To our stockholders


Throughout  2002  interest  rates  continued  to decline as the Federal  Reserve
attempted to stimulate our weakened economic environment.  Technology stocks led
the  decline  in all major  stock  markets.  The  negative  impact on  household
investment and retirement plans was dramatic. This led many families to seek the
safety of insured  deposits  where the yields were low but their  principal  was
protected from loss.  Through the  introduction  of  "seven-day-a-week"  banking
hours in each of our  market  areas and by  maintaining  our  focus on  superior
customer  service  initiatives,  we  experienced a 5% gain in deposits to $442.6
million.

The one bright  spot for  families  around the country  was the  opportunity  to
refinance their mortgages at a much lower interest rate. The rate of refinancing
during 2002 was unprecedented.  Because our portfolio contains a large amount of
mortgage-related investment securities and loans, we received a record amount of
prepayments  throughout  2002.  We ramped up our lending  operations to reinvest
these funds in short-to-intermediate-term  mortgages and consumer loans. Despite
our best  efforts,  loan  repayments  exceeded  our  lending  and loan  purchase
transactions.  This left us with over $100  million in  liquidity  at a very low
yield at December 31, 2002.

We plan to continue our  aggressive  lending and loan  purchase  programs  aimed
primarily at the short and  intermediate  term to limit our  interest  rate risk
profile. As prepayments slow, our liquidity will be reinvested at higher rates.

In the first  quarter of 2003, we opened our  fourteenth  branch in the Northern
Liberties  section of Philadelphia.  This section of Northeast  Philadelphia has
experienced  a substantial  amount of  redevelopment  in recent years.  Property
values  are  rising  and the  improvements  are  expected  to  continue  for the
foreseeable  future.  We  expect  this  office to be a strong  loan and  deposit
generator.

We will  continue  to serve  our  customers  with the  personal  attention  of a
community  bank while  offering the products and services of a regional bank. We
are committed to increasing profitability and shareholder value in the future.

The Board of  Directors  and I would like to  express  our  appreciation  to our
employees, shareholders and customers for your continued support and confidence.



/s/John R. Stranford

John R. Stranford
President and Chief Executive Officer

                                       1
<PAGE>

Corporate Profile and Related Information

TF Financial  Corporation  (the  "Corporation")  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, 2002, total
assets  were  approximately  $721.0  million.  The  Corporation  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,
2002,  total  stockholders'   equity  was  approximately   $62.8  million.   The
Corporation 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.  Third  Federal  expanded  its  operations  in  Philadelphia  and  Bucks
Counties,  Pennsylvania  in June 1992  through  its  acquisition  of  Doylestown
Federal Savings and Loan  Association  ("Doylestown").  In September 1996, Third
Federal  expanded its  operations  into Mercer County,  New Jersey,  through its
acquisition of three branch offices and  approximately  $143 million of deposits
from Cenlar Federal Savings Bank.  Third Federal added a fourth branch office in
Mercer County in December,  1999 with the  Corporation's  acquisition of Village
Financial  Corporation  ("Village").  During  the  first  quarter  of  2000  the
Corporation closed the branch facility in its administrative  office location in
Newtown  and  simultaneously  opened a larger,  freestanding  branch at a nearby
site.  During  the first  quarter  of 2001 the  Corporation  closed  its  branch
facility in  Princeton,  New Jersey and  transferred  the deposits to its branch
office in Lawrenceville, New Jersey. During December 2001 the Corporation closed
the sale of $10.2 million in deposits at what had been a leased branch  facility
in  Warminster,  Pennsylvania.  As of December 31, 2002 Third  Federal  operated
thirteen branch offices in Bucks and  Philadelphia  counties,  Pennsylvania  and
Mercer  County,  New Jersey.  During the first  quarter of 2003 the Savings Bank
opened its fourteenth  branch office in the Northern  Liberties  neighborhood in
Philadelphia.

Third Federal attracts  deposits  (approximately  $442.6 million at December 31,
2002) from the general public and uses such deposits,  together with  borrowings
mainly  from the  Federal  Home Loan Bank of  Pittsburgh  (approximately  $207.4
million at  December  31,  2002) 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 Corporation's  common stock has been traded
on the Nasdaq National Market.  The daily stock quotation for the Corporation 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 17, 2003, 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 Corporation'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  Corporation'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

                                Quoted market price          Dividend paid
Quarter ended                  High              Low           per share
-------------                  ----              ---         -------------
December 31, 2002            $25.510           $20.330           $0.15
September 30, 2002           $23.710           $19.700           $0.15
June 30, 2002                $24.800           $22.070           $0.15
March 31,2002                $23.500           $21.050           $0.15
December 31, 2001            $21.750           $18.880           $0.15
September 30, 2001           $23.700           $17.800           $0.15
June 30, 2001                $19.790           $16.950           $0.14
March 31, 2001               $18.063           $15.625           $0.14




                                       2
<PAGE>

SELECTED FINANCIAL INFORMATION AND OTHER DATA
<TABLE>
<CAPTION>
Financial Condition                                                            At December 31,
                                                                               ---------------
(Dollars in thousands, except per share data)           2002           2001          2000         1999         1998
                                                        ----           ----          ----         ----         ----
<S>                                                 <C>           <C>           <C>          <C>          <C>
Total assets                                          $721,032      $711,204      $723,297     $721,874     $665,608
Loans receivable, net                                  370,092       377,635       361,806      287,979      240,841
Mortgage-backed securities available for sale,
  at fair value                                        115,243        99,763        97,914      132,515       75,285
Mortgage-backed securities held to maturity,
  at amortized cost                                     54,592        93,367       135,142      159,888      180,964
Securities purchased under agreements to
  resell                                                     -             -             -            -            -
Investment securities available for sale, at
  fair value                                            27,243        22,671        18,865       21,930        9,042
Investment securities held to maturity, at
  amortized cost                                        14,563         9,866        63,461       66,760       80,895
Cash and cash equivalents(l)                           100,580        69,139        10,618       16,715       42,703
Deposits                                               442,558       422,052       400,851      401,698      438,913
Advances from the Federal Home Loan Bank and
  other borrowings                                     207,359       222,359       259,821      264,299      163,359
Retained earnings                                       59,978        56,370        52,061       48,905       45,842
Total stockholders' equity                              62,840        57,975        53,109       48,447       52,660
Book value per common share                             $25.31        $23.51        $21.32       $18.81       $18.43
Tangible book value per common share                    $23.34        $21.44        $18.99       $16.26       $15.84
</TABLE>

<TABLE>
<CAPTION>


Summary of Operations                                           At or for the year ended December 31,
                                                                -------------------------------------
                                                         2002           2001          2000         1999        1998(2)
                                                         ----           ----          ----         ----        -------
<S>                                                  <C>           <C>           <C>          <C>          <C>
Interest income                                        $40,455       $46,747       $48,708      $47,022      $43,579
Interest expense                                        22,660        26,908        28,921       27,974       26,195
Net interest income                                     17,795        19,839        19,787       19,048       17,384
Provision for loan losses                                  988           500           410          300           60
Non-interest income                                      3,304         3,172         1,432        1,589        1,535
Non-interest expense                                    13,414        14,708        14,404       13,529       12,722
Net income before cumulative effect of change
  in accounting method                                   5,092         5,733         4,482        4,422        3,830
Net income                                               5,092         5,733         4,482        4,422        4,038
Earnings per common share - basic
Continuing operations                                    $2.06         $2.32         $1.76        $1.60        $1.32
Cumulative effect of accounting change                       -             -             -            -        $0.07
Earnings per common share - basic                        $2.06         $2.32         $1.76        $1.60        $1.39
Earnings per common share - diluted
Continuing operations                                    $1.91         $2.19         $1.72        $1.54        $1.23
Cumulative effect of accounting change                       -             -             -            -        $0.07
Earnings per common share - diluted                      $1.91         $2.19         $1.72        $1.54        $1.30

Performance Ratios and Other Selected Data
Return on average assets                                 0.71%         0.82%         0.63%        0.62%        0.58%
Return on average equity                                 8.47%        10.42%         9.18%        8.60%        7.39%
Average equity to average assets                         8.34%         7.83%         6.86%        7.17%        7.74%
Average interest rate spread                             2.42%         2.74%         2.70%        2.54%        2.44%
Non-performing loans to total assets                     0.53%         0.53%         0.20%        0.18%        0.24%
Non-performing loans to total loans                      1.03%         0.99%         0.41%        0.45%        0.65%
Allowance for loan losses to non-performing loans        53.86%        52.22%       115.97%      145.56%      119.16%
Allowance for loan losses to total loans                 0.55%         0.52%         0.47%        0.66%        0.78%
Savings Bank regulatory capital
Core                                                     6.85%         6.95%         6.18%        5.76%        6.79%
Tangible                                                 6.85%         6.95%         6.18%        5.76%        6.79%
Risk based                                              15.25%        14.95%        11.97%       12.83%       17.73%
Dividend payout ratio (3)                               31.41%        26.48%        30.23%       31.82%       36.92%
</TABLE>


(1)  Consists  of cash,  cash due from  banks,  interest-bearing  deposits  with
     maturities of less than three months, and federal funds sold.
(2)  Income and income  related  ratios for the  year-ended  December  31,  1998
     include  the  cumulative  effect  of a change  in  accounting  for  certain
     investments of $208,000 (SFAS #133).
(3)  Payout  ratio is  dividends  paid for the period  divided by  earnings  per
     common share - diluted after cumulative effect of accounting change.

                                       3
<PAGE>

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

General

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

This  document  contains  statements  that project the future  operations of the
Corporation  which involve risks and  uncertainties.  The  Corporation'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
Corporation 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
Corporation.

The Corporation'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 Condition

Assets. The Corporation's total assets at December 31, 2002 were $721.0 million,
an  increase  of $9.8  million  during  the year.  The  increase  was mainly the
combined result of the net change in various asset  categories as described more
fully below.

Loans  receivable,  net,  decreased  by $7.5  million or 2.0%.  During the year,
market  interest  rates were  relatively low compared to the interest rates many
borrowers  were paying the Savings Bank on loans held in the Savings Bank's loan
portfolio  causing a large number of borrowers with the higher interest rates on
their loans to refinance them.  Many of these loans were  refinanced  elsewhere.
While the Savings Bank originated $80.9 million in loans, repayments of existing
loans totaled $147.3 million.  Consequently, the Savings Bank subsidized its own
loan originations with approximately $74.6 million

                                       4
<PAGE>
of loan  purchases.  Purchased  loans generally have lower yields than otherwise
equivalent originated loans.

Investment  securities  available for sale  increased by $4.6 million,  net, and
mortgage-backed  securities  available for sale increased by $15.5 million,  net
during 2002. The Corporation purchased $103.2 million of these securities during
the year,  $38.4 million were sold generating  gains of $1.2 million,  and $44.7
million matured or were otherwise  repaid.  The securities sales were undertaken
in order to realize  the gains that had  accumulated  due to  decreasing  market
interest  rates.  The securities  purchased were generally  short-term in nature
with less than a four year  average  life in order to lessen  the  Corporation's
interest rate risk as compared to the purchase of longer average life securities
even though the longer securities generally have higher yields.

Mortgage-backed  securities held to maturity decreased by $38.8 million or 41.5%
during 2002.  This  decrease  occurred due to the  increased  prepayment  of the
underlying  mortgages  comprising the  securities,  which was the result of near
record low mortgage rates throughout the year,  resulting in an increased number
of mortgagors refinancing their mortgages into lower interest rates.

As a result of the net decrease in the  Corporation's  mortgage-related  assets,
growth in deposits,  and the inability to repay  long-term  borrowings  from the
Federal Home Loan Bank without incurring substantial  prepayment penalties,  the
Corporation's cash and cash equivalents grew by $31.4 million and totaled $100.6
million or 14% of total assets at December 31, 2002.

Liabilities. The Corporation's total liabilities were $658.2 million at December
31, 2002, an increase of $5.0 million during 2002.

Deposits  increased by $20.5 million;  certificates of deposit increased by $2.0
million,  while the remaining or "core"  deposit  categories  increased by $18.5
million.  Management believes that deposit growth occurred mainly as a result of
successful sales initiatives and focused  advertising  campaigns  implemented by
the  Corporation,  but also due to external  factors that were  causing  deposit
growth to occur throughout the community banking industry.

Advances from the Federal Home Loan Bank decreased by $15.0 million.  Throughout
the year the Corporation used excess cash from loan and security repayments, and
deposit increases to repay maturing borrowings.

Stockholders'  equity.  Total consolidated  stockholders'  equity increased $4.9
million to $62.8  million at  December  31,  2002.  The  increase is largely the
result  of  $5.1  million  in  net  income,  plus  a $1.1  million  increase  in
accumulated other comprehensive income, less $1.5 million in cash dividends paid
to the  Corporation's  common  stockholders.  In  addition,  during the year the
Corporation  repurchased  approximately  16,900 shares of its common stock at an
average price of $22.26 per share.

                                       5
<PAGE>

Average Balance Sheet

The following table sets forth  information  (dollars in thousands)  relating to
the Corporation'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>

                                             2002                                2001                               2000
                                             ----                                ----                               ----
                               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 (4)          $362,104     $25,662       7.09%    $359,928     $28,443       7.90%    $299,770    $23,756     7.92%
Mortgage-backed securities     200,316      11,423       5.70%     212,951      13,749       6.46%     278,434     18,449     6.63%
Investment securities           50,072       2,271       4.54%      51,384       3,015       5.87%     100,274      6,180     6.16%
Other interest-earning
  assets(1)                     74,058       1,099       1.48%      49,206       1,540       3.13%       5,236        323     6.17%
                              --------     -------                --------      ------                --------     ------
Total interest-earning
  assets                       686,550      40,455       5.89%     673,469      46,747       6.94%     683,714     48,708     7.12%
                                           -------                              ------                             ------
Non interest-earning
  assets                        34,494                              29,202                              28,529
                              --------                            --------                            --------
Total assets                  $721,044                            $702,671                            $712,243
                              ========                            ========                            ========

LIABILITIES AND
STOCKHOLDERS'EQUITY
Interest-bearing
  liabilities:
Deposits                      $433,522      10,506       2.42%    $409,688      14,043       3.43%    $410,330     15,082     3.68%
Advances from the FHLB
  and borrowings               219,797      12,154       5.53%     230,078      12,865       5.59%     243,656     13,839     5.68%
                              --------     -------                --------      ------                --------     ------
Total interest-bearing
  liabilities                  653,319      22,660       3.47%     639,766      26,908       4.20%     653,986     28,921     4.42%
                                           -------                              ------                             ------
Non interest-bearing
  liabilities                    7,603                               7,865                               9,432
                              --------                            --------                            --------
Total liabilities              660,922                             647,631                             663,418
Stockholders' equity            60,122                              55,040                              48,825
                              --------                            --------                            --------
Total liabilities and
  stockholders' equity        $721,044                            $702,671                            $712,243
                              ========                            ========                            ========
Net interest income                        $17,795                             $19,839                            $19,787
                                           =======                             =======                            =======
Interest rate spread (2)                                 2.42%                               2.74%                            2.70%
Net yield on
  interest-earning assets (3)                            2.59%                               2.95%                            2.89%
Ratio of average
  interest-earning assets
  to average interest
  bearing liabilities                                     105%                                105%                             105%
</TABLE>

(1)  Includes interest-bearing deposits in other banks.
(2)  Interest-rate spread represents the difference between the average yield on
     interest-earning   assets  and  the   average   cost  of   interest-bearing
     liabilities.
(3)  Net yield on  interest-earning  assets  represents net interest income as a
     percentage of average interest-earning assets.
(4)  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.

                                       6
<PAGE>

     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>
                                                2002 vs 2001                     2001 vs 2000
                                                ------------                     ------------
                                         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                   $   171    $(2,952)   $(2,781)   $ 4,740    $   (53)   $ 4,687
Mortgage-backed securities                 (784)    (1,542)    (2,326)    (4,229)      (471)    (4,700)
Investment securities                       (75)      (669)      (744)    (2,884)      (281)    (3,165)
Other interest-earning assets               577     (1,018)      (441)     1,450       (233)     1,217
                                        --------------------------------------------------------------
Total interest-earning assets              (111)    (6,181)    (6,292)      (923)    (1,038)    (1,961)
                                        --------------------------------------------------------------

Interest expense:
Deposits                                    777     (4,314)    (3,537)       (23)    (1,016)    (1,039)
Advances from the FHLB and borrowings      (570)      (141)      (711)      (761)      (213)      (974)
                                        --------------------------------------------------------------
Total interest-bearing liabilities          207     (4,455)    (4,248)      (784)    (1,229)    (2,013)
                                        --------------------------------------------------------------
Net change in net interest income       $  (318)   $(1,726)   $(2,044)   $  (139)   $   191    $    52
                                        ==============================================================
</TABLE>


                                       7
<PAGE>

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

Net Income. Net income was $5.092 million for the fiscal year ended December 31,
2002, a decrease of $641,000 or 11.2%  compared with the year ended December 31,
2001. The  Corporation'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  Corporation'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 Corporation'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 Corporation'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  Corporation's
mortgage-backed  securities  portfolios  to  decrease  by 76  basis  points.  At
December 31, 2002  prepayments  of  mortgage-related  earning  assets were still
high. Thus, the Corporation's interest income could be adversely affected during
2003  barring an increase in longer term  market  interest  rates and  resulting
relief from high loan prepayments.

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%. Thus, the Corporation's  earnings
during  2003  will be  significantly  affected  by the  general  level of market
interest rates and the timing of its  reinvestment of cash and cash  equivalents
into other interest-bearing  assets, or the use of the cash and cash equivalents
to reduce interest-bearing liabilities.

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 Corporation's new certificates of deposit;
in addition,  the Corporation  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.

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

                                       8
<PAGE>

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 Corporation's purchased lease portfolio. The Corporation now
services  these  leases  itself.  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 $3.3 million  during 2002
compared  with $3.2  million  during  2001.  During  2002 the  Corporation  sold
approximately $37.2 million  mortgage-backed and investment securities available
for sale  and  realized  gains  of $1.2  million.  During  2001 the  Corporation
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 Corporation 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 Corporation  decreased by $236,000 other operating
expenses,  $110,000  of  which  related  to bank  service  charges  because  the
Corporation  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 Corporation'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 Corporation'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.


                                       9
<PAGE>

  Comparison of Years Ended December 31, 2001 and December 31, 2000

Net Income. Net income was $5.733 million for the fiscal year ended December 31,
2001,  an  increase  of $1.251  million  or 27.9%  compared  with the year ended
December 31, 2000.

In addition,  the  Corporation's  basic earnings per share increased by 31.8% to
$2.32 per share during 2001,  exceeding the  percentage  growth in net income by
14%, due to the 25,468 net decrease in shares  outstanding during the year. This
decrease occurred as the combined result of the Corporation's  share repurchases
during 2001,  which resulted in the repurchase of 60,900 shares of common stock,
less 23,276 shares issued as a result of stock option  exercises and less 12,156
shares allocated to employee stock ownership plan participants at year end.

Total  Interest  Income.  For the year ended  December 31, 2001,  total interest
income  decreased to $46.7 million compared to $48.7 million from the year ended
December 31, 2000. The $2.0 million  decrease in interest  income was mainly the
result of a $65.5  million  decrease in the average  balance of  mortgage-backed
securities  and a $48.9  million  decrease in the average  balance of investment
securities.  These  decreases  were  mainly  the direct  result of lower  market
interest  rates  during  2001  compared  to 2000,  causing  an  acceleration  of
prepayments  of the  Corporation's  mortgage-backed  securities  and  the  early
redemption  or  "call" of the  callable  bonds in the  Corporation's  investment
securities  portfolios.  The Corporation was able to reinvest a portion of these
proceeds into loans receivable that on average increased by $60.1 million during
2001.  However,  an average of $49.2  million  was  maintained  in cash and cash
equivalents,  earning an average interest rate of 3.13%,  which is substantially
less than these funds were earning while invested in mortgage-backed  securities
or investment securities.

At  year-end  2001,  cash and cash  equivalents  totaled  $69.1  million and was
earning the federal  funds rate minus 25 basis  points or  approximately  1.50%.
Thus, the Corporation's  earnings during 2002 will be significantly  affected by
the general level of market interest rates and the timing of its reinvestment of
cash and cash equivalents into other interest-bearing  assets, or the use of the
cash and cash equivalents to reduce interest-bearing liabilities.

Total Interest  Expense.  Total interest expense decreased to $26.9 million from
$28.9  million  for the year ended  December  31, 2001  compared  to 2000.  This
decrease is mainly the result of lower market  interest  rates during the period
and,  consequently,  lower rates paid on the  Corporation's  new certificates of
deposit. In addition, the Corporation 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,  mainly the federal funds rate.  During 2001 the Federal
Reserve  Board  lowered  the federal  funds rate eleven  times by a total of 475
basis points.  The  Corporation  reacted to this  situation by lowering  certain
administered  deposit  account  rates by 25 to 75 basis points during the fourth
quarter of 2001.

Allowance for Loan Losses.  The allowance for loan losses was approximately $2.0
million  at  December  31,  2001 and $1.7  million at  December  31,  2000.  The
provision for loan losses was $500,000 during 2001 compared with $410,000 during
2000. Charge-offs were $242,000 during 2001 compared to $613,000 during 2000. In
addition,  the allowance for loan losses was 0.52% of gross loans  receivable at


                                       10
<PAGE>

December  2001  compared  with 0.47% at  December  31,  2000 while  gross  loans
receivable  grew  by  approximately  $16.1  million.  Thus,  the  growth  in the
allowance  for loan losses is consistent  with the growth in the loan  portfolio
and the level of actual charge-offs.  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 $3.2 million  during 2001
compared with $1.4 million during 2000.  Several items had an impact on the $1.8
million  increase in non-interest  income.  The Corporation  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, the
Corporation  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 on
approximately  September  1, 2001.  This asset  produced an increase in its cash
surrender  value of  $174,000  during  2001,  which  income is included in other
operating income.

Non-interest  Expense.  Total non-interest  expense increased by $304,000 during
2001  compared to 2000.  This increase  occurred  mainly from a $489,000 or 6.6%
increase in employee  compensation  and benefits.  In addition,  during 2001 the
Corporation decreased its advertising  expenditures by $204,000 and decreased by
$122,000 other operating expenses,  mainly those related to bank service charges
because the Corporation  ceased using a third-party bank for its item processing
activities and rather used its own personnel and technology.

Income Tax Expense.  The Corporation's  effective tax rate was 26.5% during 2001
compared to 30.0% during 2000. The decrease  occurred as a result of certain tax
reduction efforts initiated during 2001 and 2000.


                                       11
<PAGE>

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
Corporation'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, 2002,  such borrowed  funds totaled $207.4  million.  The amount of
these  borrowings  that will mature during the twelve months ending December 31,
2003 is $27  million.  At December  31, 2002 the Savings  Bank had a $20 million
unused  line of  credit  and up to  approximately  $191  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, 2003, is approximately  $96.7 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, 2002, the Savings Bank had outstanding  commitments to originate
loans or fund unused lines of credit of $37.5 million. The loan commitments will
be funded during the twelve months ending December 31, 2003. 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.  At December 31, 2002, the Savings Bank had no outstanding
commitments to sell loans.

The Corporation also has obligations under lease  agreements.  Payments required
under such  lease  agreements  will be  approximately  $190,000  during the year
ending December 31, 2003.

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, 2002, 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.


                                       12
<PAGE>

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  Corporation'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 Corporation'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 Corporation 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 net
interest  income.  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 59% of the Corporation's  total assets.  For this prepayment speed
assumption the  Corporation  uses median  expected  prepayment  speeds which are
obtained from a reliable third party source.  The Corporation 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  Corporation  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  Corporation's  NII exposure at December 31, 2002, the  Corporation
focused on the  simulation  of net  interest  income in the "ramped up 200 basis
points" and "shocked down 50 basis points" scenarios.  The Corporation also used
the results of the most recently  available OTS model's forecast of market value
of portfolio equity under different


                                       13
<PAGE>

interest rate scenarios.  In addition,  the Corporation  prepared current period
and one-year  forward "gap" reports in order to show  potential  mis-matches  of
repricing or cash flows from the  Corporation'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.


At December 31, 2002,  the most adverse  change in net interest  income over the
two-year  horizon  commencing  January  1, 2003  using the  "ramped up 200 basis
points" and "shocked down 50 basis points"  simulation  methodologies was a $2.0
million or a 4%  decrease in  expected  net  interest  income.  The  Corporation
estimated its one-year positive gap (i.e. assets repricing/maturing in excess of
liabilities  repricing/maturing) to be $71.0 million in the "ramped up 200 basis
points"  scenario,  and $185.1  million in the  "shocked  down 50 basis  points"
scenario,  compared to $148.4 million under the "rates unchanged"  interest rate
scenario. Essentially, the Corporation's net interest income is highly sensitive
to the movement of short-term interest rates because of the large amount of cash
and cash  equivalents on hand at December 31, 2002, and highly  sensitive to the
movement of long-term  interest  rates  because of the  resulting  effect on the
prepayment speeds of the Corporation's mortgage-related earning assets. 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 year 2003 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.

                                       14
<PAGE>

Critical Accounting Policies

Certain  critical  accounting  policies  of the  Corporation  require the use of
significant  judgment  and  accounting  estimates  in  the  preparation  of  the
consolidated  financial  statements and related data of the  Corporation.  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  condition of a significant  amount of debtors  should
deteriorate  more than the Corporation 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 $2,047,000 at December 31, 2002.

  Recent Accounting Pronouncements

In August 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial  Accounting  Standards (SFAS) 143, "Accounting for Asset Retirement
Obligations." This Statement  addresses  financial  accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS 143 requires an enterprise to record the
fair value of an asset  retirement  obligation  as a liability  in the period in
which it incurs a legal obligation  associated with the retirement of a tangible
long-lived  asset. SFAS 143 also requires the enterprise to record the contra to
the initial  obligation  as an increase  to the  carrying  amount of the related
long-lived asset (i.e., the associated asset retirement costs) and to depreciate
that cost over the remaining useful life of the asset. The liability is adjusted
at the end of each  period to  reflect  the  passage  of time  (i.e.,  accretion
expense) and changes in the estimated  future cash flows  underlying the initial
fair value  measurement.  Enterprises  are required to adopt SFAS 143 for fiscal
years beginning after June 15, 2002.  Management does not expect the adoption of
SFAS 143 to have a  material  effect on the  Corporation's  financial  position,
results of operations, or cash flows.

In October  2001,  the FASB issued SFAS 144  "Accounting  for the  Impairment or
Disposal of Long-Lived Assets." SFAS 144 supersedes SFAS 121 "Accounting for the
Impairment of Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed Of,"
and  certain  provisions  of APB  Opinion  No.  30  "Reporting  the  Results  of
Operations-Reporting  the Effects of  Disposal  of a Segment of a Business,  and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS
144 establishes standards for long-lived assets to be disposed of, and redefines
the valuation and presentation of discontinued operations. SFAS 144 is effective
for fiscal years  beginning  after December 15, 2001, and interim periods within
those fiscal years.  The adoption of SFAS 144 did not have a material  effect on
the Corporation's financial position, results of operations, or cash flows.

In April 2002, the FASB issued SFAS 145,  "Rescission of FASB  Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS
145 eliminates  extraordinary accounting treatment for reporting gain or loss on
debt extinguishment,  and amends other existing authoritative  pronouncements to
make  various  technical  corrections,   clarify  meanings,  or  describe  their
applicability  under changed  conditions.  The provisions of SFAS 145 related to
the


                                       15
<PAGE>

rescission  of FASB  Statement No. 4 are  applicable  in fiscal years  beginning
after May 15, 2002.  Management does not expect the adoption of these provisions
of SFAS 145 to have a material effect on the Corporation's  financial  position,
results of operations,  or cash flows. The provisions  related to FASB Statement
No. 13 are  effective for  transactions  occurring  after May 15, 2002,  and all
other provisions are effective for financial  statements  issued on or after May
15,  2002;  however,  early  application  is  encouraged.  Debt  extinguishments
reported as extraordinary items prior to scheduled or early adoption of SFAS 145
would be reclassified in most cases  following  adoption.  The adoption of these
provisions  of SFAS  145 did not have a  material  effect  on the  Corporation's
financial position, results of operations, or cash flows.

In June 2002, the FASB issued SFAS 146,  "Accounting  for Costs  Associated with
Exit or Disposal  Activities." SFAS 146 requires recording costs associated with
exit or disposal  activities  at their fair  values  when a  liability  has been
incurred.  Under  previous  guidance,  certain  exit  costs  were  accrued  upon
management's  commitment  to an exit plan,  which is generally  before an actual
liability  has  been  incurred.  The  requirements  of SFAS  146  are  effective
prospectively for exit or disposal activities initiated after December 31, 2002;
however,  early  application  is  encouraged.  Management  does not  expect  the
adoption of SFAS 146 to have a material  effect on the  Corporation's  financial
position, results of operations, or cash flows.

In  November  2002,  the  FASB  issued  FASB   Interpretation  45,  "Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees  of  Indebtedness  of Others"  (FIN 45).  FIN 45  requires  that upon
issuance of a guarantee,  a guarantor  must  recognize a liability  for the fair
value  of an  obligation  assumed  under  a  guarantee.  FIN  45  also  requires
additional  disclosures  by a  guarantor  in its  interim  and annual  financial
statements  about  the  obligations   associated  with  guarantees  issued.  The
recognition  provisions  of FIN 45 are effective  for any  guarantees  issued or
modified after December 31, 2002. Management is currently evaluating the effects
of the recognition  provisions of FIN 45;  however,  it does not expect that the
adoption of these  provisions will have a material  effect on the  Corporation's
financial  position,  results  of  operations,  or cash  flows.  The  disclosure
requirements are effective for financial statements of interim or annual periods
ending after December 15, 2002. The adoption of the disclosure  requirements  of
FIN 45 did not have a material effect on the Corporation's  financial  position,
results of operations, or cash flows.

In  December  2002,  the FASB  issued  SFAS  148,  "Accounting  for  Stock-Based
Compensation-  Transition and Disclosure," which provides alternative methods of
transition  for a voluntary  change to the fair value based method of accounting
for  stock-based  compensation.  In  addition,  SFAS 148 amends  the  disclosure
requirements  of SFAS 123 to require  prominent  disclosure  in both  annual and
interim  financial  statements  about the method of accounting  for  stock-based
compensation  and the effect of the method  used on reported  results.  Finally,
SFAS 148  amends APB  Opinion  28,  "Interim  Financial  Reporting,"  to require
disclosure  about those effects in interim  financial  information.  SFAS 148 is
effective for fiscal and interim  periods  ending after  December 15, 2002.  The
adoption  of SFAS  148 did  not  have a  material  effect  on the  Corporation's
financial position, results of operations, or cash flows.


                                       16
<PAGE>


               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, 2002
and 2001,  and the  related  consolidated  statements  of  earnings,  changes in
stockholders'  equity and cash  flows for each of the three  years in the period
ended December 31, 2002. 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, 2002 and 2001, and the
consolidated  results of their operations and their  consolidated cash flows for
each of the three years in the period ended  December 31,  2002,  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, 2003


                                       17
<PAGE>

                  CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

                                   December 31


<TABLE>
<CAPTION>
                                                                        2002         2001
                                                                        ----         ----
                                                                         (in thousands)
         ASSETS
<S>                                                                <C>          <C>
Cash and cash equivalents                                            $ 100,580    $  69,139
Certificates of deposit in other financial institutions                    220          194
Investment securities available for sale - at fair value                27,243       22,671
Investment securities held to maturity (fair value of $15,187
  and $9,830 as of December 31, 2002 and 2001, respectively)            14,563        9,866
Mortgage-backed securities available for sale - at fair value          115,243       99,763
Mortgage-backed securities held to maturity (fair value of $57,346
  and $94,735 as of December 31, 2002 and 2001, respectively)           54,592       93,367
Loans receivable, net                                                  370,092      377,635
Federal Home Loan Bank stock - at cost                                  11,424       11,368
Accrued interest receivable                                              3,576        4,154
Premises and equipment, net                                              6,742        7,484
Core deposit intangible asset, net of accumulated amortization of
  $2,271 and $2,049 as of December 31, 2002 and 2001, respectively         553          775
Goodwill, net of accumulated amortization of $2,328                      4,324        4,324
Other assets                                                            11,880       10,464
                                                                     ---------    ---------
         TOTAL ASSETS                                                $ 721,032    $ 711,204
                                                                     =========    =========


         LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities
  Deposits                                                           $ 442,558    $ 422,052
  Advances from the Federal Home Loan Bank                             207,359      222,359
  Advances from borrowers for taxes and insurance                        1,330        1,241
  Accrued interest payable                                               2,897        3,762
  Other liabilities                                                      4,048        3,815
                                                                     ---------    ---------
         Total liabilities                                             658,192      653,229
                                                                     ---------    ---------
Stockholders' equity
  Preferred stock, no par value; 2,000,000 shares authorized
    at December 31, 2002 and 2001, none issued                               -            -
  Common stock, $0.10 par value; 10,000,000 shares authorized,
    5,290,000 shares issued, 2,482,586 and 2,465,986 shares
    outstanding at December 31, 2002 and 2001, respectively,
    net of shares in treasury:  2002 - 2,567,268; 2001 - 2,571,712         529          529
  Retained earnings                                                     59,978       56,370
  Additional paid-in capital                                            51,647       51,652
  Unearned ESOP shares                                                  (2,401)      (2,523)
  Treasury stock - at cost                                             (48,809)     (48,838)
  Accumulated other comprehensive income                                 1,896          785
                                                                     ---------    ---------
         Total stockholders' equity                                     62,840       57,975
                                                                     ---------    ---------
         TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                  $ 721,032    $ 711,204
                                                                     =========    =========
</TABLE>

The accompanying notes are an integral part of these statements

                                       18
<PAGE>

                       CONSOLIDATED STATEMENTS OF EARNINGS

                             Year ended December 31,

<TABLE>
<CAPTION>
                                                                          2002       2001        2000
                                                                          ----       ----        ----
                                                                    (in thousands, except per share data)
<S>                                                                 <C>        <C>         <C>
Interest income
  Loans, including fees                                               $ 25,662   $ 28,443    $ 23,756
  Mortgage-backed securities                                            11,423     13,749      18,449
  Investment securities                                                  2,271      3,015       6,180
  Interest-bearing deposits and other                                    1,099      1,540         323
                                                                      --------   --------    --------
         TOTAL INTEREST INCOME                                          40,455     46,747      48,708
                                                                      --------   --------    --------

Interest expense
  Deposits                                                              10,506     14,043      15,082
  Borrowings                                                            12,154     12,865      13,839
                                                                      --------   --------    --------
         TOTAL INTEREST EXPENSE                                         22,660     26,908      28,921
                                                                      --------   --------    --------
         NET INTEREST INCOME                                            17,795     19,839      19,787
                                                                      --------   --------    --------

Provision for possible loan losses                                         988        500         410

         NET INTEREST INCOME AFTER PROVISION
           FOR POSSIBLE LOAN LOSSES                                     16,807     19,339      19,377
                                                                      --------   --------    --------

Non-interest income
  Service fees, charges and other operating income                       2,114      1,734       1,353
  Gain on sale of deposits                                                   -      1,092           -
  Gain on sale of real estate held for investment                            -        444           -
  Gain  (loss) on sale of investment and mortgage-backed securities      1,190       (126)         46
  Gain on sale of loans                                                      -         28          33
                                                                      --------   --------    --------
         TOTAL NON-INTEREST INCOME                                       3,304      3,172       1,432
                                                                      --------   --------    --------
Non-interest expense
  Employee compensation and benefits                                     7,629      7,865       7,376
  Occupancy and equipment                                                2,303      2,493       2,392
  Federal deposit insurance premium                                         75         75          85
  Professional fees                                                        408        486         385
  Advertising                                                              441        507         711
  Other operating                                                        2,336      2,572       2,694
  Amortization of core deposit intangible asset                            222        266         317
  Amortization of goodwill                                                   -        444         444
                                                                      --------   --------    --------
         TOTAL NON-INTEREST EXPENSE                                     13,414     14,708      14,404
                                                                      --------   --------    --------
         INCOME BEFORE INCOME TAXES                                      6,697      7,803       6,405

Income taxes                                                             1,605      2,070       1,923
                                                                      --------   --------    --------

         NET INCOME                                                   $  5,092   $  5,733    $  4,482
                                                                      ========   ========    ========

Earnings per share - basic                                            $   2.06   $   2.32    $   1.76
                                                                      ========   ========    ========

Earnings per share - diluted                                          $   1.91   $   2.19    $   1.72
                                                                      ========   ========    ========
</TABLE>

  The accompanying notes are an integral part of these statements.

                                       19
<PAGE>

                       CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

                             Years ended December 31, 2002, 2001 and 2000

                                  (in thousands, except share data)
<TABLE>
<CAPTION>
                                                                                                            Accumu-
                                                                                                            lated
                                   Common Stock                                                             Compre-
                                   -------------     Additional Unearned    Shares                          hensive          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>      <C>
Balance at January 1, 2000      2,576,160   $529      $51,931    $(2,766)   $ (71)    $(46,996)  $ 48,905  $(3,085) $48,447
Allocation of ESOP shares          12,156      -           52        122        -            -          -        -      174
Amortization of MSBP expense            -      -           33          -       67            -          -        -      100
Purchase of treasury stock       (138,112)     -            -          -        -       (1,972)         -        -   (1,972)
Cash dividends - common stock           -      -            -          -        -            -     (1,326)       -   (1,326)
Exercise of options                41,250      -         (312)         -        -          795          -        -      483
Other comprehensive income,
  net of taxes                          -      -            -          -        -            -          -    2,721    2,721  $ 2,721
Net income for the year ended
  December 31, 2000                     -      -            -          -        -            -      4,482        -    4,482    4,482
                                ---------   ----      -------    -------    -----     --------   --------  -------  -------  -------
Comprehensive income                                                                                                         $ 7,203
                                                                                                                             =======
Balance at December 31, 2000    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
                               ==========   ====      =======    =======    =====     ========   ========  =======  =======
</TABLE>


                                                                     (Continued)
                                        20
<PAGE>


      CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - CONTINUED

                  Years ended December 31, 2002, 2001 and 2000

                        (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                                                            Accumu-
                                                                                                            lated
                                   Common Stock                                                             Compre-
                                   -------------     Additional Unearned    Shares                          hensive          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>      <C>
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
                                =========    ====     =======    =======    =====     ========    =======   ======  =======
</TABLE>

         The accompanying notes are an integral part of this statement.

                                       21

<PAGE>
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                             Year ended December 31,
<TABLE>
<CAPTION>
                                                                               2002         2001         2000
                                                                               ----         ----         ----
                                                                                     (in thousands)
<S>                                                                     <C>          <C>          <C>
OPERATING ACTIVITIES
  Net income                                                              $   5,092    $   5,733    $   4,482
  Adjustments to reconcile net income to net cash provided
   by operating activities
    Amortization of
      Mortgage loan servicing rights                                             14           14           13
      Deferred loan origination fees                                           (201)        (387)        (119)
      Premiums and  discounts on  investment  securities, net                   108           36           65
      Premiums and discounts on mortgage-backed
       securities and loans, net                                                758          (72)        (544)
      Goodwill and other intangibles                                            222          710          761
    Deferred income taxes                                                       (19)        (172)        (122)
    Provision  for loan losses and  provision for losses on real estate         988          510          459
    Depreciation of premises and equipment                                    1,014        1,092        1,040
    Increase in value of bank-owned life insurance                             (520)        (174)           -
    Stock-based benefit programs                                                273          240          274
    (Gain) loss on sale of
       Investment and mortgage-backed securities                             (1,190)         126          (46)
       Real estate acquired through foreclosure                                 (60)         (27)         (48)
       Property, equipment and real estate held for investment                    -         (444)           -
       Mortgage loans                                                             -          (28)         (33)
       Deposits                                                                   -       (1,092)           -
    (Increase) decrease in
       Accrued interest receivable                                              578        1,369         (565)
       Other assets                                                             (89)         248         (283)
    Increase (decrease) in
       Accrued interest payable                                                (865)        (908)         921
       Other liabilities                                                       (318)        (470)        (122)
                                                                          ---------     --------     --------
         NET CASH PROVIDED BY OPERATING
           ACTIVITIES                                                         5,785        6,304        6,133
                                                                          ---------     --------     --------
INVESTING ACTIVITIES
  Loan originations                                                         (80,943)     (48,526)     (74,555)
  Purchases of loans                                                        (59,926)     (74,647)     (72,990)
  Loan principal payments                                                   147,296      106,019       71,724
  Principal repayments on mortgage-backed securities
    held to maturity                                                         41,499       41,456       24,827
  Principal repayments on mortgage-backed securities
    available for sale                                                       39,005       22,415       11,925
  Proceeds from loan sales                                                        -        1,480        1,669
  Purchases and maturities of certificates of deposit in other
    financial institutions, net                                                 (26)          (3)         656
  Purchases of investment and mortgage-backed securities
    held to maturity                                                         (9,650)           -      (96,595)
  Purchase of investment securities and mortgage-backed
    securities available for sale                                          (103,201)     (47,364)     (11,508)
</TABLE>

                                   (Continued)

                                       22
<PAGE>

                CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

                             Year ended December 31,
<TABLE>
<CAPTION>
                                                                                      2002         2001         2000
                                                                                   ---------    ---------    ---------
                                                                                              (in thousands)
<S>                                                                              <C>          <C>          <C>
Purchase of bank-owned life insurance                                              $       -    $  (9,000)   $       -
Proceeds from maturities of investment securities
  held to maturity                                                                     2,060       51,233       99,726
Proceeds from maturities of investment securities
  available for sale                                                                   8,000       18,501            -
Proceeds from the sale of investment and mortgage-backed
  securities available for sale                                                       38,380        4,890       41,892
(Purchase) redemption of Federal Home Loan Bank stock                                    (56)       1,674            -
(Purchase) sale of property, equipment and real estate held for investment              (769)       1,635            -
Proceeds from sales of real estate acquired through foreclosure                          275          163          452
Purchase of premises and equipment                                                      (272)        (357)      (1,273)
                                                                                   ---------    ---------    ---------
         NET CASH PROVIDED BY (USED IN)
           INVESTING ACTIVITIES                                                       21,672       69,569       (4,050)
                                                                                   ---------    ---------    ---------
FINANCING ACTIVITIES
  Net increase (decrease) in demand deposit/NOW accounts, passbook
    savings accounts and certificates of deposit                                      20,506       31,989         (847)
  Funding of sale of deposits                                                              -       (9,706)           -
  Net decrease in advances from Federal Home
    Loan Bank                                                                        (15,000)     (22,500)      (3,674)
  Net decrease in securities sold under agreements to repurchase                           -      (14,962)        (804)
  Net increase (decrease) in advances from borrowers for taxes and insurance              88           83          (40)
  Treasury stock acquired                                                               (376)      (1,110)      (1,972)
  Exercise of stock options                                                              249          278          483
  Common stock dividends paid                                                         (1,484)      (1,424)      (1,326)
                                                                                   ---------    ---------    ---------
         NET CASH PROVIDED BY (USED IN)
           FINANCING ACTIVITIES                                                        3,984      (17,352)      (8,180)
                                                                                   ---------    ---------    ---------
         NET INCREASE (DECREASE) IN CASH AND
           CASH EQUIVALENTS                                                           31,441       58,521       (6,097)

Cash and cash equivalents at beginning of year                                        69,139       10,618       16,715
                                                                                   ---------    ---------    ---------
Cash and cash equivalents at end of year                                           $ 100,580    $  69,139    $  10,618
                                                                                   =========    =========    =========
Supplemental disclosure of cash flow information
  Cash paid for
    Interest on deposits and advances from Federal Home Loan Bank                  $  23,525    $  27,816    $  28,122
    Income taxes                                                                   $   2,050    $   2,495    $   1,675
  Non-cash transactions
    Transfers from loans to real estate acquired through
      foreclosure                                                                  $       -    $       -    $     127
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       23
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 2002 and 2001


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    TF Financial  Corporation  (the  Corporation)  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,  ten  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 Corporation
    and its wholly  owned  subsidiaries:  Third  Federal,  and its wholly  owned
    subsidiary,  Third Delaware Corporation,  TF Investments,  Teragon Financial
    Corporation  and Penns  Trail  Development  Corporation  (collectively,  the
    Corporation).  All material intercompany balances and transactions have been
    eliminated in consolidation.

    The accounting policies of the Corporation 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  Corporation  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 Corporation  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
    Corporation classifies its investment, mortgage-backed and marketable equity
    securities  in one of  three  categories:  held  to  maturity,  trading,  or
    available for sale. The  Corporation  does not presently  engage in security
    trading activities.

                                   (Continued)

                                       24
<PAGE>


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2002 and 2001



NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    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.

    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 Corporation has the ability
    and it is management's intention to hold such assets to maturity.

    The Corporation accounts for derivatives under SFAS No. 133, "Accounting for
    Derivative  Instruments and Hedging  Activities" as amended in June, 1999 by
    SFAS No. 137, "Accounting for Derivative  Instruments and Hedging Activities
    - Deferral of the  Effective  Date of FASB  Statement No. 133," and in June,
    2000, by SFAS No. 138,  "Accounting for Certain  Derivative  Instruments and
    Certain  Hedging  Activities,"  (collectively  SFAS No.  133).  SFAS No. 133
    requires  that  entities  recognize  all  derivatives  as  either  assets or
    liabilities  in the  statement  of  financial  condition  and measure  those
    instruments  at fair  value.  Under SFAS No. 133 an entity may  designate  a
    derivative as a hedge of exposure to either  changes in: (a) fair value of a
    recognized  asset or  liability  or firm  commitment,  (b)  cash  flows of a
    recognized or  forecasted  transaction,  or (c) foreign  currencies of a net
    investment  in  foreign  operations,  firm  commitments,  available-for-sale
    securities or a forecasted transaction.  Depending upon the effectiveness of
    the hedge and/or the transaction being hedged,  any change in the fair value
    of the derivative instrument is either recognized in earnings in the current
    year,  deferred to future  periods,  or  recognized  in other  comprehensive
    income.  Changes  in the  fair  value  of  all  derivative  instruments  not
    recognized as hedge accounting are recognized in current year earnings.

    SFAS No. 119 "Disclosure  About  Derivative  Financial  Instruments and Fair
    Value of Financial  Instruments"  ("SFAS 119")  requires  disclosures  about
    financial  instruments,  which are  defined as futures,  forwards,  swap and
    option   contracts   and   other   financial    instruments   with   similar
    characteristics. On balance sheet receivables and payables are excluded from
    this  definition.  The  Corporation  did not hold any  derivative  financial
    instruments as defined by SFAS No. 119 at December 31, 2002, 2001 or 2000.

    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).

                                   (Continued)

                                       25
<PAGE>


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2002 and 2001



NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    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  Corporation  accounts  for  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.

    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)

                                       26
<PAGE>


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2002 and 2001



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 Corporation 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 Corporation.

    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
    Corporation has elected to apply SFAS No. 147 as of January 1, 2002.

    The  Corporation  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 Corporation has concluded was a
    business  combination  in  accordance  with SFAS No. 147. In  addition,  the
    Corporation has tested the goodwill and core deposit  intangible  assets for
    impairment  prior to its fiscal year ending December 31, 2002. No impairment
    has been recognized.

                                   (Continued)

                                       27

<PAGE>


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2002 and 2001



NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    7.  Transfers of Financial Assets
        -----------------------------

    The Corporation  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  Corporation  has  established an Employee  Stock  Ownership Plan (ESOP)
    covering  eligible  employees with six months of service,  as defined by the
    ESOP. The Corporation  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.

                                  (Continued)

                                       28
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2002 and 2001



NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    The  Corporation  has  several  fixed  stock  option  plans  that  allow the
    Corporation  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  Corporation's
    stock  on the  date of  grant.  The  Corporation  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  Corporation'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.

     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 Corporation's net income and
    earnings  per  share  would  have  been  reduced  to the pro  forma  amounts
    indicated below.  Information for the years ended December 31, 2001 and 2000
    has been revised to more accurately account for forfeitures.

<TABLE>
<CAPTION>
                                                                 2002        2001        2000
                                                              ---------   ---------   ---------
<S>                                                         <C>         <C>         <C>
Net income
  As reported                                                 $   5,092   $   5,733   $   4,482
  Deduct: stock-based compensation expense determined
    using the fair value method, net of related tax effects          58          64          52
                                                              ---------   ---------   ---------
  Pro forma                                                   $   5,034   $   5,669   $   4,430
                                                              =========   =========   =========

Basic earnings per share
  As reported                                                 $    2.06   $    2.32   $    1.76
  Deduct: stock-based compensation expense determined
    using the fair value method, net of related tax effects        0.02        0.02        0.02
                                                              ---------   ---------   ---------
  Pro forma                                                   $    2.04   $    2.30   $    1.74
                                                              =========   =========   =========

Diluted earnings per share
  As reported                                                 $    1.91   $    2.19   $    1.72
  Deduct: stock-based compensation expense determined
    using the fair value method, net of related tax effects        0.01        0.01        0.00
                                                              ---------   ---------   ---------
    Pro forma                                                 $    1.90   $    2.18   $    1.72
                                                              =========   =========   =========

Weighted  average fair value of options  granted during the
    year                                                      $    6.60   $    5.49   $    3.48
</TABLE>

                                   (Continued)

                                       29
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2002 and 2001


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

       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 2002, 2001 and 2000, respectively:  a
    dividend yield of 2.78%, 3.23%, and 4.32%;  expected volatility of 29%, 30%,
    and 30%,  risk-free  interest rate of 2.78%,  5.02%, and 6.16%, and expected
    lives of six years for all options.

    9.  Income Taxes
        ------------

    The  Corporation  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 Corporation expenses advertising costs as incurred.

    11. Earnings Per Share
        ------------------

    The  Corporation  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)

                                       30
<PAGE>


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2002 and 2001


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    12. Comprehensive Income
        --------------------

    The Corporation 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 Corporation's other comprehensive
    income consists of net unrealized gains and losses on investment  securities
    available  for  sale.  Comprehensive  income  for  2002,  2001  and 2000 was
    $6,203,000,  $6,882,000,  and  $7,203,000,  respectively.  The components of
    other comprehensive income are as follows:

<TABLE>
<CAPTION>
                                                                                    December 31, 2002
                                                                                    -----------------
                                                                                           Tax
                                                                   Before 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
                                                                                    -----------------
                                                                                           Tax
                                                                   Before 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>

<TABLE>
<CAPTION>
                                                                                    December 31, 2000
                                                                                    -----------------
                                                                                           Tax
                                                                   Before tax           (expense)         Net of tax
                                                                     amount              benefit            amount
                                                                     ------              -------            ------
                                                                                     (in thousands)
<S>                                                                 <C>              <C>                 <C>
Unrealized gains on securities
         Unrealized holding gains arising during period               $ 4,165          $ (1,414)           $ 2,751
Reclassification adjustment for gains realized in net income              (46)               16               (30)
                                                                      -------          --------            -------
Other comprehensive income, net                                       $ 4,119          $ (1,398)           $ 2,721
                                                                      =======          ========            =======
</TABLE>
                                   (Continued)

                                       31
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2002 and 2001



NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    13. Segment Reporting
        -----------------

    The  Corporation  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 Corporation has one reportable segment,  "Community Banking." All of the
    Corporation's  activities are  interrelated,  and each activity is dependent
    and assessed based on how each of the activities of the Corporation 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  Corporation  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,
                                                            -------------------
                                                              2002        2001
                                                            --------   --------
                                                              (in thousands)

Cash and due from banks                                     $  6,657   $ 11,176
Interest-bearing deposits in other financial institutions     93,823     57,863
Federal funds sold                                               100        100
                                                            --------   --------
                                                            $100,580   $ 69,139
                                                            ========   ========

                                       32
<PAGE>


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2002 and 2001



NOTE C - SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL

    The Bank has entered into purchases of securities under agreements to resell
    substantially  identical  securities.  However,  there  were  no  securities
    purchased  under  agreements to resell  during the years ended  December 31,
    2002 or 2001.



NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES

    The amortized cost, gross unrealized gains and losses, and fair value of the
    Corporation's investment and mortgage-backed securities at December 31, 2002
    and 2001, are summarized as follows:

<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)

                                       33
<PAGE>

                    TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2002 and 2001




NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued

<TABLE>
<CAPTION>
                                                              December 31, 2001
                                                              -----------------
                                                              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              $   5,743   $      44     $      -    $   5,787
  Corporate debt securities                         4,123           -          (80)       4,043
                                                ---------   ---------    ---------    ---------
                                                    9,866          44          (80)       9,830

Mortgage-backed securities held to maturity        93,367       1,449          (81)      94,735
                                                ---------   ---------    ---------    ---------

                                                $ 103,233   $   1,493    $    (161)   $ 104,565
                                                =========   =========    =========    =========
Investment securities available for sale
  U.S. Government and federal agencies          $  11,018   $      10    $     (99)   $  10,929
  Corporate debt securities                        11,070         202          (27)      11,245
  Mutual funds                                        500           -           (3)         497
                                                ---------   ---------    ---------    ---------
                                                   22,588         212         (129)      22,671

Mortgage-backed securities available for sale      98,656       1,491         (384)      99,763
                                                ---------   ---------    ---------    ---------

                                                $ 121,244   $   1,703    $    (513)   $ 122,434
                                                =========   =========    =========    =========
</TABLE>

    Gross realized  gains were  $1,190,000,  $7,000,  and $151,000 for the years
    ended December 31, 2002, 2001 and 2000,  respectively.  These gains resulted
    from the sale of investment and mortgage-backed securities of $37.2 million,
    $507,000,  and $18.9 million for the years ended December 31, 2002, 2001 and
    2000, respectively.

    Gross realized  losses were $0,  $133,000,  and $105,000 for the years ended
    December 31, 2002, 2001 and 2000,  respectively.  These losses resulted from
    the sale of investment and  mortgage-backed  securities of $0 million,  $4.4
    million,  and $23.0 million for the years ended December 31, 2002,  2001 and
    2000, respectively.


                                   (Continued)

                                      34
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2002 and 2001



NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued

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

<TABLE>
<CAPTION>
                                                      December 31, 2002
                                                      -----------------
                                           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                 $ 18,471   $ 18,518   $      -   $      -
   Due after one year through five years      8,027      8,261     11,193     11,640
   Due after five years through 10 years          -          -      2,155      2,326
   Due after 10 years                           453        464      1,215      1,121
                                           --------   --------   --------   --------
                                             26,951     27,243     14,563     15,187
Mortgage-backed securities                  112,663    115,243     54,592     57,346
                                           --------   --------   --------   --------
                                           $139,614   $142,486   $ 69,155   $ 72,533
                                           ========   ========   ========   ========
</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, 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>
                                   (Continued)

                                       35
<PAGE>


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2002 and 2001


NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued

<TABLE>
<CAPTION>
                                                             December 31, 2001
                                                             -----------------
                                                              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                            $ 35,000   $    789    $    (36)   $ 35,754
  FNMA certificates                               15,739        168         (35)     15,871
  GNMA certificates                               29,877        274           -      30,151
  Real estate mortgage investment conduit         12,550        218          (3)     12,765
  Other mortgage-backed securities                   201          -          (7)        194
                                                --------   --------    --------    --------
                                                $ 93,367   $  1,449    $    (81)   $ 94,735
                                                ========   ========    ========    ========

Mortgage-backed securities available for sale
  FHLMC certificates                            $  1,077   $     31           -    $  1,108
  FNMA certificates                               22,415         74         (30)     22,459
  GNMA certificates                                5,462         53           -       5,515
  Real estate mortgage investment conduit         69,702      1,333        (354)     70,681
                                                --------   --------    --------    --------
                                                $ 98,656   $  1,491    $   (384)   $ 99,763
                                                ========   ========    ========    ========
</TABLE>

    Investment  securities  having an aggregate  amortized cost of approximately
    $5.0 and $4.0 million were pledged to secure public deposits at December 31,
    2002 and 2001, 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.

                                       36
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2002 and 2001

NOTE E - LOANS RECEIVABLE

    Loans receivable are summarized as follows:

<TABLE>
<CAPTION>
                                                                           December 31,
                                                                           ------------
                                                                          2002         2001
                                                                          ----         ----
                                                                        (in thousands)
<S>                                                                <C>          <C>
First mortgage loans (principally conventional)
  Secured by one-to-four family residences                           $ 227,953    $ 222,016
  Secured by other non-residential properties                           85,493       93,572
  Construction loans                                                    12,026        9,824
                                                                     ---------    ---------
                                                                       325,472      325,412
Net deferred loan origination cost (fees) and unamortized premiums         377         (633)
                                                                     ---------    ---------
         Total first mortgage loans                                    325,849      324,779
                                                                     ---------    ---------

Consumer and other loans
  Commercial                                                             8,005        9,285
  Home equity and second mortgage                                       25,480       25,640
  Leases                                                                 2,246        3,544
  Other                                                                 10,490       16,154
                                                                     ---------    ---------
                                                                        46,221       54,623
                                                                     ---------    ---------
Unearned premiums                                                           69          205
                                                                     ---------    ---------
         Total consumer and other loans                                 46,290       54,828
                                                                     ---------    ---------
  Less allowance for loan losses                                        (2,047)      (1,972)
                                                                     ---------    ---------
         Total loans receivable                                      $ 370,092    $ 377,635
                                                                     =========    =========
</TABLE>

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

                                                   December 31,
                                                   ------------
                                       2002            2001            2000
                                      -------         -------         -------
                                                   (in thousands)
Balance at beginning of year          $ 1,972         $ 1,714         $ 1,917
Provision charged to income               988             500             410
Charge-offs, net                         (913)           (242)           (613)
                                      -------         -------         -------
Balance at end of year                $ 2,047         $ 1,972         $ 1,714
                                      =======         =======         =======

    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  $3.8  million and $3.8
    million at December 31, 2002 and 2001,  respectively.  Interest  income that
    would have been  recorded  under the  original  terms of such loans  totaled
    approximately $307,000,  $284,000, and $112,000 for the years ended December
    31,  2002,  2001  and  2000,  respectively.  No  interest  income  has  been
    recognized on non-accrual loans for any of the periods presented.


                                   (Continued)

                                       37
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2002 and 2001



NOTE E - LOANS RECEIVABLE - Continued

    The Bank has no  concentration  of loans to  borrowers  engaged  in  similar
    activities  that exceeded 10% of loans at December 31, 2002 and 2001. 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 $1,112,000,  and $1,039,000 at December 31, 2002 and
    2001,  respectively.  For  the  year  ended  December  31,  2002,  principal
    repayments of approximately $27,000 were received and $100,000 was disbursed
    to executive officers, directors or their related interests.

NOTE F - 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,
                                                        2002             2001
                                                      -------          -------
                                                           (in thousands)
Mortgage loan servicing portfolios
  FHLMC                                               $ 3,758          $ 6,789
  Other investors                                       8,203            7,068
                                                      -------          -------
                                                      $11,961          $13,857
                                                      =======          =======


    Custodial  balances   maintained  in  connection  with  the  foregoing  loan
    servicing totaled approximately  $149,000, and $287,000 at December 31, 2002
    and 2001, respectively. The net servicing revenue on mortgage loans serviced
    for others is immaterial for all periods presented.

NOTE G - PREMISES AND EQUIPMENT

    Premises and equipment are summarized as follows:

                                                              December 31,
                                          Estimated       ---------------------
                                        useful lives        2002          2001
                                        ------------      -------       -------
                                                             (in thousands)

Buildings                                 30 years        $ 6,483       $ 6,454
Leasehold improvements                     5 years          1,264         1,264
Furniture, fixtures and equipment         3-7 years         8,390         8,147
                                                          -------       -------
                                                           16,137        15,865
Less accumulated depreciation                              11,238        10,224
                                                          -------       -------
                                                            4,899         5,641
Land                                                        1,843         1,843
                                                          -------       -------
                                                          $ 6,742       $ 7,484
                                                          =======       =======

                                       38
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2002 and 2001


NOTE H - GOODWILL AND CORE DEPOSIT INTANGIBLE ASSET

A  reconciliation  of net income  and  earnings  per share to amounts  excluding
goodwill amortization for years prior to 2002 is as follows:

<TABLE>
<CAPTION>

(000s in thousands except per share amounts)                        2002     2001     2000
                                                                   ------   ------   ------
<S>                                                              <C>      <C>      <C>
     Reported net income                                           $5,092   $5,733   $4,482
     Add back: goodwill amortization, net of related tax benefit        -      293      293
                                                                   ------   ------   ------
     Adjusted net income                                           $5,092   $6,026   $4,775
                                                                   ======   ======   ======

Basic earnings per share
     Reported net income                                           $ 2.06   $ 2.32   $ 1.76
     Add back: goodwill amortization, net of related tax benefit        -     0.12     0.12
                                                                   ------   ------   ------
     Adjusted net income                                           $ 2.06   $ 2.44   $ 1.88
                                                                   ======   ======   ======

Diluted earnings per share
     Reported net income                                           $ 1.87   $ 2.15   $ 1.71
     Add back: goodwill amortization, net of related tax benefit        -     0.11     0.11
                                                                   ------   ------   ------
     Adjusted net income                                           $ 1.87   $ 2.26   $ 1.82
                                                                   ======   ======   ======
</TABLE>


Core deposit  intangible  amortization  for each of the five years subsequent to
December 31, 2002 is estimated to be as follows:

                        Year ending December 31,
                        ------------------------

                    2003                         $185,000
                    2004                          154,500
                    2005                          129,250
                    2006                           83,989
                                                 --------
                                                 $552,739
                                                 ========


                                       39
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2002 and 2001

NOTE I - DEPOSITS

    Deposits are summarized as follows:

                                                               December 31,
Deposit type                                                 2002        2001
------------                                              --------     --------
                                                             (in thousands)

Demand                                                     $20,810      $18,200
NOW                                                         48,496       46,990
Money Market                                                43,677       42,557
Passbook savings                                           182,813      169,576
                                                          --------     --------
Total demand, transaction and passbook deposits            295,796      277,323
Certificates of deposit                                    146,762      144,729
                                                          --------     --------
                                                          $442,558     $422,052
                                                          ========     ========

    The aggregate amount of certificates of deposit with a minimum  denomination
    of $100,000 was  approximately  $19.7  million and $17.3 million at December
    31, 2002 and 2001, respectively.

    At December 31, 2002, scheduled maturities of certificates of deposit are as
follows:

                            Year ending December 31,
--------------------------------------------------------------------------------
   2003        2004     2005      2006      2007      Thereafter      Total
   ----        ----     ----      ----      ----      ----------      -----
                             (in thousands)
$96,669     $27,193   $16,233   $1,471    $4,883        $  313     $146,762
=======     =======   =======   ======    ======        ======     ========


                                       40

<PAGE>


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2002 and 2001




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

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

                                            December 31,
                                            ------------
                              2002                             2001
                              ----                             ----
 Contractual                        Weighted                         Weighted
maturity date          Amount     average rate          Amount     average rate
-------------          ------     ------------          ------     ------------
                           (in thousands)

    2002            $       -            - %           $15,000          5.52%
    2003               27,000         5.70              27,000          5.70
    2004               52,000         5.23              52,000          5.23
    2005                5,000         6.58               5,000          6.58
    2006               25,000         5.44              25,000          5.44
    2008               70,000         5.62              70,000          5.62
    2009               25,000         4.86              25,000          4.86
    2010                3,359         6.70               3,359          6.70
                     --------         ----            --------          ----

                     $207,359         5.46%           $222,359          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, 2002.


NOTE K - BENEFIT PLANS

    The Bank  maintains a 401(k)  profit-sharing  plan for  eligible  employees.
    Participants may contribute up to 15% of pretax eligible  compensation.  The
    Bank makes discretionary  matching  contributions equal to 100% of the first
    $600 deferred.  Contributions to the 401(k) plan totaled  $52,000,  $48,000,
    and $48,000 in 2002, 2001 and 2000, respectively.


                                   (Continued)

                                       41
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2002 and 2001




NOTE K - BENEFIT PLANS - Continued

    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.

    The following  table sets forth the pension plan's funded status and amounts
    recognized in the consolidated statements of financial position at the dates
    indicated.

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

Change in benefit obligation
Benefit obligation at beginning of year          $ 1,991    $ 3,017
Service cost                                         172        114
Interest cost                                        163        194
Plan amendments                                       42          -
Actuarial loss                                      (405)       (96)
Benefits paid                                       (161)    (1,238)
                                                 -------    -------
Benefits obligation at end of year               $ 2,612    $ 1,991
                                                 =======    =======

Change in plan assets
Fair value of plan assets at beginning of year   $ 2,323    $ 2,713
Actual return on plan assets                         114        391
Employer contribution                                450        457
Benefits paid                                       (161)    (1,238)
                                                 -------    -------
Fair value of plan assets at end of year         $ 2,725    $ 2,323
                                                 =======    =======

Funded status
Unfunded accumulated benefits                    $   114    $   331
Unrecognized transition obligation                     9         15
Unrecognized net actuarial loss (gain)               325       (245)
Unrecognized prior service cost                      344        364
                                                 -------    -------
Prepaid benefit cost                             $   792    $   465
                                                 =======    =======

                                   (Continued)

                                       42
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2002 and 2001


NOTE K - BENEFIT PLANS - Continued

                                                  2002      2001      2000
                                                  ----      ----      ----

Weighted-average assumptions as of December 31
  Discount rate                                   6.75%     7.00%     7.50%
  Expected return on plan assets                  8.00      8.00      8.00
  Rate of compensation increase                   4.00      4.00      4.00

Components of net periodic benefit cost
  Service cost                                   $ 172     $ 114     $  68
  Interest cost                                    163       194       210
  Expected return on plan assets                  (185)     (231)     (204)
  Amortization of prior service cost                67        58        65
                                                 -----     -----     -----
  Net periodic benefit cost                      $ 217     $ 135     $ 139
                                                 =====     =====     =====

    The Corporation also maintains the following benefit plans:

    1.  Employee Stock Ownership Plan

    The  Corporation  established  an  internally  leveraged  ESOP for  eligible
    employees who have  completed six months of service with the  Corporation or
    its  subsidiaries.  The ESOP borrowed $4.2 million from the  Corporation  to
    purchase 423,200 newly issued shares of common stock. The Corporation  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
    Corporation accounts for its ESOP in accordance with SOP 93-6. As shares are
    released from collateral, the Corporation 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 $197,000,  $162,000, and $112,000 in 2002, 2001 and
    2000, respectively.

                                                          2002          2001
                                                       ----------    ----------

              Allocated shares                            133,200       126,600
              Unreleased shares                           240,100       252,300
                                                       ----------    ----------
                       Total ESOP shares                  373,300       378,900
                                                       ==========    ==========
              Fair value of unreleased shares          $5,933,900    $5,323,500
                                                       ==========    ==========


                                   (Continued)

                                       43
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2002 and 2001




NOTE K - BENEFIT PLANS - Continued

    2.  Stock Option Plans
        ------------------

    A summary of the status of the Corporation's  fixed stock option plans as of
    December  31,  2002,  and  changes  for each of the years in the  three-year
    period then ended is as follows:

<TABLE>
<CAPTION>
                                          2002                 2001                 2000
                                          ----                 ----                 ----
                                             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    652,443    $13.52    659,759    $13.23    698,185    $13.27
Options granted                      32,150     24.77     24,275     20.30     45,930     13.82
Options exercised                   (21,338)    11.66    (23,276)    11.81    (41,250)    11.72
Options forfeited                    (4,282)    15.93     (8,315)    15.03    (43,106)    15.62
                                    -------              -------              -------
Outstanding at end of year          658,973    $14.11    652,443    $13.52    659,759    $13.23
                                    =======              =======              =======
</TABLE>



    The following table summarizes  information about stock options  outstanding
    at December 31, 2002:

<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            2002           life (years)   price        2002             price
        ------            ----           ------------   -----        ----             -----
<S>                   <C>               <C>           <C>        <C>               <C>
     $11.50-14.13       393,770           2.15 years    $11.64     377,570           $11.56
     $14.50-18.00       195,343           4.14 years     15.97     187,410            16.02
     $19.00-28.00        69,860           8.69 years     22.88      15,182            22.17

</TABLE>

                                       44
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2002 and 2001


NOTE L - INCOME TAXES

    The components of income tax expense are summarized as follows:

<TABLE>
<CAPTION>
                                                                            Year ended December 31,
                                                                          2002       2001       2000
                                                                          ----       ----       ----
                                                                                (in thousands)
<S>                                                                  <C>        <C>        <C>
Federal
         Current                                                       $ 1,623    $ 2,257    $ 1,875
         Charge in lieu of income tax relating to stock compensation         -          3        170
         Deferred                                                          (19)      (172)      (122)
                                                                       -------    -------    -------
                                                                         1,604      2,088      1,923

State and local - current                                                    1        (18)         -
                                                                       -------    -------    -------
Income tax provision                                                   $ 1,605    $ 2,070    $ 1,923
                                                                       =======    =======    =======
</TABLE>

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

                                                   Year ended December 31,
                                                   -----------------------
                                                 2002       2001       2000
                                                 ----       ----       ----

Statutory federal income tax                     34.0%      34.0%      34.0%
Increase (decrease) resulting from
         Tax-exempt income                       (8.3)      (5.3)      (6.7)
         State tax, net of federal benefit        0.0        0.0        0.0
         Other                                   (1.7)      (2.2)       2.7
                                                 ----       ----       ----
                                                 24.0%      26.5%      30.0%
                                                 ====       ====       ====

                                   (Continued)

                                       45
<PAGE>


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2002 and 2001


NOTE L - INCOME TAXES - Continued

    Deferred taxes are included in the accompanying  consolidated  statements of
    financial  position at December 31, 2002 and 2001, 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, 2002 and 2001.  The  Corporation's  net
    deferred tax asset  (liability)  at December 31, 2002 and 2001, was composed
    of the following:

                                                           December 31,
                                                           ------------
                                                         2002       2001
                                                         ----       ----
                                                          (in thousands)
 Deferred tax assets
   Deferred loan origination fees                     $    12    $    35
   Deferred compensation                                  330        351
   Allowance for loan losses, net                         746        586
   Amortization                                           221        361
                                                      -------    -------
                                                        1,309      1,333
                                                      -------    -------
 Deferred tax liabilities
   Accrued pension expense                                492        534
   Unrealized gain on securities available for sale       976        405
   Other                                                   32         33
                                                      -------    -------
                                                        1,500        972
                                                      -------    -------
   Deferred tax (liability) asset                     $  (191)   $   361
                                                      =======    =======

    The  Corporation  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.

                                       46
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2002 and 2001



NOTE M - 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   Corporation'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 Corporation'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, 2002.

    As of December 31, 2002,  management  believes that the Bank met all capital
    adequacy requirements to which it was subject.

<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 gain 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      50,983       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%    $24,237        7.25%
                                              =======       =====       =======       =====     =======       =====

</TABLE>

                                   (Continued)

                                       47
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2002 and 2001



NOTE M- REGULATORY MATTERS - Continued

<TABLE>
<CAPTION>
                                                                       Regulatory capital
                                                                       ------------------
                                                                       December 31, 2001
                                                                       -----------------
                                                    Tangible                   Core                 Risk-based
                                              Capital      Percent      Capital      Percent    Capital     Percent
                                              -------      -------      -------      -------    -------     -------
<S>                                         <C>            <C>        <C>            <C>      <C>           <C>
Capital under generally
  accepted accounting principles              $55,074        7.78%      $55,074        7.78%    $55,074       16.10%

Unrealized loss on certain
  available-for-sale securities                  (785)      (0.11)         (785)      (0.11)       (785)      (0.23)

Goodwill and other intangible assets           (5,099)      (0.72)       (5,099)      (0.72)     (5,099)      (1.50)
Additional capital items
  General valuation allowances - limited            -           -             -           -       1,972        0.58
                                            ---------       -----     ---------       -----   ---------       -----

Regulatory capital computed                    49,190        6.95        49,190        6.95      51,162       14.95

Minimum capital requirement                    10,618        1.50        28,313        4.00      27,374        8.00
                                            ---------       -----     ---------       -----   ---------       -----
Regulatory capital - excess                 $  38,572        5.45%    $  20,877        2.95%  $  23,788        6.95%
                                            =========       =====     =========       =====   =========       =====

</TABLE>

    At  December  31,  2002,  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.

                                       48

<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2002 and 2001



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

    The Corporation 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 Corporation'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 Corporation uses the same credit policies in making
    commitments  and  conditional  obligations  as it does for  on-balance-sheet
    instruments.

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

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

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

               Commitments to extend credit              $35,983        $28,799
               Standby letters of credit                   1,548          2,338
               Loans sold with recourse                      163            175
                                                       ---------      ---------
                                                       $  37,694      $  31,312
                                                       =========      =========

    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  Corporation  evaluates  each
    customer's   creditworthiness   on  a  case-by-case  basis.  The  amount  of
    collateral  obtained,  if it is deemed  necessary  by the  Corporation  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.

                                       49

<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2002 and 2001



NOTE O - COMMITMENTS AND CONTINGENCIES

    The Bank had no  commitments to sell mortgage loans to investors at December
    31, 2002 and 2001.

    The Bank leases  branch  facilities  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 $279,000, $316,000,
    and  $343,000  for the  years  ended  December  31,  2002,  2001  and  2000,
    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,
                         ------------------------

                    2003                       $190,001
                    2004                        139,364
                    2005                         78,285
                    2006                         38,475
                    2007                         38,475
                    Thereafter                   38,475
                                               --------
                                               $523,075
                                               ========


    The  Corporation  has agreements  with certain key  executives  that provide
    severance  pay benefits if there is a change in control of the  Corporation.
    The  agreements  will continue in effect until  terminated or not renewed by
    the Corporation or key executives. Upon a change in control, the Corporation
    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, 2002 was approximately $2,439,000.

    From time to time,  the  Corporation  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 Corporation's consolidated financial position
    or results of operations.

NOTE P - 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 area will  deteriorate,  thereby  potentially
    impairing collateral values in the primary lending area. However, management
    believes that  residential  and commercial  real estate values are presently
    stable in its primary  lending area and that loan loss  allowances have been
    provided  for in amounts  commensurate  with its current  perception  of the
    foregoing risks in the portfolio.

                                       50

<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2002 and 2001



NOTE Q- 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  Corporation'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 Corporation 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.

    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.

                                                  December 31,
                                                  ------------
                                      2002                       2001
                                      ----                       ----
                                 Fair       Carrying       Fair     Carrying
                                 value       value         value      value
                                 -----       -----         -----      -----
                                                (in thousands)

Cash and cash equivalents       $100,580    $100,580     $ 69,139   $ 69,139
Investment securities             42,431      41,806       32,501     32,537
Mortgage-backed securities       172,589     169,835      194,498    193,130


                                   (Continued)

                                       51
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2002 and 2001



NOTE Q - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued

    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,
                                                             ------------
                                                    2002                   2001
                                                    ----                   ----
                                               Fair    Carrying       Fair     Carrying
                                               value    value         value     value
                                               -----    -----         -----     -----
                                                               (in thousands)
<S>                                       <C>         <C>         <C>         <C>
Assets
  Interest-bearing deposits with banks     $    220    $    220    $    194    $    194
Liabilities
  Deposits with stated maturities           149,033     146,762     146,227     144,729
  Borrowings with stated maturities
    Short-term (due within 6 months)         15,125      15,000           -           -
    Long-term                               210,613     192,359     231,648     222,359
</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).

                                                        December 31,
                                                        ------------
                                              2002                 2001
                                              ----                 ----
                                          Fair     Carrying     Fair    Carrying
                                          value     Value       value     value
                                          -----     -----       -----     -----
                                                     (in thousands)

Deposits with no stated maturities     $295,796    $295,796    $277,323 $277,323
                                       ========    ========    ======== ========

    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.


                                     December 31,
                                     ------------
                         2002                        2001
                         ----                        ----
                    Fair      Carrying          Fair      Carrying
                    value      value            value       value
                    -----      -----            -----       -----
                                    (in thousands)

Net loans          $382,796   $370,092         $386,302   $377,635
                   ========   ========         ========   ========


                                   (Continued)

                                       52
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2002 and 2001



NOTE Q - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued

    The fair value of  commitments  to extend  credit is estimated  based on the
    amount of  unamortized  deferred  loan  commitment  fees.  The fair value of
    letters of credit is based on the amount of unearned fees plus the estimated
    cost to  terminate  the  letters  of  credit.  Fair  values of  unrecognized
    financial  instruments  including  commitments to extend credit and the fair
    value of letters of credit are considered immaterial.

    The 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 R - SERVICE FEES, CHARGES AND OTHER OPERATING INCOME AND OTHER OPERATING
            EXPENSE

                                                         Year ended December 31,
                                                         -----------------------
                                                          2002     2001     2000
                                                          ----     ----     ----

(in thousands)

Service fees, charges and other operating income
  Loan servicing fees                                   $  338   $  241   $  329
  Late charge income                                        99      105      126
  Deposit service charges                                  750      835      548
  Bank-owned life insurance value increase                 520      174        -
  Other income                                             407      379      350
                                                        ------   ------   ------
                                                        $2,114   $1,734   $1,353
                                                        ======   ======   ======

Other operating expense
  Insurance and surety bond                             $  146   $  128   $  120
  Office supplies                                          192      249      202
  Loan expense                                             272      359      342
  Loan servicing fees                                      127      223      258
  Postage                                                  299      261      140
  Telephone                                                262      286      242
  Service charges on bank accounts                          95      205      423
  Supervisory examination fees                             148      141      138
  Other expenses                                           795      720      829
                                                        ------   ------   ------
                                                        $2,336   $2,572   $2,694
                                                        ======   ======   ======

NOTE S - SHAREHOLDER RIGHTS PLAN

    The  Corporation  adopted a  Shareholder  Rights Plan (the  Rights  Plan) to
    protect  shareholders from attempts to acquire control of the Corporation at
    an inadequate  price.  Under the Rights Plan, the Corporation  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 Corporation earlier redeems the Rights.

                                   (Continued)

                                       53
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2002 and 2001



NOTE S - SHAREHOLDER RIGHTS PLAN - Continued

    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  Corporation's  common shares or the common shares of
    the potential acquirer at a substantially reduced price.

    The Corporation 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 Corporation's common stock.  Following the acquisition by a person or
    group of  beneficial  ownership of 15% or more of the  Corporation'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  Corporation.  The issuance of rights has no dilutive
    effect,  did not affect the  Corporation's  reported earnings per share, and
    was not taxable to the Corporation or its shareholders.

NOTE T - 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).  Diluted  earnings per share
    calculations  for the  years  ended  December  31,  2001 and 2000  have been
    revised to more accurately  account for the tax benefit  associated with the
    exercise of non-qualified  stock options.  As originally  reported,  diluted
    earnings per share for the years ended December 31, 2001 and 2000 were $2.15
    and $1.71, respectively.

<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)

                                       54
<PAGE>


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2002 and 2001



NOTE T - 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.

<TABLE>
<CAPTION>
                                                               Year ended December 31, 2000
                                                               ----------------------------
                                                                            Weighted
                                                                             average
                                                             Income          shares        Per share
                                                           (numerator)    (denominator)      amount
                                                           -----------    -------------      ------
<S>                                                         <C>           <C>            <C>
Basic earnings per share
  Income available to common stockholders                     $ 4,482       2,540,242      $  1.76

Effect of dilutive securities
  Stock options                                                     -          58,895        (0.04)
                                                              -------       ---------      -------
Diluted earnings per share
  Income available to common stockholders plus
    effect of dilutive securities                             $ 4,482       2,599,137      $  1.72
                                                              =======       =========      =======
</TABLE>

    There were options to purchase  207,929 shares of common stock at a range of
    $14.75 to $28.00 per share which were outstanding  during 2000 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.


                                       55

<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2002 and 2001



NOTE U - SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATE (UNAUDITED)

<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>

                                   (Continued)

                                       56
<PAGE>


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2002 and 2001



NOTE U - SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED) - Continued

<TABLE>
<CAPTION>
                                                            Three months ended
                                                            ------------------
                                              Dec. 31,     Sept. 30,   June 30,    March 31,
                                                2001         2001        2001       2001
                                               -------     -------     -------     -------
                                                   (in thousands, except per share data)
<S>                                         <C>         <C>         <C>         <C>
Total interest income                          $11,130     $11,470     $11,817     $12,330
Total interest expense                           6,431       6,653       6,733       7,091

  Net interest income                            4,699       4,817       5,084       5,239

Provision for possible loan losses                 127         124         124         125
                                               -------     -------     -------     -------

  Net interest income after provision            4,572       4,693       4,960       5,114

Other income                                     1,489         474         809         400
Other expenses                                   3,784       3,627       3,486       3,811
                                               -------     -------     -------     -------

  Income before income taxes                     2,277       1,540       2,283       1,703

Income taxes                                       641         389         595         445
                                               -------     -------     -------     -------

  Net income                                   $ 1,636     $ 1,151     $ 1,688     $ 1,258
                                               =======     =======     =======     =======

Earnings per share - basic                     $  0.66     $  0.47     $  0.69     $  0.51
Earnings per share - assuming dilution         $  0.62     $  0.44     $  0.65     $  0.49
</TABLE>


                                       57

<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2002 and 2001



NOTE V - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY

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

                                  BALANCE SHEET
                                                                 December 31,
                                                                 ------------
                                                                2002       2001
                                                              -------    -------
                                                                (in thousands)
                                     ASSETS

Cash                                                          $ 5,683    $ 2,458
Certificates of deposit - other institutions                      220        194
Investment securities available-for-sale                            -          -
Investment in Third Federal                                    53,311     52,551
Investment in TF Investments                                    2,282      2,261
Investment in Teragon                                               9         10
Investment in Penns Trail Development                           1,045        275
Other assets                                                      315        226
                                                              -------    -------
          Total assets                                        $62,865    $57,975
                                                              =======    =======

          LIABILITIES AND STOCKHOLDERS' EQUITY

Total liabilities                                             $    25    $     -
Stockholders' equity                                           62,840     57,975
                                                              -------    -------
           Total liabilities and stockholders' equity         $62,865    $57,975
                                                              =======    =======

                              STATEMENT OF EARNINGS

                                                      Year ended December 31,
                                                      -----------------------
                                                    2002        2001        2000
                                                    ----        ----        ----
                                                           (in thousands)
 INCOME
   Equity in earnings of subsidiaries             $5,269      $5,825      $4,573
   Interest and dividend income                      110         108         140
   Other                                               -          29           -
                                                  ------      ------      ------

         Total income                              5,379       5,962       4,713

 EXPENSES
   Other                                             287         229         231
                                                  ------      ------      ------

         Total expenses                              287         229         231
                                                  ------      ------      ------

         NET INCOME                               $5,092      $5,733      $4,482
                                                  ======      ======      ======


                                   (Continued)

                                       58
<PAGE>


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2002 and 2001



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

                             STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                           Year ended December 31,
                                                         2002       2001       2000
                                                       -------    -------    -------
                                                              (in thousands)
<S>                                                  <C>        <C>        <C>
Cash flows from operating activities
  Net income                                           $ 5,092    $ 5,733    $ 4,482
  Adjustments to reconcile net income to net cash
    provided  by (used in)  operating activities
      Equity in earnings of subsidiaries                (5,269)    (5,825)    (4,573)
      Gain on sale of investment securities                  -         (7)         -
      Net change in assets and liabilities                 (64)       (97)       (56)
                                                       -------    -------    -------

         Net cash used in operating activities            (241)      (196)      (147)
                                                       -------    -------    -------

Cash flows from investing activities
  Capital distribution from subsidiaries                 5,853      2,053      2,938
  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                   (26)        (4)        (9)
                                                       -------    -------    -------

         Net cash provided by investing activities       5,077      2,556      2,929
                                                       -------    -------    -------

Cash flows from financing activities
  Cash dividends paid to stockholders                   (1,484)    (1,424)    (1,326)
  Treasury stock acquired                                 (376)    (1,110)    (1,972)
  Exercise of stock options                                249        278        483
                                                       -------    -------    -------

         Net cash used in financing activities          (1,611)    (2,256)    (2,815)
                                                       -------    -------    -------

         NET INCREASE (DECREASE) IN CASH                 3,225        104        (33)
                                                       -------    -------    -------

Cash at beginning of year                                2,458      2,354      2,387
                                                       -------    -------    -------

Cash at end of year                                    $ 5,683    $ 2,458    $ 2,354
                                                       =======    =======    =======

Supplemental disclosure of cash flow information
  Cash paid during the year for income taxes           $     -    $     -    $     -
                                                       =======    =======    =======

</TABLE>

                                       59