portfolio has been  estimated  using the present
value of cash flows, discounted at the approximate current market rates adjusted
for  non-interest   operating  costs,  and  giving  consideration  to  estimated
prepayment risk and credit loss factors.

<TABLE>
<CAPTION>
                                                        December 31,
                                       --------------------------------------------
                                                2003                 2002
                                       --------------------------------------------
                                          Fair      Carrying    Fair      Carrying
                                          value      value      value      value
                                       --------------------------------------------
                                                     (in thousands)
<S>                                      <C>        <C>        <C>        <C>
Net loans                                 $412,741   $404,649   $382,796   $370,092
                                          =========================================
</TABLE>

The fair value of commitments to extend credit is estimated  based on the amount
of  unamortized  deferred  loan  commitment  fees.  The fair value of letters of
credit  is based on the  amount of  unearned  fees  plus the  estimated  cost to
terminate  the  letters  of  credit.  Fair  values  of  unrecognized   financial
instruments including commitments to extend credit and the fair value of letters
of credit are not material.

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


NOTE Q - SERVICE FEES,  CHARGES AND OTHER  OPERATING  INCOME AND OTHER OPERATING
         EXPENSE

                                                    Year ended December 31,
                                                   ------------------------
                                                     2003     2002     2001
                                                   ------------------------
                                                        (in thousands)
Service fees, charges and other operating income
  Loan servicing fees                              $  358   $  338   $  241
  Late charge income                                  100       99      105
  Deposit service charges                             923      750      835
  Bank-owned life insurance value increase            553      520      174
  Other income                                        438      407      379
                                                   ------------------------
                                                   $2,372   $2,114   $1,734
                                                   ========================
Other operating expense
  Insurance and surety bond                        $  180   $  146   $  128
  Office supplies                                     234      192      249
  Loan expense                                        491      272      359
  Loan servicing fees                                  32      127      223
  Postage                                             299      299      261
  Telephone                                           283      262      286
  Service charges on bank accounts                     85       95      205
  Supervisory examination fees                        147      148      141
  Other expenses                                    1,096      795      720
                                                   ------------------------
                                                   $2,847   $2,336   $2,572
                                                   ========================

                                                                              43
<PAGE>
TF FINANCIAL CORPORATION & SUBSIDIARIES
================================================================================

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

                           December 31, 2003 and 2002

NOTE R - SHAREHOLDER RIGHTS PLAN

The Company  adopted a  Shareholder  Rights  Plan (the  Rights  Plan) to protect
shareholders  from  attempts to acquire  control of the Company at an inadequate
price.  Under the  Rights  Plan,  the  Company  distributed  a  dividend  of one
Preferred  Share Purchase  Right (a Right) for each share of outstanding  common
stock.  The rights are currently not exercisable and will expire on November 22,
2005,  unless the  expiration  date is extended  or unless the  Company  earlier
redeems the Rights.

After the Rights become  exercisable,  under certain  circumstances,  the Rights
(other than rights held by a 15% beneficial owner or an "acquiring person") will
entitle the holders to purchase one  one-hundredth of a share of a new series of
junior  participating  preferred  stock at an exercise  price of $45 or purchase
either  the  Company's  common  shares or the  common  shares  of the  potential
acquirer at a substantially reduced price.

The  Company is  entitled  to redeem the Rights at $0.01 per Right  prior to the
acquisition  by a person or group of beneficial  ownership of 15% or more of the
Company's  common  stock.  Following  the  acquisition  by a person  or group of
beneficial  ownership of 15% or more of the Company's  common stock and prior to
an  acquisition  of 50% or more,  the Board of Directors may exchange the Rights
(other than Rights  owned by such person or group),  in whole or in part,  at an
exchange ratio of one share of common stock (or one  one-hundredth of a share of
the new series of junior participating preferred stock) per Right.

The Rights Plan was not adopted in  response to any  specific  effort to acquire
control of the Company.  The issuance of rights has no dilutive effect,  did not
affect the  Company's  reported  earnings per share,  and was not taxable to the
Company or its shareholders.

NOTE S - EARNINGS PER SHARE

The  following  tables  illustrate  the  reconciliation  of the  numerators  and
denominators of the basic and diluted earnings per share  computations  (dollars
in thousands, except per share data):

<TABLE>
<CAPTION>
                                                         Year ended December 31, 2003
                                                  -----------------------------------------
                                                                 Weighted average
                                                   Income            shares       Per share
                                                 (numerator)      (denominator)     amount
                                                  -----------------------------------------
<S>                                             <C>              <C>               <C>
Basic earnings (loss) per share
  Income (loss) available to common stockholders  $(5,834)         2,541,677         $(2.30)
Effect of dilutive securities
  Stock options                                        --                 --             --
                                                  -----------------------------------------
Diluted earnings (loss) per share
  Income available to common stockholders plus
    effect of dilutive securities                 $(5,834)         2,541,677         $(2.30)
                                                  =========================================
</TABLE>

<TABLE>
<CAPTION>
                                                         Year ended December 31, 2002
                                                  -----------------------------------------
                                                                 Weighted average
                                                   Income            shares       Per share
                                                 (numerator)      (denominator)     amount
                                                  -----------------------------------------
<S>                                             <C>              <C>               <C>
Basic earnings per share
  Income available to common stockholders         $5,092            2,473,044        $ 2.06
Effect of dilutive securities
  Stock options                                       --              175,144         (0.15)
                                                  -----------------------------------------
Diluted earnings per share
  Income available to common stockholders plus
    effect of dilutive securities                 $5,092            2,648,188        $ 1.91
                                                  =========================================
</TABLE>

There  were  options to  purchase  27,150  shares of common  stock at a range of
$25.35 to $28.00 per share  which  were  outstanding  during  2002 that were not
included in the  computation of diluted  earnings per share because the options'
exercise prices were greater than the average market price of the common shares.

                                                                       Continued

44

<PAGE>
                                                              2003 ANNUAL REPORT
================================================================================

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

                           December 31, 2003 and 2002

NOTE S - EARNINGS PER SHARE - Continued

<TABLE>
<CAPTION>
                                                         Year ended December 31, 2001
                                                  -----------------------------------------
                                                                 Weighted average
                                                   Income            shares       Per share
                                                 (numerator)      (denominator)     amount
                                                  -----------------------------------------
<S>                                             <C>              <C>               <C>
Basic earnings per share
  Income available to common stockholders         $5,733            2,466,149         $ 2.32
Effect of dilutive securities
  Stock options                                       --              148,412          (0.13)
                                                  ------------------------------------------
Diluted earnings per share
  Income available to common stockholders plus
    effect of dilutive securities                 $5,733            2,614,561         $ 2.19
                                                  ==========================================
</TABLE>

There  were  options to  purchase  10,000  shares of common  stock at a range of
$20.88 to $28.00 per share  which  were  outstanding  during  2001 that were not
included in the  computation of diluted  earnings per share because the options'
exercise prices were greater than the average market price of the common shares.

NOTE T - SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATE (UNAUDITED)

<TABLE>
<CAPTION>
                                                             Three months ended
                                                ---------------------------------------------
                                                Dec. 31,     Sept. 30,    June 30,   March 31,
                                                  2003          2003        2003         2003
                                                ---------------------------------------------
                                                     (in thousands, except per share data)
<S>                                           <C>           <C>         <C>          <C>
Total interest income                           $7,729        $7,835      $8,156       $8,657
Total interest expense                           2,188         3,716       4,525        4,823
  Net interest income                            5,541         4,119       3,631        3,834
Provision for possible loan losses                  60            90          90           90
                                                ---------------------------------------------
  Net interest income after provision            5,481         4,029       3,541        3,744
Other income                                       636           322         648        1,084
Other expenses                                   3,887        17,478       3,599        3,739
                                                ---------------------------------------------
Income before income taxes                       2,230       (13,127)        590        1,089
Income taxes                                       714        (4,562)        154          310
                                                ---------------------------------------------
  Net income (loss)                             $1,516       $(8,565)     $  436       $  779
                                                =============================================
Earnings (loss) per share - basic               $ 0.59       $ (3.33)     $ 0.17       $ 0.31
Earnings (loss) per share - assuming dilution   $ 0.54       $ (3.33)     $ 0.16       $ 0.29
</TABLE>

                                                                       Continued

                                                                              45

<PAGE>
TF FINANCIAL CORPORATION & SUBSIDIARIES
================================================================================

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

                           December 31, 2003 and 2002

NOTE T - SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATE (UNAUDITED) - Continued

<TABLE>
<CAPTION>
                                                          Three months ended
                                              -------------------------------------------
                                              Dec. 31,  Sept. 30,   June 30,   March 31,
                                                2002      2002        2002        2002
                                              -------------------------------------------
                                                  (in thousands, except per share data)
<S>                                         <C>         <C>         <C>         <C>
Total interest income                         $ 9,377     $10,038     $10,453     $10,587
Total interest expense                          5,390       5,625       5,778       5,867
  Net interest income                           3,987       4,413       4,675       4,720
Provision for possible loan losses                150         150         538         150
                                              -------------------------------------------
  Net interest income after provision           3,837       4,263       4,137       4,570
Other income                                    1,316         982         466         540
Other expenses                                  3,255       3,433       3,306       3,420
                                              -------------------------------------------
  Income before income taxes                    1,898       1,812       1,297       1,690
Income taxes                                      460         438         302         405
                                              -------------------------------------------
  Net income                                  $ 1,438     $ 1,374     $   995     $ 1,285
                                              ===========================================
Earnings per share - basic                    $  0.58     $  0.55     $  0.40     $  0.52
Earnings per share - assuming dilution        $  0.54     $  0.52     $  0.37     $  0.49
</TABLE>

NOTE U - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY

Condensed  financial  information for TF Financial  Corporation  (parent company
only) follows:

                                                            December 31,
                                                      ----------------------
                                                         2003           2002
                                                      ----------------------
                                                           (in thousands)
BALANCE SHEET
  ASSETS
  Cash                                                $ 4,953        $ 5,683
  Certificates of deposit - other institutions            155            220
  Investment in Third Federal                          46,597         53,311
  Investment in TF Investments                          2,321          2,282
  Investment in Teragon                                     7              9
  Investment in Penns Trail Development                 1,010          1,045
  Other assets                                            488            315
                                                      ----------------------
    Total assets                                      $55,531        $62,865
                                                      ======================

  LIABILITIES AND STOCKHOLDERS' EQUITY
    Total liabilities                                 $    51        $    25
  Stockholders' equity                                 55,480         62,840
                                                      ----------------------
    Total liabilities and stockholders' equity        $55,531        $62,865
                                                      ======================

                                                                       Continued

46

<PAGE>
                                                              2003 ANNUAL REPORT
================================================================================

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

                           December 31, 2003 and 2002

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


STATEMENT OF OPERATIONS

                                          Year ended December 31,
                                       ----------------------------
                                          2003       2002      2001
                                       ----------------------------
                                               (in thousands)
INCOME
  Equity in earnings of subsidiaries   $(5,556)   $ 5,269   $ 5,825
  Interest and dividend income              99        110       108
  Other                                     --         --        29
                                       ----------------------------
    Total income (loss)                 (5,457)     5,379     5,962
                                       ----------------------------

EXPENSES
  Other                                    377        287       229
                                       ----------------------------
    Total expenses                         377        287       229
                                       ----------------------------
    NET INCOME (LOSS)                  $(5,834)   $ 5,092   $ 5,733
                                       ============================

<TABLE>
<CAPTION>
                                                           Year ended December 31,
                                                       -----------------------------
                                                          2003       2002       2001
                                                       -----------------------------
                                                                (in thousands)
<S>                                                  <C>        <C>        <C>
STATEMENT OF CASH FLOWS
Cash flows from operating activities
  Net income (loss)                                    $(5,834)   $ 5,092    $ 5,733
  Adjustments to reconcile net income to net cash
       provided by (used in) operating activities
    Equity in (earnings) loss of subsidiaries            5,556     (5,269)    (5,825)
    (Gain) on sale of investment securities                 --         --         (7)
    Net change in assets and liabilities                  (147)       (64)       (97)
                                                       -----------------------------
      Net cash used in operating activities               (425)      (241)      (196)
                                                       -----------------------------
Cash flows from investing activities
  Capital distribution from subsidiaries                    --      5,853      2,053
  Capital contribution to subsidiary                        --       (750)        --
  Sale of investment securities available for sale          --         --        507
  Purchase and maturities of certificates of deposit
    in other financial institutions, net                    65        (26)        (4)
                                                       -----------------------------
      Net cash provided by investing activities             65      5,077      2,556
                                                       -----------------------------
Cash flows from financing activities
  Cash dividends paid to stockholders                   (1,518)    (1,484)    (1,424)
  Treasury stock acquired                                   --       (376)    (1,110)
  Exercise of stock options                              1,148        249        278
                                                       -----------------------------
      Net cash used in financing activities               (370)    (1,611)    (2,256)
                                                       -----------------------------
      NET INCREASE (DECREASE) IN CASH                     (730)     3,225        104
Cash at beginning of year                                5,683      2,458      2,354
                                                       -----------------------------
Cash at end of year                                    $ 4,953    $ 5,683    $ 2,458
                                                       =============================
Supplemental disclosure of cash flow information
  Cash paid during the year for income taxes           $    --    $    --    $    --
                                                       =============================
</TABLE>


                                                                              47
<PAGE>


BOARD OF DIRECTORS AND MANAGEMENT TEAM
<TABLE>
<CAPTION>
================================================================================================

TF FINANCIAL CORPORATION
------------------------------------------------------------------------------------------------
<S>                                     <C>
Board of Directors                        Executive Officers

Robert N. Dusek                           Kent C. Lufkin
Chairman of the Board                     President and Chief Executive Officer

Carl F. Gregory                           Dennis R. Stewart
                                          Executive Vice President and Chief Financial Officer
Dennis L. McCartney
                                          Elizabeth Davidson Maier
George A. Olsen                           Senior Vice President and Corporate Secretary

John R. Stranford

Albert M. Tantala



THIRD FEDERAL SAVINGS BANK
------------------------------------------------------------------------------------------------

Board of Directors                        Executive Officers

George A. Olsen                           Kent C. Lufkin
Chairman of the Board                     President and Chief Executive Officer

Carl F. Gregory                           Dennis R. Stewart
Chairman Emeritus                         Executive Vice President and Chief Financial Officer

Robert N. Dusek                           Floyd P. Haggar
                                          Senior Vice President and Chief Lending Officer
William J. Happ, Jr.
                                          Cynthia G. Mullen
Kent C. Lufkin                            Senior Vice President and Retail Banking Officer

Dennis L. McCartney                       Elizabeth Davidson Maier
                                          Senior Vice President
Kenneth A. Swanstrom
                                          Lorraine A. Wolf
Albert M. Tantala                         Corporate Secretary






Independent Auditors             Special Counsel                Transfer Agent and Registrar
Grant Thornton LLP               Malizia Spidi & Fisch, P.C.    Computershare Investor Services
Two Commerce Square              1100 New York Avenue, NW       350 Indiana Street
2001 Market Street               Suite 340 West                 Suite 800
Philadelphia, PA 19103-7080      Washington, DC 20005           Golden, CO 80401

</TABLE>

48

<PAGE>

THIRD FEDERAL SAVINGS BANK LOCATIONS

Corporate Office                        Operations
3 Penns Trail                           215.579.4600
Newtown, PA 18940-3433                  www.thirdfedbank.com
215.579.4000                            e-mail: service@thirdfedbank.com


<TABLE>
<CAPTION>
<S>                              <C>                                 <C>

PENNSYLVANIA BRANCHES

Bucks County

Feasterville Office                 New Britain Office                 Cross Keys Office
Buck Hotel Complex                  600 Town Center                    834 North Easton Highway
Feasterville, PA 19053-2209         New Britain, PA 18901-5199         Doylestown, PA 18901-1007
215.364.7096                        215.345.5800                       215.348.5566

Newtown Office                      Doylestown Office
Route 332 and Campus Drive          60 North Main Street
Newtown, PA 18940-4018              Doylestown, PA 18901-3730
215.968.4444      215.348.9021

Philadelphia County

Frankford Office                    Fishtown Office                    Mayfair Office
4625 Frankford Avenue               York & Memphis Streets             Roosevelt Blvd. at Unruh
Philadelphia, PA 19124-5889         Philadelphia, PA 19125-3029        Philadelphia, PA 19149-2494
215.289.1400                        215.423.2314                       215.332.7650

Bridesburg Office                   Woodhaven Office                   Northern Liberties Office
Orthodox & Almond Streets           Knights Road Center                905 North 2nd Street
Philadelphia, PA 19137-1626         Knights & Woodhaven Roads          Philadelphia, PA 19123-4226
215.743.6673                        Philadelphia, PA 19154-2810        215.922.0217
                                    215.824.0151

NEW JERSEY BRANCHES

Mercer Couty

Ewing Office                        Quakerbridge Road Office           Hamilton Square Office
2075 Pennington Road                Village Square Plaza               1850 Route 33
Ewing, NJ 08618-1003                Lawrenceville, NJ 08648-2674       Hamilton Square, NJ 08690-1712
609.883.7033                        609.689.1010                       609.890.1333

</TABLE>