UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K
(mark one)

|X|   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934
               For the fiscal year ended June 30, 2006

                                       OR

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

               For the transition period from___________to___________

                         Commission file number 0-24040

                        PENNFED FINANCIAL SERVICES, INC.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

<TABLE>
<CAPTION>
<S>                                                              <C>
                          Maryland                                          22-3297339
--------------------------------------------------------------   ------------------------------------
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

      622 Eagle Rock Avenue, West Orange, New Jersey                        07052-2989
-----------------------------------------------------------------------------------------------------
         (Address of principal executive offices)                            (Zip Code)
</TABLE>

Registrant's telephone number, including area code: (973) 669-7366
                                                    ----------------------------

           Securities Registered Pursuant to Section 12(b) of the Act:

          Title of each class          Name of each exchange on which registered
          -------------------          -----------------------------------------
Common Stock, par value $.01 per share           Nasdaq Global Market
     Common Stock Purchase Rights                Nasdaq Global Market

           Securities Registered Pursuant to Section 12(g) of the Act:
                                      None

      Indicate by check mark if the registrant is a well-known  seasoned issuer,
as defined in Rule 405 of the Securities Act. YES |_|. NO |X|.

      Indicate by check mark if the  registrant  is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. YES |_|. NO |X|.

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

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

      Indicate  by check mark  whether  the  registrant  is a large  accelerated
filer,  an accelerated  filer,  or a  non-accelerated  filer.  See definition of
"accelerated  filer and large  accelerated  filer" in Rule 12b-2 of the Exchange
Act.

(Check one):

Large accelerated filer ___.   Accelerated filer X .  Non-accelerated filer ___.
                                                ---

      Indicate  by check mark  whether  the  registrant  is a shell  company (as
defined in Rule 12b-2 of the Exchange Act). YES |_|. NO |X|.

      The aggregate market value of the voting stock held by  non-affiliates  of
the registrant,  computed by reference to the closing price of such stock on the
Nasdaq Global Market as of December 31, 2005, was  $205,111,000.  (The exclusion
from such amount of the market value of the shares owned by any person shall not
be deemed an admission by the registrant that such person is an affiliate of the
registrant.)

      As of  September  1, 2006,  there were issued and  outstanding  12,848,722
shares of the Registrant's Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

Part III of Form 10-K - Portions of the Proxy Statement for 2006 Annual Meeting
                                of Stockholders.

<PAGE>

                            PennFed Financial Services, Inc. and Subsidiaries
                                      2006 Annual Report on Form 10-K
                                           Contents of Report

<TABLE>
<CAPTION>
                                                                                                  Page
                                                                                                Number
                                                                                                ------
<S>       <C>                                                                                       <C>
PART I
ITEM 1.   Business ...........................................................................       1
ITEM 1A.  Risk Factors .......................................................................      21
ITEM 1B.  Unresolved Staff Comments ..........................................................      22
ITEM 2.   Properties .........................................................................      22
ITEM 3.   Legal Proceedings ..................................................................      22
ITEM 4.   Submission of Matters to a Vote of Security Holders ................................      23

PART II
ITEM 5.   Market for the Registrant's Common Equity and Related Stockholder Matters ..........      24
ITEM 6.   Selected Financial Data ............................................................      25
ITEM 7.   Management's Discussion and Analysis of Financial Condition and Results of Operation      27
ITEM 7A.  Quantitative and Qualitative Disclosures About Market Risk .........................      45
ITEM 8.   Financial Statements and Supplementary Data ........................................      46
ITEM 9.   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure      80
ITEM 9A.  Controls and Procedures ............................................................      80
ITEM 9B.  Other Information ..................................................................      80

PART III
ITEM 10.  Directors and Executive Officers of the Registrant .................................      81
ITEM 11.  Executive Compensation .............................................................      81
ITEM 12.  Security Ownership of Certain Beneficial Owners and Management
            and Related Stockholder Matters ..................................................      81
ITEM 13.  Certain Relationships and Related Transactions .....................................      82
ITEM 14.  Principal Accountants Fees and Services ............................................      82

PART IV
ITEM 15.  Exhibits and Financial Statement Schedules .........................................      83
</TABLE>


<PAGE>

                                     PART I

Item 1.  Business

General

PennFed  Financial  Services,  Inc.  ("PennFed" and with its  subsidiaries,  the
"Company"), a Maryland corporation,  was organized in March 1994 for the purpose
of becoming the savings and loan holding  company for Penn Federal  Savings Bank
("Penn Federal" or the "Bank") in connection  with the Bank's  conversion from a
federally  chartered mutual savings bank to a federally  chartered stock savings
bank (the "Conversion"). PennFed owns all of the outstanding common stock of the
Bank.  The Company's  common stock is traded on the Nasdaq Global Market Tier of
the Nasdaq Stock Market under the symbol "PFSB."

PennFed and the Bank are subject to  comprehensive  regulation,  examination and
supervision  by the  Office  of  Thrift  Supervision  of the  Department  of the
Treasury ("OTS") and by the Federal Deposit Insurance Corporation ("FDIC").  The
Bank is a member of the Federal Home Loan Bank ("FHLB")  System.  Penn Federal's
deposits are insured up to applicable limits by the FDIC.

The  Company  has been,  and  intends to  continue  to be, a  community-oriented
financial institution offering a variety of financial services to meet the needs
of the  communities it serves.  The Company  attracts  deposits from the general
public and uses these  deposits,  together with  borrowings and other funds,  to
originate and purchase one- to four-family residential mortgage loans, and, to a
lesser extent, to originate commercial and multi-family real estate and consumer
loans. See "Originations,  Purchases, Sales and Servicing of Loans." The Company
also  invests  in  mortgage-backed  securities  secured  by one- to  four-family
residential mortgages,  U.S. government agency obligations and other permissible
investments.

The  Company  offers  many  types of  deposit  accounts  having a wide  range of
interest rates and terms,  which generally  include savings,  money market,  and
checking  accounts,  as well as  certificate  accounts.  The  Company  generally
solicits deposits in its primary market areas.

At June 30, 2006,  the Company had total assets of  approximately  $2.3 billion,
deposits of $1.4 billion, borrowings of $748 million and stockholders' equity of
$123 million.

Penn Federal offers uninsured  non-deposit  investment  products and through its
wholly-owned  subsidiary,  Penn Savings Insurance Agency, Inc., offers insurance
products to its customers.  Through the Bank's wholly-owned subsidiary,  PennFed
Title  Service  Corporation,  the Bank has a 49%  ownership  interest in a title
insurance  agency  known  as Eagle  Rock  Title  Agency,  LLC.  See  "Subsidiary
Activities."

In October  1997,  Penn Federal  formed Ferry  Development  Holding  Company,  a
Delaware operating subsidiary.  In November 2002, Penn Federal formed Eagle Rock
Investment  Corp.,  a New Jersey  investment  company.  Both  companies hold and
manage investment portfolios for the Bank.

The administrative  offices of the Company are located at 622 Eagle Rock Avenue,
West Orange, New Jersey 07052-2989,  and the telephone number at that address is
(973) 669-7366.

The Company's reports,  proxy statements and other information the Company files
with  the  Securities  and  Exchange  Commission  (the  "SEC"),  as  well as the
Company's news releases,  are available free of charge through our Internet site
at  http://www.pennfsb.com.  The  SEC  filings  can  be  found  under  "Investor
Relations" on the "Documents" page of the Company's Internet site. The Company's
Annual Report on Form 10-K,  Quarterly Reports on Form 10-Q,  Current Reports on
Form 8-K, and amendments to those reports filed or furnished pursuant to Section
13(a) of the Exchange Act are available as soon as reasonably  practicable after
they have been filed with the SEC.  Reference to the Company's  Internet address
is not intended to incorporate any of the information  contained on our Internet
site into this document.


                                       1
<PAGE>

Forward-Looking Statements

When used in this Form 10-K and in future  filings by the Company  with the SEC,
in the Company's  press releases or other public or shareholder  communications,
and in oral  statements  made  with  the  approval  of an  authorized  executive
officer,  the words or phrases  "will likely  result,"  "are expected to," "will
continue," "is anticipated,"  "estimate,"  "project" or similar  expressions are
intended  to  identify  "forward-looking  statements"  within the meaning of the
Private  Securities  Litigation Reform Act of 1995. These statements are subject
to certain risks and uncertainties,  including,  among other things,  changes in
economic and  competitive  conditions in the Company's  market area,  changes in
laws and  regulations  and in policies by regulatory  agencies,  fluctuations in
interest  rates and demand for loans in the  Company's  market area,  the credit
risks of lending  activities,  including  changes in the level and  direction of
loan  delinquencies  and  write-offs and changes in estimates of the adequacy of
the  allowance  for loan  losses,  the  Company's  ability to attract and retain
depositors and to obtain cost-effective  funding, the relationship of short-term
interest rates to long-term  interest rates and the Company's  ability to manage
its interest rate risk,  competition  and terrorist acts that could cause actual
results  to differ  materially  from  historical  earnings  and those  presently
anticipated  or projected.  The Company  wishes to caution  readers not to place
undue  reliance on any  forward-looking  statements,  which speak only as of the
date made.  The Company  wishes to advise readers that the factors listed above,
as well as other factors,  could affect the Company's financial  performance and
could cause the Company's actual results for future periods to differ materially
from any opinions or statements  expressed with respect to future periods in any
current statements.

The Company will not undertake -- and specifically declines any obligation -- to
publicly  release  the  result  of  any  revisions  which  may  be  made  to any
forward-looking  statements to reflect events or circumstances after the date of
these  statements or to reflect the occurrence of  anticipated or  unanticipated
events.

Market Area

The Company's primary market areas are comprised of the Ironbound section of the
City of Newark and surrounding  communities,  the suburban Essex County area and
selected areas of  central/southern  New Jersey,  which are serviced  through 24
full service  offices.  Penn Federal was organized in the  Ironbound  section of
Newark in 1941 and the home  office of the Bank  remains  there.  The  Ironbound
section  of the City of Newark  and  immediately  adjacent  communities  of East
Newark and  Harrison  are  primarily  urban blue  collar  areas with two or more
family dwellings and some manufacturing and industry.  The Company entered Union
County in fiscal  2004 with the  opening of a branch in the  township  of Union.
Deposits  at Bank  branches in the  Ironbound  section of the City of Newark and
surrounding  communities  and the township of Union  comprised 28% of total Bank
deposits  at  June  30,  2006.  The  suburban  Essex  County  area  consists  of
communities with  predominantly  single family homes and a white collar commuter
population.  Suburban Essex County is the Bank's largest market area, accounting
for  approximately  43% of total Bank deposits at June 30, 2006.  Penn Federal's
central/southern New Jersey branches are located in selected areas of Middlesex,
Monmouth and northern Ocean counties. The central/southern region branches, with
29% of total Bank deposits at June 30, 2006,  serve  retirement  populations and
expanding townhouse,  multi-family and single family home developments. The Bank
also originates  loans secured by properties  throughout New Jersey and areas in
eastern  Pennsylvania and, from time to time, purchases one-to four-family loans
secured  by  properties  primarily  located  in New  Jersey  and other  selected
Northeastern  states.  See  "Originations,  Purchases,  Sales and  Servicing  of
Loans."

Lending Activities

General.  The Company  primarily  originates  fixed and adjustable rate, one- to
four-family  first  mortgage  loans.  The Company's  policy is to originate such
loans,  in  general,  with  maturities  between  10 and 30  years.  The  Company
underwrites   mortgage  loans   generally  using  Freddie  Mac  and  Fannie  Mae
guidelines,  although  loan  amounts  may exceed  agency  limits.  A  conforming
mortgage loan is defined as a mortgage loan that meets all  requirements  (size,
type and age) to be eligible for purchase or securitization by federal agencies,
such as Freddie Mac and Fannie Mae. The Company has purchased loans from time to
time generally under the same guidelines  under which it originates  loans.  See
"Loan  Portfolio  Composition"  and "One- to  Four-Family  Residential  Mortgage
Lending."

The Company also  originates  commercial and  multi-family  (five units or more)
real estate  loans and  consumer  loans.  These  loans  generally  reprice  more
frequently,  have shorter  maturities and/or have higher yields than fixed rate,
one- to  four-family  mortgage  loans.  In addition,  as part of its  commercial
lending  activities,  the Company originates loans under an accounts  receivable
financing  program for small and  mid-sized  businesses  and  business  lines of
credit secured by non-real estate assets.


                                       2
<PAGE>

Residential and consumer loan  applications  may be approved by various officers
up to $1.5 million.  Commercial and multi-family  real estate loan  applications
are initially  considered by the Senior Vice President of the Commercial Lending
Group. Generally, commercial and multi-family real estate loans must be approved
by the Executive Loan Committee which consists of the Chief  Executive  Officer,
Chief Operating Officer,  Chief Financial Officer,  the Executive Vice President
of the Residential Lending Group and the Senior Vice President of the Commercial
Lending Group. The approval of the Bank's Board of Directors is required for all
loans or relationships above $1.5 million.

The  aggregate  amount  of  loans  that  the  Bank is  permitted  to make  under
applicable federal regulations to any one borrower,  including related entities,
or the  aggregate  amount  that the Bank could have lent to any one  borrower is
generally  15% of  unimpaired  capital  and  surplus.  See  "Regulation-Federal
Regulation of Savings  Associations  by the OTS." At June 30, 2006,  the maximum
amount  which the Bank could have lent to any one  borrower  and the  borrower's
related entities was approximately  $26.2 million.  The Company's current policy
is to limit such loans to a maximum of 50% of the  general  regulatory  limit or
$10.0 million, whichever is less. Any exception to this policy requires approval
of the Board of  Directors.  At June 30, 2006,  the  Company's  largest group of
loans to one  borrower  (and any  related  entities)  totaled  $8.1  million and
consisted of four  commercial  real estate loans of $5.0 million,  $1.3 million,
$1.3 million and $445,000.  At June 30, 2006,  there were a total of 25 loans or
lender  relationships  in excess of $1.5  million,  for a total  amount of $77.7
million.  At that date,  all of these loans were  performing in accordance  with
their respective repayment terms.

Loan Portfolio  Composition.  The following  table sets forth the composition of
the Company's loan portfolio at the dates indicated.

<TABLE>
<CAPTION>
                                                                      June 30,
                                      ----------------------------------------------------------------------
                                               2006                     2005                    2004
                                      ----------------------------------------------------------------------
                                        Amount      Percent      Amount     Percent      Amount     Percent
                                      ----------------------------------------------------------------------
                                                              (Dollars in thousands)
<S>                                   <C>           <C>       <C>           <C>       <C>          <C>
First mortgage loans:
  One- to four-family(1) ..........   $ 1,302,447    77.55%   $ 1,148,489    78.52%   $   996,659    77.46%
  Commercial and multi-family(2) ..       172,600    10.28        169,765    11.61        172,244    13.39
                                      ----------------------------------------------------------------------
       Total first mortgage loans .     1,475,047    87.83      1,318,254    90.13      1,168,903    90.85
                                      ----------------------------------------------------------------------
Other loans:
  Consumer loans:
    Second mortgages ..............       153,024     9.11         91,147     6.23         67,538     5.25
    Home equity lines of credit ...        47,500     2.83         49,901     3.41         46,288     3.60
    Other .........................         3,922     0.23          3,375     0.23          3,862     0.30
                                      ----------------------------------------------------------------------
       Total consumer loans .......       204,446    12.17        144,423     9.87        117,688     9.15
                                      ----------------------------------------------------------------------
       Total loans ................     1,679,493   100.00%     1,462,677   100.00%     1,286,591   100.00%
                                                    ======                  ======                  ======
Add/(less):
  Unamortized premiums,
    deferred loan costs, and
       other, net .................        10,619                   8,853                   7,131
  Allowance for loan losses .......        (5,888)                 (6,050)                 (6,249)
                                      ----------------------------------------------------------------------
  Total loans receivable
    and loans held for sale, net ..   $ 1,684,224             $ 1,465,480             $ 1,287,473
                                      ======================================================================

<CAPTION>
                                                          June 30,
                                      ---------------------------------------------
                                               2003                     2002
                                      ---------------------------------------------
                                        Amount      Percent      Amount     Percent
                                      ---------------------------------------------
                                                  (Dollars in thousands)
<S>                                   <C>            <C>      <C>            <C>
First mortgage loans:
  One- to four-family(1) ..........   $   946,560    77.01%   $ 1,172,145    81.53%
  Commercial and multi-family(2) ..       165,905    13.50        144,585    10.06
                                      ---------------------------------------------
       Total first mortgage loans .     1,112,465    90.51      1,316,730    91.59
                                      ---------------------------------------------
Other loans:
  Consumer loans:
    Second mortgages ..............        67,290     5.47         58,671     4.08
    Home equity lines of credit ...        44,308     3.61         55,247     3.85
    Other .........................         5,060     0.41          6,948     0.48
                                      ---------------------------------------------
       Total consumer loans .......       116,658     9.49        120,866     8.41
                                      ---------------------------------------------
       Total loans ................     1,229,123   100.00%     1,437,596   100.00%
                                                    ======                  ======
Add/(less):
  Unamortized premiums,
    deferred loan costs, and
       other, net .................         6,079                   9,485
  Allowance for loan losses .......        (6,284)                 (5,821)
                                      ---------------------------------------------
  Total loans receivable
    and loans held for sale, net ..   $ 1,228,918             $ 1,441,260
                                      =============================================
</TABLE>

--------------
(1)   One-to  four-family  loans include  loans held for sale of $217,000,  $4.8
      million,  $11.5 million and $1.6 million at June 30, 2006,  2005, 2003 and
      2002, respectively. There were no loans held for sale at June 30, 2004.

(2)   Commercial  and  multi-family   loans  include  loans  under  an  accounts
      receivable  financing  program  for small  and  mid-sized  businesses  and
      business  lines of credit  secured  by  non-real  estate  business  assets
      totaling $6.4 million, $8.6 million, $12.6 million, $12.6 million and $9.1
      million at June 30, 2006, 2005, 2004, 2003 and 2002, respectively.

Loan Maturity. The following schedule sets forth the contractual maturity of the
Company's loan portfolio as of June 30, 2006.  Loans that have adjustable  rates
are shown as amortizing to final  maturity  rather than when the interest  rates
are next  subject  to  change.  Loans with  balloon  payments  are also shown as
amortizing  to final  maturity  (i.e.,  when the  balloon  payment is due).  All
balances are shown on a gross basis and,  thus, do not include the allowance for
loan losses or adjustments for premiums or deferred loan costs.  Savings account
loans and overdraft checking balances, included in consumer loans, which have no
stated final  maturity,  are reported as due within one year. The table does not
reflect the effects of possible prepayments or scheduled principal amortization.


                                       3
<PAGE>

<TABLE>
<CAPTION>
                                                After One    After Three    After Five       After Ten
                                   One Year      Through       Through        Through         Through        After
                                    or Less    Three Years   Five Years      Ten Years     Twenty Years    Twenty Years   Total
                                   -----------------------------------------------------------------------------------------------
                                                                           (In thousands)
<S>                                <C>         <C>           <C>           <C>             <C>             <C>          <C>
First mortgage loans:
   One- to four-family .........   $     857   $     4,409   $     4,241   $      57,508   $     373,829   $  861,603   $1,302,447
   Commercial and multi-family .       7,461         1,801         4,688          37,296         120,938          416      172,600
                                   -----------------------------------------------------------------------------------------------
      Total first mortgage loans       8,318         6,210         8,929          94,804         494,767      862,019    1,475,047
Other loans:
   Consumer loans ..............       2,685         3,862         8,325          34,970         113,020       41,584      204,446
                                   -----------------------------------------------------------------------------------------------
      Total loans, gross .......   $  11,003   $    10,072   $    17,254   $     129,774   $     607,787   $  903,603   $1,679,493
                                   ===============================================================================================
</TABLE>

Loans due after June 30, 2007,  which have fixed  interest  rates amount to $1.2
billion, while those with adjustable rates amount to $424.5 million, detailed as
follows:

                                                  Due After June 30, 2007
                                            ------------------------------------
                                              Fixed      Adjustable     Total
                                            ------------------------------------
                                                        (In thousands)
First mortgage loans:
   One- to four-family .................    $1,037,502    $264,088    $1,301,590
   Commercial and multi-family .........        52,235     112,904       165,139
                                            ------------------------------------
      Total first mortgage loans .......     1,089,737     376,992     1,466,729
Other loans:
   Consumer loans ......................       154,283      47,478       201,761
                                            ------------------------------------
      Total loans, gross ...............    $1,244,020    $424,470    $1,668,490
                                            ====================================

One- to  Four-Family  Residential  Mortgage  Lending.  At  June  30,  2006,  the
Company's one- to four-family  residential  mortgage loans totaled $1.3 billion,
or approximately  77.6% of the Company's gross loan portfolio.  Residential loan
originations are generated by the Company's in-house  originations staff through
marketing  efforts,  present  customers,  walk-in  customers and referrals  from
attorneys,  accounting firms, real estate agents, mortgage brokers and builders.
The Company  focuses its lending  efforts  primarily on the origination of loans
secured by first mortgages on  owner-occupied,  one- to four-family  residences.
During  the fiscal  year ended June 30,  2006,  the  Company  originated  $327.4
million of real estate loans secured by first  mortgages on one- to  four-family
residential  real estate.  All of the Company's one- to four-family  residential
mortgage  originations  are  secured by  properties  located in the State of New
Jersey and areas in eastern Pennsylvania.

The Company currently originates one- to four-family  residential mortgage loans
with terms of up to 30 years in amounts up to 95% of the appraised  value of the
property.  The Company  generally  requires that private  mortgage  insurance be
obtained in an amount sufficient to reduce the Company's exposure to 80% or less
of the  loan-to-value  level.  Interest rates charged on loans are appropriately
priced according to market and competitive conditions.

In underwriting  one- to four-family  residential real estate loans, the Company
evaluates the borrower's  ability to make monthly payments,  past credit history
and the value of the property securing the loan. Properties securing real estate
loans made by the Company are  appraised  by a licensed  in-house  appraiser  or
independent appraisers,  all of whom are approved by the Board of Directors. The
Company requires  borrowers to obtain title insurance in the amount of the loan.
In  addition,  the  Company  requires  borrowers  to  obtain  fire and  property
insurance  (including flood insurance up to a maximum available of $500,000,  if
necessary) in the amount of the replacement  cost. Real estate loans  originated
and purchased by the Company contain a "due on sale" clause allowing the Company
to declare the unpaid  principal  balance  due and payable  upon the sale of the
property.

Commercial  and  Multi-Family  Real  Estate  Lending.  The  Company  engages  in
commercial and multi-family  real estate lending  primarily in its market areas.
At June 30, 2006, the Company had $172.6 million of commercial and  multi-family
real estate loans which represented 10.3% of the Company's gross loan portfolio.
This amount  includes $1.3 million of lines of credit secured by non-real estate
business assets and $5.1 million of loans under an accounts receivable financing
program for small and mid-sized  businesses.  At June 30, 2006,  the average per
loan balance of the  Company's  commercial  and  multi-family  real estate loans
outstanding was $464,000. As of June 30, 2006, approximately 70% of the loans in
the commercial and multi-family  real estate loan portfolio were adjustable rate
loans.


                                       4
<PAGE>

The Company's  commercial and multi-family real estate loan portfolio is secured
primarily by first mortgage liens on apartment  buildings,  mixed-use buildings,
small office  buildings,  restaurants,  warehouses and strip  shopping  centers.
Commercial and  multi-family  real estate loans typically have terms that do not
exceed 15 years and have a variety of rate adjustment  features and other terms.
Generally, the loans are made in amounts up to 75% of the appraised value of the
property. Adjustable rate commercial and multi-family real estate loans normally
provide  for a margin  over  various  U.S.  Treasury  securities  adjusted  to a
constant maturity,  with periodic adjustments,  or are tied to the prime rate as
reported in the Wall Street Journal.  In underwriting  these loans,  the Company
analyzes the current financial condition of the borrower,  the borrower's credit
history,  the value of the property  securing the loan, and the  reliability and
predictability of the cash flow generated by the property securing the loan. The
Company usually requires  personal  guarantees of individuals who are principals
of the borrowers. Appraisals on properties securing commercial real estate loans
originated by the Company are performed by  independent  appraisers  approved by
the Board of Directors.

Commercial and multi-family  real estate loans generally  present a higher level
of risk than loans secured by one- to four-family residences.  This greater risk
is due to several  factors,  including the  concentration in a limited number of
loans  and   borrowers,   the  effect  of   general   economic   conditions   on
income-producing  properties  and the increased  difficulty  of  evaluating  and
monitoring these types of loans. Furthermore,  the repayment of loans secured by
commercial  and  multi-family  real  estate  is  typically  dependent  upon  the
successful  operation of the related real estate project.  If the cash flow from
the  project is reduced  (e.g.,  if leases are not  obtained  or renewed or if a
major tenant is unable to fulfill its lease obligations), the borrower's ability
to repay the loan may be impaired.

Under the  accounts  receivable  financing  program,  credit is  extended to the
customer  based upon the amount of  receivables  purchased by the  Company.  The
Company has actual ownership of these receivables.  Remittances from the account
debtors of the customer are made directly to the Company's lockbox account. Risk
under this type of lending is  further  limited by the  establishment  of a cash
collateral  reserve  account  used to  offset  any  receivables  that do not pay
timely. Furthermore, accounts receivable default and fraud insurance is obtained
as additional protection. The facility can be terminated at the Company's option
upon 60 days notice to the customer.  Accounts receivable financing is done with
full recourse to the customer and is generally  guaranteed by the  principals of
the customer. In addition to the accounts receivable as collateral,  the Company
typically obtains additional  collateral in the form of a lien on the customer's
business assets and/or real estate.

Consumer  Lending.  The  Company  offers a variety  of secured  consumer  loans,
including home equity lines of credit, second mortgages,  automobile loans, boat
loans and loans secured by savings  deposits.  In addition,  the Company  offers
unsecured overdraft checking  protection.  At June 30, 2006, the Company's total
consumer  loan  portfolio  was  $204.4  million,  or  12.2%  of its  gross  loan
portfolio,  of  which  approximately  76% were  fixed  rate  loans  and 24% were
adjustable rate loans. The Company  originates  nearly all of its consumer loans
throughout the State of New Jersey and areas in eastern Pennsylvania.

The Company  originates  adjustable  rate home equity  lines of credit and fixed
rate second  mortgage  loans.  Home equity  lines of credit and second  mortgage
loans,  together with loans secured by all prior liens, are generally limited to
80% of the appraised  value of the property  securing the loan. The Company also
offers 100% equity  financing up to $100,000,  with these loans  re-underwritten
and insured through a mortgage  insurance  company.  As of June 30, 2006, second
mortgage  loans  have a maximum  term of up to 20 years.  Home  equity  lines of
credit may have draw periods up to 10 years with repayment  terms up to 15 years
beyond the draw period.  As of June 30,  2006,  second  mortgage  loans and home
equity  lines of credit  amounted  to $200.5  million or 98.1% of the  Company's
consumer loan portfolio.

Consumer  loan  terms vary  according  to the type and value of  collateral  and
length of  contract.  The  underwriting  standards  employed  by the Company for
consumer  loans  include an  application,  a  determination  of the  applicant's
payment history on other debts and an assessment of the  applicant's  ability to
meet  existing   obligations  and  payments  on  the  proposed  loan.   Although
creditworthiness of the applicant is a primary  consideration,  the underwriting
process also  includes a  comparison  of the value of the  security,  if any, in
relation to the proposed loan amount.

Consumer loans may entail greater  credit risk than  residential  first mortgage
loans,  particularly  in the case of consumer loans which are secured by rapidly
depreciable   assets,  such  as  automobiles  and  boats.  In  such  cases,  any
repossessed  collateral  from a  defaulted  consumer  loan  may not  provide  an
adequate source of repayment of the outstanding  loan balance as a result of the
greater likelihood of damage, loss or depreciation.  In addition,  consumer loan
collections are dependent on the borrower's continuing financial stability,  and
thus  are  more  likely  to  be  affected  by  adverse  personal  circumstances.
Furthermore,  the  application  of various  federal  and state  laws,  including
bankruptcy and  insolvency  laws, may limit or eliminate the amount which can be
recovered on such loans.


                                       5
<PAGE>

Originations, Purchases, Sales and Servicing of Loans

For the year ended June 30,  2006,  the  Company  originated  $501.2  million of
loans,  compared to $479.7  million and $528.0  million in fiscal 2005 and 2004,
respectively.  Mortgage  loan  originations  are  handled  by  employees  of the
Company.

During the year ended June 30, 2006, the Company purchased $13.4 million of one-
to four-family  first mortgage loans.  There were no loans purchased  during the
year ended June 30,  2005.  During the year  ended June 30,  2004,  the  Company
purchased $53.0 million of one- to four-family first mortgage loans.  During the
year  ended  June 30,  2006,  loans  secured by  properties  in New Jersey  were
purchased through a correspondent  relationship with a mortgage company that was
able to originate,  fund and sell shorter duration one- to four-family  loans to
the Bank. With a decline in mortgage refinance activity in fiscal 2006, the loan
purchases were a means to maintain the Company's loan production levels. For the
year  ended June 30,  2004,  the  purchased  loans  represented  large bulk loan
purchases  of  adjustable  rate  and  fixed  rate  first  mortgages  secured  by
properties  primarily located in selected  northeastern and mid-Atlantic  states
(i.e.,  Connecticut,   Delaware,  Maryland,   Massachusetts,   Pennsylvania  and
Virginia).  The fiscal 2004 loan  purchases  were viewed as a means of investing
excess cash from the high levels of loan prepayments.

From time to time,  the Company has engaged in loan sale  strategies  -- selling
loans  to  Freddie  Mac and  other  secondary  market  purchasers,  and to other
financial  institutions,  as a part of its efforts to manage interest rate risk.
During  the  year  ended  June  30,  2006,   approximately   $29.5   million  of
predominately  conforming,  fixed rate one- to four-family residential mortgage
loans were sold into the secondary  market and to other financial  institutions,
respectively.  During the year ended June 30, 2005,  approximately $35.6 million
of predominately conforming, fixed rate one- to four-family residential mortgage
loans were sold into the secondary  market and to other financial  institutions,
respectively.  During the year ended June 30, 2004, approximately $87.4 million
of predominately conforming, fixed rate one- to four-family residential mortgage
loans were sold into the secondary  market and to other financial  institutions,
respectively.  In addition,  during the year ended June 30, 2004, a $3.0 million
commercial  real  estate  loan  participation  was sold as a means to reduce the
Company's credit exposure on a single commercial real estate property.

The  level  of  loan  sale  activity  is  continuously  evaluated  with  primary
consideration given to interest rate risk  management,  long-term  profitability
and liquidity objectives.

When loans are sold, the Company may retain the responsibility for servicing the
loans or may sub-service the loans for a short term period. The Company receives
a fee for performing  these services.  The Company serviced for others primarily
one- to  four-family  mortgage  loans with an  aggregate  outstanding  principal
balance of $76.1 million, $69.1 million and $66.3 million at June 30, 2006, 2005
and 2004,  respectively.  At June 30, 2006 and 2005,  the carrying  value of the
Company's  mortgage  servicing rights was immaterial in relation to total assets
and is included in Other  assets on the  Company's  Consolidated  Statements  of
Financial Condition.


                                       6
<PAGE>

The following  table sets forth the activity in the Company's loan portfolio for
the years indicated.

<TABLE>
<CAPTION>
                                                                             Year ended June 30,
                                                                    ------------------------------------
                                                                        2006         2005         2004
                                                                    ------------------------------------
                                                                               (In thousands)
<S>                                                                 <C>          <C>          <C>
Net loans receivable and loans held for sale at beginning of year   $1,465,480   $1,287,473   $1,228,918

Plus:
   Loans originated:
       One- to four-family ......................................      327,445      350,274      409,799
       Commercial and multi-family real estate ..................       42,060       38,612       43,222
       Consumer .................................................      131,729       90,808       75,002
                                                                    ------------------------------------
          Total loans originated ................................      501,234      479,694      528,023
                                                                    ------------------------------------

   One- to four-family loans purchased ..........................       13,407           --       53,034
                                                                    ------------------------------------

          Total loans originated and purchased ..................      514,641      479,694      581,057
                                                                    ------------------------------------
Less:
   Loans sold ...................................................       29,540       35,643       90,395
   Loan principal payments and other, net .......................      265,880      265,572      432,107
   Loans transferred to real estate owned .......................          477          472           --
                                                                    ------------------------------------
Net loans receivable and loans held for sale at end of year .....   $1,684,224   $1,465,480   $1,287,473
                                                                    ====================================
</TABLE>

Non-Performing and Classified Assets

Generally,  when a borrower  fails to make a required  payment on a real  estate
secured loan or other secured loan,  collection  procedures  are initiated with
the mailing of a late charge  notice and the customer is contacted by telephone.
At the end of the first month, a  delinquency  notice is issued.  In many cases,
delinquencies are cured promptly;  however,  if a loan secured by real estate or
other  collateral has been  delinquent for more than 65 days, a letter of notice
of  intention  to  foreclose  is sent  and the  customer  is  requested  to make
arrangements to bring the loan current. At 95 days past due, unless satisfactory
arrangements  have been made,  immediate  repossession  commences or foreclosure
procedures are instituted.  For unsecured loans,  the collection  procedures are
similar;  however,  at 90 days past due, a specific  reserve  or  charge-off  is
recommended  and,  subsequently,  a lawsuit is filed, if necessary,  to obtain a
judgement.


                                       7
<PAGE>

The  table  below  sets  forth  the   Company's   amounts  and   categories   of
non-performing  assets and restructured  loans.  Loans are placed on non-accrual
status when the collection of principal or interest becomes delinquent more than
90 days.  There  are no loans  delinquent  more  than 90 days  which  are  still
accruing.  Real estate owned  represents  assets  acquired in the  settlement of
loans  (generally  through  foreclosure  or a deed in lieu)  and is shown net of
valuation allowances.

<TABLE>
<CAPTION>
                                                          At June 30,
                                        ----------------------------------------------
                                          2006      2005      2004      2003      2002
                                        ----------------------------------------------
                                                   (Dollars in thousands)
<S>                                     <C>       <C>       <C>       <C>       <C>
Non-accruing loans:
 One- to four-family ................   $1,025    $1,713    $2,158    $1,451    $2,905
 Commercial and multi-family ........      731       904        --        --        --
 Consumer ...........................       24         2        24       231       370
                                        ----------------------------------------------
  Total non-accruing loans ..........    1,780     2,619     2,182     1,682     3,275


Real estate owned, net ..............       --        --        --        28        28
                                        ----------------------------------------------
   Total non-performing assets ......    1,780     2,619     2,182     1,710     3,303

Restructured loans ..................       61        --        --        --        --
                                        ----------------------------------------------
   Total risk elements ..............   $1,841    $2,619    $2,182    $1,710    $3,303
                                        ==============================================
Non-accruing loans as a percentage
    of total loans ..................     0.11%     0.18%     0.17%     0.14%     0.23%
                                        ==============================================
Non-performing assets as a percentage
    of total assets .................     0.08%     0.13%     0.11%     0.09%     0.17%
                                        ==============================================
Total risk elements as a percentage
    of total assets .................     0.08%     0.13%     0.11%     0.09%     0.17%
                                        ==============================================
</TABLE>

For the year ended June 30, 2006,  gross  interest  income which would have been
recorded  had the  non-accruing  loans  been  current in  accordance  with their
original  terms  amounted  to  $36,000;  $1,000 of this  amount was  included in
interest income for the year ended June 30, 2006.

Non-Performing Assets. Non-accruing loans at June 30, 2006 were comprised of ten
one-  to  four-family  loans   aggregating  $1,025,000,   two  commercial  loans
aggregating $731,000 and three consumer loans aggregating $24,000.  Non-accruing
loans  at  June  30,  2005  were  comprised  of 13  one-  to  four-family  loans
aggregating  $1,713,000,  three  commercial loans  aggregating  $904,000 and six
consumer loans aggregating $2,000.

Other Loans of Concern.  As of June 30,  2006,  there were $2.9 million of other
loans not included in the table or discussed above where known information about
the possible credit problems of borrowers caused management to have doubts as to
the ability of the  borrower to comply with  present  loan  repayment  terms and
which may result in  disclosure  of such  loans in the  future.  These  loans of
concern have been  considered by management in conjunction  with the analysis of
the adequacy of the allowance for loan losses.

Classified Assets.  Federal  regulations provide for the classification of loans
and other assets such as debt and equity securities  considered by the OTS to be
of lesser quality as "substandard," "doubtful" or "loss." An asset is considered
"substandard"  if it is  inadequately  protected  by the  current  net worth and
paying  capacity  of  the  obligor  or  of  the   collateral  pledged,  if  any.
"Substandard"  assets include those characterized by the "distinct  possibility"
that the savings  institution  will sustain "some loss" if the  deficiencies are
not  corrected.  Assets  classified  as  "doubtful"  have all of the  weaknesses
inherent in those classified  "substandard," with the added  characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently  existing  facts,  conditions  and values,  "highly  questionable  and
improbable."  Assets  classified as "loss" are those considered  "uncollectible"
and of such little value that the   establishment  of a specific loss reserve is
warranted.

When a savings  institution  classifies  problem assets as either substandard or
doubtful,  it may  establish  general  allowances  for loan  losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been  established  to recognize the inherent risk  associated  with lending
activities.  When a savings institution  classifies problem assets as "loss," it
is required to either establish a specific reserve equal to 100% of that portion
of the asset so classified or to charge-off such amount.


                                       8
<PAGE>

In  connection  with the  filing  of its  periodic  reports  with the OTS and in
accordance with its  classification of assets policy, the Bank regularly reviews
the  assets  in  its   portfolio  to  determine   whether  any  assets   require
classification  in  accordance  with  applicable  regulations.  On the  basis of
management's review of its assets at June 30, 2006, the Bank's classified assets
totaled $2.3 million,  of which $1.6 million were classified as substandard.  At
June 30,  2006,  total  classified  assets  represented  1.83% of the  Company's
stockholders' equity and 0.10% of the Company's total assets.

Allowance for Loan Losses. The allowance for loan losses is established  through
charges to income  based on   management's  evaluation  of the  probable  credit
losses  presently  inherent in the Company's loan portfolio.  This   evaluation,
which  includes  a review  of loans  for which  full  collectibility  may not be
reasonably  assured,   considers  among  other  matters,   loan  classifications
discussed above, the estimated fair value of the underlying collateral, economic
conditions,  historical loan loss experience,  portfolio growth and composition
and other  factors that warrant  recognition  in providing  for an adequate loan
loss allowance.

Real estate properties acquired through foreclosure are recorded at the lower of
cost or estimated  fair value less costs to dispose of such  properties.  If the
fair value at the date of  foreclosure  is lower than the balance of the related
loan, the difference will be charged-off to the allowance for loan losses at the
time of transfer.  Valuations are periodically  updated by management and if the
value  declines,  a  specific  provision  for  losses  on real  estate  owned is
established by a charge to income.

Although  management  believes  that it uses the best  information  available to
determine  the  allowances,   unforeseen   market  conditions  could  result  in
adjustments and earnings could be significantly affected if circumstances differ
substantially  from the  assumptions  used in making  the  final  determination.
Future additions to the Company's allowance will be the result of periodic loan,
property and  collateral  reviews and thus cannot be  predicted  in advance.  In
addition,  federal  regulatory  agencies, as an integral part of the examination
process,  periodically  review the Company's  allowance  for loan losses.  These
agencies  may require the Company to record  additions  to the  allowance  level
based upon their assessment of the information  available to them at the time of
examination.  See Item 7.  Management's  Discussion  and  Analysis of  Financial
Condition and Results of Operations "-Critical Accounting Policies."


                                       9
<PAGE>
The following  table sets forth an analysis of the Company's  allowance for loan
losses at the dates and for the periods  indicated.

<TABLE>
<CAPTION>
                                                           Year ended June 30,
                                        -------------------------------------------------------
                                          2006        2005        2004        2003        2002
                                        -------------------------------------------------------
                                                         (Dollars in thousands)
<S>                                     <C>         <C>         <C>         <C>         <C>
Balance at beginning of year ........   $ 6,050     $ 6,249     $ 6,284     $ 5,821     $ 4,248

Charge-offs:
  One- to four-family ...............      (127)       (165)         --         (20)        (20)
  Commercial and multi-family .......        (4)         (2)         --          --          --
  Consumer ..........................       (31)        (32)        (35)        (42)        (32)
                                        -------------------------------------------------------
                                           (162)       (199)        (35)        (62)        (52)
                                        -------------------------------------------------------

Recoveries:
  One- to four-family ...............        --          --          --          --          --
  Commercial and multi-family .......        --          --          --          --          --
  Consumer ..........................        --          --          --          --          --
                                        -------------------------------------------------------
                                             --          --          --          --          --
                                        -------------------------------------------------------

Net charge-offs .....................      (162)       (199)        (35)        (62)        (52)
Additions charged to operations .....        --          --          --         525       1,625
                                        -------------------------------------------------------
Balance at end of year ..............   $ 5,888     $ 6,050     $ 6,249     $ 6,284     $ 5,821
                                        =======================================================

Ratio of net charge-offs during the
  year to average loans outstanding
  during the year ...................      0.01%       0.01%       0.00%       0.00%       0.00%
                                        =======================================================

Ratio of allowance for loan losses
  to total loans at end of year .....      0.35%       0.41%       0.48%       0.51%       0.40%
                                        =======================================================

Ratio of allowance for loan losses to
  non-accruing loans at end of year .    330.79%     231.00%     286.39%     373.60%     177.74%
                                        =======================================================
</TABLE>

The  distribution  of the  Company's  allowance  for loan  losses  at the  dates
indicated is summarized in the following table.

<TABLE>
<CAPTION>
                                                                      June 30,
                            -----------------------------------------------------------------------------------------------
                                    2006                    2005                   2004                     2003
                            ----------------------------------------------------------------------------------------------
                                       Percent of              Percent of              Percent of              Percent of
                                         Loans in                Loans in                Loans in                Loans in
                                             Each                    Each                    Each                    Each
                                         Category                Category                Category                Category
                                         to Total                to Total                to Total                to Total
                              Amount        Loans     Amount        Loans     Amount        Loans     Amount        Loans
                            ----------------------------------------------------------------------------------------------
                                                                 (Dollars in thousands)
<S>                          <C>           <C>       <C>            <C>      <C>           <C>      <C>            <C>
One- to four-family ......   $ 2,819        77.55%   $ 3,006        78.52%   $ 2,896        77.46%   $ 2,869        77.01%
Commercial and
  multi-family real estate     2,314        10.28      2,396        11.61      2,768        13.39      2,767        13.50
Consumer .................       755        12.17        648         9.87        585         9.15        648         9.49
                            ----------------------------------------------------------------------------------------------

    Total ................   $ 5,888       100.00%   $ 6,050       100.00%   $ 6,249       100.00%   $ 6,284       100.00%
                            ==============================================================================================

<CAPTION>
                                  June 30,
                            ----------------------
                                    2002
                            ----------------------
                                       Percent of
                                         Loans in
                                             Each
                                         Category
                                         to Total
                              Amount        Loans
                            ----------------------
                            (Dollars in thousands)
<S>                          <C>            <C>
One- to four-family ......   $ 2,928        81.53%
Commercial and
  multi-family real estate     2,040        10.06
Consumer .................       853         8.41
                             --------------------

    Total ................   $ 5,821       100.00%
                             ====================
</TABLE>


                                       10
<PAGE>

Investment Activities

General.  The Bank maintains  appropriate  levels of  investments  for liquidity
purposes.  Liquidity may increase or decrease depending upon the availability of
funds and comparative  yields on investments in relation to the return on loans.
Historically,  the Bank has  maintained  its liquid  assets at a level  believed
adequate to meet the  requirements  of normal  daily  activities,  repayment  of
maturing debt and potential deposit outflows.

At June 30, 2006, the Company had a securities portfolio consisting  principally
of U.S.  government agency securities and  mortgage-backed  securities issued by
Ginnie  Mae,  Freddie  Mac and Fannie Mae.  These  investments  carry a low risk
weighting for OTS risk-based  capital purposes and are considered liquid assets.
See  "Regulation-Regulatory  Capital  Requirements."  The majority of investment
securities  and  all  mortgage-backed  securities  were  classified  as  held to
maturity at June 30, 2006,  as the Company has a positive  intent and ability to
hold these securities to maturity.  All investment  securities not classified as
held to maturity are classified as available for sale.

The following table sets forth the  composition of the Company's  investment and
mortgage-backed securities portfolios at the dates indicated.

<TABLE>
<CAPTION>
                                                                      June 30,
                                         ----------------------------------------------------------------
                                                      2006                               2005
                                         ----------------------------------------------------------------
                                                    Estimated   Percent               Estimated   Percent
                                                       Fair     of Total                Fair     of Total
                                         Carrying     Market    Carrying   Carrying    Market    Carrying
                                           Value      Value      Value       Value      Value      Value
                                         ----------------------------------------------------------------
                                                                (Dollars in thousands)
<S>                                      <C>        <C>          <C>       <C>        <C>            <C>
Investment securities:
Available for sale:
   Equity securities .................   $  4,936   $  4,936       1.04%   $  5,011   $  5,011       1.16%
                                         ----------------------------------------------------------------
Held to maturity:
   U.S. government
       agency obligations ............    406,470    386,621      85.93     371,487    371,270      85.81
   Corporate bonds ...................      1,018      1,144       0.22       1,022      1,236       0.24
   Trust preferred securities ........     32,872     32,898       6.95      32,989     34,220       7.62
                                         ----------------------------------------------------------------
       Total held to maturity ........    440,360    420,663      93.10     405,498    406,726      93.67
                                         ----------------------------------------------------------------
       Total investment securities ...    445,296    425,599      94.14     410,509    411,737      94.83
FHLB of New York stock ...............     27,714     27,714       5.86      22,391     22,391       5.17
                                         ----------------------------------------------------------------
       Total investment securities
          and FHLB of New York stock .   $473,010   $453,313     100.00%   $432,900   $434,128     100.00%
                                         ================================================================

Mortgage-backed securities:
       Ginnie Mae ....................   $     55   $     58       0.09%   $    151   $    163       0.19%
       Freddie Mac ...................     28,382     27,378      45.08      35,221     35,581      45.04
       Fannie Mae ....................     34,413     33,444      54.65      42,529     43,204      54.38
       Collateralized Mortgage
        Obligations/REMICs/IOs .......         13         13       0.02         161        161       0.21
                                         ----------------------------------------------------------------
                                           62,863     60,893      99.84      78,062     79,109      99.82
   Unamortized premiums, net .........        100         --       0.16         139         --       0.18
                                         ----------------------------------------------------------------
      Total mortgage-backed securities   $ 62,963   $ 60,893     100.00%   $ 78,201   $ 79,109     100.00%
                                         ================================================================

<CAPTION>

                                                    June 30,
                                         ------------------------------
                                                      2004
                                         ------------------------------
                                                    Estimated   Percent
                                                       Fair    of Total
                                         Carrying     Market   Carrying
                                           Value      Value      Value
                                         ------------------------------
                                             (Dollars in thousands)
<S>                                      <C>        <C>            <C>
Investment securities:
Available for sale:
   Equity securities .................   $  4,720   $  4,720       1.05%
                                         ------------------------------
Held to maturity:
   U.S. government
       agency obligations ............    386,134    377,610      86.05
   Corporate bonds ...................      1,026      1,276       0.23
   Trust preferred securities ........     33,100     34,329       7.37
                                         ------------------------------
       Total held to maturity ........    420,260    413,215      93.65
                                         ------------------------------
       Total investment securities ...    424,980    417,935      94.70
FHLB of New York stock ...............     23,773     23,773       5.30
                                         ------------------------------
       Total investment securities
          and FHLB of New York stock .   $448,753   $441,708     100.00%
                                         ==============================

Mortgage-backed securities:
       Ginnie Mae ....................   $    249   $    271       0.25%
       Freddie Mac ...................     45,526     45,718      45.49
       Fannie Mae ....................     53,860     54,430      53.82
       Collateralized Mortgage
        Obligations/REMICs/IOs .......        225        225       0.22
                                         ------------------------------
                                           99,860    100,644      99.78
   Unamortized premiums, net .........        219         --       0.22
                                         ------------------------------
      Total mortgage-backed securities   $100,079   $100,644     100.00%
                                         ==============================
</TABLE>

Investment  Securities.  At June 30, 2006, the Company's  investment  securities
(including  $4.9 million of investment   securities  available for sale,  $440.4
million of investment securities held to maturity and a $27.7 million investment
in FHLB of New York stock) totaled $473.0 million, or 20.5% of its total assets.
The Company's  general  policy is to purchase  U.S.  government  securities  and
federal agency  obligations and other  investment grade securities in accordance
with its strategic objectives, including, but not limited to, liquidity, growth,
yield  and  interest  rate  risk  management  and  to  provide   collateral  for
borrowings.  In prior years,  PennFed invested in certain  non-investment  grade
trust preferred  securities of other financial  institutions.  At June 30, 2006,
PennFed held $10.9 million of such non-investment grade securities. In addition,
investment  securities  at June 30, 2006  included  $22.0  million of investment
grade trust preferred securities.


                                       11
<PAGE>

OTS regulations limit investments in corporate debt and equity securities by the
Bank. See "Regulation-Federal Regulation of Savings Associations by the OTS" for
a discussion of additional restrictions on the Company's investment activities.

The following table indicates the composition of the held to maturity portion of
the  investment  securities  portfolio  based on the  final  maturities  of each
investment.  Securities  in the  investment  portfolio  in the  amount of $439.3
million have call features and, thus,  depending on future interest  rates,  may
have a much shorter life than final maturity.

<TABLE>
<CAPTION>
                                                                       June 30, 2006
                              ---------------------------------------------------------------------------------------------------
                                                             After                     After
                                                           One Year                  Five Years                 After
                                  One Year                  Through                    Through                   Ten
                                   or Less                 Five Years                 Ten Years                  Years
                              ---------------------------------------------------------------------------------------------------
                               Book      Weighted       Book      Weighted        Book      Weighted        Book      Weighted
                              Value    Average Yield   Value    Average Yield    Value    Average Yield    Value    Average Yield
                              ---------------------------------------------------------------------------------------------------
                                                                  (Dollars in thousands)
<S>                           <C>           <C>       <C>           <C>          <C>           <C>         <C>            <C>
U.S. government
    agency obligations ....   $   --        --%       $ 9,996       4.40%        $76,850       5.28%       $319,624       5.47%
Corporate bonds ...........       --        --          1,018       9.25              --          --             --         --
Trust preferred
    securities ............       --        --             --         --              --          --         32,872       8.00
                              ---------------------------------------------------------------------------------------------------
Total investment securities
    held to maturity ......   $   --        --%        $11,014      4.85%        $76,850       5.28%       $352,496       5.71%
                              ===================================================================================================

<CAPTION>

                                    June 30, 2006
                              --------------------------
                                   Total Investment
                                    Securities Held
                                    to Maturity
                              --------------------------
                                Book        Weighted
                                Value     Average Yield
                              --------------------------
                                 (Dollars in thousands)
<S>                           <C>                 <C>
U.S. government
    agency obligations ....   $406,470            5.41%
Corporate bonds ...........      1,018            9.25
Trust preferred
    securities ............     32,872            8.00
                              ------------------------
Total investment securities
    held to maturity ......   $440,360            5.61%
                              ========================
</TABLE>

The Company's  investment  securities portfolio at June 30, 2006 did not contain
tax-exempt  securities or securities of any single issuer with an aggregate book
value in excess  of 10% of the  Company's  retained  earnings,  excluding  those
issued by the U.S. government or its agencies.

Mortgage-Backed Securities. At June 30, 2006, mortgage-backed securities totaled
$63.0 million,  or 2.7% of the Company's  total assets,  of which  approximately
4.5% consisted of adjustable rate securities. The Company has invested primarily
in securities of Freddie Mac and Fannie Mae.

The following table indicates the composition of the mortgage-backed  securities
portfolio based on the final maturities of each security.

<TABLE>
<CAPTION>
                                                                      June 30, 2006
                              ---------------------------------------------------------------------------------------------------
                                                              After                    After
                                                            One Year                  Five Years                 After
                                   One Year                  Through                   Through                    Ten
                                    or Less                 Five Years                Ten Years                  Years
                              ---------------------------------------------------------------------------------------------------
                               Book      Weighted        Book      Weighted        Book      Weighted        Book     Weighted
                              Value    Average Yield    Value    Average Yield    Value    Average Yield    Value   Average Yield
                              ---------------------------------------------------------------------------------------------------
                                                                    (Dollars in thousands)
<S>                           <C>         <C>           <C>           <C>         <C>                      <C>           <C>
Ginnie Mae ................   $    1      7.50%         $   21        8.12%       $   --         --%       $    33       8.97%
Freddie Mac ...............        2      8.00           1,666        6.97            --         --         26,716       4.96
Fannie Mae ................       --        --             900        6.77           797       7.00         32,814       5.27
Collateralized Mortgage
   Obligations/REMICs/IOs .       --        --              --          --            --         --             13       6.50
                              -----------------------------------------------------------------------------------------------
  Total mortgage-backed
    securities ............   $    3      7.88%         $2,587        6.91%       $  797       7.00%        $59,576      5.13%
                              ===============================================================================================

<CAPTION>
                                    June 30, 2006
                               ------------------------
                                Total Mortgage-Backed
                                   Securities Held
                                     to Maturity
                               ------------------------
                                 Book      Weighted
                                Value    Average Yield
                               ------------------------
                                (Dollars in thousands)
<S>                             <C>           <C>
Ginnie Mae ................     $    55       8.62%
Freddie Mac ...............      28,384       5.08
Fannie Mae ................      34,511       5.35
Collateralized Mortgage
   Obligations/REMICs/IOs .          13       6.50
                                -----------------------
  Total mortgage-backed
    securities ............     $62,963       5.23%
                                =======================
</TABLE>

The  Ginnie  Mae,   Freddie  Mac  and  Fannie  Mae   certificates  are  modified
pass-through  mortgage-backed  securities that represent  undivided interests in
underlying   pools  of  fixed  rate,  or  certain  types  of  adjustable   rate,
single-family   residential  mortgages  issued  by  these   government-sponsored
entities. Ginnie Mae's guarantee to the certificate holder of timely payments of
principal  and  interest  is  backed by the full  faith  and  credit of the U.S.
government.  Freddie  Mac and  Fannie  Mae  provide  the  certificate  holder  a
guarantee  of timely  payments of interest  and  scheduled  principal  payments,
whether  or not they  have been  collected.  In  accordance  with  Statement  of
Financial  Accounting Standards No. 140, "Accounting for Transfers and Servicing
of Financial  Assets and  Extinguishments  of  Liabilities"  ("SFAS 140"),  with
certain loan sales, the Company may record an interest-only strip ("IO").  These
IO's represent the contractual  right to receive some or all of the interest due
on the mortgage loans sold.


                                       12
<PAGE>

The  following  table sets forth the activity in the  Company's  mortgage-backed
securities portfolio for the years indicated.

                                                        Year ended June 30,
                                                  ------------------------------
                                                    2006       2005       2004
                                                  ------------------------------
                                                           (In thousands)
Mortgage-backed securities, net:
   At beginning of year .......................   $ 78,201   $100,079   $ 93,632
   Plus:
      Securities purchased ....................         --         --     54,823
   Less:
      Principal repayments ....................     15,058     21,739     47,976
      Amortization of premiums, net ...........        180        139        400
                                                  ------------------------------
   At end of year .............................   $ 62,963   $ 78,201   $100,079
                                                  ==============================

Sources of Funds

General.  The Company's  sources of funds are deposits,  borrowings,  payment of
principal  and  interest  on loans  and   mortgage-backed  securities,  interest
received on and  maturities or calls of other  investment  securities  and funds
provided from operations.

Deposits.  The Company offers a variety of deposit  accounts having a wide range
of interest rates and terms. The Company's  deposits  consist of savings,  money
market and demand deposit accounts,  as well as certificate  accounts  currently
ranging in terms up to 60 months.  The Company solicits deposits  primarily from
its market areas and relies on its product mix,  appropriate  pricing  policies,
advertising,  customer service and customer  relationships to attract and retain
deposits.  The Company also solicits short term deposits from  municipalities in
its  market  areas.   As  of  June  30,  2006,   certificates  of  deposit  from
municipalities  totaled $6.2 million and checking  accounts from  municipalities
totaled $4.6 million.

The  variety of deposit  accounts  offered by the  Company  has allowed it to be
competitive  in obtaining  funds and to respond with  flexibility  to changes in
consumer demand.  The Company endeavors to manage the pricing of its deposits in
keeping  with  its  asset/liability  management,   liquidity  and  profitability
objectives.  In this regard,  the Company has from  time-to-time  paid  slightly
higher rates than its competitors to attract deposits.  Based on its experience,
the Company believes that its savings,  money market and demand deposit accounts
are relatively stable sources of deposits.  However,  the ability of the Company
to attract  and  maintain  certificates  of deposit  and the rates paid on these
deposits  has been and will  continue  to be  significantly  affected  by market
conditions, including general economic conditions, changes in interest rates and
the extremely  competitive  New Jersey deposit  market.  When  appropriate,  the
Company has from time to time utilized  brokered deposits as an alternate source
of funds.  At June 30, 2006 and 2005,  the  Company had $65.4  million and $66.1
million, respectively, of brokered deposits. See Item 8 - Financial Statements -
Note H - Deposits - of the Notes to Consolidated Financial Statements.

The  following  table sets forth the  deposit  flows of the  Company  during the
periods indicated.

                                               Year ended June 30,
                                   ---------------------------------------------
                                      2006             2005             2004
                                   ---------------------------------------------
                                               (Dollars in thousands)
Opening balance .............      $1,339,491       $1,188,100       $1,094,666
Net deposits ................          36,064          123,307           69,326
Interest credited ...........          39,033           28,084           24,108
                                   ---------------------------------------------
Ending balance ..............      $1,414,588       $1,339,491       $1,188,100
                                   ============================================
Net increase ................      $   75,097       $  151,391       $   93,434
                                   ============================================
Percent increase ............            5.61%           12.74%            8.54%
                                   ============================================



                                       13
<PAGE>

The  following  table  indicates  the amount of the  Company's  certificates  of
deposit by time remaining until maturity as of June 30, 2006.

<TABLE>
<CAPTION>
                                                                         Maturity
                                                 ---------------------------------------------------------
                                                               Over        Over        Over
                                                 3 Months     3 to 6      6 to 12       12
                                                  or Less     Months      Months      Months       Total
                                                 ---------------------------------------------------------
                                                                       (In thousands)
<S>                                              <C>         <C>         <C>         <C>         <C>
Certificates of deposit less than $100,000 ...   $ 147,767   $ 148,187   $ 105,253   $ 147,826   $ 549,033
Certificates of deposit of $100,000 or more ..      58,954      50,322      52,001      90,179     251,456
                                                 ---------------------------------------------------------
Total certificates of deposit ................   $ 206,721   $ 198,509   $ 157,254   $ 238,005   $ 800,489
                                                 =========================================================
</TABLE>

Borrowings.  Although  deposits are the Company's  primary source of funds,  the
Company's  policy has been to  utilize  borrowings  when they are a less  costly
source of funds,  when the  Company  desires  additional  capacity  to fund loan
demand, or to extend the life of its liabilities as a means of managing exposure
to interest rate risk.

The Company's  borrowings  historically have consisted of advances from the FHLB
of New York, and to a lesser extent,  reverse  repurchase  agreements  and, from
time to time, overnight repricing lines of credit. FHLB of New York advances can
be obtained pursuant to several different credit programs, each of which has its
own interest rate and range of maturities.

Junior  Subordinated  Deferrable  Interest  Debentures.  In 2001, PennFed formed
PennFed  Capital  Trust II (the "Trust II"),  which on March 28, 2001 sold $12.0
million of 10.18% cumulative trust preferred securities in a private transaction
exempt from  registration  under the  Securities  Act of 1933,  as amended  (the
"Act").  Trust  II used  the  proceeds  from  the  sale of its  trust  preferred
securities and from the sale of $0.4 million of its common securities to PennFed
to purchase  $12.4 million of 10.18%  junior  subordinated  deferrable  interest
debentures  issued  by  PennFed,  which are the sole  assets of Trust II.  These
junior  subordinated  deferrable  interest  debentures  mature  in 2031  and are
redeemable at any time after ten years.  The  obligations of PennFed  related to
Trust II  constitute a full and  unconditional  guarantee by PennFed of Trust II
obligations under its trust preferred securities. PennFed used the proceeds from
the junior  subordinated  deferrable  interest  debentures for general corporate
purposes,  including a $4.2 million capital  contribution to the Bank to support
growth.

In 2003,  PennFed formed PennFed  Capital Trust III (the "Trust III"),  which on
June 2, 2003 sold $30.0  million of variable  rate  cumulative  trust  preferred
securities  in a private  transaction  exempt from  registration  under the Act.
Trust III used the proceeds from the sale of its trust preferred  securities and
from the sale of $0.9  million of its common  securities  to PennFed to purchase
$30.9  million  of  variable  rate  junior   subordinated   deferrable  interest
debentures  issued by  PennFed,  which are the sole  assets of Trust III.  These
junior  subordinated  deferrable  interest  debentures  mature  in 2033  and are
redeemable at any time after five years.  The interest rate on the $30.0 million
of  trust  preferred  securities  and  the  $30.9  million  junior  subordinated
deferrable  interest debentures resets quarterly and was 8.58% and 6.66% at June
30, 2006 and 2005, respectively. The obligations of PennFed related to Trust III
constitute  a  full  and  unconditional   guarantee  by  PennFed  of  Trust  III
obligations under its trust preferred securities. PennFed used the proceeds from
the junior  subordinated  deferrable interest debentures together with available
cash to redeem $34.5  million of 8.90%  cumulative  trust  preferred  securities
issued by PennFed Capital Trust I in October 1997.

In  accordance  with the full  adoption in fiscal 2003 of  Financial  Accounting
Standards  Board  Interpretation  No. 46,  "Consolidation  of Variable  Interest
Entities" ("FIN 46"), the Company's trust subsidiaries are not consolidated.


                                       14
<PAGE>

The following table sets forth the maximum month-end  balance,  average balance,
year-end balance and weighted  average cost of FHLB of New York advances,  other
borrowings  and  junior  subordinated  deferrable  interest  debentures  for the
periods indicated.

<TABLE>
<CAPTION>
                                                                  Year ended June 30,
                                                           --------------------------------
                                                             2006        2005        2004
                                                           --------------------------------
                                                                (Dollars in thousands)
<S>                                                        <C>         <C>         <C>
Maximum month-end balance for the year ended:
  FHLB of New York advances ............................   $465,465    $435,465    $504,465
                                                           ================================
  Other borrowings:
     Overnight repricing lines of credit ...............   $136,250    $ 68,400    $ 15,200
     Reverse repurchase agreements callable or maturing
       within one year .................................     88,271      22,206      34,260
     Reverse repurchase agreements callable or maturing
       after one year ..................................     29,986      54,461      24,986
     Unsecured revolving line of credit ................      7,772       9,586       9,892
                                                           --------------------------------
        Total other borrowings .........................   $262,279    $154,653    $ 84,338
                                                           ================================
   Junior subordinated debentures, net .................   $ 42,126    $ 42,082    $ 42,037
                                                           ================================

Average balance for the year ended:
  FHLB of New York advances ............................   $440,226    $425,319    $489,699
                                                           ================================
  Other borrowings:
     Overnight repricing lines of credit ...............   $ 95,093    $ 48,820    $  3,452
      Reverse repurchase agreements callable or maturing
       within one year .................................     51,578      14,252      20,590
     Reverse repurchase agreements callable or maturing
       after one year ..................................     24,876      47,646       1,898
     Unsecured revolving line of credit ................      6,209       7,567       5,368
                                                           --------------------------------
       Total other borrowings ..........................   $177,756    $118,285    $ 31,308
                                                           ================================
   Junior subordinated debentures, net .................   $ 42,104    $ 42,059    $ 42,015
                                                           ================================

Balance at June 30:
  FHLB of New York advances ............................   $465,465    $415,465    $475,465
                                                           ================================
  Other borrowings:
     Overnight repricing lines of credit ...............   $134,150    $ 45,150    $  7,000
     Reverse repurchase agreements callable or maturing
       within one year .................................     88,271      15,000      17,468
     Reverse repurchase agreements callable or maturing
       after one year ..................................     10,000      39,461      24,986
     Unsecured revolving line of credit ................      7,772       8,341       9,892
                                                           --------------------------------
       Total other borrowings ..........................   $240,193    $107,952    $ 59,346
                                                           ================================
   Junior subordinated debentures, net .................   $ 42,126    $ 42,082    $ 42,037
                                                           ================================

Weighted average cost of funds for the year ended:
  FHLB of New York advances ............................       5.65%       5.80%       5.76%
  Other borrowings:
     Overnight repricing lines of credit ...............       4.48%       2.30%       1.13%
     Reverse repurchase agreements callable or maturing
        within one year ................................       3.81%       2.23%       4.38%
     Reverse repurchase agreements callable or maturing
        after one year .................................       3.65%       3.32%       2.95%
     Unsecured revolving line of credit ................       5.87%       3.82%       2.66%
  Junior subordinated debentures, net ..................       8.69%       7.24%       6.42%

Weighted average cost of funds at June 30:
  FHLB of New York advances ............................       5.47%       5.75%       5.70%
  Other borrowings:
     Overnight repricing lines of credit ...............       5.40%       3.49%       1.56%
     Reverse repurchase agreements callable or maturing
        within one year ................................       4.60%       2.88%       1.21%
     Reverse repurchase agreements callable or maturing
        after one year .................................       3.59%       3.42%       3.23%
     Unsecured revolving line of credit ................       6.63%       4.64%       2.63%
  Junior subordinated debentures, net ..................       9.04%       7.67%       6.32%
</TABLE>


                                       15
<PAGE>

Subsidiary Activities

As a federally chartered savings  association,  Penn Federal is permitted by OTS
regulations to invest up to 2% of its assets, or $46.0 million at June 30, 2006,
in the stock of, or loans to,  service  corporation  subsidiaries.  Penn Federal
currently has two service  corporations,  Penn Savings  Insurance  Agency,  Inc.
("PSIA") and PennFed Title Service Corporation  ("PTSC").  At June 30, 2006, the
net book values of Penn Federal's investments in PSIA and PTSC were $136,000 and
$39,000, respectively.

PSIA  offers  insurance  products  and the  Bank  offers  uninsured  non-deposit
investment products to the Company's customers and members of the general public
through a program  known as  Investment  Services at Penn  Federal.  The sale of
securities,  such as mutual funds and variable rate  annuities,  and  securities
brokerage  services  are  provided  by an  agreement  with the  Bank and  INVEST
Financial  Corporation  ("INVEST"),  a non-affiliated  registered broker dealer,
member NASD and SIPC.  Fixed annuity and  insurance  products are provided by an
agreement with PSIA and INVEST Financial  Corporation  Insurance Agency, Inc. of
Maryland ("INVEST Insurance"),  a non-affiliated licensed insurance agency and a
subsidiary  of  INVEST.   The  Bank's   relationship   with  INVEST  and  PSIA's
relationship  with  INVEST  Insurance  enhance the  Investment  Services at Penn
Federal  program by giving  customers a wide array of  insurance  and  uninsured
non-deposit  investment products,  while offering convenient access to financial
consulting and advisory services and securities  brokerage  services.  To a much
lesser extent, PSIA also offers homeowners insurance to Bank customers.

PTSC was formed to  participate  in the  ownership of a title  insurance  agency
known as Eagle Rock Title Agency,  LLC. PTSC is a joint venture partner,  owning
49%,  with a third party title agency owning the  remainder.  PTSC has no active
role in the management of the company.

In addition to investments in service  corporations,  federal  associations  are
permitted to invest an unlimited amount in operating subsidiaries engaged solely
in activities which a federal association may engage in directly. As of June 30,
2006, the Bank's  investment in its operating  subsidiaries,  Ferry  Development
Holding Company  ("FDHC") and Eagle Rock Investment Corp.  ("ERIC"),  was $342.8
million  and  $157.7  million,  respectively.  FDHC  and ERIC  hold  and  manage
investment portfolios for the Bank.

Competition

The Company faces strong competition,  both in originating real estate and other
loans and in attracting  deposits.  Competition in originating real estate loans
comes  primarily from commercial  banks,  other savings  associations,  mortgage
banking  companies and credit unions making loans secured by real estate located
in New Jersey.  Competition in   originating  non-real estate loans comes mainly
from commercial banks and other savings  associations.  Commercial banks, credit
unions and finance companies  provide vigorous  competition in consumer lending.
The Company competes for real estate and other loans principally on the basis of
the quality of services it provides to borrowers,  interest  rates and loan fees
it charges, and the types of products offered.

The Company  attracts  substantially  all of its deposits  through its branches,
primarily from the  communities  in which those offices are located;  therefore,
competition  for those deposits is principally  from commercial  banks,  savings
associations, credit unions and brokerage houses. The Company competes for these
deposits  by  offering a variety of deposit  accounts  at  appropriately  priced
rates, quality customer service,  convenient business hours and branch locations
with interbranch deposit and withdrawal privileges.


                                       16
<PAGE>

                                   REGULATION

General

Penn Federal is a federally chartered savings bank, and accordingly, the Bank is
subject to comprehensive  federal  regulation and oversight by the OTS extending
to all its  operations.  Penn  Federal  is a member  of the FHLB of New York and
certain of its activities are subject to regulation by the Board of Governors of
the Federal Reserve System ("Federal  Reserve  Board").  As the savings and loan
holding company of Penn Federal,  PennFed is also subject to federal  regulation
and  oversight  by the OTS. The Bank is a member of the Deposit  Insurance  Fund
("DIF")  and  the  deposits  of  Penn  Federal  are  insured  by the  FDIC up to
applicable  limits.  As a  result,  the FDIC  has   regulatory  and  examination
authority over the Bank. For purposes of the "Regulation" discussion,  the terms
"savings bank," "savings  association"  and "savings  institution"  apply to the
Bank.

Certain of these regulatory requirements and restrictions are discussed below or
elsewhere in this document.

Federal Regulation of Savings Associations by the OTS

The OTS has extensive authority over the operations of savings associations.  As
part of this authority,  Penn Federal is required to file periodic  reports with
the OTS and is subject to periodic examinations by the OTS. The last regular OTS
examination of the Bank was as of September 2005.

The OTS, as well as the other federal banking agencies, has developed guidelines
establishing   safety  and   soundness    standards  on  matters  such  as  loan
underwriting  and  documentation,  internal  controls and audit  systems,  asset
quality,  earning  standards,  interest rate risk exposure and  compensation and
other employee benefits.

Insurance of Accounts and Regulation by the FDIC

Penn  Federal's  deposits are insured by the DIF, which is  administered  by the
FDIC. Deposits are insured up to  applicable limits by the FDIC. As insurer, the
FDIC  may  impose  deposit  insurance  premiums  and is  authorized  to  conduct
examinations of, and to require  reporting by,  FDIC-insured  institutions.  The
FDIC may prohibit any FDIC-insured institution from engaging in any activity the
FDIC  determines  by  regulation  or order to pose a serious risk to the deposit
insurance funds. The FDIC also has the authority to initiate enforcement actions
against savings  associations,  after giving the OTS an opportunity to take such
action,  and may terminate  the savings  association's  deposit  insurance if it
determines that the savings  association has engaged or is engaging in unsafe or
unsound practices, or is in an unsafe or unsound condition.

Deposit Insurance Assessments

Under the Federal Deposit Insurance Reform Act of 2005, by November 5, 2006, the
Federal  Deposit  Insurance  Corporation  must  promulgate  new  regulations  on
risk-based  deposit  insurance   assessments.   The  Federal  Deposit  Insurance
Corporation  has proposed  regulations  that would create four Risk  Categories.
Risk Category I would apply to institutions  that are well  capitalized and have
composite CAMELS ratings of 1 or 2. CAMELS is an acronym for the six supervisory
ratings assigned in examinations for an institution's  capital  adequacy,  asset
quality, management,  earnings, liquidity and sensitivity to market risk. Annual
base rate  assessments  for Risk  Category I would  range  between 2 and 4 basis
points,  applied to an  institution's  assessment  base,  which is generally its
deposits. Within Risk Category I, the precise base rate for an institution would
be  determined  for an  institution  with less than $10  billion  in assets by a
formula using the  institution's  CAMELS ratings,  certain  financial ratios and
other factors.  A different method would apply for  institutions  with assets of
$10 billion or more. Any Risk Category I institution less than 7 years old would
be  assessed  at the  highest  rate for Risk  Category  I. The  Federal  Deposit
Insurance Corporation has stated that currently,  95% of institutions it insures
would be in Risk  Category I. Risk  Categories  II,  III,  and IV would apply to
institutions  with  progressively  greater risk of loss to the deposit insurance
fund. The proposed base rates for these  categories  would be 7, 25 and 40 basis
points, respectively.

Under the  proposed  regulations,  the FDIC would be able to  increase  the base
assessment  rates  by  up  to  5  basis  points  without  new  regulations.  Any
institution  insured by the FDIC on December 31, 1996,  such as the Bank,  which
had previously paid assessments (or its successor in a merger or  consolidation)
would be  eligible  for a  one-time  credit  against  assessments  under the new
regulations. Federal Deposit Insurance Corporation officials have indicated that
base assessment  rates in the final  regulations  could be higher than stated in
the proposed regulations.


                                       17
<PAGE>

Regulatory Capital Requirements

Federally insured savings  associations,  such as Penn Federal,  are required to
maintain a minimum level of regulatory capital.  The OTS has established capital
standards,  including a tangible capital requirement,  a leverage ratio (or core
capital)  requirement  and  a  risk-based  capital  requirement.  These  capital
requirements   must  be  generally  as  stringent  as  the  comparable  capital
requirements  for national  banks.  The OTS is also authorized to impose capital
requirements  in excess  of these  standards  on  individual  associations  on a
case-by-case basis.

The capital  regulations  require  tangible capital of at least 1.5% of adjusted
total assets (as defined by regulation).  Tangible  capital  generally  includes
common  stockholders'  equity and retained earnings,  and certain  noncumulative
perpetual  preferred  stock.  In addition,  all  intangible  assets,  other than
certain amounts of mortgage servicing rights,  and accumulated  unrealized gains
and losses on certain available for sale securities must be deducted from assets
and capital for calculating compliance with the requirements.  At June 30, 2006,
Penn Federal had no intangible assets other than qualifying  mortgage  servicing
rights.

At June 30, 2006, Penn Federal had tangible capital of $168.7 million,  or 7.33%
of adjusted  total  assets,  which was  approximately  $134.2  million above the
minimum  requirement of $34.5 million or 1.5% of adjusted total assets in effect
on that date.

The capital standards also require core capital equal to at least 3% of adjusted
total assets and 4% of risk-weighted assets (as described below). As a result of
the prompt  corrective  action provisions  discussed below,  however,  a savings
association  must maintain a ratio of core capital to adjusted  total assets of
at least 4% to be  considered  adequately  capitalized  unless  its  supervisory
condition is such as to allow it to maintain a 3% ratio.  Core capital generally
consists  of  tangible  capital  plus  certain  intangible  assets  up to 25% of
adjusted  total  assets.  At June  30,  2006,  Penn  Federal  did not  have  any
intangibles which were subject to these tests.

At June 30, 2006, Penn Federal had core capital of $168.7  million,  or 7.33% of
adjusted  total assets,  which was  approximately  $76.7 million above the $92.1
million or 4% required to be considered adequately capitalized.

The OTS risk-based  capital  requirement  requires savings  associations to have
total capital of at least 8% of risk-weighted  assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of selected  items,  such as certain  permanent  and  maturing  capital
instruments  that do not qualify as core capital,  allowances for loan and lease
losses up to a maximum of 1.25% of risk-weighted  assets and up to 45% of pretax
unrealized  gains,  net of  unrealized  losses,  on  available  for sale  equity
securities.  Supplementary  capital  may  be  used  to  satisfy  the  risk-based
requirement  only to the extent of core capital.  At June 30, 2006, the Bank had
no capital instruments that qualify as supplementary  capital. The Bank had $5.9
million of allowances  for loan and lease losses at June 30, 2006,  all of which
was  included  as  supplementary  capital  since  it  was  less  than  1.25%  of
risk-weighted assets.

In determining the amount of risk-weighted assets, all assets, including certain
off-balance  sheet items,  are  multiplied by a risk weight,  ranging from 0% to
100% as assigned by OTS capital  regulations  based on the risk  inherent in the
type of assets.

On June 30, 2006,  Penn Federal had total  risk-based  capital of $174.6 million
(consisting  of $168.7  million in core  capital and $5.9  million in  allowable
supplementary capital) and risk-weighted assets of $1.3 billion (including $45.3
million in converted  off-balance  sheet items  primarily  represented by unused
lines  of  credit)  resulting  in  a  risk-based  capital  ratio  of  13.81%  of
risk-weighted  assets. This amount was $73.5 million above the $101.2 million or
8% required on that date.

Penn Federal met all the  requirements  to be  considered  a "well  capitalized"
institution as of June 30, 2006. The OTS and the FDIC are authorized  and, under
certain  circumstances   required,  to  take  certain  actions  against  savings
associations that fail to meet their capital requirements.

Limitations on Dividends and Other Capital Distributions

OTS regulations impose various restrictions or requirements on associations with
respect  to their  ability  to pay  dividends  or make  other  distributions  of
capital.  OTS regulations  prohibit an association  from declaring or paying any
dividends or from repurchasing any of its stock if, as a result,  the regulatory
capital of the  association  would be reduced  below the  association's  minimum
capital requirements or the amount required to be maintained for the liquidation
account established in connection with the Conversion.


                                       18
<PAGE>

Generally,  associations  may make  capital  distributions  without OTS approval
during any calendar year equal to 100% of calendar  year-to-date net income plus
retained net income for the two previous calendar years. The Bank is required to
give the OTS 30 days notice  prior to  declaring  any dividend to PennFed on its
stock. The OTS may object to the distribution during that 30-day period based on
safety and soundness concerns. See "Regulatory Capital Requirements."

Qualified Thrift Lender Test

All  savings  associations,  including  Penn  Federal,  are  required  to meet a
qualified  thrift  lender  ("QTL") test to avoid certain  restrictions  on their
operations. This test requires a savings association to have at least 65% of its
portfolio assets (as defined by regulation) in qualified thrift investments on a
monthly  average for nine out of every twelve months on a rolling  basis.  As an
alternative,  the savings  association may meet the Internal  Revenue  Service's
Domestic  Building and Loan Association test by maintaining 60% of its assets in
those assets specified in Section 7701(a)(19)(C) of the Internal Revenue Code of
1986, as amended (the "Code").  Under either test, such assets primarily consist
of residential housing related loans and investments. At June 30, 2006, the Bank
met the QTL test and has always met the test since its effective date.

Any  savings  association  that  fails to meet the QTL test  must  convert  to a
national bank charter,  unless it re-qualifies as a QTL and thereafter remains a
QTL. If an  association  does not  re-qualify  and  converts to a national  bank
charter,  it must remain insured with the FDIC.  Until such an  association  has
re-qualified or converted to a national bank, its new investments and activities
are limited to those  permissible for both a savings  association and a national
bank, and it is limited to national bank branching rights in its home state.

In addition,  such an association  is immediately  ineligible to receive any new
FHLB of New York  borrowings  and is subject to national bank limits for payment
of dividends. If the association has not re-qualified or converted to a national
bank  within  three  years  after  the  failure,  it must  divest  itself of all
investments  and cease all  activities not  permissible  for a national bank. In
addition,  it must repay promptly any outstanding  FHLB of New York  borrowings,
which may result in prepayment penalties.  If any association that fails the QTL
test is controlled by a holding company, then within one year after the failure,
the holding  company must register as a bank holding  company and become subject
to all restrictions on bank holding companies.

Community Reinvestment Act

Under the Community Reinvestment Act ("CRA"), every FDIC insured institution has
a continuing and affirmative   obligation consistent with safe and sound banking
practices to help meet the credit needs of its entire  community,  including low
and moderate income  neighborhoods.  The CRA does not establish specific lending
requirements  or  programs  for  financial  institutions  nor  does it  limit an
institution's  discretion  to develop the types of products and services that it
believes are best suited to its particular  community,  consistent with CRA. The
CRA requires the OTS, in connection  with the  examination  of Penn Federal,  to
assess the  institution's  record of meeting the credit needs of its communities
and to take this record into account in its evaluation of certain  applications,
such as a merger, by Penn Federal. A less than "satisfactory" rating may be used
by the OTS as the basis for the denial of an application.

Due to the heightened attention being given to the CRA in recent years, the Bank
has  devoted   additional  funds  for   investment  and  lending  in  its  local
communities.  CRA  compliance  ratings  given by the OTS include  "outstanding,"
"satisfactory,"  "needs  improvement" and "substantial  noncompliance." The Bank
was last  examined for CRA  compliance in February 2004 and was notified in July
2004 that it received a rating of "satisfactory."

Transactions with Affiliates

Generally,  transactions  between a savings  association or its subsidiaries and
its  affiliates  are required to be on terms as favorable to the  association as
transactions with  non-affiliates.  In addition,  certain of these transactions,
such as loans to affiliates, are restricted to a percentage of the association's
capital.  Affiliates of Penn Federal  include  PennFed.  Furthermore,  a savings
association may not lend to any affiliate  engaged in activities not permissible
for a bank holding  company or acquire the securities of most  affiliates.  Penn
Federal's  subsidiaries  are not  deemed  affiliates;  however,  the OTS has the
discretion  to treat  subsidiaries  of savings  associations  as affiliates on a
case-by-case basis.


                                       19
<PAGE>

Federal Securities Law

The  common  stock of PennFed is  registered  with the SEC under the  Securities
Exchange Act of 1934, as amended (the "Exchange Act"). PennFed is subject to the
information,   proxy  solicitation,   insider  trading  restrictions  and  other
requirements  of the  Exchange  Act and the  rules and  regulations  of the SEC
thereunder.

PennFed stock held by persons who are affiliates  (generally executive officers,
directors  and  principal  stockholders)  of PennFed  may not be resold  without
registration  or unless  the stock is sold in  accordance  with  certain  resale
restrictions.   If  PennFed   meets   specified   current   public   information
requirements,  each affiliate of PennFed may sell in the public market,  without
registration, a limited number of shares in any three-month period.

Federal Home Loan Bank System

Penn  Federal is a member of the FHLB of New York,  which is one of 12  regional
FHLBs that provide loans and  correspondent  services to its members.  Each FHLB
serves as a reserve or central bank for its members within its assigned  region.
It is funded  primarily  from  proceeds  derived  from the sale of  consolidated
obligations of the FHLB System.  It makes loans to members  (i.e.,  advances) in
accordance with policies and procedures established by the board of directors of
the FHLB,  which are subject to the  oversight  of the Federal  Housing  Finance
Board.  All  borrowings  from the  FHLB are  required  to be  fully  secured  by
sufficient collateral as determined by the FHLB.

As a member, Penn Federal is required to purchase and maintain stock in the FHLB
of New York.  At June 30, 2006,  the Bank had $27.7  million in FHLB of New York
stock, which was in compliance with this requirement.  Over the past five fiscal
years,  the yields earned on its FHLB of New York stock have averaged  4.01% per
annum.

Federal and State Taxation

Federal Taxation. PennFed files consolidated federal income tax returns with the
Bank and its subsidiaries.  In addition to the regular income tax, corporations,
including  savings  associations  such as the Bank,  are generally  subject to a
minimum  tax.  An  alternative  minimum  tax  is  imposed  at a  rate  of 20% on
alternative minimum taxable income, which is the sum of a corporation's  regular
taxable income (with certain  adjustments)  and tax preference  items,  less any
available  exemption.  The  alternative  minimum tax is imposed to the extent it
exceeds the  corporation's  regular  income tax.  This excess amount may then be
used as a credit in a future year to offset the income tax liability  calculated
under the regular  income tax method.  Net  operating  losses can offset no more
than 90% of  alternative minimum taxable income.

The Bank and its  consolidated  subsidiaries  have been  audited by the Internal
Revenue  Service  ("IRS") with respect to its  consolidated  federal  income tax
returns through  December 31, 1991.  There were no material  adjustments made to
taxable income as originally  reported to the IRS. In the opinion of management,
any examination of still open returns  (including  returns of  subsidiaries  and
predecessors  of PennFed)  would not result in a  deficiency  which would have a
material  adverse  effect on the  financial  condition  of the  Company  and its
consolidated subsidiaries.

New Jersey Taxation. Earnings for the Bank are taxed at a 9% corporate tax rate.
In addition,  New Jersey imposes an alternative minimum assessment.  The Bank is
required  to pay the  greater of the regular  corporate  tax or the  alternative
minimum assessment.  The amount of alternative minimum assessment can be used in
a future year as a credit to offset the income tax  liability  calculated  under
the regular corporate business tax. The alternative  minimum assessment is based
on either 0.4% of gross  receipts  (less  certain  deductions)  or 0.8% of gross
profits.  PennFed and ERIC are taxed under the New Jersey  Corporation  Business
Tax Act (the  "Tax  Act"),  and if they  meet  certain  tests,  will be taxed as
investment  companies at an effective  annual rate of 3.6% of New Jersey taxable
income (as defined in the Tax Act). If they fail to meet these tests,  they will
be taxed at an annual rate of 9% of New Jersey taxable income. It is anticipated
that PennFed and ERIC will be taxed as investment  companies.  PSIA and PTSC are
taxed at the corporate tax rate of 9% on their New Jersey taxable income.

Delaware Taxation.  FDHC, a Delaware investment company, is exempt from Delaware
corporate  income tax,  but is  required  to file an annual  report with and pay
annual  fees  to the  State  of  Delaware.  FDHC is also  subject  to an  annual
franchise  tax imposed by the State of Delaware.  As Delaware  business  trusts,
treated as grantor trusts for income tax purposes,  PennFed Capital Trust II and
PennFed  Capital Trust III are not required to pay income or franchise  taxes to
the State of Delaware.

Maryland  Taxation.  PennFed,  a Maryland  corporation,  currently  does not pay
Maryland  income  taxes  because it does not conduct any business in that state.
Unlike the State of Delaware,  the State of Maryland does not impose a franchise
tax on corporations incorporated under its laws.


                                       20
<PAGE>

Executive Officers

The  executive  officers of PennFed are elected  annually  and hold office until
their  respective  successors  have been  elected and  qualified or until death,
resignation  or  removal  by the Board of  Directors.  The  principal  executive
officers of PennFed  are as follows:  Joseph L.  LaMonica,  President  and Chief
Executive Officer; Jeffrey J. Carfora, Senior Executive Vice President and Chief
Operating Officer; Patrick D. McTernan, Senior Executive Vice President, General
Counsel and Secretary;  and Claire M. Chadwick,  Senior Executive Vice President
and Chief Financial  Officer.  Executive  officers of PennFed do not receive any
remuneration in their capacity as PennFed executive officers.

The  following  table sets forth  certain  information  regarding  the executive
officers of the Bank who are not also directors.

<TABLE>
<CAPTION>
Name                                        Age          Positions Held with the Bank
-----------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>          <C>
Jeffrey J. Carfora ..................       48           Senior Executive Vice President and Chief Operating Officer

Claire M. Chadwick ..................       46           Senior Executive Vice President and Chief Financial Officer

Maria F. Magurno ....................       54           Executive Vice President and Residential Lending Group Executive

Anthony V. Bilotta, Jr. .............       45           Executive Vice President and Retail Banking Group Executive
</TABLE>

Officers  are  elected  annually  by the Board of  Directors  of the  Bank.  The
business  experience of each executive officer who is not also a director is set
forth below.

Jeffrey J. Carfora - Mr. Carfora is responsible for the daily  operations of the
Bank.  Mr.  Carfora  also  assists  President  LaMonica  in the  development  of
corporate  policies and goals. Mr. Carfora joined Penn Federal in 1993 as Senior
Vice  President and Chief  Financial  Officer and was appointed  Executive  Vice
President  in 1999.  He was named  Senior  Executive  Vice  President  and Chief
Operating Officer in 2001. Mr. Carfora is a Certified Public Accountant.

Claire M. Chadwick - Ms.  Chadwick is responsible  for the financial  affairs of
the Bank,  which include  financial and tax accounting and reporting,  budgeting
and investor  relations.  Ms. Chadwick joined Penn Federal in 1994 and served as
the Bank's  Senior Vice  President  and  Controller  since  1999.  She was named
Executive  Vice  President  and  Chief  Financial  Officer  in 2002  and  Senior
Executive Vice President in 2005. Ms. Chadwick is a Certified Public Accountant.

Maria F. Magurno - Ms. Magurno joined the Bank in October 1997 as Vice President
of Residential  Lending.  Ms. Magurno is responsible for the Bank's  residential
lending  operations.  She was named Senior Vice  President in 1999 and Executive
Vice President in 2001.

Anthony V.  Bilotta,  Jr. - Mr.  Bilotta  joined the Bank in July 2005 as Senior
Vice  President of Branch  Administration.  He was  promoted to  Executive  Vice
President  and Retail  Banking  Group  Executive  in July 2006.  Mr.  Bilotta is
responsible  for the Bank's  branch  network,  as well as the Bank's  Investment
Services at Penn Federal  program.  Prior to joining the Bank,  Mr.  Bilotta had
various retail banking experience with several other banking institutions.

Employees

At June 30, 2006, the Company and its subsidiaries had a total of 272 employees,
including 58 part-time employees. The Company's employees are not represented by
any collective bargaining group.

Item 1A. Risk Factors

Rising interest rates may negatively impact the Company's results of operations.
The  Company's  results of operations  are  primarily  dependent on net interest
income,  which is the  difference  between  the  interest  income  earned on its
interest earning assets such as loans, mortgage-backed securities and investment
portfolios and the interest expense paid on interest bearing  liabilities,  such
as deposits and borrowings. With a further rise in short-term interest rates and
a flat or inverted  yield curve,  deposits and  borrowings  may reprice  upwards
faster  than the rates on loans,  mortgage-backed  securities  and  investments,
causing  additional  compression  in the net  interest  margin  and  may  have a
negative  impact on the Company's  results of operations.  Rising interest rates
can also affect borrowers' demand for loan products as historical experience has
shown that as interest rates rise, origination levels may decline.

A downturn in the local economy can affect  profitability  due to the geographic
concentration  of our market area. The Company gathers  deposits  primarily from
the  communities  its  serves,  which are the  Ironbound  section of the City of
Newark and  surrounding  areas,  suburban  Essex  county and  selected  areas of
central  and  southern  New  Jersey.  The


                                       21
<PAGE>

Company originates loans secured by properties located throughout New Jersey and
areas in eastern  Pennsylvania.  A downturn in the local economy in any of these
market areas may have an adverse  effect on customers'  demand for the Company's
products,  borrowers'  ability to service  their debt, as well as the quality of
the Company's  loan  portfolio.  Declining real estate values can cause loans to
become inadequately  collateralized,  potentially exposing the Company to a risk
of loss.

Changes in  estimates  of the adequacy of the  allowance  for loan  losses.  The
Company's  allowance  for loan  losses  is  established  based  on  management's
evaluation  of the  probable  credit  losses in the loan  portfolio.  Management
believes that they use the best information available to establish the allowance
for loan losses.  However,  changes in market conditions,  borrowers' ability to
service their debt, real estate values, or in federal regulatory policies, which
are unforeseeable and beyond the Company's controls, may cause the allowance for
loan losses to become  inadequate  and  earnings  may be  affected.  See Item 7.
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations "-Critical Accounting Policies."

Risks in changes in the laws and regulations of regulatory agencies. The Bank is
subject to  comprehensive  regulation and  examination by the OTS, as the Bank's
primary  regulator,  and the  FDIC,  as its  insurer  of  deposits.  The OTS has
extensive  authority  over the  operations  of savings  associations,  which are
subject to  periodic  examinations  and  reporting  requirements.  FDIC may also
conduct  examinations  and require  reporting by FDIC-insured  institutions.  In
addition, these regulatory agencies have the authority to impose restrictions on
operations.  In  recent  years,  there  have  been  significant  changes  in the
legislative  policies  for  regulation  of  financial  institutions.  Any future
changes in legislative policies,  regulations or laws of regulatory agencies are
beyond the  Company's  control and may have a material  effect on the  Company's
operations.

Strong  competition  in originating  loans and  attracting  deposits may have an
adverse effect on the Company's profitability.  The Company operates in a highly
competitive  environment in both the  origination of real estate and other loans
and in  attracting  deposits.  The  Company  competes  based on the  quality  of
services  offered,  interest  rates  offered,  fees charged,  types of products,
quality  customer  service and convenient  business hours and branch  locations.
Competition  in  originating  loans is primarily from  commercial  banks,  other
savings associations,  mortgage banking companies and credit unions. Competition
in  attracting  deposits is  primarily  from  commercial  banks,  other  savings
associations,  credit  unions and  brokerage  houses.  In order to compete,  the
Company,  from time to time, may offer slightly higher rates in order to attract
deposits  and  stimulate  loan  originations.  This  may  impact  the  Company's
profitability,  depending on the level of interest rates offered, and may have a
negative effect on the net interest margin.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

The Company conducts its business at its operations center and the Bank's branch
offices  located in its primary  market  areas.  The total net book value of the
Company's  premises  and  equipment  (including  land,  building  and  leasehold
improvements and furniture and equipment) at June 30, 2006 was $20.4 million.

The  Company  believes  that its  current  facilities  are  adequate to meet the
present  and  foreseeable  needs of the  Company,  subject  to  possible  future
expansion.

Item 3. Legal Proceedings

The Company is involved  from time to time as  plaintiff or defendant in various
legal actions  arising in the normal course of its business.  While the ultimate
outcome of these  proceedings  cannot be  predicted  with  certainty,  it is the
opinion of  management  at the present  time,  after  consultation  with counsel
representing  the  Company  in the  proceedings,  that the  resolution  of these
proceedings  should not have a  material  effect on the  Company's  consolidated
financial position or results of operations.

Penn  Federal  Savings Bank and  ExxonMobil  have been ordered by the New Jersey
Department of  Environmental  Protection to  investigate  and remediate soil and
ground water  pollution that may have been  generated at a branch  location that
was  formerly  a  gasoline  service  station.  Penn  Federal  Savings  Bank  and
ExxonMobil have entered into a


                                       22
<PAGE>

cost sharing arrangement under which ExxonMobil will supervise the investigation
and remediation and the cost will be shared equally.  Based on information  then
available,  the Company  recorded a $298,000  (pretax)  charge during the fourth
quarter of fiscal 2004 to accrue its share of the  estimated  cost.  At June 30,
2006 and 2005, an  environmental  liability of $328,000 was included in Accounts
payable  and other  liabilities  in the  Company's  Consolidated  Statements  of
Financial Condition. Management believes the total current liability of $328,000
represents the probable liability at this time.

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

No matter was submitted to a vote of security holders,  through the solicitation
of proxies or otherwise, during the quarter ended June 30, 2006.


                                       23
<PAGE>

                                     PART II

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

The Company's common stock trades on the Nasdaq Global Market tier of the Nasdaq
Stock  Market  under the  symbol  "PFSB."  At  September  1,  2006,  there  were
approximately  500  stockholders  of record of the  Company's  common stock (not
including  the number of persons or entities  holding stock in nominee or street
name through various brokerage firms).

The following  table sets forth the high and low closing sales prices per common
share for the periods indicated.

<TABLE>
<CAPTION>
                                              Fiscal  2006 Closing Price      Fiscal 2005 Closing Price
                                             ----------------------------    ---------------------------
                                                High          Low                 High         Low
                                             ----------------------------    ---------------------------
Quarter Ended:
<S>                                            <C>           <C>                 <C>          <C>
September 30, 2005 and 2004 ................   $20.15        $16.48              $16.50       $14.84
December 31, 2005 and 2004 .................    19.55         16.94               17.34        15.18
March 31, 2006 and 2005 ....................    19.17         17.75               16.68        14.75
June 30, 2006 and 2005 .....................    19.15         17.75               17.12        13.20
</TABLE>

The  closing  price of a common  share was $18.65 at June 30,  2006  compared to
$16.88 at June 30, 2005.

The Company initiated  quarterly cash dividend payments in the second quarter of
fiscal 1997 and has since then continuously  paid quarterly cash dividends.  The
initial  quarterly cash dividend was $0.025 per share.  Since the second quarter
of fiscal 2002, the Company paid quarterly cash dividends of $0.03 per share. In
the first quarter of fiscal 2003,  the quarterly  cash dividend was increased to
$0.05 per share.  During the fourth  quarter of fiscal 2005,  the quarterly cash
dividend was increased to $0.07 per share.

PennFed's  ability  to pay cash  dividends  is  substantially  dependent  on the
dividend payments it receives from the Bank. For a description of the regulatory
restrictions on the ability of the Bank to pay dividends to PennFed, see Item 1.
Business  --   "Regulation  -   Limitations   on  Dividends  and  Other  Capital
Distributions" and Note N -- Stockholders'  Equity and Regulatory Capital in the
Notes to Consolidated Financial Statements.

The following table summarizes the Company's stock repurchase  activity for each
month during the three months ended June 30, 2006. All shares repurchased during
the three months ended June 30, 2006 were repurchased in the open market.

<TABLE>
<CAPTION>
                                                                             Total Number         Maximum Number
                                             Total Number     Average     of Shares Purchased   of Shares that May
                                              of Shares     Price Paid    as Part of Publicly    Yet Be Purchased
                                             Repurchased     Per Share      Announced Plan        Under the Plan
                                             -----------     ---------      --------------        --------------
<S>                                              <C>          <C>               <C>                 <C>
Repurchases for the Month
-------------------------
April 1 - April 30, 2006 .............           15,600       $18.18            15,600              535,100
May 1 - May 31, 2006 .................           97,500        18.12            97,500              437,600
June 1 - June 30, 2006 ...............           22,900        18.17            22,900              414,700
                                             -----------------------------------------
Total repurchases.....................          136,000       $18.14           136,000
                                             =========================================
</TABLE>

At June 30, 2006,  the Company had a repurchase  plan under which it had not yet
completed all approved repurchases.  This repurchase plan was publicly announced
January 25, 2006 and  authorized the Company to repurchase up to 5%, or 650,000,
of its outstanding shares over the following 18 months.


                                       24
<PAGE>

Item 6. Selected Financial Data

The following selected  consolidated  financial data of the Company is qualified
in its entirety by, and should be read in  conjunction  with,  the  consolidated
financial  statements,  including  notes  thereto,  included  elsewhere  in this
document.

<TABLE>
<CAPTION>
                                                                          At June 30,
                                                --------------------------------------------------------------
                                                   2006         2005         2004         2003         2002
                                                --------------------------------------------------------------
                                                         (In thousands, except per share amounts)
<S>                                             <C>          <C>          <C>          <C>          <C>
Selected Financial Condition Data:
Total assets ................................   $2,306,510   $2,050,551   $1,902,286   $1,812,452   $1,892,427
Loans receivable and loans held for sale, net    1,684,224    1,465,480    1,287,473    1,228,918    1,441,260
Investment securities .......................      445,296      410,509      424,980      344,239      183,785
Mortgage-backed securities ..................       62,963       78,201      100,079       93,632      169,689
Deposits ....................................    1,414,588    1,339,491    1,188,100    1,094,666    1,174,507
Total borrowings ............................      747,784      565,499      576,848      561,114      527,779
Trust preferred securities, net .............           --           --           --       11,621       44,537
Stockholders' equity ........................      123,421      124,054      118,399      116,835      118,761

Book value per common share(a)(b) ...........         9.59         9.34         8.72         8.71         8.36
</TABLE>

-------------------
(a)   The  calculation  of book value per share only includes ESOP shares to the
      extent that they are  released  or  committed  to be  released  during the
      fiscal year.

(b)   Amounts have been restated for the effects of a 2 for 1 stock split in the
      form of a 100% stock dividend paid on October 29, 2004.

<TABLE>
<CAPTION>
                                                                            Year ended June 30,
                                                    -------------------------------------------------------------------
                                                       2006            2005        2004           2003           2002
                                                    -------------------------------------------------------------------
                                                                (In thousands, except per share amounts)
<S>                                                 <C>             <C>         <C>            <C>            <C>
Selected Operating Data:
Total interest and dividend income ..............   $ 115,276       $ 104,722   $  96,276      $ 106,371      $ 121,339
Total interest expense ..........................      77,782          61,384      58,674         62,956         72,862
                                                    -------------------------------------------------------------------
Net interest and dividend income before provision
   for loan losses ..............................      37,494          43,338      37,602         43,415         48,477
Provision for loan losses .......................          --              --          --            525          1,625
                                                    -------------------------------------------------------------------
Net interest income after provision for
   loan losses ..................................      37,494          43,338      37,602         42,890         46,852
                                                    -------------------------------------------------------------------
Fees and service charges ........................       5,670(a)        3,096       4,175          5,232          2,961
Income on Bank Owned Life Insurance ("BOLI") ....         966             690         512             --             --
Net gain on sales of loans ......................         143             394         759          1,863            194
Net gain (loss) from real estate operations .....          (6)            156          58              3             87
Other non-interest income .......................         740             660         925            973            975
                                                    -------------------------------------------------------------------
Total non-interest income .......................       7,513           4,996       6,429          8,071          4,217
                                                    -------------------------------------------------------------------
Total non-interest expenses .....................      24,198(b)       24,171      25,430(c)      29,120(d)      28,450
                                                    -------------------------------------------------------------------
Income before income taxes ......................      20,809          24,163      18,601         21,841         22,619
Income tax expense ..............................       7,411           8,669       6,543          8,107          8,036
                                                    -------------------------------------------------------------------
Net income ......................................   $  13,398       $  15,494   $  12,058      $  13,734      $  14,583
                                                    ===================================================================

Net income per common share(e):
   Basic ........................................   $    1.03       $    1.14   $    0.89      $    0.99      $    1.01
                                                    ===================================================================
   Diluted ......................................   $    1.00       $    1.11   $    0.83      $    0.92      $    0.94
                                                    ===================================================================
</TABLE>

-----------------
(a)   Includes $2,688 for a commercial loan prepayment premium.

(b)   Includes $1,351 prepayment penalty on FHLB of New York advances,  $372 for
      acceleration  of  depreciation on branch  automation  system software and
      $169 for an increase in obligations under certain long-term benefit plans.

(c)   Includes $298 for recognition of a non-recurring  expense  associated with
      an environmental liability.

(d)   Includes $1,514 for recognition of a non-recurring expense associated with
      the  unamortized  issuance  costs  related to the PennFed  Capital Trust I
      securities that were redeemed.

(e)   Amounts have been restated for the effects of a 2 for 1 stock split in the
      form of a 100% stock dividend paid on October 29, 2004.


                                       25
<PAGE>

<TABLE>
<CAPTION>
                                                                         At and for the year ended June 30,
                                                               ---------------------------------------------------
Selected Financial Ratios and Other Data:                        2006       2005       2004       2003       2002
                                                               ---------------------------------------------------
<S>                                                            <C>        <C>        <C>        <C>        <C>
Performance Ratios:
Return on average assets (ratio of net income to
   average total assets) ...................................      0.62%      0.78%      0.67%      0.75%      0.79%
Return on average stockholders' equity (ratio of
   net income to average stockholders' equity) .............     10.78      12.64      10.20      11.53      12.59
Net interest rate spread during the year ...................      1.66       2.14       2.02       2.19       2.37
Net interest margin (net interest and dividend
   income to average interest-earning assets) ..............      1.79       2.26       2.16       2.44       2.68
Ratio of average interest-earning assets to average
   deposits and borrowings .................................    103.46     103.87     104.21     107.00     107.88
Ratio of earnings to fixed charges(a):
   Excluding interest on deposits ..........................      1.58x      1.78x      1.58x      1.73x      1.74x
   Including interest on deposits ..........................      1.27x      1.39x      1.32x      1.35x      1.31x
Ratio of non-interest expenses to average total assets .....      1.12%      1.22%      1.41%      1.58%      1.53%
Efficiency ratio (non-interest expenses, excluding
   amortization of intangible assets, to net interest and
   dividend income and non-interest income excluding
   gains (losses) on sales and real estate operations) .....     53.93      47.74      54.64      54.93      50.58
Dividend payout ratio ......................................     27.18      19.30      22.47      20.30      11.39

Asset Quality Ratios:
Non-accruing loans to total loans at end of year ...........      0.11       0.18       0.17       0.14       0.23
Allowance for loan losses to non-accruing loans
   at end of year ..........................................    330.79     231.00     286.39     373.60     177.74
Allowance for loan losses to total loans at end of year ....      0.35       0.41       0.48       0.51       0.40
Non-performing assets to total assets at end of year .......      0.08       0.13       0.11       0.09       0.17
Ratio of net charge-offs during the year to average
   loans outstanding during the year .......................      0.01       0.01       0.00       0.00       0.00

Capital Ratios:
Stockholders' equity to total assets at end of year ........      5.35       6.05       6.22       6.45       6.28
Average stockholders' equity to average total assets .......      5.73       6.19       6.56       6.47       6.25

Tangible capital to adjusted total assets at end of year(b).      7.33       8.28       8.61       8.73       8.37
Core capital to adjusted total assets at end of year(b) ....      7.33       8.28       8.61       8.73       8.37
Risk-based capital to risk-weighted assets at end of year(b)     13.81      15.84      16.86      17.21      15.93

Other Data:
Number of branch offices at end of year ....................        24         25         24         21         21
Number of deposit accounts at end of year ..................    71,800     71,600     69,800     74,800     84,200
Cash dividends declared per common share ...................   $  0.28    $  0.22    $  0.20    $  0.20    $  0.12
</TABLE>

---------------
(a)   The ratio of earnings to fixed charges  excluding  interest on deposits is
      calculated by dividing income before taxes and extraordinary  items before
      interest on borrowings  by interest on  borrowings on a pretax basis.  The
      ratio of  earnings  to fixed  charges  including  interest  on deposits is
      calculated by dividing income before income taxes and extraordinary  items
      before  interest on deposits and  borrowings  by interest on deposits plus
      interest on borrowings on a pretax basis.

(b)   Represents regulatory capital ratios for the Bank.


                                       26
<PAGE>

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

Critical Accounting Policies

The  consolidated  financial  statements  are prepared in  conformity  with U.S.
generally  accepted  accounting  principles.  The  preparation  of the financial
statements requires management to make estimates and assumptions that affect the
amounts reported in the financial  statements and accompanying  notes. While the
Company bases estimates on historical experience,  current information and other
factors deemed to be relevant, actual results could differ from those estimates.
Management  believes the following  policies are both  important to the reported
financial condition and results of  operations and require subjective judgements
and are, therefore, considered critical accounting policies.

Allowance  for Loan  Losses -- The  allowance  for loan  losses  is  established
through  charges to income  based on  management's  evaluation  of the  probable
credit  losses  presently  inherent  in  the  Company's  loan  portfolio.   This
evaluation,  which includes a review of loans for which full collectibility may
not be reasonably assured,  considers among other matters, loan classifications,
the estimated  fair value of the  underlying  collateral,  economic  conditions,
historical  loan loss  experience,  portfolio  growth and  composition and other
factors  that  warrant  recognition  in  providing  for an  adequate  loan  loss
allowance.

Loan losses are charged  against the allowance  for loan losses when  management
believes  that the recovery of  principal is unlikely.  If, as a result of loans
charged  off or  increases  in the  size or  risk  characteristics  of the  loan
portfolio,  the  allowance is below the level  considered  by  management  to be
adequate to absorb loan losses on existing loans, the  provision for loan losses
is increased to the level considered necessary to provide an adequate allowance.
The allowance is an amount that  management  believes will be adequate to absorb
probable  losses on  existing  loans  that may  become  uncollectible,  based on
evaluations  of the  collectibility  of the  loans.  The  evaluations  take into
consideration  such  factors  as  changes  in the  nature and volume of the loan
portfolio,  overall  portfolio  quality,  review of specific  problem  loans and
current  economic  conditions  that may  affect the  borrowers'  ability to pay.
Economic  conditions  may result in the   necessity  to change the  allowance in
order to react to deteriorating financial conditions of the Company's borrowers.
As a result,  additional  provisions  on  existing  loans may be required in the
future if borrowers' financial  conditions  deteriorate or if real estate values
decline.

Where  appropriate,  reserves  are  allocated to  individual  loans that exhibit
actual or probable credit  weakness.  For example,  reserves may be specifically
assigned  for loans that are 90 days or more past due,  loans where the borrower
has filed for  bankruptcy or loans  identified as  problematic  by the Company's
internal loan review process.  Reserves are based upon management's  estimate of
the borrower's  ability to repay the loan given the  availability of collateral,
other sources of cash flow and legal options available to the Company. For loans
not subject to specific  reserve  allocations,  loss rates by loan  category are
applied.  A reserve is maintained to recognize the imprecision in estimating and
measuring loss when  evaluating reserves for individual loans or pools of loans.
Reserves on individual  loans are reviewed no less frequently than quarterly and
adjusted as appropriate.

The Company has not substantively  changed any aspect of its overall approach in
its determination of the level of the allowance for loan losses. There have been
no material changes in assumptions or estimation techniques as compared to prior
periods that impacted the determination of the current period allowance.

Although  management  believes  that it uses the best  information  available to
determine  the  allowances,   unforeseen   market  conditions  could  result  in
adjustments and earnings could be significantly affected if circumstances differ
substantially  from the  assumptions  used in making  the  final  determination.
Future  additions to the Company's  allowance may have to be made as a result of
periodic loan,  property and collateral  reviews and thus cannot be predicted in
advance. In addition,  federal  regulatory  agencies, as an integral part of the
examination  process,  periodically  review  the  Company's  allowance  for loan
losses.  These  agencies  may  require the  Company to record  additions  to the
allowance level based upon their assessment of the information available to them
at the time of examination.

Accounting for Income Taxes -- In the  accounting  for income taxes, the Company
records  amounts that  represent  taxes  payable for the current year as well as
deferred  tax  assets  and  liabilities  arising  from  transactions  that  have
differing  effects  for  financial  statements  and tax  returns.  Judgement  is
required  in  assessing  the future tax effects of  transactions  that have been
recognized in the Company's  consolidated  financial  statements or tax returns.
Fluctuations  in the actual tax effects in future  years could have an impact on
the Company's consolidated financial condition or results of  operations.

Asset Impairment Judgments -- The Company periodically performs analyses to test
for  impairment of various  assets.  When  necessary,  valuation  allowances are
established to recognize impairment of assets. In addition to the impairment


                                       27
<PAGE>

analyses  related to loans,  additional  impairment  analysis is conducted as it
relates  to the  value of other  than  temporary  declines  in the  value of the
investment and mortgage-backed securities portfolios.

Investments  securities  available  for sale are carried at market  value,  with
unrealized  gains  and  losses,  net of taxes,  reported  as  accumulated  other
comprehensive  income in stockholders'  equity.  Investment and  mortgage-backed
securities  held to maturity  are carried at  amortized  cost as the Company has
both the  ability and intent to hold the  securities  to  maturity.  The Company
conducts a periodic review and evaluation of the investment and  mortgage-backed
securities  portfolios  to  determine  if the value of any security has declined
below its carrying value and whether such decline is other than temporary.

If such  decline is deemed  other than  temporary,  the  carrying  amount of the
security  would be adjusted by writing  down the  security to fair market  value
through  a charge  to  current  period  operations.  The  market  values  of the
Company's investment and mortgage-backed  securities are significantly  affected
by changes in interest  rates.  In general,  as interest  rates rise, the market
value of fixed-rate securities will decrease; as interest rates fall, the market
value of  fixed-rate  securities  will  increase.  With  significant  changes in
interest  rates,  the  Company  evaluates  the  intent  and  ability to hold the
security to maturity or for a sufficient time to recover the recorded  principal
balance.  Estimated fair values for securities are based on quoted dealer market
prices or subscribed pricing services.

Overview

You  should  read  the  following  discussion  together  with  our  Consolidated
Financial Statements and the related Notes to Consolidated Financial Statements,
which  are  included  elsewhere  in this Form  10-K.  This  discussion  contains
forward-looking   statements   and  you   should   read   the   section   titled
"Forward-Looking Statements" in Item 1. Business.

The  Company  has been,  and  intends to  continue  to be, a  community-oriented
financial institution offering a variety of financial services to meet the needs
of the communities it serves.  The Company  currently has 24 full service branch
offices located in New Jersey.  The Company  attracts  deposits from the general
public and uses these  deposits,  together with  borrowings and other funds,  to
originate and purchase one- to four-family residential mortgage loans, and, to a
lesser extent, to originate commercial and multi-family real estate and consumer
loans. The Company also invests in mortgage-backed securities secured by one- to
four-family  residential  mortgages  and  U.S.  government  agency  obligations.
Through a  relationship  with an  unaffiliated  third party,  the Company offers
insurance  and  uninsured  non-deposit  investment   products  to the  Company's
customers and members of the general  public.  A wholly-owned  subsidiary of the
Company participates in the ownership of a title insurance agency.

The Company's  loan  portfolio  growth is dependent  primarily on its ability to
provide the products and  services  that meet the needs of the  customers in its
market area. The Company offers fixed rate, adjustable rate and balloon mortgage
loans for residential and commercial purposes, as well as home equity,  consumer
loans and  non-mortgage  business  loans,  with a variety of terms.  Residential
first  mortgage  loans  are  the  largest  part of the  portfolio,  representing
approximately  77.6% at June 30,  2006.  The level of interest  rates also has a
significant  impact on the ability of the Company to  originate loans and on the
amount of prepayment activity experienced by the Company. During the past fiscal
year,  the  Company's  net loans  receivable  and loans held for sale  increased
$218.7  million.  This  increase  was  primarily  attributable  to  strong  loan
origination levels in one- to four family residential and consumer loans and the
lower levels of  prepayments  when compared to prior years when market  interest
rates were  declining.  The Company sold $29.5  million of primarily  fixed rate
loans during the fiscal year as a means to assist in the  management of interest
rate risk.

The retention and the  recruitment of profitable  deposit  customers is vital to
PennFed's ability to generate liquid funds and to generate  non-interest income.
The number of deposit  accounts at June 30,  2006 was up slightly  from June 30,
2005;  and  the  average  deposit  balances  per  account,  excluding  wholesale
certificates  of deposit,  has increased  5.6% since June 30, 2005.  The Company
offers a number of different  deposit  products and uses this product mix, along
with a strong  focus on  customer  service,  to attract  customers  and to build
depositor relationships.  The level of interest rates also significantly affects
the level of the  Company's  deposits.  During the past  fiscal  year,  deposits
increased  $75.1  million,   primarily  due  to  a  $74.5  million  increase  in
certificates  of deposit,  and an $85.5  million  increase in checking and money
market  accounts  partially  offset by a  decrease  of $85.1  million in savings
accounts.  The decrease in savings accounts since June 30, 2005 was attributable
to a rise in short term interest rates, which has shifted  temporarily  "parked"
savings account funds to higher  yielding  deposit  alternatives.  This shift in
temporarily  "parked" savings accounts has also led to a portion of the increase
in checking and money market  accounts,  as these  accounts are more liquid than
certificates  of deposit.  Overall,  the increase in deposits  was  accomplished
through a combination of desirable product features, focused marketing campaigns
and appropriately priced products.


                                       28
<PAGE>

The Company's  future loan and deposit  growth is, to a large  extent,  directly
tied to the level of interest  rates.  If long-term  interest  rates rise,  loan
origination  levels may decline.  Growth in the loan pipeline will depend on the
Company's ability to successfully seek out customers in spite of the higher cost
of borrowing for the customer and  competition  from other lenders.  Loan growth
driven by borrower demand also will depend on the strength of the economy in the
Company's market area. With rising interest rates and/or deteriorating  economic
conditions, loan origination volumes would likely be lower than recent years and
a reduction in the prepayment of loans currently in portfolio would be expected.
The Company has  continued  its loan sale  strategy  with  respect to new longer
term,  fixed rate  residential loan product in order to assist in the management
of interest rate risk  associated  with keeping longer term loans on the balance
sheet.  With  respect to  deposits,  while an increase  in interest  rates would
increase the Company's cost of funds,  it would also provide the Company with an
additional  opportunity  to  attract  depositors,  some of whom may have  sought
higher returns with mutual funds and other non-deposit  investment products when
market  rates  were  lower.  The  Company  remains  confident  that by  offering
appropriately  priced products and by striving to deliver superior  service,  it
will be able to maintain profitable levels of loans and deposits.

Cash and cash  equivalent  balances were at lower levels during  portions of the
fiscal  year,  compared  to the  prior  year,  due to a decline  in  accelerated
prepayments  and  strong  loan  origination   levels.  The  average  balance  of
investment  securities  increased  during the past fiscal year,  compared to the
prior fiscal year,  reflecting the replacement of those  securities that prepaid
early, while the average balance of  mortgage-backed  securities  decreased,  as
available funds were utilized to grow the loan portfolio.

The  Company's  results of operations  are  dependent  primarily on net interest
income,  which  is the  difference  between  the  income  earned  on  its  loan,
mortgage-backed  securities  and  investment  portfolios  and its cost of funds,
consisting of the interest paid on deposits and borrowings. General economic and
competitive  conditions,  particularly  changes in  interest  rates,  government
policies and actions of regulatory  authorities,  also significantly  affect the
Company's results of  operations. Future changes in applicable laws, regulations
or government policies may also have a material impact on the Company.

Growth in the loan  portfolio at a lower average  yield,  combined with a higher
cost of funds on  increased  deposits  and  other  borrowings  contributed  to a
compression in the net interest margin,  when compared to the prior fiscal year.
The lower level of prepayments and a greater amount of loan originations  during
the  fiscal  year  positively   impacted  the  Company's   interest  income  and
contributed to growth in the average balance of loans outstanding, when compared
to the prior year. The Company's interest income is primarily driven by interest
earned on residential first mortgage loans,  which increased $7.1 million during
the fiscal year, when compared to the prior fiscal year. Higher cost of funds on
deposits  and  borrowings,  due to the short  term  interest  rate  environment,
combined  with  an  increase  in the  average  balance  of  deposits  and  other
borrowings,  were the  primary  factors  responsible  for an  increase  of $16.4
million in interest  expense on deposits  and other  borrowings  for the current
year compared to the prior year.  Overall,  net interest  income  decreased $5.8
million and the net  interest  margin  decreased  from 2.26% to 1.79% during the
fiscal year, compared to the prior fiscal year.

Non-interest income has increased this fiscal year when compared to the previous
fiscal year  primarily due to fees and service  charges,  mainly loan fees,  and
income on Bank Owned Life Insurance ("BOLI"). Fees and service charges include a
$2.7  million  prepayment  premium  earned  on  the  payoff  of a  large-balance
commercial real estate loan in the current fiscal year.

Non-interest  expenses  remained  at  relatively  the same level in the  current
fiscal  year when  compared  to the level  reported  in the prior  fiscal  year.
However,  the  Company's  non-interest  expenses as a percent of average  assets
decreased  to 1.12% for the year  ended  June 30,  2006 from 1.22% for the prior
year.  Fiscal 2006  non-interest  expenses  included a $1.4  million  prepayment
penalty on certain Federal Home Loan Bank ("FHLB") of New York advances. FHLB of
New York  advances of $35.0  million with a weighted  average  interest  rate of
5.95% and a weighted  average  remaining  term of 28 months were  replaced  with
$35.0 million of new FHLB of New York advances with a weighted  average interest
rate of 4.20% and a weighted average remaining term of 43 months.  Also included
in non-interest  expenses this fiscal year was an increase in obligations  under
certain long-term benefit plans and accelerated  depreciation expense for branch
automation system software that is no longer used. In addition, costs associated
with regulatory burden, especially compliance with Sarbanes-Oxley Section 404 on
internal  control   reporting,   continue  to  require   additional   compliance
expenditures.  Fiscal  2005  non-interest  expenses  included  $1.4  million  of
amortization of intangible assets, which was fully amortized on March 31, 2005.


                                       29
<PAGE>

The Company's future earnings are inherently tied to the level of interest rates
and the  relationship  of short to long term rates.  If interest rates increase,
the  Company's  interest  expense on  deposits  and  wholesale  borrowings  will
increase at a faster pace than the  effects  that will be seen in the  Company's
interest income on loans, investment securities and mortgage-backed  securities.
This  effect  on   interest   expense  is  due  to  the   short-term   repricing
characteristics  of a portion of the Company's  deposits and borrowings.  As for
interest income, loan commitments,  generally locked in at issuance, will result
in loans closed at  below-market  rates if rates  continue to rise.  As interest
rates rise, a decline in loan prepayments and in prepayments on  mortgage-backed
securities will reduce cashflows  available for reinvestment at higher rates. By
emphasizing  the  origination of adjustable  rate and biweekly loan products and
continuing  the sale of longer  term fixed rate  residential  loans,  while also
focusing on increasing the balance of core deposits and longer term certificates
of deposit and  borrowings,  the Company will endeavor to better position itself
to  mitigate  the  effects of rising  interest  rates.  See the  section  titled
"Management  Strategy" for a discussion of those areas management has emphasized
as important to future growth and improved earnings.

On February 27,  2006,  the Company  notified its  customers of its May 31, 2006
closing of its branch located at 493 Bloomfield Avenue in Montclair, New Jersey.
The  decision to close the branch was  principally  due to  economies  of scale.
Deposits  were  transferred  to a branch  located  less than two miles  from the
branch that was closed.

Management Strategy

Management's  primary goal is to enhance  stockholder value, while providing our
customers with  appropriate  quality  products and services  through a continued
focus on  improved  earnings  while  managing  risks,  including  liquidity  and
interest rate risk. The Company's  current  strategies focus on: (i) emphasizing
lending  secured  by one- to  four-family   residential  first  mortgages,  (ii)
increasing the commercial and multi-family  and consumer loan portfolios,  (iii)
maintaining asset quality, (iv) increasing core deposit balances,  (v) managing
the Company's exposure to interest rate risk, (vi) improving non-interest income
and (vii) controlling non-interest expenses.

Emphasizing Lending Secured by One- to Four-Family  Residential First Mortgages.
As a traditional  thrift  serving our market area,  the Company will continue to
emphasize  production of traditional  one- to  four-family  first mortgage loans
secured by properties located primarily in New Jersey.  One-to four-family loans
are generally  considered to have a lower  inherent  risk,  coupled with a lower
yield. The Company produced $340.9 million, $350.3 million and $462.8 million in
one- to four-family mortgage loans in fiscal 2006, 2005 and 2004,  respectively.
Of  these  amounts,   $327.4   million,   $350.3  million  and  $409.8  million,
respectively,  represent loan originations,  with the balance  representing loan
purchases.  As a result of rising  interest rates,  refinance  activity had been
significantly  reduced  throughout  fiscal 2006.  While the Company's  customers
continue to favor fixed rate products,  with rising  interest  rates,  there has
been a slight  increase in borrowers'  preference for adjustable  rate products.
The  Company's   interest  income  has  been  derived  primarily  from  one-  to
four-family  mortgage  loans,  which  totaled  $1.3  billion,  or 77.6%,  of the
Company's  gross loan  portfolio  at June 30, 2006.  Interest  income on one- to
four-family loans of $64.4 million represented 75.0% of total interest on loans.

Increasing the Commercial and  Multi-Family  and Consumer Loan  Portfolios.  The
Company will continue its emphasis on increasing the commercial and multi-family
and consumer loan  porfolios  while  remaining  vigilant in minimizing  the risk
inherent in these products  through sound  underwriting.  These loans  generally
reprice more frequently, have shorter maturities, and/or have higher yields than
one- to four-family first mortgage loans. The Company originated $173.8 million,
$129.4 million and $118.2 million of commercial  and  multi-family  and consumer
loans in fiscal 2006, 2005 and 2004, respectively. As of June 30, 2006, 2005 and
2004,  commercial and multi-family and consumer loans represented  22.5%,  21.5%
and 22.5%, respectively,  of the total gross loan portfolio.  Interest income on
commercial  and  multi-family  and consumer  loans of $21.5 million  represented
25.0% of  total  interest  on loans  for the year  ended  June 30,  2006.  While
commercial  and  multi-family  and consumer  loans  generally  represent  higher
yielding assets,  the Company will continue to balance the increased income with
the risk  inherent in these types of loans as compared to a first lien on a one-
to four-family home.

Maintaining Asset Quality. The majority of the Company's loan portfolio consists
of one- to  four-family  mortgages,  which are considered to have less risk than
commercial and multi-family real estate or consumer loans. In recognition of the
Company's strong underwriting standards and aggressive collection efforts on all
loan  portfolios,  the Company's  historical  loss experience and net chargeoffs
continue to be low.

The  Company's  non-performing  assets  consist of  non-accruing  loans and real
estate owned.  Non-performing  assets as a percentage of total assets were 0.08%
at June 30, 2006, as compared to 0.13% at June 30, 2005.


                                       30
<PAGE>

Increasing  Core Deposit  Balances.  The  Company's  primary  source of funds is
deposits.  The  Company  will  continue  to  emphasize  growth in core  deposits
consisting  of  checking,  money  market and savings  accounts.  These  deposits
provide a more  stable,  lower  cost  source of funds than  other  deposits  and
borrowings  and generate  service charge income.  The Company  utilizes  various
techniques to generate core deposits  including  special  promotional  rates and
offerings.  The Company  recognizes  the  importance  of  building  relationship
customers.  Therefore, certain higher rates have been offered on certificates of
deposit for customers who also maintain checking  accounts.  The Company is also
focused on growing  deposits from businesses  through new and enhanced  business
products and sales efforts by its Business Development Team.

Managing  the  Company's  Exposure  to  Interest  Rate Risk.  The Company has an
asset/liability  committee  that meets monthly to develop,  implement and review
strategies  and policies to manage  interest  rate risk. As part of its interest
rate risk strategy,  the Company has emphasized  core deposit  growth,  utilized
intermediate/longer-term  borrowings and has, at select times, emphasized growth
in longer term certificates of deposit.  Furthermore, the Company has endeavored
to manage its interest rate risk through the pricing and  diversification of its
loan products,  including  focusing on the  production of loans with  adjustable
rate features and/or loans with shorter terms to maturity.

In an effort to manage  sensitivity  to changes in interest  rates,  the Company
periodically evaluates the sale of longer-term,  fixed rate, one- to four-family
residential loan production.  During the year ended June 30, 2006, approximately
$29.5  million  of  primarily   conforming,   fixed  rate  one-  to  four-family
residential  mortgage  loans  were sold into the  secondary  market and to other
institutions as part of the Company's  efforts to manage interest rate risk. The
level of loan sale  activity  continues  to be actively  evaluated  with primary
consideration given to interest rate risk, long-term profitability and liquidity
objectives. See "-Interest Rate Sensitivity" and "-Asset/Liability Strategy."

Improving  Non-Interest Income. The Company has sought and will continue to seek
additional  ways of improving  non-interest  income.  Fees and service  charges,
which  represent the primary  source of  non-interest  income,  reflected a $2.6
million, or 83.1%,  increase for fiscal 2006 compared to fiscal 2005,  primarily
due to increases in loan prepayment  fees.  With an anticipated  leveling off of
prepayments and refinance activity expected during the next fiscal year, related
income would also not be expected to rise.  Increasing core deposits will likely
result in an increase in fees and service charges.

Controlling   Non-Interest   Expenses.   Non-interest   expenses  are  carefully
monitored,  which includes  ongoing reviews of staffing  levels,  facilities and
operations. The Company's ratio of non-interest expenses to average total assets
was 1.12%  for the year  ended  June 30,  2006  compared  to 1.22% for the prior
fiscal year.

Interest Rate Sensitivity

Interest  Rate  Sensitivity  Gap. The interest  rate risk inherent in assets and
liabilities  may be  determined by analyzing the extent to which such assets and
liabilities  are "interest  rate  sensitive"  and by measuring an  institution's
interest rate   sensitivity  "gap." An asset or liability is said to be interest
rate  sensitive  within a defined  time period if it matures or reprices  within
that period.  The difference or mismatch between the amount of  interest-earning
assets  maturing  or  repricing  within  a  defined  period  and the  amount  of
interest-bearing  liabilities  maturing or  repricing  within the same period is
defined as the interest rate  sensitivity  gap. An  institution is considered to
have a negative gap if the amount of  interest-bearing  liabilities  maturing or
repricing within a specified time period exceeds the amount of  interest-earning
assets maturing or repricing  within the same period.  If more  interest-earning
assets than  interest-bearing  liabilities  mature or reprice within a specified
period, then the institution is considered to have a positive gap.  Accordingly,
in a rising interest rate  environment,  in an institution  with a negative gap,
the cost of its rate sensitive liabilities would  theoretically rise at a faster
pace than the yield on its rate sensitive assets, thereby diminishing future net
interest income.  In a falling interest rate  environment,  a negative gap would
indicate that the cost of rate sensitive  liabilities  would decline at a faster
pace than the yield on rate  sensitive  assets and improve net interest  income.
For an institution with a positive gap, the reverse would be expected.

In an attempt to manage its  exposure to changes in interest  rates,  management
closely  monitors  the  Company's  exposure  to interest  rate risk.  Management
maintains  an  asset/liability  committee  consisting  of  the  Chief  Executive
Officer,   the  Chief  Operating  Officer,  the  Chief  Financial  Officer,  the
Residential  Lending Group Executive,  the Retail Banking Group  Executive,  the
Treasurer  and the  Customer  Support/Operations  Group  Executive,  which meets
regularly  and reviews  the  Company's  interest  rate risk  position  and makes
recommendations  for  adjusting  this  position.  In   addition,  the  Board  of
Directors  reviews on a monthly  basis the Company's  asset/liability  position,
including  simulations  of the effect on the  Company's  capital and earnings of
various interest rate scenarios and operational strategies.


                                       31
<PAGE>

The table following this  discussion  provides  information  about the Company's
interest sensitive financial instruments.  Except for the effects of prepayments
and scheduled  principal  amortization  on mortgage  related  assets,  the table
presents principal cash flows and related weighted average interest rates by the
earlier of term to repricing or contractual term to maturity.

Investment  securities available for sale are assumed to reprice within one year
due to the  characteristics  associated with the underlying assets of the mutual
fund.  Callable government agency securities are assumed to be called within one
year if their stated interest rates are at or above current market rates. If the
stated  interest rate is below current market rates,  these callable  securities
are assumed to be called at a time  determined by considering the spread between
the stated  interest  rate and the market rate, as well as the age and structure
of the security.  Some of these callable  government agency   securities will be
assumed to be called early, while others may extend to maturity.

Based on the Company's  experience,  residential fixed and adjustable rate loans
are assumed to prepay at an annualized  rate between 8% and 12%.  Commercial and
multi-family  real  estate  loans are  assumed to prepay at an  annualized  rate
between  7% and 38% while  consumer  loans are  assumed to prepay at a 32% rate.
Fixed  and  adjustable  rate  mortgage-backed  securities  have  annual  payment
assumptions  ranging  from 15% to 20%.  Demand  loans  and loans  which  have no
repayment  schedule or stated final  maturity,  are assumed to be due within six
months. Loan and mortgage-backed   securities balances are net of non-performing
loans and are not adjusted for unearned discounts,  premiums,  and deferred loan
costs.

The Company  assumes  that  variable  rate  savings  account  balances  roll-off
gradually over time. Based on the Company's historical experience, it is assumed
that 12% of these balances  roll-off within one year; 10% roll-off in the second
year;  8%  roll-off in the third year;  and 5%  roll-off  each year  thereafter.
During fiscal 2001 and 2002,  the Bank promoted "5% Savings for Life"  accounts,
which totaled  $120.8  million at June 30, 2006.  These  deposits are assumed to
have an average life of approximately 10 years unless the 6-month U.S.  treasury
bill exceeds 5%; during those times,  these deposits are assumed to decay at the
same annual rates as variable rate savings  accounts.  At June 30, 2006,  $220.8
million, or 73.5%, of savings accounts are assumed to roll-off after five years.
Transaction accounts,  excluding money market accounts,  are assumed to roll-off
after five years.  Money market accounts are assumed to be variable accounts and
are  reported as  repricing  within six months.  No roll-off  rate is applied to
certificates of deposit. Fixed maturity deposits reprice at maturity.


                                       32
<PAGE>

<TABLE>
<CAPTION>
                                                                Maturing or Repricing
                                               ------------------------------------------------------
                                                                 Year ending June 30,
                                               ------------------------------------------------------

                                                   2007          2008          2009          2010
                                               ------------------------------------------------------
                                                               (Dollars in thousands)
<S>                                            <C>             <C>           <C>           <C>
Fixed rate mortgage loans including
  one- to four-family and commercial
  and multi-family .........................   $   141,451     $ 125,098     $ 115,812     $ 107,315
  Average interest rate ....................          5.56%         5.53%         5.53%         5.53%

Adjustable rate mortgage loans including
  one- to four-family and commercial
  and multi-family .........................   $    79,368     $  54,284     $  59,228     $  66,806
  Average interest rate ....................          6.27%         5.89%         5.43%         5.48%

Consumer loans including
  demand loans .............................   $   105,917     $  38,467     $  26,567     $  18,499
  Average interest rate ....................          6.70%         5.74%         5.74%         5.74%

Investment securities and other ............   $    37,650     $   1,000     $   2,000     $      --
  Average interest rate ....................          5.90%         8.90%         7.00%           --%

Mortgage-backed securities excluding
  unamortized premium ......................   $    14,745     $  10,339     $   7,510     $   6,810
  Average interest rate ....................          5.34%         5.14%         5.19%         5.17%

  Total interest-earning assets ............   $   379,131     $ 229,188     $ 211,117     $ 199,430
                                               ======================================================

Savings deposits ...........................   $    36,030     $  19,334     $  11,368     $   6,537
  Average interest rate ....................          2.88%         1.98%         1.30%         1.30%

Money market and demand deposits
  (transaction accounts) ...................   $   142,777     $      --     $      --     $      --
  Average interest rate ....................          4.60%           --%           --%           --%

Certificates of deposit ....................   $   562,483     $ 139,659     $  52,219     $  34,099
  Average interest rate ....................          4.09%         4.13%         4.44%         4.23%

FHLB of New York advances ..................   $    30,465     $  50,000     $  75,000     $ 175,000
  Average interest rate ....................          5.32%         5.21%         4.50%         5.88%

Other borrowings ...........................   $   230,193     $  10,000     $      --           $--
  Average interest rate ....................          5.17%         3.59%           --%           --%

Junior subordinated deferrable interest
  debentures ...............................   $        --     $      --     $      --     $      --
  Average interest rate ....................            --%           --%           --%           --%

  Total deposits and borrowings ............   $ 1,001,948     $ 218,993     $ 138,587     $ 215,636
                                               ======================================================

Interest earning assets less deposits and
  borrowings (interest-rate sensitivity gap)   $  (622,817)    $  10,195     $  72,530     $ (16,206)
                                               ======================================================

Cumulative interest-rate sensitivity gap ...   $  (622,817)    $(612,622)    $(540,092)    $(556,298)
                                               ======================================================

Cumulative interest-rate sensitivity
  gap as a percentage of total assets
  at June 30, 2006 .........................        (27.02)%      (26.58)%      (23.43)%      (24.14)%
                                               ======================================================

Cumulative interest-rate sensitivity gap
  as a percentage of total interest-
  earning assets at June 30, 2006 ..........        (28.14)%      (27.68)%      (24.40)%      (25.13)%
                                               ======================================================

Cumulative interest-earning assets as a
  percentage of cumulative deposits and
  borrowings at June 30, 2006 ..............         37.84%       49.82%        60.27%        64.68%
                                               ======================================================

<CAPTION>
                                                                Maturing or Repricing
                                               ------------------------------------------------------
                                                                 Year ending June 30,
                                               ------------------------------------------------------

                                                   2011     Thereafter        Total       Fair Value
                                               ------------------------------------------------------
                                                               (Dollars in thousands)
<S>                                            <C>             <C>           <C>           <C>

Fixed rate mortgage loans including
  one- to four-family and commercial
  and multi-family .........................   $ 100,015     $ 500,042     $ 1,089,733     $ 1,049,634
  Average interest rate ....................        5.53%         5.60%           5.56%

Adjustable rate mortgage loans including
  one- to four-family and commercial
  and multi-family .........................   $  75,421     $  48,451     $   383,558     $   362,708
  Average interest rate ....................        5.21%         6.45%           5.76%

Consumer loans including
  demand loans .............................   $  13,038     $   1,934     $   204,422     $   202,554
  Average interest rate ....................        5.74%         5.74%           6.24%

Investment securities and other ............   $  18,351     $ 414,009     $   473,010     $   453,313
  Average interest rate ....................        5.21%         5.59%           5.61%

Mortgage-backed securities excluding
  unamortized premium ......................   $   6,261     $  17,198     $    62,863     $    60,893
  Average interest rate ....................        5.15%         5.24%           5.22%

  Total interest-earning assets ............   $ 213,086     $ 981,634     $ 2,213,596     $ 2,129,102
                                               ======================================================

Savings deposits ...........................   $   6,210     $ 220,768     $   300,247     $   300,247
  Average interest rate ....................        1.30%         3.02%           2.80%

Money market and demand deposits
  (transaction accounts) ...................   $      --     $ 169,712     $   312,489     $   312,488
  Average interest rate ....................          --%         0.80%           2.54%

Certificates of deposit ....................   $  12,029     $      --     $   800,489     $   794,163
  Average interest rate ....................        4.65%          --%            4.13%

FHLB of New York advances ..................   $ 115,000     $  20,000     $   465,465     $   464,946
  Average interest rate ....................        5.69%         5.17%           5.47%

Other borrowings ...........................   $      --     $      --     $   240,193     $   239,730
  Average interest rate ....................          --%           --%           5.11%

Junior subordinated deferrable interest
  debentures ...............................   $      --     $  43,300     $    43,300     $    45,372
  Average interest rate ....................          --%         9.04%           9.04%

  Total deposits and borrowings ............   $ 133,239     $ 453,780     $ 2,162,183     $ 2,156,946
                                               ======================================================

Interest earning assets less deposits and
  borrowings (interest-rate sensitivity gap)   $  79,847     $ 527,854     $    51,403
                                               =======================================

Cumulative interest-rate sensitivity gap ...   $(476,451)    $  51,403
                                               =======================

Cumulative interest-rate sensitivity
  gap as a percentage of total assets
  at June 30, 2006 .........................      (20.67)%        2.23%
                                               =======================

Cumulative interest-rate sensitivity gap
  as a percentage of total interest-
  earning assets at June 30, 2006 ..........      (21.52)%        2.32%
                                               =======================

Cumulative interest-earning assets as a
  percentage of cumulative deposits and
  borrowings at June 30, 2006 ..............       72.11%       102.38%
                                               =======================
</TABLE>

At June 30,  2006,  the  Company's  total  deposits and  borrowings  maturing or
repricing within one year exceeded its total interest-earning assets maturing or
repricing  within one year by $622.8  million,  representing a one year negative
gap of 27.02% of total  assets,  compared to a one year  negative  gap of $166.8
million,  or 8.13%,  of total  assets at June 30,  2005.  See  "-Asset/Liability
Strategy."  The  Company's  negative gap position at June 30, 2006 has increased
significantly  when compared to June 30, 2005. Higher market rates resulted in a
decline in loan and mortgage-backed security prepayments


                                       33
<PAGE>

and an extension in the projected redemption of certain callable U.S. government
agency  securities,  as well as a shift in  balances  from  savings  accounts to
short-term certificates of deposit and money market products. As a result, asset
cash flows  lengthened  while  liabilities  repricing  within one year increased
significantly.

In evaluating the Company's exposure to interest rate risk, certain  limitations
inherent in the method of interest rate gap analysis  presented in the foregoing
table must be considered.  For example,  although certain assets and liabilities
may have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and  liabilities  may  fluctuate in advance of changes in market
interest  rates,  while  interest rates on other types may lag behind changes in
market rates.  Additionally,  certain assets, such as adjustable rate mortgages,
have features  which  restrict  changes in interest  rates in the short-term and
over the life of the asset.  Furthermore,  in the event of a change in  interest
rates,  prepayment and early withdrawal levels may deviate   significantly  from
those assumed in calculating the table.  Finally,  the ability of many borrowers
to service  their debt may decrease in the event of an interest  rate  increase.
The  Company  considers  all of these  factors in  monitoring  its  exposure  to
interest rate risk.

Net Portfolio  Value.  The  Company's  interest  rate  sensitivity  is regularly
monitored by management through additional  interest rate risk ("IRR") measures,
including an IRR "Exposure Measure" or "Post-Shock" NPV ratio and a "Sensitivity
Measure."  A low  Post-Shock  NPV ratio may  indicate  greater  exposure to IRR.
Greater  exposure  can result  from a high  sensitivity  to changes in  interest
rates. The Sensitivity  Measure is the change in the NPV ratio, in basis points,
caused by a 2%  increase  or  decrease  in rates,  whichever  produces  a larger
decline.  OTS guidelines  would  characterize  an institution  with a Post Shock
ratio of less  than 4% to have  "high"  interest  rate  risk if the  Sensitivity
Measure  is  greater  than  2%.  At  least  quarterly,  and  generally  monthly,
management  models the change in net  portfolio  value ("NPV") over a variety of
interest  rate  scenarios.  NPV is the present value of expected cash flows from
assets,  liabilities  and  off-balance  sheet  contracts.  An NPV ratio,  in any
interest rate scenario,  is defined as the NPV in that rate scenario  divided by
the market value of assets in the same scenario. Assumptions used in calculating
interest rate sensitivity are periodically reviewed and modified as appropriate.

As of June 30,  2006,  the Bank's  internally  generated  initial  NPV ratio was
8.66%.  Following a 2% increase in interest  rates,  the Bank's  Post-Shock  NPV
ratio was 5.02%. The change in the NPV ratio, or the Bank's Sensitivity Measure,
was  negative  3.64%.  Following a 2% decrease  in  interest  rates,  the Bank's
internally  generated Post-Shock NPV ratio was 9.11% and the Sensitivity Measure
was positive  0.45%.  As of June 30, 2006,  the Company's  internally  generated
initial NPV ratio was 8.47%, the Post-Shock ratio was 4.34%, and the Sensitivity
Measure was negative 4.13%. As of June 30, 2005, the Bank's Post-Shock NPV ratio
and  Sensitivity  Measure were 8.33% and negative 1.86%,  respectively,  and the
Company's  Post-Shock NPV ratio and Sensitivity  Measure were 8.27% and negative
1.70%,  respectively.  At June 30, 2005, the effect of a 2% decrease in interest
rates  could not be  meaningfully  simulated.  The  Post-Shock  NPV  ratios  and
Sensitivity Measures from a simulated 2% increase in rates deteriorated from the
prior year,  primarily due to a sharp  increase in interest  rates.  The rise in
long  term  market  rates  reduced  prepayment   activity  on  certain  one-  to
four-family loans and mortgage-backed securities. In addition, despite continued
focus on  generating  one- to  four-family  loan  growth  with  shorter  average
durations,  such as bi-weekly and adjustable rate mortgages with shorter average
durations,  overall asset duration increased,  principally due to a shift in the
projected  redemption  date of callable  U.S.  government  agency  securities to
beyond one year.  Furthermore,  a decline in liability duration resulted from an
increase in short-term  retail  deposit and  wholesale  borrowing  balances,  an
increase in the sensitivity of FHLB of New York convertible advances, and from a
reduction in savings  account  balances,  as certain  "parked"  funds shifted to
shorter-term, higher-yielding deposit alternatives. Variances between the Bank's
and the Company's NPV ratios are  attributable  to balance sheet items which are
eliminated during consolidation,  such as investments,  intercompany  borrowings
and capital.

Internally  generated NPV  measurements  are based on simulations  which utilize
institution  specific  assumptions,  including  discount  and decay  rates,  and
generally  result  in lower  levels  of  presumed  interest  rate  risk than OTS
measurements indicate.

The OTS  measures  the  Bank's  IRR on a  quarterly  basis  using  data from the
quarterly Thrift Financial  Reports filed by the Bank with the OTS, coupled with
non-institution specific assumptions which are based on national averages. As of
March 31, 2006 (the latest date for which information is available),  the Bank's
initial  NPV ratio,  as measured by the OTS,  was 7.17%,  the Bank's  Post-Shock
ratio  following a 2% increase in interest  rates was 2.10% and the  Sensitivity
Measure was negative 5.07%.


                                       34
<PAGE>

In addition to monitoring NPV and gap,  management also monitors the duration of
assets and  liabilities  and the effects on net interest  income  resulting from
parallel and non-parallel increases or decreases in rates.

At June 30, 2006,  based on its  internally  generated  simulation  models,  the
Company's  consolidated net interest income projected for one year forward would
decrease  27.3%  from  the base  case,  or  current  market,  as a result  of an
immediate and sustained 2% increase in interest rates.

Asset/Liability Strategy

The  primary  elements of the  Company's  asset/liability  strategy  include the
following:

1. The  Company has focused on  managing  the average  life and  duration of its
portfolio of one- to four-family mortgage loans by promoting one year adjustable
rate  products,  with initial  fixed rate terms of 3 and 5 years;  15, 20 and 30
year  bi-weekly  mortgages;  and fixed rate products with terms of 10, 15 and 20
years, which have shorter durations than 30 year fixed rate mortgage loans.

2. The Company has emphasized the origination of variable rate home equity lines
of credit and fixed rate second   mortgage  loans as well as variable  and fixed
rate commercial and multi-family real estate loans having maturities or terms to
repricing  significantly  shorter than one- to four-family  residential mortgage
loans.

3. The  Company  has  periodically  sold a  portion  of its one- to  four-family
mortgage  loan  portfolio in an effort to shorten its average life and duration,
as well as to mitigate prepayment risk and reduce borrowings.  The level of such
activity continues to be regularly evaluated with primary consideration given to
interest rate risk, long term profitability and liquidity objectives.

4. The Company has emphasized the  lengthening of maturities of its  liabilities
through  its pricing of longer term   certificates  of deposit and by  utilizing
intermediate- and longer-term borrowings, subject to market conditions.

5. The Company has focused on the  retention and the  recruitment  of profitable
deposit customers in an effort to improve funding stability and earnings.

6. The Company has also emphasized  growth in personal and business core deposit
accounts as these funds are relatively stable, have a longer duration and assist
in strengthening customer relationships.

During the year ended June 30,  2006,  each of the  strategies  noted  above was
employed to manage the Company's sensitivity to changes in interest rates.

Over the last year, the Federal Open Market Committee has continued the measured
increase in the targeted  Federal  funds rate, by raising it 2.00% from 3.25% at
June 30, 2005 to 5.25% at June 30,  2006.  During this time,  longer term market
yields also  increased,  but only  approximately  1.25%. As the steepness of the
curve declined and occasionally  inverted,  loan origination  activity  remained
strong until the fourth quarter when it began to decelerate.  However,  shifting
of funds in retail  products,  particularly  from savings accounts to short-term
certificates  of deposit and money market  accounts,  accelerated  due to strong
competitive pricing for short term retail deposits.

One-to four-family residential and consumer mortgage activity remained strong in
fiscal 2006,  reflective of a robust housing market and competitive  pricing for
most of the fiscal year. As production began to slow in the fourth quarter,  the
Company added a correspondent relationship with a mortgage company that was able
to originate,  fund and sell shorter  duration one- to four-family  loans to the
Bank.  Bi-weekly and adjustable rate production dominated new volumes and helped
to manage the lengthening  duration being  experienced in the  residential  loan
portfolio.  Furthermore, a large portion of the commercial and multi-family loan
production  added during the fiscal year was also adjustable  rate.  Though loan
sale  activities  declined  during fiscal 2006 compared to the prior year,  they
included  primarily  lower  coupon,  fixed rate products  with  longer-terms  to
maturity and supported efforts to manage interest rate risk.

Asset  growth was funded  through a  combination  of retail  deposit  growth and
wholesale  borrowings  during  fiscal  2006.  Significant   competitive  pricing
pressures made it difficult to grow retail balances at a pace sufficient to fund
loan volumes, resulting in an increase in wholesale borrowings. While efforts to
grow checking and savings accounts were only marginally  successful,  the Bank's
money market  accounts  maintained a strong market  presence and helped to build
new relationships  and to retain a large portion of existing  customers who were
shifting their balances to higher yielding alternatives. Certificates of deposit
growth was found  primarily  in shorter  term  maturities,  as  depositors  were
generally  unwilling  to place their  deposits  for terms  longer than one year.
Wholesale  funding growth  included short term overnight  borrowings and reverse
repurchase agreements, and longer term FHLB of New York advances.


                                       35
<PAGE>

By the end of fiscal 2006,  the  Company's NPV ratios had  deteriorated,  as the
overall decline in asset values  surpassed the improvement in liability  values.
The  Sensitivity  Measure also  deteriorated,  as asset duration  lengthened and
liability duration continued to shorten.

As a result of the above  activity,  one- to four-family  mortgage loan balances
increased  $154.0  million  between June 30, 2005 and June 30, 2006.  Adjustable
rate one- to four-family  mortgage loan balances  increased  $70.1 million while
fixed rate balances increased $83.9 million. Additionally,  approximately 73% of
the fiscal 2006 fixed rate loan  originations  were for terms less than 30 years
or for bi-weekly products. Consumer loan balances increased $60.0 million. Prime
based home equity lines of credit  decreased  $2.4 million while other  consumer
products,  principally  fixed  rate  second  mortgages  generally  with  shorter
durations  than  one- to  four-family  residential  mortgages,  increased  $62.4
million.  The commercial and multi-family  real estate loan portfolio  increased
$2.8  million  during the current  fiscal  year with  adjustable  rate  products
declining $3.9 million and fixed rate loans increasing $6.7 million.

At June 30, 2006,  medium and long term  certificate  of deposit  balances  with
remaining  maturities  greater than one year totaled $238.0  million,  including
$48.2 million of wholesale  certificates of deposit,  compared to $287.5 million
at June 30, 2005. There were $65.4 million of wholesale  certificates of deposit
at June 30, 2006,  compared to $66.1  million at June 30, 2005.  Certificate  of
deposit balances,  excluding brokered deposits, increased $75.4 million as short
term  interest  rates  increased  during the  fiscal  year,  while core  deposit
balances increased  $345,000.  Savings balances  decreased $85.1 million,  while
checking and money market account  balances  increased $85.5 million.  Wholesale
borrowings  with  remaining  maturities  greater  than one year  totaled  $445.0
million at June 30, 2006,  reflecting  an increase of $20.1  million  during the
current fiscal year. During fiscal 2006, FHLB of New York advances  increased by
$50.0 million;  $100.0 million was called or matured, $35.0 million was prepaid,
and $185.0 million of new advances were obtained. In addition,  $40.0 million of
convertible  advances from the FHLB of New York with one-time call features were
not called and   subsequently  were extended five years to their final maturity.
Retail certificate of deposit balances with remaining  maturities of one year or
less  increased  $106.8 million while  short-term  wholesale  funding  balances,
including $17.2 million of wholesale  certificates of deposit,  increased $179.4
million between June 30, 2005 and 2006, as a portion of such borrowings  shifted
to within one year of maturity.  In fiscal 2006,  $132.2  million of new,  short
term wholesale borrowings were added,  including a net increase of $89.0 million
drawn on an overnight repricing line of credit and a net decrease of $569,000 on
an unsecured revolving line of credit.

The Company emphasizes and promotes its savings, money market and demand deposit
accounts,  and  certificates  of deposit  with varying  maturities  through five
years,  principally  within its primary  market areas.  The balances of savings,
money market and demand deposit accounts  represented 43.3% of total deposits at
June 30, 2006.

Analysis  of Net  Interest  Income.  The  following  table  sets  forth  certain
information  relating to the  Company's  Consolidated  Statements  of  Financial
Condition and the Consolidated Statements of Income for the years ended June 30,
2006, 2005 and 2004 and reflects the average yield on assets and average cost of
liabilities  for the periods  indicated.  Such yields and costs are derived from
average  daily  balances.  The  average  balance  of loans  receivable  includes
non-accruing  loans.  The yields and costs  include fees,  which are  considered
adjustments to yields.


                                       36
<PAGE>

<TABLE>
<CAPTION>
                                                               Year ended June 30,
                                      ----------------------------------------------------------------------
                                                      2006                                 2005
                                      ----------------------------------------------------------------------
                                        Average      Interest               Average      Interest
                                      Outstanding    Earned/     Yield/   Outstanding    Earned/     Yield/
                                        Balance        Paid       Rate      Balance        Paid       Rate
                                      ----------------------------------------------------------------------
                                                               (Dollars in thousands)
<S>                                    <C>          <C>            <C>     <C>          <C>            <C>
Interest-earning assets:
   One- to four-family mortgage
       loans .......................   $1,227,499   $   64,447     5.25%   $1,082,952   $   57,358     5.30%
   Commercial and multi-family real
       estate loans ................      167,083       11,522     6.90       168,556       11,638     6.90
   Consumer loans ..................      170,601        9,953     5.83       127,020        6,834     5.38
                                       ----------   ----------             ----------   ----------
       Total loans receivable ......    1,565,183       85,922     5.49     1,378,528       75,830     5.50

   Federal funds sold ..............           --           --       --            --           --       --
   Investment securities and other .      461,033       25,794     5.59       446,903       24,384     5.46
   Mortgage-backed securities ......       69,804        3,560     5.10        88,286        4,508     5.11
                                       ----------   ----------             ----------   ----------
       Total interest-earning assets    2,096,020   $  115,276     5.50     1,913,717   $  104,722     5.47
                                                    ==========                          ==========

Non-interest earning assets ........       73,125                              67,373
                                       ----------                          ----------
       Total assets ................   $2,169,145                          $1,981,090
                                       ==========                          ==========
Deposits and borrowings:
   Money market and demand
       deposits ....................   $  261,404   $    4,748     1.82%   $  191,747   $    1,144     0.60%
   Savings deposits ................      339,864        8,911     2.62       420,852        9,901     2.35
   Certificates of deposit .........      764,537       28,107     3.68       644,112       19,311     3.00
                                        ---------    ---------             ----------   ----------
       Total deposits ..............    1,365,805       41,766     3.06     1,256,711       30,356     2.42

   FHLB of New York advances .......      440,226       24,863     5.65       425,319       24,668     5.80
   Other borrowings ................      177,756        7,496     4.22       118,285        3,313     2.80
   Junior subordinated debentures ..       42,104        3,657     8.69        42,059        3,047     7.24
                                       ----------   ----------             ----------   ----------
       Total deposits and borrowings    2,025,891   $   77,782     3.84     1,842,374   $   61,384     3.33
                                                    ==========                          ==========
Other liabilities ..................       18,917                              16,095
                                       ----------                          ----------
       Total liabilities ...........    2,044,808                           1,858,469

Stockholders' equity ...............      124,337                             122,621
                                       ----------                          ----------
       Total liabilities and
          stockholders' equity .....   $2,169,145                          $1,981,090
                                       ==========                          ==========
Net interest income and net interest
   rate spread .....................                $   37,494     1.66%                $   43,338     2.14%
                                                    ==========   ======                 ==========   ======
Net interest-earning assets and net
   interest margin .................   $   70,129                  1.79%   $   71,343                  2.26%
                                       ==========                ======    ==========                ======
Ratio of interest-earning assets to
   deposits and borrowings .........                             103.46%                             103.87%
                                                                 ======                              ======

<CAPTION>

                                               Year ended June 30,
                                      -----------------------------------
                                                      2004
                                      -----------------------------------
                                        Average      Interest
                                      Outstanding    Earned/     Yield/
                                        Balance        Paid       Rate
                                      -----------------------------------
                                              (Dollars in thousands)
<S>                                    <C>          <C>            <C>
Interest-earning assets:
   One- to four-family mortgage
       loans .......................   $  915,316   $   49,831     5.44%
   Commercial and multi-family real
       estate loans ................      162,855       12,029     7.39
   Consumer loans ..................      115,793        6,353     5.49
                                       ----------   ----------

       Total loans receivable ......    1,193,964       68,213     5.71

   Federal funds sold ..............       17,918          178     0.99
   Investment securities and other .      428,104       22,816     5.33
   Mortgage-backed securities ......       98,828        5,069     5.13
                                       ----------   ----------
       Total interest-earning assets    1,738,814   $   96,276     5.54
                                                    ==========
Non-interest earning assets ........       63,978
                                       ----------
       Total assets ................   $1,802,792
                                       ==========
Deposits and borrowings:
   Money market and demand
       deposits ....................   $  167,569   $      315     0.19%
   Savings deposits ................      388,552        9,931     2.56
   Certificates of deposit .........      549,480       16,388     2.98
                                       ----------   ----------
       Total deposits ..............    1,105,601       26,634     2.41

   FHLB of New York advances .......      489,699       28,203     5.76
   Other borrowings ................       31,308        1,139     3.64
   Junior subordinated debentures ..       42,015        2,698     6.42
                                       ----------   ----------
       Total deposits and borrowings    1,668,623   $   58,674     3.52
                                                    ==========
Other liabilities ..................       15,899
                                       ----------
       Total liabilities ...........    1,684,522

Stockholders' equity ...............      118,270
                                       ----------
       Total liabilities and
          stockholders' equity .....   $1,802,792
                                       ==========

Net interest income and net interest
   rate spread .....................                $   37,602     2.02%
                                                    ==========   ======
Net interest-earning assets and net
   interest margin .................   $   70,191                  2.16%
                                       ==========                ======

Ratio of interest-earning assets to
   deposits and borrowings .........                             104.21%
                                                                 ======
</TABLE>


                                       37
<PAGE>

Rate/Volume  Analysis.  The following table presents the extent to which changes
in  interest  rates and  changes  in the volume of  interest-earning  assets and
deposits and borrowings have affected the Company's interest income and interest
expense during the periods  indicated.  Information is provided in each category
with respect to (1) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (2) changes  attributable to changes in rate (changes
in rate  multiplied by prior  volume),  (3) changes  attributable  to changes in
rate/volume  (changes in rate  multiplied  by changes in volume) and (4) the net
change.

<TABLE>
<CAPTION>
                                                                         Year ended June 30,
                                      ---------------------------------------------------------------------------------------------
                                                   2006 vs. 2005                                       2005 vs. 2004
                                      ---------------------------------------------  ----------------------------------------------
                                                 Increase (Decrease)                                 Increase (Decrease)
                                                       Due to                                               Due to
                                      ---------------------------------------------  ----------------------------------------------
                                                                             Total                                            Total
                                                                 Rate/    Increase                               Rate/     Increase
                                        Volume        Rate      Volume   (Decrease)     Volume        Rate      Volume    (Decrease)
                                      ---------------------------------------------------------------------------------------------
                                                                               (In thousands)
<S>                                   <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>
Interest-earning assets:
   One- to four-family
     mortgage loans ................  $  7,656   $    (500)  $     (67)  $   7,089   $   9,127   $  (1,352)  $    (248)  $   7,527

   Commercial and multi-family
     real estate loans .............      (102)        (14)         --        (116)        421        (785)        (27)       (391)

   Consumer loans ..................     2,345         576         198       3,119         616        (123)        (12)        481
                                      ---------------------------------------------------------------------------------------------

     Total loans receivable ........     9,899          62         131      10,092      10,164      (2,260)       (287)      7,617

   Federal funds sold ..............        --          --          --          --        (178)       (178)        178        (178)

   Investment securities and other .       771         619          20       1,410       1,002         542          24       1,568

   Mortgage-backed securities ......      (944)         (5)          1        (948)       (540)        (23)          2        (561)
                                      ---------------------------------------------------------------------------------------------

     Total interest-earning assets .  $  9,726   $     676   $     152   $  10,554   $  10,448   $  (1,919)  $     (83)  $   8,446
                                      =============================================================================================

Deposits and borrowings:

   Money market and demand
     deposits ......................  $    416   $   2,338   $     850   $   3,604   $      45   $     685   $      99   $     829

   Savings deposits ................    (1,905)      1,133        (218)       (990)        826        (790)        (66)        (30)

   Certificates of deposit .........     3,610       4,369         817       8,796       2,822          86          15       2,923
                                      ---------------------------------------------------------------------------------------------

     Total deposits ................     2,121       7,840       1,449      11,410       3,693         (19)         48       3,722

   FHLB of New York advances .......       865        (647)        (23)        195      (3,708)        199         (26)     (3,535)

   Other borrowings ................     1,666       1,675         842       4,183       3,164        (262)       (728)      2,174

   Junior subordinated debentures ..         3         606           1         610           3         346          --         349
                                      ---------------------------------------------------------------------------------------------

     Total deposits and borrowings .  $  4,655   $   9,474   $   2,269   $  16,398   $   3,152   $     264   $    (706)  $   2,710
                                      =============================================================================================

   Net change in net interest income  $  5,071   $  (8,798)  $  (2,117)  $  (5,844)  $   7,296   $  (2,183)  $     623   $   5,736
                                      =============================================================================================
</TABLE>

Financial Condition

Comparison of Financial Condition at June 30, 2006 and June 30, 2005

Assets. Total assets increased $256.0 million to $2.307 billion at June 30, 2006
from total assets of $2.051  billion at June 30, 2005.  The increase at June 30,
2006 was primarily due to a $223.4 million  increase in net loans receivable and
a $34.9 million  increase in investment  securities  held to maturity  partially
offset  by a  $15.2  million  decrease  in  mortgage-backed  securities  held to
maturity.  The increase in total assets at June 30, 2006 was also  partially due
to an $8.0 million increase in the investment in BOLI.

The increase in net loans  receivable was reflective of strong loan  origination
levels and the lower levels of loan  prepayment  activity due to rising interest
rates.  Loan sales in fiscal 2006 were $29.5 million,  compared to $35.6 million
in fiscal 2005, as  originations  of long term,  fixed rate  conforming  balance
loans were at reduced  levels in fiscal 2006


                                       38
<PAGE>

when compared to fiscal 2005.  Loan purchases in fiscal 2006 were $13.4 million.
There were no loan purchases for the year ended June 30, 2005. The interest rate
environment  during the fiscal year  allowed  the  Company to utilize  available
funds for the purchase of investment  securities and the origination of loans at
higher  rates of  return  than  would  have been  achieved  by  re-investing  in
mortgage-backed  securities,  as these  securities  rolled off during the fiscal
year.

Liabilities. Deposits increased $75.1 million to $1.415 billion at June 30, 2006
from $1.339  billion at June 30,  2005.  The  increase  was  attributable  to an
increase in  certificates  of deposit of $74.5  million and an increase of $85.5
million in checking and money market accounts  partially offset by a decrease of
$85.1 million in savings  accounts  since June 30, 2005. The decrease in savings
accounts since June 30, 2005 was  attributable  to a rise in short term interest
rates,  which has shifted  temporarily  "parked" savings account funds to higher
yielding  deposit  alternatives.  This  shift in  temporarily  "parked"  savings
accounts  has also led to a portion of the increase in checking and money market
accounts,  as these accounts are more liquid than  certificates  of deposit.  At
June 30, 2006,  FHLB of New York advances and other  borrowings  totaled  $705.7
million,  reflecting a $182.2  million  increase from $523.4 million at June 30,
2005. Throughout fiscal 2006, wholesale borrowings have been an alternate, lower
costing  source of funds  when  compared  to the highly  competitive  pricing of
retail deposits.

Stockholders'  Equity.  Stockholders'  equity at June 30,  2006  totaled  $123.4
million  compared  to $124.1  million  at June 30,  2005.  The  change in equity
reflects the repurchase of 626,300 shares of the Company's  outstanding stock at
an average  price of $18.57 per share,  the  declaration  of cash  dividends and
unrealized  holding losses on investment  securities  available for sale, net of
taxes,  partially  offset by the net income recorded for the year ended June 30,
2006 and the exercise of stock options, including the related tax effect.

Results of Operations

Comparison  of Operating  Results for the Years Ended June 30, 2006 and June 30,
2005

General.  For the year ended June 30,  2006,  net income was $13.4  million,  or
$1.00 per diluted share,  compared to net income of $15.5 million,  or $1.11 per
diluted share, for the year ended June 30, 2005.

Interest and Dividend  Income.  Interest and dividend  income for the year ended
June 30, 2006 increased to $115.3 million from $104.7 million for the year ended
June 30, 2005. In general, the increase in interest and dividend income reflects
a higher level of  interest-earning  assets due to strong loan  originations  of
one- to  four-family  residential  and  consumer  loans and the lower  levels of
prepayments  in the Company's  loan and  mortgage-backed  securities  portfolios
during fiscal 2006. Average  interest-earning assets were $2.096 billion for the
year ended June 30,  2006,  compared to $1.914  billion for the prior year.  The
average yield earned on interest-earning  assets increased to 5.50% for the year
ended  June 30,  2006 from 5.47% for the year  ended  June 30,  2005,  primarily
reflective of the increase in the yield earned on consumer  loans and investment
securities.

Interest income on residential  one- to four-family  mortgage loans for the year
ended June 30, 2006  increased $7.1 million when compared to the prior year. The
increase in interest  income on residential  one- to four-family  mortgage loans
was due to an increase in the average balance of residential one- to four-family
mortgage  loans  outstanding  of $144.5  million to $1.227  billion for the year
ended June 30, 2006, compared to $1.083 billion for the prior year, primarily as
a result of strong loan origination  levels and the lower levels of prepayments.
Somewhat  offsetting the increase in the average balance of residential  one- to
four-family  mortgage  loans was a decrease in the average  yield earned on this
loan  portfolio  to 5.25% for the year  ended  June 30,  2006 from 5.30% for the
prior year period,  reflecting the payoff or refinance of higher  yielding loans
and the origination of lower yielding loans over the last twelve months. At June
30, 2006,  one- to four- family  mortgage loans  represented  77.6% of the total
loan portfolio and 75.0% of interest income on loans for the fiscal year.

Interest  income on  commercial  and  multi-family  real estate loans  decreased
$116,000 for the year ended June 30, 2006,  when compared to the year ended June
30, 2005. The decrease in interest  income on commercial and  multi-family  real
estate loans was partially attributable to a decrease in the average outstanding
balance on these  loans.  With loan payoffs  exceeding  loan  originations,  the
average  balance  outstanding of commercial and  multi-family  real estate loans
decreased  $1.5 million for the year ended June 30, 2006,  when  compared to the
year  ended June 30,  2005.  The  average  yield  earned on this loan  portfolio
remained unchanged at 6.90% for fiscal 2006, compared to fiscal 2005.

Interest income on consumer loans increased $3.1 million for the year ended June
30,  2006,  when  compared  to the year ended June 30,  2005.  The  increase  in
interest income on consumer loans for the year ended June 30, 2006 was partially
attributable  to an  increase in the  average  outstanding  balance of this loan
portfolio of $43.6  million,  when compared to the year ended


                                       39
<PAGE>

June  30,  2005,  due  primarily  to  higher   origination  levels  and  reduced
prepayments.  Also  contributing  to the increase in interest income on consumer
loans for the year ended June 30,  2006 was an  increase  in the  average  yield
earned on these  loans to 5.83%  from  5.38%  for the  prior  year due to fourth
quarter originations at higher market interest rates.

Interest  income on  investment  securities  and other  interest-earning  assets
increased  $1.4 million for the year ended June 30, 2006,  when  compared to the
prior year.  The increase in interest  income on these  securities was partially
attributable to a $14.1 million increase in the average balance  outstanding for
the year ended June 30,  2006,  when  compared to the prior year,  as  available
funds were utilized to purchase additional  investment securities and due to the
absence of callable  securities  being called before maturity as a result of the
increase in interest  rates.  In addition,  the  increase in interest  income on
investment  securities  and other  interest-earning  assets  was also  partially
attributable  to an increase in the average yield earned on these  securities to
5.59% for the year ended  June 30,  2006,  compared  to 5.46% for the year ended
June 30,2005.

Interest income on the mortgage-backed  securities  portfolio decreased $948,000
for the year ended June 30, 2006  compared to the prior  year.  The  decrease in
interest income on  mortgage-backed  securities for the year ended June 30, 2006
was  partially  due to a decrease in the average  balance  outstanding  of $18.5
million for the year ended June 30, 2006,  when  compared to the prior year.  In
addition, the decrease in interest income on mortgage-backed  securities was due
to a slight  decrease in the average yield earned on this portfolio to 5.10% for
the year ended June 30, 2006 from 5.11% for the year ended June 30, 2005.

Interest Expense. Interest expense increased to $77.8 million for the year ended
June 30, 2006 from $61.4 million for the year ended June 30, 2005. A significant
rise in short term  interest  rates  coupled  with an  increase  in the  average
balance of deposits,  FHLB of New York advances and other  borrowings,  were the
primary factors  responsible  for the increase in interest  expense for the year
ended June 30, 2006,  when compared to the year ended June 30, 2005. The average
rate on deposits and  borrowings  was 3.84% for the year ended June 30, 2006, an
increase from 3.33% for the year ended June 30, 2005. Total average deposits and
borrowings  increased $183.5 million for fiscal 2006, when compared to the prior
year.

The average rate paid on deposits increased to 3.06% for the year ended June 30,
2006 from 2.42% for the year ended June 30, 2005,  reflecting  the effect of the
rise in short term market  interest rates and the highly  competitive New Jersey
market.  Average deposit balances increased $109.1 million to $1.366 billion for
the year ended June 30, 2006 from $1.257 billion for the prior year.

The average  cost of FHLB of New York  advances  decreased to 5.65% for the year
ended June 30, 2006 from 5.80% for the prior year,  due to the addition of lower
costing  advances  and the first  quarter  of fiscal  2006  prepayment  of $35.0
million of advances that had an average rate of 5.95% and their replacement with
$35.0 million of advances with an average rate of 4.20%.  The average balance of
FHLB of New York  advances  increased  $14.9 million for the year ended June 30,
2006,  when  compared to the year ended June 30, 2005. To offset the slower loan
prepayment  cashflows  and  to  take  advantage  of  favorable  rates  on  other
borrowings  as  compared  to rates on  deposits,  the  average  balance of other
borrowings  increased  $59.5  million  for the year  ended June 30,  2006,  when
compared to the prior year. The average rate paid on other borrowings  increased
to 4.22% for the year ended June 30, 2006 from 2.80% for the year ended June 30,
2005, as a result of higher market interest rates.  During fiscal 2006, the vast
majority of other  borrowings had maturities  within one year; thus, the cost of
these  borrowings  reflected  the  higher  levels of short term  interest  rates
experienced during the year, when compared to fiscal 2005.

Interest expense on junior  subordinated  debentures  increased $610,000 for the
year ended June 30,  2006,  when  compared  to the prior year.  The  increase in
interest  expense was  primarily due to an increase in the average cost of these
borrowings  to 8.69% for the year  ended  June 30,  2006 from 7.24% for the year
ended June 30,  2005.  The  average  balance of junior  subordinated  debentures
increased  $45,000 during the fiscal year ended June 30, 2006,  when compared to
the prior fiscal year.

Net Interest  and Dividend  Income.  Net  interest  and dividend  income  before
provision  for loan  losses for the year ended June 30,  2006 was $37.5  million
compared  to  $43.3   million   recorded   in  the  prior   year.   Average  net
interest-earning assets decreased $1.2 million for the year ended June 30, 2006,
when  compared to the prior year.  The net interest rate spread and net interest
margin for fiscal 2006 were 1.66% and 1.79%, respectively, a decrease from 2.14%
and 2.26% for the year  ended June 30,  2005.  The  decline in the net  interest
margin  during  fiscal 2006 has been the result of the  flattening  yield curve,
with longer term interest rates  reflecting  minimal movement but with continual
increases  in  shorter  term  rates.  As a result,  the  Company's  deposit  and
borrowing costs  continued to rise at a significantly  faster pace than interest
rates offered on real estate mortgage loans within the Company's lending market.


                                       40
<PAGE>

Provision for Loan Losses.  There was no provision for loan losses  recorded for
the years ended June 30, 2006 and 2005,  reflecting  the Company's  historically
low levels of non-accruing loans and loan  chargeoffs.  Management believes that
the  allowance  for loan losses at both dates was  adequate  to absorb  probable
losses on existing loans that may become  uncollectible.  The allowance for loan
losses at June 30, 2006 was $5.9  million  compared to $6.1  million at June 30,
2005.  The allowance for loan losses as a percentage of  non-accruing  loans was
330.79% at June 30,  2006,  compared to 231.00% at June 30,  2005.  Non-accruing
loans were $1.8  million at June 30, 2006  compared to $2.6  million at June 30,
2005.  The  allowance for loan losses as a percentage of total loans at June 30,
2006 was 0.35% compared to 0.41% at June 30, 2005, primarily due to the increase
in the  balance  of  the  overall  loan  portfolio.  See  Item  7.  Management's
Discussion  and  Analysis  of  Financial  Condition  and  Results of  Operations
"-Critical Accounting Policies".

Non-Interest  Income. For the year ended June 30, 2006,  non-interest income was
$7.5  million  compared  to $5.0  million for the prior  year.  The  increase in
non-interest income for fiscal 2006 was primarily due to an increase in fees and
service charges when compared to the year ended June 30, 2005.

Fees and  service  charges  for the year ended June 30,  2006 was $5.7  million,
reflecting  an increase of $2.6 million  from the $3.1 million  recorded for the
prior year.  This  increase for fiscal 2006 was  primarily due to a $2.7 million
prepayment  premium  earned on the  payoff of a  large-balance  commercial  real
estate loan.

During the year ended June 30, 2006, the net gain on sales of loans was $143,000
compared  to  $394,000  for the year ended  June 30,  2005.  Approximately  $6.1
million of conforming, fixed rate one- to four-family residential mortgage loans
were sold into the  secondary  market  during the 2006 fiscal year. In addition,
during  the year ended June 30,  2006,  the  Company  sold  approximately  $23.4
million of primarily fixed rate one- to four-family  residential  mortgage loans
to other financial  institutions.  For the year ended June 30, 2005,  there were
$11.0 million and $24.6  million of such sales into the secondary  market and to
other financial institutions,  respectively. The reduction in loan sales for the
year ended June 30,  2006,  when  compared to the prior year,  can be  partially
attributed to a reduction in the origination of longer term fixed rate products,
as borrowers  have shown  increased  interest in  adjustable  rate and bi-weekly
loans, which are retained in portfolio.

Income on BOLI  increased  $277,000 to $967,000 for the year ended June 30, 2006
from  $690,000  for the year ended June 30, 2005.  The fiscal 2006  increase was
primarily due to a $7.0 million additional BOLI purchase.

Non-Interest  Expenses.  Non-interest  expenses for the year ended June 30, 2006
were  $24.2  million,  which was  relatively  unchanged  from the $24.2  million
recorded for the prior year. The Company's non-interest expenses as a percent of
average  assets  decreased  to 1.12% for the year ended June 30, 2006 from 1.22%
for the prior year.  Fiscal 2006  non-interest  expenses included a $1.4 million
prepayment penalty on certain FHLB of New York advances,  a $169,000 increase in
obligations  under certain  long-term  benefit plans and $372,000 of accelerated
depreciation  expense for branch  automation  system  software that is no longer
used.  The  opening of a new branch in  February  2005 also added to fiscal 2006
non-interest  expenses.  Fiscal 2005 non-interest expenses included $1.4 million
of the  amortization of intangible  assets,  which were fully amortized on March
31, 2005.

Income Tax Expense. Income tax expense for the year ended June 30, 2006 was $7.4
million compared to $8.7 million for the year ended June 30, 2005. The effective
tax rate for the year ended June 30,  2006 was 35.6%  compared  to 35.9% for the
prior year.

Comparison  of Operating  Results for the Years Ended June 30, 2005 and June 30,
2004

General.  For the year ended June 30,  2005,  net income was $15.5  million,  or
$1.11 per diluted share,  compared to net income of $12.1 million,  or $0.83 per
diluted  share,  for the year ended  June 30,  2004.  As a result of  additional
Sarbanes-Oxley  Section 404 ("SOX 404")  compliance  costs, the Company recorded
approximately $300,000 (pretax) of costs associated with SOX 404 in fiscal 2005,
including a $208,000  (pretax)  charge during the fourth quarter of fiscal 2005.
As a  result  of an  environmental  liability,  as  explained  in Item 3.  Legal
Proceedings,  the Company recorded a $298,000  (pretax) charge during the fourth
quarter of fiscal  2004.  Earnings per share  amounts  reflect the effect of the
100%  stock  dividend  described  in Item 8 -  Financial  Statements  - Note N -
Stockholders'  Equity  and  Regulatory  Capital - of the  Notes to  Consolidated
Financial Statements.

Interest and Dividend  Income.  Interest and dividend  income for the year ended
June 30, 2005  increased to $104.7 million from $96.3 million for the year ended
June 30, 2004. In general, the increase in interest and dividend income reflects
a


                                       41
<PAGE>

higher level of interest-earning  assets due to strong loan originations and the
slowdown in  prepayments in the Company's  loan and  mortgage-backed  securities
portfolios during fiscal 2005. The effect of the increase was slightly offset by
a lower  average yield earned on assets which was the result of  prepayments  of
higher  yielding  loans and the  origination  of loans at lower market  interest
rates during the year ended June 30, 2005. Average  interest-earning assets were
$1.914  billion for the year ended June 30, 2005 compared to $1.739  billion for
the prior year. The average yield earned on interest-earning assets decreased to
5.47% for the year  ended  June 30,  2005 from 5.54% for the year ended June 30,
2004.

Interest income on residential  one- to four-family  mortgage loans for the year
ended June 30, 2005  increased $7.5 million when compared to the prior year. The
increase in interest  income on residential  one- to four-family  mortgage loans
was due to an increase in the average balance of residential one- to four-family
mortgage  loans  outstanding of $167.6 million for the year ended June 30, 2005,
when compared to the prior year, as a result of strong loan  origination  levels
and a  slowdown in prepayments.  Somewhat offsetting the increase in the average
balance of residential one- to four-family  mortgage loans was a decrease in the
average yield earned on this loan portfolio to 5.30% for the year ended June 30,
2005 from 5.44% for the prior year period, reflecting the payoff or refinance of
higher  yielding loans and the origination of lower yielding loans over the year
ended June 30, 2005.  At June 30,  2005,  one- to four-  family  mortgage  loans
represented  78.5% of the total loan  portfolio and 75.6% of interest  income on
loans.

Interest  income on  commercial  and  multi-family  real estate loans  decreased
$391,000 for the year ended June 30, 2005,  when compared to the year ended June
30, 2004. The decrease in interest  income on commercial and  multi-family  real
estate loans was attributable to a decrease in the average yield earned on these
loans.  The average  yield on  commercial  and  multi-family  real estate  loans
decreased  to 6.90% for the year ended June 30,  2005  compared to 7.39% for the
year ended June 30,  2004.  As with other loans,  the payoff of higher  yielding
loans and the  origination of loans at lower market interest rates resulted in a
decline  in the  yield on the  commercial  and  multi-family  real  estate  loan
portfolio.  The decrease in interest  income for this  portfolio  was  partially
offset by an increase  in the  average  outstanding  balance of  commercial  and
multi-family real estate loans of $5.7 million for the year ended June 30, 2005,
when compared to the prior year.

Interest income on consumer loans increased $481,000 for the year ended June 30,
2005,  when  compared to the year ended June 30, 2004.  The increase in interest
income on consumer loans for the year ended June 30, 2005 was due to an increase
in the average balance outstanding of this loan portfolio of $11.2 million, when
compared to the year ended June 30, 2004.  The increase in interest  income from
the larger  portfolio  of  consumer  loans for the year ended June 30,  2005 was
partially  offset by a decrease in the average yield to 5.38% from 5.49% for the
prior year.

Interest  income on  investment  securities  and other  interest-earning  assets
increased  $1.6  million for the year ended June 30, 2005  compared to the prior
year. The increase in interest income on these securities was attributable to an
$18.8 million  increase in the average  balance  outstanding  for the year ended
June 30, 2005,  when compared to the prior year. The average yield  increased to
5.46% for the year ended June 30, 2005 compared to 5.33% for the year ended June
30, 2004.

Interest income on the mortgage-backed  securities  portfolio decreased $561,000
for the year ended June 30, 2005  compared to the prior  year.  The  decrease in
interest income on  mortgage-backed  securities for the year ended June 30, 2005
was  primarily  due to a decrease in the average  balance  outstanding  of $10.5
million for the year ended June 30, 2005,  when  compared to the prior year.  In
addition, the decrease in interest income on mortgage-backed  securities was due
to a decrease in the average yield earned on this  portfolio to 5.11% from 5.13%
for the year ended June 30, 2004.

Interest  Expense.  Interest  expense  increased $2.7 million for the year ended
June 30, 2005 from the year ended June 30,  2004.  While the  Company's  cost of
funds decreased,  total average deposits and borrowings  increased.  The average
rate on deposits and  borrowings  decreased to 3.33% for the year ended June 30,
2005 from 3.52% for the prior year, as a result of lower market  interest  rates
on other  borrowings  and only a slight  increase in the cost of  deposits.  The
decrease  in the cost of funds for the year ended June 30, 2005 was offset by an
increase in total  average  deposits  and  borrowings  of $173.8  million,  when
compared to the year ended June 30, 2004.

The average rate paid on deposits increased slightly to 2.42% for the year ended
June 30,  2005 from  2.41% for the year  ended June 30,  2004.  Average  deposit
balances  increased $151.1 million to $1.257 billion for the year ended June 30,
2005 from  $1.106  billion  for the prior  year.  The  growth  in  deposits  was
partially  reflective  of the  addition of the four new  branches  opened  since
September  2003 and the  addition  of  wholesale  certificates  of  deposit.  In
addition,  deposit growth  reflected the offering of attractive and  competitive
deposit products, which were promoted through various marketing strategies.


                                       42
<PAGE>

The average  cost of FHLB of New York  advances  increased to 5.80% for the year
ended June 30, 2005 from 5.76% for the prior year,  due to the maturity of lower
costing  advances.  The average  balance of FHLB of New York advances  decreased
$64.4 million for the year ended June 30, 2005,  when compared to the year ended
June 30, 2004. As a funding source to replace maturing FHLB of New York advances
and because of the  slowdown in  prepayments  on loans,  the average  balance of
other borrowings for the year ended June 30, 2005 increased $87.0 million,  when
compared to the prior year. The average rate paid on other borrowings  decreased
to 2.80% for fiscal 2005 from 3.64% for fiscal 2004.  During  fiscal  2005,  the
vast majority of other  borrowings were  borrowings  with maturities  within one
year;  thus,  the cost of these  borrowings  reflected the lower levels of short
term interest rates experienced during the year, when compared to fiscal 2004.

Interest expense on junior  subordinated  debentures  increased $349,000 for the
year ended June 30,  2005,  when  compared  to the prior year.  The  increase in
interest  expense was due to an increase in the average cost of these borrowings
to 7.24% for the year ended June 30, 2005 from 6.42% for the year ended June 30,
2004. The average balance of junior  subordinated  debentures  increased $44,000
during the fiscal year ended June 30, 2005.

Net Interest  and Dividend  Income.  Net  interest  and dividend  income  before
provision  for loan  losses for the year ended June 30,  2005 was $43.3  million
compared  to  $37.6   million   recorded   in  the  prior   year.   Average  net
interest-earning assets increased $1.2 million for the year ended June 30, 2005,
when  compared to the prior year.  The net interest rate spread and net interest
margin for fiscal  2005 were 2.14% and 2.26%,  respectively,  an  increase  from
2.02%  and 2.16% for the year  ended  June 30,  2004.  The net  interest  margin
expanded during fiscal 2005 when compared to the prior year   principally due to
a slowdown in loan  prepayments,  growth in the loan portfolio and the repricing
of certain deposits and other borrowings.

Provision for Loan Losses.  There was no provision for loan losses  recorded for
the  years  ended  June  30,  2005  and  2004,  which  was  consistent  with the
maintenance of the Company's  historically low levels of non-accruing  loans and
loan  chargeoffs. Management believes that the allowance for loan losses at both
dates was  adequate to absorb  probable  losses on existing  loans that may have
become  uncollectible.  The  allowance  for loan losses at June 30, 2005 of $6.1
million was  relatively  unchanged  from the $6.2 million at June 30, 2004.  The
allowance for loan losses as a percentage of  non-accruing  loans was 231.00% at
June 30,  2005,  compared to 286.39% at June 30, 2004.  Non-accruing  loans were
$2.6 million at June 30, 2005  compared to $2.2  million at June 30,  2004.  The
allowance  for loan losses as a  percentage  of total loans at June 30, 2005 was
0.41%  compared to 0.48% at June 30, 2004,  primarily due to the increase in the
balance of the overall loan portfolio.  See Item 7. Management's  Discussion and
Analysis of Financial Condition and Results of Operations  "-Critical Accounting
Policies".

Non-Interest  Income. For the year ended June 30, 2005,  non-interest income was
$5.0  million  compared  to $6.4  million for the prior  year.  The  decrease in
non-interest  income for fiscal 2005 was  primarily due to decreases in fees and
service  charges and net gain on sales of loans when  compared to the year ended
June 30, 2004.

Fees and  service  charges  for the year  ended June 30,  2005 was $3.1  million
compared to $4.2 million  recorded  for the prior year.  The decline in fees and
service  charges for the year ended June 30, 2005 was primarily due to a decline
in fees  associated with various loan prepayments and/or modifications.

During the year ended June 30, 2005, the net gain on sales of loans was $394,000
compared  to  $759,000  for the year ended June 30,  2004.  Approximately  $11.0
million of conforming, fixed rate one- to four-family residential mortgage loans
were sold into the  secondary  market  during the 2005 fiscal year. In addition,
during  the year ended June 30,  2005,  the  Company  sold  approximately  $24.6
million of fixed rate one- to  four-family  residential  mortgage loans to other
financial  institutions.  For the year  ended  June 30,  2004,  there were $48.4
million and $39.0 million of such sales into the  secondary  market and to other
financial institutions,  respectively.  Furthermore,  during the year ended June
30, 2004, a $3.0 million commercial real estate loan participation was sold as a
means to reduce the Company's credit  exposure on a large commercial real estate
loan  relationship,   realizing  a  net  gain  of  approximately  $183,000.  The
reduction  in loan sales for the year ended June 30, 2005 was  attributed  to a
reduction in the origination of longer-term  fixed rate  products,  as borrowers
showed  increased  interest in adjustable rate and bi-weekly  loans,  which were
retained in portfolio.

Non-Interest  Expenses.  Non-interest  expenses for the year ended June 30, 2005
were $24.2 million  compared to $25.4 million for the prior year.  The Company's
non-interest  expenses as a percent of average assets decreased to 1.22% for the
year  ended June 30,  2005 from  1.41% for the prior  year.  While  fiscal  2005
expense levels  reflected the end of costs associated with funding the Company's
Employee Stock Ownership Plan ("ESOP"),  expenses in fiscal 2005 included a much
less  expensive  replacement  benefit plan for the ESOP,  increased  advertising
expense and costs associated with the


                                       43
<PAGE>

four branches opened since September  2003. In addition,  costs  associated with
regulatory  burden,  especially  compliance with SOX 404,  required  significant
additional  expenditures  and were expected to remain high into fiscal 2006. The
opening of a new branch in  February  2005 will also add to future  non-interest
expense,  particularly in the net occupancy and advertising  expense categories.
For the year ended  June 30,  2004,  the  Company  recorded a $298,000  (pretax)
non-recurring  charge for an additional  environmental  accrual, as discussed in
Item 3. Legal Proceedings.

Income Tax Expense. Income tax expense for the year ended June 30, 2005 was $8.7
million compared to $6.5 million for the year ended June 30, 2004. The effective
tax rate for the year ended June 30,  2005 was 35.9%  compared  to 35.2% for the
prior year.  The higher  effective  tax rate in fiscal 2005 was primarily due to
adjustment  in  the  first  quarter  of  fiscal  2005  in  valuation  allowances
established against state deferred tax assets.

Liquidity and Capital Resources

The  Company's  primary  sources of funds are  deposits,  principal and interest
payments on loans and mortgage-backed  securities,  and borrowings from the FHLB
of New York.  While  scheduled  loan  repayments  and maturing  investments  are
relatively  predictable,  deposit  flows  and  early  loan  repayments  are more
influenced by interest rates,  general economic conditions and competition.  The
Company sets rates on deposit  products for selected terms and, when  necessary,
has supplemented deposits with longer-term or less expensive alternative sources
of funds.

The Bank  maintains  appropriate  levels of liquid  assets.  The Company's  most
liquid assets are cash and cash equivalents,  U.S.  government agency securities
and mortgage-backed  securities. The levels of these assets are dependent on the
Bank's operating,  financing,  lending and investing activities during any given
period.

In the event  that the  Company  should  require  funds  beyond  its  ability to
generate them internally,  additional sources of funds are available through the
use of FHLB of New York advances and reverse repurchase agreements. In addition,
the Company may access funds, if necessary,  through the use of a $100.0 million
overnight  repricing line of credit and a $100.0 million variable rate one-month
overnight  repricing  line of credit  from the FHLB of New  York,  both of which
expire in July 2006.  The Company  expects to renew these lines of credit  after
expiration on an annual basis.  Furthermore,  the Company has $120.0  million of
overnight variable repricing lines of credit available from other  correspondent
banks. The Company also has a $12.0 million unsecured  revolving line of credit.
The Company uses its liquid resources  principally to fund maturing certificates
of deposit and deposit  withdrawals,  to purchase loans and securities,  to fund
existing and future loan commitments,  and to meet operating  expenses.  At June
30,  2006,  the Company  had  outstanding  commitments  to extend  credit  which
amounted  to $121.0  million  (including  $90.7  million in  available  lines of
credit).  The actual  extension of credit  would  result in a use of  liquidity.
Management  believes  that loan  repayments  and other  sources of funds will be
adequate to meet the Company's  foreseeable  liquidity  needs.  Future liquidity
requirements  are not expected to be  significantly  different  from  historical
experience.

During  fiscal 2006,  the  Company's  cash  inflows  included  $29.8  million of
proceeds from the sale of loans,  a $74.9  million  increase in deposits (net of
accrued  interest  payable),  a  $332.2  million  increase  in FHLB of New  York
advances and other  borrowings,  including short term borrowings,  and principal
repayments of loans and mortgage-backed  securities.  During the year ended June
30, 2006, the cash provided was used to repay $150.0 million of maturing FHLB of
New York advances and other borrowings and to fund investing  activities,  which
included the origination and purchase of loans, the purchase of $35.0 million of
investment  securities,  the  purchase of $5.3 million of FHLB of New York stock
and the funding of a $7.0 million  investment  in BOLI.  In  addition,  the cash
provided was used to repurchase $10.6 million of outstanding  common shares, net
of reissuances, and to pay cash  dividends of $3.6 million.

The  Company's  cash  inflows  for the year ended June 30, 2005  included  $36.0
million of  proceeds  from the sale of loans,  $44.7  million of  proceeds  from
maturities  of  investment   securities,   principal  repayments  of  loans  and
mortgage-backed  securities,  a $151.4  million  increase  in  deposits  (net of
accrued  interest  payable) and a $48.6  million  increase in other  borrowings,
including short term  borrowings.  During the year ended June 30, 2005, the cash
provided was used to fund investing  activities,  which included the origination
of loans,  the purchase of $30.2 million of investment  securities and to fund a
$10.0 million  investment  in BOLI.  In addition,  the cash provided was used to
repay $60.0 million of maturing FHLB of New York advances and other  borrowings,
to repurchase $9.9 million of outstanding common shares, net of reissuances, and
to pay cash dividends of $2.9 million.

During the year ended June 30, 2004, the Company's  cash inflows  included $91.4
million of  proceeds  from the sale of loans,  $96.3  million of  proceeds  from
maturities  of  investment   securities,   principal  repayments  of  loans  and
mortgage-backed  securities  and a $93.6  million  increase in deposits  (net of
accrued interest payable). Additionally, the Company's cash inflows for the year
ended June 30,  2004  included a $52.1  million  increase  in other  borrowings,
including short term


                                       44
<PAGE>

borrowings.  During fiscal 2004,  the cash  provided was used to fund  investing
activities,  which  included  the  origination  and  purchase  of loans  and the
purchase of $232.2 million of investment and mortgage-backed securities, as well
as for the  repayment  of $48.4  million of FHLB of New York  advances and other
borrowings. Additionally, during the year ended June 30, 2004, the cash provided
was used to fund a $12.0 million investment in BOLI, to repurchase $11.0 million
of outstanding common shares,  net of reissuances,  and to pay cash dividends of
$2.7 million.

Total dividends paid for the years ended June 30, 2006, 2005 and 2004 were $0.28
per share,  $0.22 per share and $0.20 per share,  respectively.  The declaration
and payment of dividends are subject to, among other things, PennFed's financial
condition  and  results of  operations,  regulatory  capital  requirements,  tax
considerations,    industry   standards,    economic   conditions,    regulatory
restrictions, general business practices and other factors.

Off-Balance Sheet Arrangements and Contractual Obligations

In the normal course of operation, the Company engages in a variety of financial
transactions  that,  in  accordance  with  U.S.  generally  accepted  accounting
principles,  are not recorded in the consolidated  financial statements,  or are
recorded in amounts that differ from the notional  amounts.  These  transactions
involve,  to varying degrees,  elements of credit,  interest rate, and liquidity
risk. Such transactions are used for general corporate  purposes or for customer
needs. Corporate purpose  transactions are used to help manage credit,  interest
rate and liquidity risk or to optimize capital.  Customer  transactions are used
to manage  customers'  requests for funding.  These  financial  instruments  and
commitments  include unused  consumer lines of credit and  commitments to extend
credit and are  discussed  in Item 8 -  Financial  Statements  - Note M - of the
Notes to Consolidated Financial Statements.

The following table shows the contractual obligations of the Company by expected
payment period as of June 30, 2006 (in thousands).  Further  discussion of these
commitments  is included in Item 8 - Financial  Statements  - Notes I and M - of
the Notes to Consolidated Financial Statements.

<TABLE>
<CAPTION>

                                            Less than     1 Year       3 Years     More than
Contractual obligations:         Total      One Year    to 3 Years   to 5 Years     5 Years
                              ---------------------------------------------------------------
<S>                           <C>          <C>          <C>          <C>          <C>
  Debt obligations .........  $   794,575  $   148,244  $   185,817  $   323,264  $   137,250
  Operating lease and other
     contractual obligations        5,916        1,179        2,034          764        1,939
                              ---------------------------------------------------------------
                              $   800,491  $   149,423  $   187,851  $   324,028  $   139,189
                              ===============================================================
</TABLE>

Debt  obligations  include  borrowings  from  the  FHLB  of  New  York,  reverse
repurchase  agreements and junior subordinated  deferrable interest  debentures.
The borrowings have defined terms and, under certain circumstances, are callable
at the option of the lender.

Operating leases and other contractual  obligations  include lease  arrangements
entered  into  by the  Company  for  the use of  land  and  premises  and a loan
sub-servicing  contract.  The Company's  leases  generally have escalation terms
based upon certain defined indexes.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The  information  required  by this  item is set  forth in Item 7.  Management's
Discussion  and  Analysis  of  Financial  Condition  and  Results of  Operations
"-Interest Rate Sensitivity" and "-Asset/Liability Strategy."


                                       45
<PAGE>

Item 8. Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
PennFed Financial Services, Inc. and Subsidiaries


We have audited the accompanying  consolidated statements of financial condition
of PennFed Financial Services,  Inc. and Subsidiaries (the "Company") as of June
30,  2006  and  2005,  and  the  related  consolidated   statements  of  income,
comprehensive  income,  changes in stockholders'  equity, and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the  Company's  management.  Our  responsibility  is to express an opinion on
these consolidated financial statements based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). 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 consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of PennFed Financial
Services, Inc. and Subsidiaries as of June 30, 2006 and 2005, and the results of
their  operations  and their cash  flows for the years then ended in  conformity
with U.S. generally accepted accounting principles.

We also have  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight  Board  (United  States),  the  effectiveness  of  PennFed
Financial  Services,  Inc. and  Subsidiaries'  internal  control over  financial
reporting  as of June  30,  2006,  based on  criteria  established  in  Internal
Control--Integrated   Framework   issued   by  the   Committee   of   Sponsoring
Organizations  of the Treadway  Commission,  and our report dated  September 11,
2006 expressed an  unqualified  opinion on  management's  assessment of, and the
effective operation of, internal control over financial reporting.




/s/ KPMG LLP
Short Hills, New Jersey
September 11, 2006


                                       46
<PAGE>

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
PennFed Financial Services, Inc. and Subsidiaries
West Orange, New Jersey


We  have   audited  the   accompanying   consolidated   statements   of  income,
comprehensive  income,  changes in  stockholders'  equity and cash flows for the
year ended June 30, 2004 of PennFed  Financial  Services,  Inc. and Subsidiaries
(the "Company").  These consolidated financial statements are the responsibility
of the  Company's  management.  Our  responsibility  is to express an opinion on
these financial statements based on our audit.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). 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  audit  provides  a
reasonable basis for our opinion.

In our opinion such  consolidated  financial  statements  present fairly, in all
material respects, the results of operations and cash flows of PennFed Financial
Services,  Inc. and  Subsidiaries for the year ended June 30, 2004 in conformity
with accounting principles generally accepted in the United States of America.

As  discussed  in  Note  U  to  the  consolidated   financial  statements,   the
consolidated  statements of cash flows for the year ended June 30, 2004 has been
restated.




 /s/ Deloitte & Touche LLP
 Parsippany, New Jersey
 August 27, 2004
(September 12, 2005 as to Note U)


                                       47
<PAGE>

Report of Independent Registered Public Accounting Firm on Internal Control Over
Financial Reporting

The Board of Directors and Stockholders
PennFed Financial Services, Inc. and Subsidiaries



We have audited management's assessment,  included in the accompanying Report of
Management on Internal Control Over Financial Reporting,  that PennFed Financial
Services,  Inc. and Subsidiaries (the "Company")  maintained  effective internal
control  over  financial  reporting  as of June  30,  2006,  based  on  criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring  Organizations of the Treadway Commission.  Management of the Company
is  responsible  for  maintaining  effective  internal  control  over  financial
reporting and for its assessment of the  effectiveness  of internal control over
financial reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain  reasonable  assurance about whether   effective
internal  control  over  financial  reporting  was  maintained  in all  material
respects. Our audit included obtaining an understanding of internal control over
financial reporting,  evaluating management's assessment, testing and evaluating
the design and operating  effectiveness of internal control, and performing such
other procedures as we considered   necessary in the  circumstances.  We believe
that our audit provides a reasonable basis for our opinion.

A company's  internal control over financial  reporting is a process designed to
provide reasonable  assurance  regarding the reliability of financial  reporting
and the preparation of financial  statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial  reporting  includes those policies and procedures that (1) pertain to
the  maintenance  of records that, in reasonable  detail,  accurately and fairly
reflect the  transactions  and  dispositions  of the assets of the company;  (2)
provide  reasonable  assurance  that  transactions  are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting  principles,  and that receipts and  expenditures  of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of   unauthorized  acquisition,  use, or  disposition of the company's
assets that could have a material effect on the financial statements.

Because of its inherent  limitations,  internal control over financial reporting
may not prevent or detect misstatements.  Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate  because of changes in  conditions,  or that the degree of compliance
with the policies or procedures may  deteriorate.

In our opinion,  management's  assessment that PennFed Financial Services,  Inc.
and Subsidiaries  maintained effective internal control over financial reporting
as of June 30,  2006,  is fairly  stated,  in all  material  respects,  based on
criteria  established in Internal  Control--Integrated  Framework  issued by the
Committee of Sponsoring  Organizations of the Treadway Commission.  Also, in our
opinion,  PennFed Financial Services, Inc. and Subsidiaries  maintained,  in all
material  respects,  effective  internal control over financial  reporting as of
June 30, 2006,  based on criteria  established  in Internal  Control--Integrated
Framework  issued by the Committee of Sponsoring  Organizations  of the Treadway
Commission.

We also have  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight  Board  (United  States),  the  consolidated  statement of
financial condition of PennFed Financial  Services,  Inc. and Subsidiaries as of
June 30,  2006 and 2005,  and the  related  consolidated  statements  of income,
comprehensive  income,  changes in stockholders'  equity, and cash flows for the
years  then  ended,  and our  report  dated  September  11,  2006  expressed  an
unqualified opinion on those consolidated financial statements.




/s/ KPMG LLP
Short Hills, New Jersey
September 11, 2006


                                       48
<PAGE>

Report of Management on Internal Control Over Financial Reporting

The  management  of PennFed  Financial  Services,  Inc.  and  Subsidiaries  (the
"Company") is responsible for  establishing  and maintaining  adequate  internal
control over financial reporting.

The Company's internal control over financial reporting is a process designed to
provide reasonable  assurance  regarding the reliability of financial  reporting
and the preparation of financial  statements for external purposes in accordance
with U.S.  generally  accepted  accounting  principles.  The Company's  internal
control over  financial  reporting  includes  policies and  procedures  that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect  transactions and dispositions of the assets of the Company; (ii)
provide  reasonable  assurance  that  transactions  are recorded as necessary to
permit  preparation of financial  statements in accordance  with U.S.  generally
accepted  accounting  principles,  and that  receipts  and  expenditures  of the
Company are being made only in accordance with  authorizations of management and
the directors of the Company;  (iii) and provide reasonable  assurance regarding
prevention or timely detection of unauthorized acquisition,  use or disposition
of the  Company's  assets  that could have a  material  effect on the  financial
statements.

Because of inherent  limitations,  internal control over financial reporting may
not prevent or detect misstatements. All internal control systems, no matter how
well designed,  have inherent  limitations,  including the  possibility of human
error and the circumvention of overriding  controls.  Therefore,  even effective
internal control over financial reporting can provide only reasonable  assurance
with  respect  to  financial  statement  preparation  and  presentation.   Also,
projections of any evaluation of  effectiveness to future periods are subject to
the risk that controls may become  inadequate  because of changes in conditions,
or  that  the  degree  of  compliance   with  the  policies  or  procedures  may
deteriorate.

The Company's  management  assessed the effectiveness of the Company's  internal
control over financial  reporting as of June 30, 2006, based on the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission in
Internal  Control--Integrated  Framework.  Based on our  assessment we concluded
that,  as of June 30,  2006,  the  Company's  internal  control  over  financial
reporting is effective based on those criteria.

The Company's  independent  registered  public  accounting firm that audited the
June 30,  2006  consolidated  financial  statements  has  issued a report on our
assessment of, and the effective  operation of, the Company's  internal  control
over financial reporting as of June 30, 2006. This report appears on page 48.




/s/ Joseph L. LaMonica              /s/ Claire M. Chadwick
Joseph L. LaMonica                  Claire M. Chadwick
President and                       Senior Executive Vice President and
Chief Executive Officer             Chief Financial Officer




September 11, 2006


                                       49
<PAGE>

               PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------

                 Consolidated Statements of Financial Condition

<TABLE>
<CAPTION>
                                                                                              June 30,
                                                                                     ------------------------
                                                                                         2006         2005
                                                                                     ------------------------
                                                                                      (Dollars in thousands)
<S>                                                                                  <C>           <C>
Assets
Cash and cash equivalents .........................................................  $    16,614   $   15,220
Investment securities available for sale, at market value, amortized cost of
    $5,053 and $4,849 at June 30, 2006 and 2005 ...................................        4,936        5,011
Investment securities held to maturity, at amortized cost, market value of
    $420,663 and $406,726 at June 30, 2006 and 2005 ...............................      440,360      405,498
Mortgage-backed securities held to maturity, at amortized cost, market value of
    $60,893 and $79,109 at June 30, 2006 and 2005 .................................       62,963       78,201
Loans held for sale ...............................................................          217        4,826
Loans receivable, net of allowance for loan losses of
    $5,888 and $6,050 at June 30, 2006 and 2005 ...................................    1,684,007    1,460,654
Premises and equipment, net .......................................................       20,415       20,903
Federal Home Loan Bank of New York stock, at cost .................................       27,714       22,391
Accrued interest receivable, net ..................................................       11,145        9,808
Bank owned life insurance ("BOLI") ................................................       31,168       23,202
Other assets ......................................................................        6,971        4,837
                                                                                     ------------------------
                                                                                     $ 2,306,510   $2,050,551
                                                                                     ========================
Liabilities and Stockholders' Equity
Liabilities:
    Deposits ......................................................................  $ 1,414,588   $1,339,491
    Federal Home Loan Bank of New York advances ...................................      465,465      415,465
    Other borrowings ..............................................................      240,193      107,952
    Junior Subordinated Deferrable Interest Debentures,
        net of unamortized issuance expenses of  $1,174 and $1,218 at June 30, 2006
        and 2005 ..................................................................       42,126       42,082
    Mortgage escrow funds .........................................................       11,877       10,398
    Accounts payable and other liabilities ........................................        8,840       11,109
                                                                                     ------------------------
    Total liabilities .............................................................    2,183,089    1,926,497
                                                                                     ------------------------

Commitments and Contingencies
Stockholders' Equity:
    Serial preferred stock, $.01 par value,
        7,000,000 shares authorized, no shares issued .............................           --           --
    Common stock, $.01 par value, 15,000,000 shares authorized, 12,864,047 and
        13,280,038 shares issued and outstanding at June 30, 2006 and 2005 ........          129          133
    Additional paid-in capital ....................................................       38,325       39,092
    Retained earnings .............................................................       85,036       84,734
    Accumulated other comprehensive income (loss), net of taxes ...................          (69)          95
                                                                                     ------------------------
    Total stockholders' equity ....................................................      123,421      124,054
                                                                                     ------------------------
                                                                                     $ 2,306,510   $2,050,551
                                                                                     ========================
</TABLE>

See notes to consolidated financial statements.


                                       50
<PAGE>

               PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------

                        Consolidated Statements of Income

<TABLE>
<CAPTION>
                                                                   For the years ended June 30,
                                                          ------------------------------------------------
                                                                  2006              2005              2004
                                                          ------------------------------------------------
                                                          (Dollars in thousands, except per share amounts)
<S>                                                       <C>               <C>               <C>
Interest and Dividend Income:
  Interest and fees on loans ........................     $     85,922      $     75,830      $     68,213
  Interest on federal funds sold ....................               --                --               178
  Interest and dividends on investment securities ...           25,794            24,384            22,816
  Interest on mortgage-backed securities ............            3,560             4,508             5,069
                                                          ------------------------------------------------
                                                               115,276           104,722            96,276
                                                          ------------------------------------------------
Interest Expense:
  Deposits ..........................................           41,766            30,356            26,634
  Borrowed funds ....................................           32,359            27,981            29,342
  Junior subordinated deferrable interest debentures             3,657             3,047             2,698
                                                          ------------------------------------------------
                                                                77,782            61,384            58,674
                                                          ------------------------------------------------
Net Interest and Dividend Income Before
  Provision for Loan Losses .........................           37,494            43,338            37,602
Provision for Loan Losses ...........................               --                --                --
                                                          ------------------------------------------------
Net Interest and Dividend Income After
  Provision for Loan Losses .........................           37,494            43,338            37,602
                                                          ------------------------------------------------
Non-Interest Income:
  Fees and service charges ..........................            5,670             3,096             4,175
  Income on BOLI ....................................              966               690               512
  Net gain on sales of loans ........................              143               394               759
  Net gain (loss) from real estate operations .......               (6)              156                58
  Other .............................................              740               660               925
                                                          ------------------------------------------------
                                                                 7,513             4,996             6,429
                                                          ------------------------------------------------
Non-Interest Expenses:
  Compensation and employee benefits ................           12,202            12,263            14,593
  Equipment .........................................            2,573             2,140             2,057
  Net occupancy expense .............................            2,426             2,319             1,894
  Extinguishment of debt ............................            1,351                --                --
  Advertising .......................................              637               719               390
  Federal deposit insurance premium .................              175               172               168
  Amortization of intangible assets .................               --             1,361             1,816
  Other .............................................            4,834             5,197             4,512
                                                          ------------------------------------------------
                                                                24,198            24,171            25,430
                                                          ------------------------------------------------
Income Before Income Taxes ..........................           20,809            24,163            18,601
Income Tax Expense ..................................            7,411             8,669             6,543
                                                          ------------------------------------------------
Net Income ..........................................     $     13,398      $     15,494      $     12,058
                                                          ================================================

Weighted average number of common shares outstanding:
  Basic .............................................       13,053,853        13,612,502        13,548,796
                                                          ================================================
  Diluted ...........................................       13,451,005        14,010,684        14,449,170
                                                          ================================================
Net income per common share:
  Basic .............................................     $       1.03      $       1.14      $       0.89
                                                          ================================================
  Diluted ...........................................     $       1.00      $       1.11      $       0.83
                                                          ================================================
</TABLE>

See notes to consolidated financial statements.


                                       51
<PAGE>

               PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------

                 Consolidated Statements of Comprehensive Income

<TABLE>
<CAPTION>
                                                                     For the years ended June 30,
                                                                 ------------------------------------
                                                                    2006          2005          2004
                                                                 ------------------------------------
                                                                            (In thousands)
<S>                                                              <C>           <C>           <C>
Net income .................................................     $ 13,398      $ 15,494      $ 12,058
Other comprehensive income (loss), net of tax:
   Unrealized holding gains (losses) arising during period
     on investment securities available for sale, net of tax         (164)           67          (149)
                                                                 ------------------------------------
Comprehensive income .......................................     $ 13,234      $ 15,561      $ 11,909
                                                                 ====================================
</TABLE>

See notes to consolidated financial statements.


                                       52
<PAGE>

               PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------

                           Consolidated Statements of
                         Changes in Stockholders' Equity
                For the Years Ended June 30, 2006, 2005 and 2004

<TABLE>
<CAPTION>
                                                                                       Employee
                                           Serial                    Additional          Stock
                                         Preferred        Common      Paid-In          Ownership         Retained
                                           Stock          Stock       Capital            Plan            Earnings
                                        -------------------------------------------------------------------------
                                                     (Dollars in thousands, except per share amounts)
<S>                                     <C>           <C>           <C>           <C>              <C>
Balance at June 30, 2003 ............   $        --   $        60   $    63,025   $         (644)  $      127,461
Allocation of Employee Stock
    Ownership Plan ("ESOP") stock ...                                                        644
ESOP adjustment .....................                                     2,659
Purchase of 792,200 shares
    of treasury stock ...............
Issuance of 692,202 shares
    of treasury stock for options
    exercised and Dividend
    Reinvestment Plan ("DRP") .......                                    (3,309)                              (40)
Cash dividends of $ 0.20 per
    common share ....................                                                                      (2,650)
Unrealized holding losses
    on investment securities
    available for sale, net of income
    taxes of $(77) ..................
Reclassification of treasury shares .                         (51)      (25,509)                          (55,333)
Net income for the year ended
    June 30, 2004 ...................                                                                      12,058
                                        -------------------------------------------------------------------------
Balance at June 30, 2004 ............            --             9        36,866               --           81,496
Repurchase of 731,800
    outstanding shares ..............                          (6)       (1,823)                           (9,451)
Issuance of 435,778 shares of
    stock for options exercised
    and DRP .........................                           2         1,087                               247
Tax benefit from stock option plan ..                                     2,962
Cash dividends of $0.22 per
    common share ....................                                                                      (2,924)
Unrealized holding gains on
    investment securities available
    for sale, net of income taxes
    of $46 ..........................
Two-for-one split in the
    form of a 100% stock dividend ...                         128                                            (128)
Net income for the year ended
    June 30, 2005 ...................                                                                      15,494
                                        -------------------------------------------------------------------------
Balance at June 30, 2005 ............            --           133        39,092               --           84,734
Repurchase of 626,300
    outstanding shares ..............                          (6)       (1,560)                          (10,067)
Issuance of 210,309 shares
    of stock for options
    exercised and DRP ...............                           2           524                               546
Tax benefit from stock option plan ..                                       269
Cash dividends of $0.28 per
    common share ....................                                                                      (3,575)
Unrealized holding losses on
    investment securities available
    for sale, net of income taxes of
    $(114) ..........................
Net income for the year ended
    June 30, 2006 ...................                                                                      13,398
                                        -------------------------------------------------------------------------
Balance at June 30, 2006 ............   $        --   $       129   $    38,325   $           --   $       85,036
                                        =========================================================================


<CAPTION>

                                          Accumulated
                                             Other
                                         Comprehensive          Treasury
                                         Income (Loss)            Stock             Total
                                        -------------------------------------------------
                                         (Dollars in thousands, except per share amounts)
<S>                                     <C>               <C>              <C>
Balance at June 30, 2003 ............   $          177    $      (73,244)  $      116,835
Allocation of Employee Stock
    Ownership Plan ("ESOP") stock ...                                                 644
ESOP adjustment .....................                                               2,659
Purchase of 792,200 shares
    of treasury stock ...............                            (12,908)         (12,908)
Issuance of 692,202 shares
    of treasury stock for options
    exercised and Dividend
    Reinvestment Plan ("DRP") .......                              5,259            1,910
Cash dividends of $ 0.20 per
    common share ....................                                              (2,650)
Unrealized holding losses
    on investment securities
    available for sale, net of income
    taxes of $(77) ..................             (149)                              (149)
Reclassification of treasury shares .                             80,893               --
Net income for the year ended
    June 30, 2004 ...................                                              12,058
                                        -------------------------------------------------
Balance at June 30, 2004 ............               28                --          118,399
Repurchase of 731,800
    outstanding shares ..............                                             (11,280)
Issuance of 435,778 shares of
    stock for options exercised
    and DRP .........................                                               1,336
Tax benefit from stock option plan ..                                               2,962
Cash dividends of $0.22 per
    common share ....................                                              (2,924)
Unrealized holding gains on
    investment securities available
    for sale, net of income taxes
    of $46 ..........................               67                                 67
Two-for-one split in the
    form of a 100% stock dividend ...                                                  --
Net income for the year ended
    June 30, 2005 ...................                                              15,494
                                        -------------------------------------------------
Balance at June 30, 2005 ............               95                --          124,054
Repurchase of 626,300
    outstanding shares ..............                                             (11,633)
Issuance of 210,309 shares
    of stock for options
    exercised and DRP ...............                                               1,072
Tax benefit from stock option plan ..                                                 269
Cash dividends of $0.28 per
    common share ....................                                              (3,575)
Unrealized holding losses on
    investment securities available
    for sale, net of income taxes of
    $(114) ..........................             (164)                              (164)
Net income for the year ended
    June 30, 2006 ...................                                              13,398
                                        -------------------------------------------------
Balance at June 30, 2006 ............   $          (69)   $           --   $      123,421
                                        =================================================
</TABLE>


See notes to consolidated financial statements.


                                       53
<PAGE>

               PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------

                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                          For the years ended June 30,
                                                                                       -----------------------------------
                                                                                          2006         2005         2004
                                                                                                                  (Note U)
                                                                                       -----------------------------------
                                                                                                  (In thousands)
<S>                                                                                    <C>          <C>          <C>
Cash Flows from Operating Activities:
   Net income ......................................................................   $  13,398    $  15,494    $  12,058
   Adjustments to reconcile net income to net cash provided by operating
     activities:
   Net gain on sales of loans ......................................................        (143)        (394)        (759)
   Proceeds from sales of loans originated for sale ................................       6,224       11,154       48,667
   Originations of loans held for sale .............................................      (5,420)     (12,051)     (42,266)
   Net (gain) loss on sales of real estate owned ...................................           4         (158)         (57)
   Amortization of investment and mortgage-backed securities premium, net ..........         295          249          503
   Depreciation and amortization ...................................................       2,169        1,920        1,733
   Amortization of cost of stock plans .............................................          --           --        3,304
   Amortization of intangible assets ...............................................          --        1,361        1,816
   Amortization of premiums on loans and loan fees .................................       1,912        1,824        2,878
   Amortization of junior subordinated debentures issuance costs ...................          44           45           38
   Income on BOLI ..................................................................        (966)        (690)        (512)
   Increase in deferred income tax liability .......................................         731        1,219          163
   (Increase) decrease in accrued interest receivable, net of accrued
     interest payable ..............................................................      (1,117)         329       (1,627)
   (Increase) decrease in other assets .............................................        (449)         527         (590)
   Increase (decrease) in accounts payable and other liabilities ...................      (4,570)         644       (8,611)
   Increase (decrease) in mortgage escrow funds ....................................       1,479          659         (752)
   Other, net ......................................................................          --           --            6
                                                                                       -----------------------------------
   Net cash provided by operating activities .......................................      13,591       22,132       15,992
                                                                                       -----------------------------------

Cash Flows From Investing Activities:
   Proceeds from maturities of investment securities held to maturity ..............          --       44,652       96,275
   Purchases of investment securities held to maturity .............................     (34,977)     (30,000)    (177,140)
   Purchases of investment securities available for sale ...........................        (203)        (177)        (205)
   Proceeds from principal repayments of mortgage-backed securities held to maturity      15,058       21,739       47,976
   Purchases of mortgage-backed securities .........................................          --           --      (54,823)
   Net outflow from loan originations net of principal repayments of loans .........    (231,918)    (203,896)     (56,769)
   Proceeds from loans sold ........................................................      23,531       24,883       42,729
   Purchases of loans ..............................................................     (13,407)          --      (53,034)
   Purchases of premises and equipment .............................................      (1,681)      (1,133)      (2,326)
   Net inflow from real estate owned activity ......................................         473          630           84
   Purchases of BOLI ...............................................................      (7,000)     (10,000)     (12,000)
   (Purchases) redemptions of Federal Home Loan Bank of New York stock .............      (5,323)       1,382        1,450
                                                                                       -----------------------------------
   Net cash used in investing activities ...........................................    (255,447)    (151,920)    (167,783)
                                                                                       -----------------------------------

Cash Flows From Financing Activities:
   Net increase in deposits ........................................................      74,876      151,449       93,550
   Proceeds from advances from the Federal Home Loan Bank of New York
     and other borrowings ..........................................................     185,000       29,475       24,986
   Repayment of advances from the Federal Home Loan Bank of
     New York and other borrowings .................................................    (150,000)     (60,000)     (48,350)
   Increase in other short term borrowings .........................................     147,241       19,131       27,066
   Cash dividends paid .............................................................      (3,575)      (2,924)      (2,650)
   Repurchases of outstanding shares, net of reissuances ...........................     (10,561)      (9,944)     (10,998)
   Tax benefit related to stock options ............................................         269        2,962           --
                                                                                       -----------------------------------
   Net cash provided by financing activities .......................................     243,250      130,149       83,604
                                                                                       -----------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents ...............................       1,394          361      (68,187)
Cash and Cash Equivalents, Beginning of Year .......................................      15,220       14,859       83,046
                                                                                       -----------------------------------
Cash and Cash Equivalents, End of Year .............................................   $  16,614    $  15,220    $  14,859
                                                                                       ===================================

Supplemental Disclosures of Cash Flow Information:
   Cash paid during the year for:
   Interest ........................................................................   $  77,333    $  61,510    $  59,335
                                                                                       ===================================
   Income taxes ....................................................................   $   8,536    $   3,649    $   7,105
                                                                                       ===================================
Supplemental Schedule of Non-Cash Activities:
   Transfer of loans receivable to loans held for sale, at lower of cost or market .   $  19,583    $  28,417    $  33,876
                                                                                       ===================================
   Transfer of loans receivable to real estate owned, net ..........................   $     477    $     472    $      --
                                                                                       ===================================
</TABLE>

See notes to consolidated financial statements.



                                       54
<PAGE>

               PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
                   Notes to Consolidated Financial Statements

                    Years Ended June 30, 2006, 2005 and 2004

A. Summary of Significant Accounting Policies

PennFed Financial Services, Inc. ("PennFed") was organized in March 1994 for the
purpose of  becoming  the  savings and loan  holding  company  for Penn  Federal
Savings  Bank (the  "Bank")  in  connection  with the Bank's  conversion  from a
federally  chartered mutual savings bank to a federally  chartered stock savings
bank (the "Conversion").

Principles of Consolidation -- The consolidated  financial statements of PennFed
and subsidiaries (with its subsidiaries,  the "Company") include the accounts of
PennFed  and its  subsidiaries  (including  the Bank).  PennFed  owns all of the
outstanding stock of the Bank issued on July 14, 1994. All intercompany accounts
and  transactions  with  consolidated   subsidiaries  have  been  eliminated  in
consolidation.

Use of Estimates -- The  preparation of financial  statements in conformity with
U.S.  generally  accepted  accounting   principles  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  most  significant  area  in the  accompanying  financial  statements  where
estimates have an impact is in the allowance for loan losses.

Cash and Cash Equivalents -- For purposes of reporting cash flows, cash and cash
equivalents include cash and amounts due from depository institutions.

Investment  Securities  and  Mortgage-Backed  Securities -- In  accordance  with
Statement of Financial  Accounting  Standards No. 115,  "Accounting  for Certain
Investments  in Debt  and  Equity  Securities"  ("SFAS  115"),  debt  securities
classified  as held to  maturity  are  carried  at  amortized  cost  only if the
reporting  entity has a positive intent and ability to hold those  securities to
maturity.

The Company classifies investment  securities and mortgage-backed  securities as
either  held to  maturity  or  available  for sale.  Investment  securities  and
mortgage-backed  securities  held to maturity  are stated at cost,  adjusted for
amortization of premiums and accretion of discounts,  since the Company has both
the ability and intent to hold the securities to maturity. Investments available
for sale are carried at market value with  unrealized  gains and losses excluded
from earnings and reported as accumulated other  comprehensive  income (loss) in
stockholders' equity. Realized and unrealized gains and losses are accounted for
on a specific  identification  method.  Held to maturity and  available for sale
securities are  periodically  reviewed for impairment.  The review considers the
length of time the market  value has been below cost,  the  expectation  for the
security's  performance,  the credit worthiness of the issuer and the Company's
ability and intent to hold the  security.  A decline  that is  considered  to be
other than temporary is recorded as a loss within other non-interest expenses in
the Consolidated Statements of Income.

In  accordance  with  Statement  of  Financial  Accounting  Standards  No.  140,
"Accounting for Transfers and Servicing of Financial Assets and  Extinguishments
of Liabilities" ("SFAS 140"), with certain loan sales, the Company may record an
interest-only  strip  ("IO").  These IO's  represent  the  contractual  right to
receive some or all of the interest due on the mortgage loans sold.

Loans Held for Sale -- Mortgage  loans  originated  and intended for sale in the
secondary  market are carried at the lower of cost or estimated  market value in
the  aggregate.  Aggregate  net  unrealized  losses are  recorded as a valuation
allowance and recognized as charges to income.

Loans  Receivable -- Loans are stated at unpaid principal  balances,  net of the
allowance  for loan  losses,  unamortized  premiums  and  deferred  loan  costs.
Interest  income on loans is accrued  and  credited  to income as  earned.  Loan
origination  fees and premiums on purchased loans are deferred and amortized to
interest income over the life of the loan as an adjustment to the loan's yield.

Interest income is not accrued on loans where management has determined that the
borrowers may be unable to meet contractual principal or interest obligations or
where  interest  and/or  principal  is 90 days or more past due.  When a loan is
placed on  nonaccrual  status,  accrual of  interest  ceases  and,  in  general,
uncollected past due interest (including


                                       55
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               PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

interest  applicable  to prior years,  if any) is reversed  and charged  against
current  income.  Therefore,  interest  income  is  not  recognized  unless  the
financial  condition and payment record of the borrower  warrant the recognition
of interest income.  Interest on loans that have been  restructured is generally
accrued according to the renegotiated terms.

In  accordance  with  Statement  of  Financial  Accounting  Standards  No.  114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114") and Statement of
Financial  Accounting Standards No. 118, "Accounting by Creditors for Impairment
of a Loan - Income  Recognition  and  Disclosures"  ("SFAS  118"),  the  Company
accounts for impaired loans, except those loans that are accounted for at market
value or at the  lower of cost or  market  value,  at the  present  value of the
estimated  future  cash flows of the loan  discounted  at the  loan's  effective
interest rate or at the loan's  observable market price or the fair value of the
collateral  if the loan is collateral  dependent.  A loan is impaired when it is
probable that all principal and interest amounts will not be collected according
to the loan contract.  Delinquent,  smaller balance,  homogeneous loans that are
evaluated for impairment  collectively  on a portfolio  basis are not considered
impaired under SFAS 114. The Company generally  evaluates the  collectibility of
consumer and one- to four-family mortgage loans on a total portfolio basis.

Allowance  for Loan  Losses -- The  allowance  for loan  losses  is  established
through  charges to income.  Loan losses are charged  against the  allowance for
loan losses when management believes that the recovery of principal is unlikely.
If,  as a  result  of  loans  charged  off or  increases  in the  size  or  risk
characteristics  of the  loan  portfolio,  the  allowance  is  below  the  level
considered  by  management  to be  adequate  to absorb  probable  loan losses on
existing  loans,  the  provision  for loan  losses  is  increased  to the  level
considered  necessary  to provide an adequate  allowance.  The  allowance  is an
amount that  management  believes will be adequate to absorb  probable losses on
existing  loans  that may  become  uncollectible,  based on  evaluations  of the
collectibility  of the  loans.  The  evaluations  take into  consideration  such
factors as changes  in the  nature  and  volume of the loan  portfolio,  overall
portfolio  quality,  review  of  specific  problem  loans and  current  economic
conditions that may affect the borrowers'  ability to pay.  Economic  conditions
may  result  in the  necessity  to  change  the  allowance  in order to react to
deteriorating  financial  conditions  of the Company's  borrowers.  As a result,
additional  provisions  on  existing  loans  may be  required  in the  future if
borrowers' financial conditions deteriorate or if real estate values decline.

Loan  Origination  Fees/Costs and Discounts and Premiums --  Nonrefundable  loan
origination  fees and certain direct loan  origination  costs are deferred.  Net
deferred amounts on loans held for investment are amortized into income over the
life of the related loans by use of the level-yield method. Net deferred amounts
on loans  originated for sale are deferred and recognized as part of the gain or
loss on sale of loans.

Discounts and premiums on investment  and  mortgage-backed  securities and loans
purchased are recognized in interest income over the estimated life of the asset
purchased using the level-yield method.

Premises  and  Equipment  -- Premises  and  equipment  are stated at cost,  less
accumulated  depreciation  and  amortization.  Provisions  for  depreciation  of
premises and  equipment are computed on the  straight-line  method over three to
ten years  for  furniture  and  equipment  and  twenty-five  to forty  years for
buildings.   Amortization  of  leasehold  improvements  is  provided  using  the
straight-line  method over the terms of the respective lease or estimated useful
life of the improvement,  whichever is shorter.

Real Estate Owned -- Real estate properties acquired by foreclosure are recorded
at the lower of cost or estimated fair value less  anticipated  costs to dispose
with any write down charged  against the allowance  for loan losses.  Subsequent
valuations  are  periodically  performed by management and the carrying value is
adjusted  by a charge to expense  to  reflect  any  subsequent  declines  in the
estimated   fair  value  or  increases  in  the  estimated   costs  to  dispose.
Unanticipated  declines in real estate values may result in increased foreclosed
real estate expense in the future.  Routine holding costs are charged to expense
as incurred and  improvements  to real estate owned that increase the fair value
of the real  estate  are  capitalized.  Gains on sale of real  estate  owned are
generally  recognized  upon  disposition of the property.  Losses are charged to
operations as incurred.

Core  Deposit  Premium  -- The  premium  resulting  from the  valuation  of core
deposits  arising  from the  acquisition  discussed  in Note B was  amortized to
expense over the  estimated  average  remaining  life of the  existing  customer
deposit base  acquired (10 years).  As of June 30, 2005,  the entire  amount has
been amortized.


                                       56
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               PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

Bank Owned Life  Insurance - The Bank has  purchased  Bank Owned Life  Insurance
("BOLI")  policies in  consideration of future employee benefit costs associated
with the Supplemental  Executive  Retirement Plan and the Directors'  Retirement
Plan as well as current benefit costs for medical insurance  coverage.  The BOLI
is recorded at its cash  surrender  value and  increases  in the cash  surrender
value of the insurance are recorded as a component of non-interest income.

Income Taxes -- In accordance with Statement of Financial  Accounting  Standards
No. 109,  "Accounting for Income Taxes" ("SFAS 109"), the Company uses the asset
and liability  method for financial  accounting  and reporting for income taxes.
Deferred   income  taxes  are  recognized   for  the  future  tax   consequences
attributable to differences  between the financial statement carrying amounts of
existing  assets and liabilities  and their  respective tax bases.  Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled.  The effect on deferred  taxes of a change in tax rates
is  recognized  in income tax expense in the period that  includes the enactment
date.

Earnings  Per Common  Share -- Basic  earnings  per common  share is computed by
dividing income available to common  stockholders by the weighted average number
of common  shares  outstanding  during the  period,  less the  weighted  average
unallocated ESOP shares of common stock. The computation of diluted earnings per
share is similar to the  computation of basic earnings per share except that the
denominator is increased to include the number of additional  common shares that
would have been  outstanding  if contracts to issue common stock,  such as stock
options,  were exercised or resulted in the issuance of common stock. The number
of additional shares is computed using the treasury stock method.

Stock  Dividend  -  All  share  information  has  been  adjusted  to  reflect  a
two-for-one stock split in the form of a 100% stock dividend paid on October 29,
2004.  For  further  information,  refer to Note N -  Stockholders'  Equity  and
Regulatory Capital.

Reclassifications  - Certain  reclassifications  have been made to prior  years'
financial statements to conform with current year's presentation.

Recently  Adopted  Accounting  Standards - Effective  July 1, 2005,  the Company
adopted  Statement of Financial  Accounting  Standards  No. 153,  "Exchanges  of
Nonmonetary  Assets" ("SFAS 153"),  which amends APB Opinion No. 29, "Accounting
for Nonmonetary Transactions." SFAS 153 eliminates the exception from fair value
measurement  for  nonmonetary  exchanges  of  similar  productive  assets in APB
Opinion No. 29 and replaces it with an exception for exchanges  that do not have
commercial  substance.  SFAS  153  specifies  that a  nonmonetary  exchange  has
commercial  substance  if the future  cash flows of the entity are  expected  to
change  significantly as a result of the exchange.  The adoption of SFAS 153 did
not have an impact on the Company's consolidated financial condition, results of
operations or cash flows.

Effective July 1, 2005, the Company  adopted  Statement of Financial  Accounting
Standards No. 123 (revised 2004),  "Share-Based  Payment"  ("SFAS 123R"),  which
requires  entities to measure the cost of employee services received in exchange
for an award of equity  instruments  based on the  grant-date  fair value of the
award (with limited  exceptions).  The cost is recognized as an expense over the
period during which the employee is required to provide  service in exchange for
the award,  which is usually the vesting  period.  As a result of SFAS 123R, the
Company will  recognize  the  grant-date  fair value of options as  compensation
expense over the applicable  vesting period.  This accounting  treatment differs
significantly  from the previous  accounting  for fixed stock  options under APB
Opinion No. 25,  which  generally  required  expense  recognition  only when the
exercise  price of the option was less than the market  price of the  underlying
stock on the grant date. As required by SFAS 123R, the Company will estimate the
fair value of stock options on each grant date,  using an appropriate  valuation
approach such as the  Black-Scholes  option pricing model.  The adoption of SFAS
123R did not have an impact on the Company's  consolidated  financial condition,
results of operations or cash flows.

B. Branch Acquisitions

In 1995, the Bank acquired the deposit liabilities and certain of the assets and
other liabilities of three branch offices of another financial institution.  The
Bank  recorded  a total  deposit  premium  intangible  asset of  $18,141,000  in
connection  with the  acquisition.  For the years  ended June 30, 2005 and 2004,
amortization of the deposit premium  intangible of $1,361,000 and $1,814,000 was
recorded,  respectively.  The deposit premium intangible was fully  amortized by
June 30, 2005.


                                       57
<PAGE>

               PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

C. Investment Securities

<TABLE>
<CAPTION>
                                                      Gross         Gross        Estimated
                                      Amortized    Unrealized    Unrealized     Fair Market
                                        Cost          Gains        Losses          Value
                                     ------------------------------------------------------
                                                       (In thousands)
<S>                                  <C>           <C>           <C>            <C>
June 30, 2006
Available for Sale:
Equity securities ................   $     5,053   $        --   $      (117)   $     4,936
                                     ======================================================
Held to Maturity:
U.S. government agency obligations   $   406,470   $        --   $   (19,849)   $   386,621
Corporate bonds ..................         1,018           126            --          1,144
Trust preferred securities .......        32,872           282          (256)        32,898
                                     ------------------------------------------------------
    Total held to maturity .......   $   440,360   $       408   $   (20,105)   $   420,663
                                     ======================================================

June 30, 2005
Available for Sale:
Equity securities ................   $     4,849   $       162   $        --    $     5,011
                                     ======================================================
Held to Maturity:
U.S. government agency obligations   $   371,487   $       255   $      (472)   $   371,270
Corporate bonds ..................         1,022           214            --          1,236
Trust preferred securities .......        32,989         1,233            (2)        34,220
                                     ------------------------------------------------------
    Total held to maturity .......   $   405,498   $     1,702   $      (474)   $   406,726
                                     ======================================================
</TABLE>

The amortized cost and estimated fair market value of investment securities held
to maturity at June 30, 2006, by  contractual  maturity,  are shown below.  The
expected  maturity may differ from the contractual  maturity because issuers may
have the right to call  obligations.  Available  for sale  securities  have been
excluded from the table as they are equity securities.

                                                         June 30, 2006
                                                 ---------------------------
                                                                 Estimated
                                                  Amortized     Fair Market
                                                     Cost          Value
                                                 ---------------------------
                                                       (In thousands)
Held to Maturity:
Maturing after one year but within five years    $     11,014   $     10,641
Maturing after five years but within ten years         76,850         74,180
Maturing after ten years .....................        352,496        335,842
                                                 ---------------------------
    Total held to maturity ...................   $    440,360   $    420,663
                                                 ===========================

At June 30,  2006 and  2005,  investment  securities  with a  carrying  value of
$243,690,000 and $189,814,000, respectively, were pledged to secure Federal Home
Loan Bank of New York advances and other borrowings.

There were no sales of investment  securities for the years ended June 30, 2006,
2005 and 2004.


                                       58
<PAGE>

               PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

The  following  tables  provide  gross  unrealized  losses and market  value for
investment  securities,  aggregated  by  category  and the  length  of time  the
individual investments have been in a continuous unrealized loss position.

<TABLE>
<CAPTION>
                                                                    June 30, 2006
                                -----------------------------------------------------------------------------------
                                   Less than 12 months            12 months or more                 Total
                                -----------------------------------------------------------------------------------
                                     Market    Unrealized         Market    Unrealized         Market    Unrealized
                                     Value       Losses           Value       Losses           Value       Losses
                                -----------------------------------------------------------------------------------
                                                                  (In thousands)
<S>                             <C>           <C>            <C>           <C>            <C>           <C>
Available for Sale:
   Equity Securities ........   $     4,936   $      (117)   $        --   $        --    $     4,936   $      (117)
                                ===================================================================================
Held to Maturity:
   U.S. Government agency
   obligations ..............   $   291,319   $   (13,248)   $    95,302   $    (6,601)   $   386,621   $   (19,849)
   Trust preferred securities         6,458          (239)         1,061           (17)         7,519          (256)
                                -----------------------------------------------------------------------------------
        Total ...............   $   297,777   $   (13,487)   $    96,363   $    (6,618)   $   394,140   $   (20,105)
                                ===================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                                                    June 30, 2005
                                -----------------------------------------------------------------------------------
                                   Less than 12 months           12 months or more                Total
                                -----------------------------------------------------------------------------------
                                     Market    Unrealized         Market    Unrealized         Market    Unrealized
                                     Value       Losses           Value       Losses           Value       Losses
                                -----------------------------------------------------------------------------------
                                                                 (In thousands)
<S>                             <C>           <C>            <C>           <C>            <C>           <C>
Held to Maturity:
   U.S. Government agency
   obligations ..............   $        --   $        --    $   101,428   $      (472)   $   101,428   $      (472)
   Trust preferred securities            --            --          1,080            (2)         1,080            (2)
                                -----------------------------------------------------------------------------------
        Total ...............   $        --   $        --    $   102,508   $      (474)   $   102,508   $      (474)
                                ===================================================================================
</TABLE>

At June 30,  2006  and  2005,  the  majority  of the  unrealized  losses  in the
investment  portfolio  were  comprised of securities  issued by U.S.  Government
sponsored  agencies.  The Company  believes  the  unrealized  losses   represent
temporary  declines  in value  and  that the  market  value  movements  in these
securities   are  reflective  of  the   movement  in  market   interest   rates,
particularly given the negligible inherent credit risk for these securities. The
unrealized  losses on equity  securities  and trust  preferred  securities  also
represent  temporary  declines in value and are  reflective  of the  movement in
market  interest rates,  as there has not been any  deterioration  in the credit
quality of the  issuers  of these  securities.  All  investment  securities  are
performing  and are  expected to continue  to perform in  accordance  with their
respective contractual terms and conditions.

D. Mortgage-Backed Securities

<TABLE>
<CAPTION>
                                                                  Gross         Gross        Estimated
                                                  Amortized    Unrealized    Unrealized     Fair Market
                                                    Cost          Gains        Losses          Value
                                                 ------------------------------------------------------
                                                                    (In thousands)
June 30, 2006
<S>                                              <C>           <C>           <C>            <C>
Ginnie Mae ...................................   $        55   $         3   $        --    $        58
Freddie Mac ..................................        28,384            83        (1,089)        27,378
Fannie Mae ...................................        34,511            72        (1,139)        33,444
Collateralized Mortgage Obligations/REMICs/IOs            13            --            --             13
                                                 ------------------------------------------------------
    Total mortgage-backed securities .........   $    62,963   $       158   $    (2,228)   $    60,893
                                                 ======================================================

<CAPTION>












                                                                  Gross         Gross        Estimated
                                                  Amortized    Unrealized    Unrealized     Fair Market
                                                    Cost          Gains        Losses          Value
                                                 ------------------------------------------------------
                                                                     (In thousands)
June 30, 2005
<S>                                              <C>           <C>           <C>            <C>
Ginnie Mae ...................................   $       151   $        12   $        --    $       163
Freddie Mac ..................................        35,232           391           (42)        35,581
Fannie Mae ...................................        42,657           615           (68)        43,204
Collateralized Mortgage Obligations/REMICs/IOs           161            --            --            161
                                                 ------------------------------------------------------
    Total mortgage-backed securities .........   $    78,201   $     1,018   $      (110)   $    79,109
                                                 ======================================================
</TABLE>


                                       59
<PAGE>

               PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

The amortized cost and estimated fair market value of mortgage-backed securities
held to maturity at June 30, 2006, by contractual maturity, are shown below.

                                                            June 30, 2006
                                                       -------------------------
                                                                      Estimated
                                                        Amortized    Fair Market
                                                          Cost          Value
                                                       -------------------------
                                                             (In thousands)
Maturing within one year ...........................   $         3   $         3
Maturing after one year but within five years ......         2,587         2,624
Maturing after five years but within ten years .....           797           809
Maturing after ten years ...........................        59,576        57,457
                                                       -------------------------
                                                       $    62,963   $    60,893
                                                       =========================

There were no sales of  mortgage-backed  securities  in the years ended June 30,
2006, 2005 and 2004.

The carrying value of mortgage-backed securities pledged were as follows:

                                                                   June 30,
                                                             -------------------
                                                                2006        2005
                                                             -------------------
                                                                (In thousands)
Pledged to secure:
   Federal Home Loan Bank of New York advances .........     $28,585     $29,561
   Other borrowings ....................................      23,324      15,154
   Public funds on deposit .............................         979         361
                                                             -------------------
                                                             $52,888     $45,076
                                                             ===================

The  following  tables  provide  gross  unrealized  losses and market  value for
mortgage-backed  securities,  aggregated  by issuer  and the  length of time the
individual  mortgage-backed securities have been in a continuous unrealized loss
position.

<TABLE>
<CAPTION>
                                                       June 30, 2006
                      -----------------------------------------------------------------------------------
                         Less than 12 months           12 months or more                Total
                      -----------------------------------------------------------------------------------
                           Market    Unrealized         Market    Unrealized         Market    Unrealized
                           Value       Losses           Value       Losses           Value       Losses
                      -----------------------------------------------------------------------------------
                                                        (In thousands)
<S>                   <C>           <C>            <C>           <C>            <C>           <C>
Freddie Mac .......   $       490   $        (5)   $    19,779   $    (1,084)   $    20,269   $    (1,089)
Fannie Mae ........        21,966          (782)         5,862          (357)        27,828        (1,139)
                      -----------------------------------------------------------------------------------
    Total .........   $    22,456   $      (787)   $    25,641   $    (1,441)   $    48,097   $    (2,228)
                      ===================================================================================

<CAPTION>

                                                        June 30, 2005
                      -----------------------------------------------------------------------------------
                         Less than 12 months           12 months or more                Total
                      -----------------------------------------------------------------------------------
                           Market    Unrealized         Market    Unrealized         Market    Unrealized
                           Value       Losses           Value       Losses           Value       Losses
                      -----------------------------------------------------------------------------------
                                                        (In thousands)
<S>                   <C>           <C>            <C>           <C>            <C>           <C>
Freddie Mac .......   $        --   $        --    $    24,443   $       (42)   $    24,443   $       (42)
Fannie Mae ........            --            --          7,363           (68)         7,363           (68)
                      -----------------------------------------------------------------------------------
    Total .........   $        --   $        --    $    31,806   $      (110)   $    31,806   $      (110)
                      ===================================================================================
</TABLE>

At June 30, 2006 and 2005,  mortgage-backed securities issued by Freddie Mac and
Fannie  Mae had  unrealized  losses as noted in the  above  table.  The  Company
believes the unrealized  losses represent  temporary  declines in value and that
the market value  movements in these   securities are reflective of the movement
in market interest rates, particularly given the negligible inherent credit risk
for these   securities.  All  mortgage-backed  securities are performing and are
expected to continue to perform in accordance with their respective  contractual
terms and conditions.


                                       60
<PAGE>

               PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

E.  Loans Receivable and Loans Held for Sale, Net

                                                           June 30,
                                                 ------------------------------
                                                    2006               2005
                                                 ------------------------------
                                                         (In thousands)
First Mortgage Loans:
  Conventional ...............................   $ 1,301,992        $ 1,147,798
  FHA insured/VA guaranteed ..................           455                691
                                                 ------------------------------
  Total one- to four-family ..................     1,302,447          1,148,489
  Commercial and multi-family ................       172,600            169,765
                                                 ------------------------------
Total first mortgage loans ...................     1,475,047          1,318,254
                                                 ------------------------------
Consumer:
  Second mortgages ...........................       153,024             91,147
  Home equity lines of credit ................        47,500             49,901
  Other ......................................         3,922              3,375
                                                 ------------------------------
Total consumer loans .........................       204,446            144,423
                                                 ------------------------------
Total loans ..................................     1,679,493          1,462,677
                                                 ------------------------------
Add (Less):
  Allowance for loan losses ..................        (5,888)            (6,050)
  Unamortized premium ........................           433                519
  Net deferred loan costs ....................        10,186              8,334
                                                 ------------------------------
                                                       4,731              2,803
                                                 ------------------------------
                                                 $ 1,684,224        $ 1,465,480
                                                 ==============================

At June 30,  2006,  there  was a  $217,000  one- to  four-family  mortgage  loan
included in loan held for sale and there was a commitment  to sell this loan. At
June 30, 2005,  there were  $4,826,000  of one- to  four-family  mortgage  loans
included in loans held for sale and these loans were sold during fiscal 2006.

Non-accruing  loans at June 30, 2006 and 2005 were  $1,780,000  and  $2,619,000,
respectively,  which  represents 0.11% and 0.18%,  respectively,  of total loans
outstanding.  The total  interest  income that would have been  recorded for the
years ended June 30, 2006 and 2005,  had these loans been current in  accordance
with their original  terms,  or since the date of origination if outstanding for
only part of the year, was approximately $36,000 and $79,000,  respectively.

At June 30, 2006 and 2005, there were no impaired loans.

The following is an analysis of the allowance for loan losses:

                                                     Year ended June 30,
                                            -----------------------------------
                                              2006          2005          2004
                                            -----------------------------------
                                                       (In thousands)
Balance, beginning of year ...........      $ 6,050       $ 6,249       $ 6,284
Provisions for loan losses ...........           --            --            --
Losses charged to allowance ..........         (162)         (199)          (35)
                                            -----------------------------------
Balance, end of year .................      $ 5,888       $ 6,050       $ 6,249
                                            ===================================

The Company's loan portfolio  consists primarily of loans secured by residential
and  commercial  real  estate  located  in  its  market  areas.  Therefore,  the
collectibility  of these  loans is  dependent  to a large  degree on the overall
strength of the New Jersey economy, as well as the specific strength of the real
estate sector.

At June 30, 2006 and 2005,  the  commercial  and  multi-family  real estate loan
portfolio totaled $172,600,000 and $169,765,000,  respectively.  These loans are
considered by management to be of somewhat greater risk of collectibility due to
their dependency on income  production.  Nearly all of the Company's  commercial
and multi-family real estate loans are  collateralized by real estate located in
New Jersey.  Commercial and  multi-family  real estate loans  collateralized  by
multi-family  or mixed use properties  were  $47,593,000 and $47,281,000 at June
30, 2006 and 2005,  respectively.  In addition,  at June 30, 2006 and 2005,  the
commercial and multi-family real estate loan portfolio  included  $1,265,000 and
$3,185,000, respectively, of lines of credit secured by non-real estate business
assets.  Furthermore,  there were $5,102,000


                                       61
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               PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

and  $5,439,000 of loans  outstanding  at June 30, 2006 and 2005,  respectively,
under  the  accounts  receivable  financing  program  for  small  and  mid-sized
businesses.  The remaining loans in this portfolio were  collateralized by other
types of non-residential, commercial real estate properties.

Loans  serviced for others,  consisting of one- to four-family  mortgage  loans,
totaled  approximately  $76,082,000  and  $69,062,000 at June 30, 2006 and 2005,
respectively.  Servicing  loans for  others  generally  consists  of  collecting
mortgage  payments,   maintaining  escrow  accounts,   disbursing   payments  to
investors,  collection  activities and  foreclosure  processing.  Loan servicing
income is  recorded  on the  accrual  basis  and  includes  servicing  fees from
investors and certain charges assessed to borrowers,  such as late payment fees.
In connection with these loans serviced for others,  the Company held borrowers'
escrow   balances  of  $816,000   and  $715,000  at  June  30,  2006  and  2005,
respectively.

F.  Premises and Equipment, Net

                                                                 June 30,
                                                           --------------------
                                                             2006        2005
                                                           --------------------
                                                               (In thousands)

Land ...................................................   $  5,577    $  5,577
Buildings and improvements .............................     18,599      18,326
Leasehold improvements .................................      2,335       2,316
Furniture and equipment ................................     16,395      15,758
                                                           --------------------
                                                             42,906      41,977
Less: accumulated depreciation and amortization ........     22,491      21,074
                                                           --------------------
                                                           $ 20,415    $ 20,903
                                                           ====================

G. Real Estate Owned

                                                                 June 30,
                                                           --------------------
                                                               2006        2005
                                                           --------------------
                                                               (In thousands)

Acquired by foreclosure or deed in lieu of foreclosure .   $     50    $     50
Allowance for losses on real estate owned ..............        (50)        (50)
                                                           --------------------
Real estate owned, net .................................   $     --    $     --
                                                           ====================

Results of real estate operations were as follows:

                                                          Year ended June 30,
                                                     ---------------------------
                                                       2006      2005      2004
                                                     ---------------------------
                                                             (In thousands)

Net gain (loss) on sales of real estate owned ....   $   (4)   $  158    $   57
Holding costs, net ...............................       (2)       (2)        1
Provision for losses on real estate owned ........       --        --        --
                                                     ---------------------------
Net gain (loss) from real estate operations ......   $   (6)   $  156    $   58
                                                     ==========================

Activity in the allowance for losses on real estate owned was as follows:

                                                        Year ended June 30,
                                                     --------------------------
                                                       2006      2005      2004
                                                     --------------------------
                                                           (In thousands)

Balance, beginning of year .......................   $   50    $   50    $   82
Provisions charged to operations .................       --        --        --
Losses charged to allowance ......................       --        --       (32)
                                                     --------------------------
Balance, end of year .............................   $   50    $   50    $   50
                                                     ==========================


                                       62
<PAGE>

               PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

H.  Deposits

<TABLE>
<CAPTION>
                                                    June 30, 2006                June 30, 2005
                                              ------------------------------------------------------
                                                               Weighted                  Weighted
                                                               Average                   Average
                                                  Amount    Interest Rate    Amount    Interest Rate
                                              ------------------------------------------------------
                                                               (Dollars in thousands)
<S>                                           <C>                 <C>     <C>                 <C>
Non-interest-bearing demand ...............   $   72,557                  $   71,769
Interest-bearing demand ...................       97,155          1.45%      105,011          0.95%
Money market accounts .....................      142,777          4.52        50,251          2.59
Savings accounts ..........................      300,247          2.68       385,360          2.53

Certificates with remaining maturities of:
    Within one year or less ...............      562,484          4.09       438,487          2.88
    After one year but within two years ...      139,658          4.13       157,017          3.51
    After two years but within three years        52,219          4.44        65,201          3.99
    After three years but within four years       34,099          4.21        29,313          4.16
    After four years but within five years        12,029          4.65        35,939          4.17
                                              ----------                  ----------
Total certificates ........................      800,489          4.13       725,957          3.23
Accrued interest payable ..................        1,363                       1,143
                                              ----------                  ----------
                                              $1,414,588          3.46%   $1,339,491          2.65%
                                              ==========                  ==========
</TABLE>

The aggregate  amount of certificates of deposit with a denomination of $100,000
or more was  approximately  $251,456,000  and  $214,377,000 at June 30, 2006 and
2005, respectively.

I. Federal Home Loan Bank of New York Advances and Other Borrowings

The following  table  presents  Federal Home Loan Bank of New York ("FHLB of New
York")  advances  by period  remaining  to the earlier of the  callable  date or
maturity date:

<TABLE>
<CAPTION>
                                                    June 30, 2006                June 30, 2005
                                              ------------------------------------------------------
                                                               Weighted                  Weighted
                                                               Average                   Average
                                                  Amount    Interest Rate    Amount    Interest Rate
                                              ------------------------------------------------------
                                                               (Dollars in thousands)
<S>                                           <C>                 <C>     <C>                 <C>
Within one year ...........................   $   30,465          5.32%   $  130,000          5.24%
After one year but within two years .......       50,000          5.22        40,465          5.51
After two years but within three years ....       75,000          4.50        55,000          5.49
After three years but within four years ...      190,000          5.77            --            --
After four years but within five years ....      110,000          5.86       140,000          6.46
After five years ..........................       10,000          4.48        50,000          5.61
                                              ----------                  ----------
                                              $  465,465          5.47%   $  415,465          5.75%
                                              ==========                  ==========
</TABLE>

The FHLB of New York  advances  are all  fixed  rate  borrowings  collateralized
either under a Listing Only pledge  agreement  by one- to  four-family  mortgage
loans  or with  investment  and  mortgage-backed  securities.  FHLB of New  York
advances  includes  $195.0  million of  convertible  advances with one-time call
features.

At June  30,  2006,  the  Company  had  available  from  the FHLB of New York an
overnight  repricing line of credit and a one-month  overnight repricing line of
credit, each in the amount of $100,000,000. Both credit lines renew annually and
currently expire in July 2006. Each line of credit has a variable interest rate.
At June 30, 2006, the Company had  $78,250,000 of overnight  borrowings from the
FHLB of New York with an interest rate of 5.42%. During fiscal 2006, the Company
incurred  a $1.35  million  penalty in  connection  with the  prepayment  of $35
million of FHLB of New York  advances  that had an average  rate of 5.95% and an
average remaining  maturity of 28 months.  These advances were replaced with $35
million  of FHLB of New York  advances  with an  average  rate of  4.20%  and an
average maturity of 43 months.  At June 30, 2005, the Company had $32,350,000 of
overnight  borrowings  from the FHLB of New York with


                                       63
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               PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

an interest  rate of 3.49%.  In addition,  the Company had  available  overnight
variable  repricing  lines of credit  with other  correspondent  banks  totaling
$120,000,000 on an unsecured  basis.  There were $55,900,000 of borrowings under
these  lines at June  30,  2006  with an  interest  rate of  5.38%.  There  were
$12,800,000  of  borrowings  under these lines at June 30, 2005 with an interest
rate of 3.50%. The Company also has a $12,000,000   unsecured  revolving line of
credit.  This line of credit has a variable  interest rate tied to 30-day LIBOR.
At June 30, 2006,  the Company had  $7,772,000 of borrowings  under this line of
credit with an interest  rate of 6.63%.  Borrowings  under this line at June 30,
2005 were $8,341,000 with an interest rate of 4.64%.

From time to time, the Company enters into sales of securities  under agreements
to repurchase ("reverse repurchase agreements").  These agreements are accounted
for as financing arrangements and the obligations to repurchase  securities sold
are reflected as Other borrowings in the accompanying Consolidated Statements of
Financial  Condition.  The reverse  repurchase  agreements are collateralized by
investment and mortgage-backed securities which continue to be carried as assets
by the Company,  with a carrying value of  $106,635,000  and  $57,414,000  and a
market  value  of  $101,595,000  and  $57,296,000  at June 30,  2006  and  2005,
respectively.  Based on the provisions of these reverse  repurchase  agreements,
counterparties  are not permitted to sell or repledge the collateral  pledged by
the Company.

The following table presents reverse  repurchase  agreements by period remaining
to the maturity date:

<TABLE>
<CAPTION>
                                                    June 30, 2006                June 30, 2005
                                              ------------------------------------------------------
                                                               Weighted                  Weighted
                                                               Average                   Average
                                                Amount      Interest Rate    Amount    Interest Rate
                                              ------------------------------------------------------
                                                               (Dollars in thousands)
<S>                                           <C>                 <C>     <C>                 <C>
Within one year ...........................   $   88,271          4.60%   $   15,000          2.88%
After one year but within five years ......       10,000          3.59        39,461          3.42
                                              ----------                  ----------
                                              $   98,271          4.50%   $   54,461          3.27%
                                              ==========                  ==========
</TABLE>

The average  balance of reverse  repurchase  agreements for the years ended June
30, 2006 and 2005 was $76,454,000 and $61,898,000, respectively.

J. Junior Subordinated Deferrable Interest Debentures

In 2001,  PennFed formed PennFed Capital Trust  II ("Trust II"),  which on March
28, 2001 sold $12.0 million of 10.18% cumulative trust preferred securities in a
private  transaction  exempt from registration under the Securities Act of 1933,
as amended  (the "Act").  Trust II used the proceeds  from the sale of its trust
preferred  securities and from the sale of $0.4 million of its common securities
to PennFed to purchase  $12.4 million of 10.18% junior  subordinated  deferrable
interest  debentures  issued by PennFed,  which are the sole assets of Trust II.
These junior subordinated deferrable interest  debentures mature in 2031 and are
redeemable at any time after ten years.  The  obligations of PennFed  related to
Trust II  constitute a full and  unconditional  guarantee by PennFed of Trust II
obligations under its trust preferred securities. PennFed used the proceeds from
the junior  subordinated  deferrable  interest  debentures for general corporate
purposes,  including a $4.2 million capital  contribution to the Bank to support
growth.

In 2003, PennFed formed PennFed Capital Trust  III ("Trust III"),  which on June
2,  2003  sold  $30.0  million  of  variable  rate  cumulative  trust  preferred
securities  in a private  transaction  exempt from  registration  under the Act.
Trust III used the proceeds from the sale of its trust preferred  securities and
from the sale of $0.9  million of its common  securities  to PennFed to purchase
$30.9  million  of  variable  rate  junior   subordinated   deferrable  interest
debentures  issued by  PennFed,  which are the sole  assets of Trust III.  These
junior  subordinated  deferrable  interest  debentures  mature  in 2033  and are
redeemable at any time after five years.  The interest rate on the $30.0 million
of  trust  preferred  securities  and  the  $30.9  million  junior  subordinated
deferrable  interest debentures resets quarterly and was 8.58% and 6.66% at June
30, 2006 and 2005, respectively. The obligations of PennFed related to Trust III
constitute  a  full  and  unconditional   guarantee  by  PennFed  of  Trust  III
obligations under its trust preferred securities. PennFed used the proceeds from
the junior  subordinated  deferrable interest debentures together with available
cash to redeem $34.5  million of 8.90%  cumulative  trust  preferred  securities
issued by PennFed Capital Trust I in October 1997.


                                       64
<PAGE>

               PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

K. Employee Benefit Plans

401(k) Employee Stock Ownership Plan ("KSOP")

Effective July 1, 2005, the Company merged the Penn Federal  Savings Bank 401(k)
Plan with the Employee Stock  Ownership Plan ("ESOP"),  forming the KSOP.  While
the KSOP is one plan,  the two  separate  components  of the 401(k) Plan and the
ESOP remain.

Under the 401(k)  Plan,  all  employees  of the  Company who work at least 1,000
hours per year and are at least 21 years old are  eligible to  participate.  For
the years ended June 30,  2006 and 2005,  the  Company  made safe harbor  profit
sharing contributions of $596,000 and $641,000, respectively. For the year ended
June 30,  2004,  the  Company  made a  discretionary  Company  match of employee
contributions  of  $106,000.  At June 30, 2006 and 2005,  the 401(k) Plan assets
included  common  stock of the  Company  with a market  value  of  $922,000  and
$926,000, respectively.

In connection with the Conversion,  the Company established an ESOP for eligible
employees. All full-time employees are eligible to participate in the ESOP after
they attain age 21 and  complete  one year of service  during which they work at
least 1,000 hours.  Employees  were credited for years of service to the Company
prior to the adoption of the ESOP for  participation  and vesting purposes.  The
Bank's   contribution   is  allocated   among   participants  on  the  basis  of
compensation.  Each participant's account is credited with cash or shares of the
Company's  common  stock  based upon  compensation  earned  during the year with
respect to which the  contribution  is made.  After  completing  seven  years of
service,  a   participant  will be 100%  vested in his/her  ESOP  account.  ESOP
participants  are entitled to receive  distributions  from the ESOP account only
upon termination of service, which includes retirement and death.

The ESOP  borrowed  $4,760,000  from PennFed and purchased  1,904,000  shares of
common  stock  issued  in  the  Conversion.  This  loan  has  been  repaid  from
discretionary  contributions  by the  Bank to the  ESOP  trust.  The  Bank  made
contributions  to the ESOP in  amounts  at  least  equal  to the  principal  and
interest  requirement of the debt, based on a ten year term and an interest rate
of 7.46%.  Annual  contributions  to the ESOP, which were used to fund principal
and interest payments on the ESOP debt, totaled $692,000.  At June 30, 2004, the
loan was paid in full and there were no unallocated shares.

For the year ended June 30, 2004, the Bank recorded compensation expense related
to the ESOP of $4,045,000. The compensation expense related to the ESOP included
$3,453,000  for a valuation  adjustment  to reflect the  increase in the average
fair value of  allocated  shares for the period from the time of purchase to the
allocation  date. The ESOP allocated  257,660 shares for the year ended June 30,
2004 to participants in the plan.

Stock Option Plan

In connection with the Conversion, the Company established the 1994 Stock Option
and Incentive Plan ("Option Plan"). The Option Plan was subsequently  amended to
increase the number of shares of common stock  available  for awards  thereunder
from 2,380,000 to 3,342,492.  The exercise  price for the options  granted under
the  Option  Plan  cannot be less than the fair  market  value of the  Company's
common stock on the date of the grant. The options are granted, and the terms of
the options  are  established,  by the  Compensation  Committee  of the Board of
Directors.  Transactions  during the years  ended June 30,  2006,  2005 and 2004
relating to the Option Plan are as follows:


                                       65
<PAGE>

               PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

                                                                      Weighted
                                                                       Average
                                                                      Exercise
                                                       Options          Price
                                                    ----------------------------
Balance, June 30, 2003 ..........................      2,223,206      $     5.36
     Granted ....................................             --              --
     Exercised ..................................       (686,962)           2.78
     Expired ....................................             --              --
     Forfeited ..................................             --              --
                                                    ----------------------------
Balance, June 30, 2004 ..........................      1,536,244            7.05
     Granted ....................................             --              --
     Exercised ..................................       (431,300)           3.10
     Expired ....................................             --              --
     Forfeited ..................................             --              --
                                                    ----------------------------
Balance, June 30, 2005 ..........................      1,104,944            7.83
     Granted ....................................             --              --
     Exercised ..................................       (205,798)           5.21
     Expired ....................................             --              --
     Forfeited ..................................             --              --
                                                    ----------------------------
Balance, June 30, 2006 ..........................        899,146      $     8.43
                                                    ============================

All options  previously granted were accounted for in accordance with Accounting
Principles  Board  ("APB")  Opinion  No.  25,  "Accounting  for Stock  Issued to
Employees."  Accordingly,  no  compensation  expense has been recognized for the
stock options.  Pro forma net income and earnings per share calculated as if the
Company  had  accounted  for  employee  stock  options  and  other  stock  based
compensation  under the fair value  method  would  equal the  amounts  presented
within the Consolidated  Statements of Income for each of the years in the three
year period  ended June 30,  2006,  as all grants had fully vested prior to June
30, 2003.

Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based
Payment"  ("SFAS 123R")  applies to all awards  granted after its effective date
and to awards  modified,  repurchased,  or cancelled  after that date.  In April
2005,  the SEC  deferred  the  adoption of SFAS 123R until the first fiscal year
beginning after June 15, 2005 (i.e., for the Company,  the fiscal year beginning
July 1, 2005). The standard permits different  transition methods of recognizing
compensation  expense.  The  Company has  adopted  SFAS 123R and will  recognize
compensation  expense for (i) any new awards granted after July 1, 2005 and (ii)
the portion of any  outstanding  awards for which the requisite  service has not
been rendered as of July 1, 2005,  based on the  grant-date  fair value of those
awards  calculated for purposes of SFAS 123R pro forma  disclosures.  At July 1,
2005,  the  Company  had no stock  options  outstanding  for which  compensation
expense would be recognized  under SFAS 123R. No options were granted during the
year ended June 30, 2006.

At June 30, 2006, 899,146 options were exercisable, with exercise prices ranging
from $6.94 to $8.59. At June 30, 2005, 1,104,944 options were exercisable,  with
exercise prices ranging from $3.97 to $8.59. At June 30, 2004, 1,536,244 options
were exercisable, with exercise prices ranging from $2.63 to $8.59.

The following table summarizes  information about stock options  outstanding and
exercisable as of June 30, 2006:

                                                                  Weighted
                                      Number                       Average
    Exercise                        Outstanding                   Remaining
     Prices                      at June 30, 2006                    Life
--------------------------------------------------------------------------------
      $6.94                            77,200                     1.06 years
      $8.41                           103,846                     3.08
      $8.59                           718,100                     1.44
                                   -----------
  $6.94 to $8.59                      899,146                     1.60 years
                                   ===========


                                       66
<PAGE>

               PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

Supplemental Executive Retirement Plan and Directors' Retirement Plan

The Company  currently  provides for a Supplemental  Executive  Retirement  Plan
("SERP")  and a  Directors'  Retirement  Plan ("DP") for  certain key  executive
employees  and  directors.  Benefits  provided  are based  primarily on years of
service and  compensation  or fees. Both plans are unfunded and at June 30, 2006
and 2005, the benefit obligations of $1,167,000 and $698,000,  respectively, are
included  in  Accounts  payable  and  other   liabilities  in  the  Consolidated
Statements of Financial  Condition.  At June 30, 2006, the  assumptions  used in
calculating the benefit obligations included a 4% compensation increase rate and
a discount  rate of 6%. The  discount  rate  assumption  was compared to certain
corporate  bond yields,  such as Moody's bond  indices,  for  reasonableness.  A
discount rate of 6% was selected for the June 30, 2006 measurement date. At June
30, 2005, the assumptions used in calculating the benefit obligations included a
4%  compensation  increase  rate and a discount rate of 7%. The  accounting  for
these  postretirement  benefits is in  accordance  with  Statement  of Financial
Accounting  Standards No. 87, "Employers'  Accounting for Pensions." The Company
has not made any contributions to these plans during the fiscal years ended June
30, 2006 and 2005 and does not expect to make any  contributions  to these plans
during the next fiscal year.

Net periodic  pension cost for the Company's  SERP and DP included the following
components:

<TABLE>
<CAPTION>
                                                       Year ended June 30,
                                     ------------------------------------------------------
                                            2006               2005               2004
                                     ------------------------------------------------------
                                       SERP       DP     SERP        DP      SERP        DP
                                     ------------------------------------------------------
                                                         (In thousands)
<S>                                  <C>      <C>      <C>       <C>       <C>       <C>
Service cost .....................   $  145   $   --   $  245    $   43    $  227    $   40
Interest cost ....................      161       22       27         5         9         2
Amortization of prior service cost      110       28       (6)       (2)       (6)       (2)
Loss recognized ..................        2        1       --        --        --        --
                                     ------------------------------------------------------
Net periodic pension expense .....   $  418   $   51   $  266    $   46    $  230    $   40
                                     ======================================================
</TABLE>

The  following  are the  weighted  average  assumptions  used to  determine  net
periodic benefit cost:

                                                      Year ended June 30,
                                                 -------------------------------
                                                   2006        2005        2004
                                                 -------------------------------
Discount rate ..............................       6.00%       7.00%       3.00%
Rate of compensation increase ..............       4.00        4.00        4.00

The following are the  weighted-average  assumptions  used to determine  benefit
obligations:

                                                            Year ended June 30,
                                                            --------------------
                                                              2006        2005
                                                            --------------------
Discount rate ..........................................      6.00%       7.00%
Rate of compensation increase ..........................      4.00        4.00

Long-Term Care Insurance Program

In January  2005,  the Bank  adopted a long-term  care  insurance  program to be
offered on a voluntary  basis to all  employees,  officers and  directors of the
Bank.  The program  provides a nursing  home care benefit at $200 per day, to be
adjusted for inflation.  Certain  officers of the Bank and certain  non-employee
directors  participate  in  this  program.   These  participating  officers  and
directors  will be provided with this benefit for their  lifetimes at no cost to
them,  with the Bank paying the related  premiums  over a ten-year  period.  All
other  employees  who  choose  to  participate   must  pay  the  cost  of  their
participation.  With policies  becoming  effective May 1, 2005, total expense to
the Bank for the year ended June 30,  2005 was  $7,000.  For the year ended June
30, 2006, total expense was $44,000.  The other employees may elect to pay their
premiums  over ten years,  over  twenty  years or over their  lifetimes  and may
choose to  receive  the  benefit  for three  years,  for five years or for their
lifetimes.


                                       67
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               PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

L. Income Taxes

The income tax provision is comprised of the following components:

                                                        Year ended June 30,
                                                  ------------------------------
                                                     2006       2005       2004
                                                  ------------------------------
                                                         (In thousands)
Current provision .............................   $  6,672   $  7,450   $  6,380
Deferred expense ..............................        739      1,219        163
                                                  ------------------------------
Total income tax provision ....................   $  7,411   $  8,669   $  6,543
                                                  ==============================

A reconciliation  of the Federal statutory income tax provision to the effective
income tax provision is as follows:

                                                      Year ended June 30,
                                                 ------------------------------
                                                   2006       2005       2004
                                                 ------------------------------
                                                         (In thousands)
Income tax provision at Federal statutory rate   $  7,283   $  8,457   $  6,510
Amortization of intangible assets .............        --         --          1
State and local income tax provision ..........       491        417        180
Income on BOLI ................................      (338)      (241)      (179)
Other, net ....................................       (25)        36         31
                                                 ------------------------------
Total income tax provision ....................  $  7,411   $  8,669   $  6,543
                                                 ==============================

Income taxes payable are included in Accounts  payable and other  liabilities in
the  Consolidated  Statements of Financial  Condition at June 30, 2006 and 2005.
The  financial  statements  at June 30,  2006 also  include a net  deferred  tax
liability  of $526,000  that has been  recorded  for the  temporary  differences
between the tax basis and the financial statement carrying amounts of assets and
liabilities.  The source of these  temporary  differences and their deferred tax
effect at June 30, 2006 and 2005 is as follows:

<TABLE>
<CAPTION>
                                                                                    June 30,
                                                                              --------------------
                                                                                 2006        2005
                                                                              --------------------
                                                                                 (In thousands)
<S>                                                                           <C>         <C>
Deferred tax assets:
  Allowance for loan losses ...............................................   $  2,405    $  2,468
  Environmental reserves ..................................................        148         134
  Deposit premium intangible ..............................................      1,853       2,347
  SERP and DP accrual .....................................................        477         285
  Unrealized loss on investment securities available for sale .............         48          --
  New Jersey Alternative Minimum Assessment credit ........................      1,081         641
  State net operating loss carryforward ...................................        582       1,406
                                                                              --------------------
Total deferred tax assets .................................................      6,594       7,281
Valuation allowance for state deferred tax assets .........................     (1,574)     (2,063)
                                                                              --------------------
Deferred tax asset after valuation allowance ..............................      5,020       5,218
                                                                              --------------------
Deferred tax liabilities:
  Net deferred loan costs .................................................      4,853       4,151
  Depreciation ............................................................        292         550
  Purchase accounting .....................................................        155         155
  Servicing asset .........................................................        246         197
  Unrealized gain on investment securities available for sale .............         --          66
                                                                              --------------------
Total deferred tax liabilities ............................................      5,546       5,119
                                                                              --------------------
Net deferred tax asset (liability) ........................................   $   (526)   $     99
                                                                              ====================
</TABLE>

Pursuant to SFAS 109, the Company is not required to provide  deferred  taxes on
the Bank's tax loan loss  reserve as of December  31,  1987.  The amount of this
reserve  on  which  no  deferred  taxes  have  been  provided  is  approximately
$16,300,000.  This reserve could be  recognized  as taxable  income and create a
current and/or  deferred tax liability using


                                       68
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               PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

the  income  tax rates  then in effect if one of the  following  occur:  (1) the
Bank's retained  earnings  represented by this reserve are used for dividends or
distributions  in  liquidation  or for any other  purpose  other  than to absorb
losses from bad debts;  (2) the Bank fails to qualify as a bank,  as provided by
the Internal Revenue Code; or (3) there is a change in federal tax law.

The Company has state net  operating  loss  carryforwards  of $6.5 million which
expire in various  years  through  2011.  The Company  has  provided a valuation
allowance for the state tax benefit of net  operating  loss  carryforwards,  tax
credits and other  temporary  differences.  Management  has estimated that it is
more likely than not that it will not be able to utilize  these  deferred  state
income tax benefits.

M. Commitments and Contingencies

Lease  Commitments  -- At June 30, 2006,  minimum rental  commitments  under all
noncancellable operating leases with initial or remaining terms of more than one
year are as follows:

                                                                  Minimum Rent
Year ending June 30,                                              (In thousands)
--------------------                                             ---------------
 2007 ........................................................          $   746
 2008 ........................................................              669
 2009 ........................................................              500
 2010 ........................................................              389
 2011 ........................................................              376
 2012 and later ..............................................            1,939
                                                                        -------
                                                                        $ 4,619
                                                                        =======

Rent  expense  under  long-term  operating  leases for  certain  branch  offices
amounted to  $795,000,  $717,000 and $472,000 for the years ended June 30, 2006,
2005 and 2004,  respectively.  Rental income of $530,000,  $532,000 and $534,000
for the  years  ended  June 30,  2006,  2005 and 2004,  respectively,  is netted
against  occupancy  expense  in  the  Consolidated  Statements  of  Income.  The
Company's  leases  generally  have  escalation  terms  based on certain  defined
indexes.

Financial  Instruments With Off-Balance  Sheet Risk -- The Company is a party to
financial  instruments  with  off-balance  sheet  risk in the  normal  course of
business. These financial instruments are not recorded on the balance sheet when
either the exchange of the  underlying  asset or liability has not yet occurred.
These  financial  instruments  include  commitments  to extend credit and unused
lines of credit.  These  instruments  involve,  to varying degrees,  elements of
credit  and  interest  rate  risk in  excess  of the  amount  recognized  in the
Consolidated Statements of Financial Condition.

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

The following  summarizes  the notional  amount of off-balance  sheet  financial
instruments:

                                                                June 30,
                                                        ------------------------
                                                           2006            2005
                                                        ------------------------
                                                             (In thousands)
Commitments to extend credit ...................         $30,346         $35,711
Unused lines of credit .........................          90,688          88,789
Commitments to sell loans ......................              --           1,447
Commitments to purchase loans ..................           6,274              --

Commitments  to extend  credit and unused  lines of credit are  legally  binding
agreements  to  lend to a  customer  as long as  there  is no  violation  of any
condition established in the contract. Commitments and lines of credit generally
have fixed expiration dates or other termination clauses and may require payment
of a fee.  Since some of the  commitments  are expected to expire  without being
drawn upon, the total  commitment  amounts do not necessarily  represent  future
cash requirements.  The Company evaluates each customer's credit worthiness on a
case-by-case  basis.  The amount of  collateral  obtained  by the  Company  upon
extension of credit is based on management's  credit evaluation of the borrower.
Collateral  held varies but may include  mortgages on commercial and residential
real estate and other tangible properties.


                                       69
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               PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

Commitments to purchase loans  represent  agreements to purchase loans through a
correspondent  relationship established by the Company with another institution.
The Company currently purchases newly originated one- to four-family residential
mortgages  secured  by  properties  primarily  located in New  Jersey.  Prior to
purchase,  the Company  applies the same  underwriting  criteria used in its own
originations.

Other  Contingencies  -- Penn  Federal  Savings  Bank and  ExxonMobil  have been
ordered by the New Jersey Department of Environmental  Protection to investigate
and remediate soil and ground water  pollution that may have been generated at a
branch  location  that was  formerly a gasoline  service  station.  Penn Federal
Savings Bank and ExxonMobil have entered into a cost sharing  arrangement  under
which ExxonMobil will supervise the  investigation  and remediation and the cost
will be  shared  equally.  Based on  information  then  available,  the  Company
recorded a $298,000  (pretax) charge during the fourth quarter of fiscal 2004 to
accrue  its  share  of the  estimated  cost.  At June  30,  2006  and  2005,  an
environmental  liability of $328,000 was included in Accounts  payable and other
liabilities  in the Company's  Consolidated  Statements of Financial  Condition.
Management  believes  the total  current  liability of $328,000  represents  the
probable liability at this time.

The Company is a defendant in certain  claims and legal  actions  arising in the
ordinary course of business. At the present time, management does not anticipate
losses on any of these  claims or actions  which  would have a material  adverse
effect on the accompanying consolidated financial statements.

N. Stockholders' Equity and Regulatory Capital

On September 29, 2004, the Company's  Board of Directors  declared a two-for-one
stock split in the form of a 100% stock dividend, payable on October 29, 2004 to
common  stockholders  of  record as of  October  15,  2004.  All share and share
related amounts reflect the effect of the stock dividend.

Stock Repurchases

During the year ended June 30, 2006, the Company  repurchased  626,300 shares of
its outstanding  common stock. The prices paid for the repurchased shares ranged
from  $17.10 to $19.75 per share,  for a total cost of  $11,633,000.  During the
year  ended  June 30,  2005,  the  Company  repurchased  731,800  shares  of its
outstanding  common stock at prices ranging from $13.30 to $17.25 per share, for
a total cost of  $11,280,000.  During the year ended June 30, 2004,  the Company
repurchased  792,200  shares of its  outstanding  common stock at prices ranging
from $13.84 to $18.03 per share, for a total cost of $12,908,000.  During fiscal
2004, the Company changed its state of incorporation  from Delaware to Maryland.
Under the laws of the State of Maryland,  shares  repurchased are not considered
treasury stock.  Rather, the shares acquired constitute  authorized but unissued
shares. Accordingly, as of June 30, 2004, the Company has  reclassified the cost
of treasury  stock by reducing  common  stock,  additional  paid-in  capital and
retained earnings based on the proceeds received for stock in the initial public
offering.

At June 30, 2006,  the Company had a repurchase  plan under which it had not yet
completed all approved repurchases.  This repurchase plan was publicly announced
January 25, 2006 and  authorized the Company to repurchase up to 5%, or 650,000,
of its outstanding  shares over the following 18 months. At June 30, 2006, there
were 414,700 shares yet to be purchased under the plan.

Stockholder Protection Rights Plan

On March 21, 1996, the Board of Directors of the Company (the "Board") adopted a
Stockholder  Protection  Rights Plan ("Rights  Plan") and declared a dividend of
one common share purchase right  ("Right") for each share of common stock of the
Company  outstanding  on April 1, 1996 and each share issued after that date and
prior to the expiration or  redemption of the Rights. Until it is announced that
a person or group has  acquired 15% or more of the  outstanding  common stock of
the  Company  ("Acquiring  Person") or has  commenced a tender  offer that could
result in such  person or group  owning 15% or more of such  common  stock,  the
Rights will initially be redeemable for $0.01 each, will be evidenced  solely by
the  Company's  common stock  certificates,  will  automatically  trade with the
Company's common stock and will not be exercisable.

Upon  announcement  that any person or group has become an Acquiring  Person and
unless the Board acts to redeem the Rights,  then ten  business  days after such
announcement  (the "Flip-in Date"),  each Right (other than Rights  beneficially
owned by any Acquiring Person or transferee  thereof,  which Rights become void)
will entitle the holder to purchase,


                                       70
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               PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

for the $67.50 exercise price, a number of shares of the Company's  common stock
having  an  aggregate  market  value of  $135.00.  In  addition,  if,  after the
Acquiring Person gains control of the Board, the Company is involved in a merger
with any person or sells  more than 50% of its  assets or  earning  power to any
person (or has entered into an agreement to do either of the foregoing), and, in
the case of a merger, an Acquiring Person will receive different  treatment than
other  stockholders,  each Right will  entitle its holder to  purchase,  for the
$67.50  exercise  price, a number of shares of common stock of such other person
having an  aggregate  market value of $135.00.  If any person or group  acquires
between 15% and 50% of the Company's common stock, the Board may, at its option,
require the Rights to be exchanged  for common stock of the Company.  The Rights
generally  may be redeemed by the Board for $0.01 per Right prior to the Flip-in
Date.

Regulatory Capital Requirements

The Bank is subject to various regulatory capital  requirements  administered by
the OTS.  Failure to meet minimum capital  requirements  could result in certain
mandatory and possible  discretionary  actions by the OTS that,  if  undertaken,
could have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory   framework for prompt corrective
action, the Bank must meet specific quantitative capital guidelines.

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the Bank to maintain  minimum amounts and ratios of tangible  capital of
not less than  1.5% of  tangible  assets,  core  capital  of not less than 4% of
adjusted  tangible  assets  and  risk-based  capital  of  not  less  than  8% of
risk-weighted  assets.  As of June 30,  2006 and 2005,  the Bank met all capital
adequacy requirements to which it was subject.

As  of  its  last   regulatory   examination,   the  Bank  was   categorized  as
"well-capitalized"   under  the  prompt  corrective  action  framework.   To  be
considered as "well-capitalized," the Bank must maintain a core capital ratio of
not less than 5% and a risk-based  capital ratio of not less than 10%. There are
no conditions or events since that  notification  that management  believes have
changed the Bank's category.

The Bank's regulatory  capital amounts and ratios are presented in the following
table.

<TABLE>
<CAPTION>
                                                                                          To Be Well
                                                                                       Capitalized Under
                                                               For Minimum Capital     Prompt Corrective
                                                Actual          Adequacy Purposes      Action Provisions
                                         ------------------------------------------------------------------
                                          Amount     Ratio       Amount     Ratio       Amount     Ratio
                                         ------------------------------------------------------------------
                                                              (Dollars in thousands)
<S>                                      <C>            <C>     <C>            <C>     <C>          <C>
As of June 30, 2006
   Tangible capital, and ratio to
    adjusted total assets ............   $168,746       7.33%   $ 34,535       1.50%        N/A        N/A
   Tier 1 (core) capital, and ratio to
    adjusted total assets ............   $168,746       7.33%   $ 92,094       4.00%   $115,117       5.00%
   Tier 1 (core) capital, and ratio to
    risk-weighted assets .............   $168,746      13.34%        N/A        N/A    $ 75,871       6.00%
   Risk-based capital, and ratio to
    risk-weighted assets .............   $174,633      13.81%   $101,161       8.00%   $126,451      10.00%

As of June 30, 2005
   Tangible capital, and ratio to
    adjusted total assets ............   $169,765       8.28%   $ 30,750       1.50%        N/A        N/A
   Tier 1 (core) capital, and ratio to
    adjusted total assets ............   $169,765       8.28%   $ 82,001       4.00%   $102,501       5.00%
   Tier 1 (core) capital, and ratio to
    risk-weighted assets .............   $169,765      15.29%        N/A        N/A    $ 66,614       6.00%
   Risk-based capital, and ratio to
    risk-weighted assets .............   $175,880      15.84%   $ 88,819       8.00%   $111,024      10.00%
</TABLE>

The Bank's management believes that, with respect to regulations,  the Bank will
continue to meet its minimum capital  requirements  in the  foreseeable  future.
However, events beyond the control of the Bank, such as increased interest rates



                                       71
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               PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

or a  downturn  in the  economy  in areas  where the Bank has most of its loans,
could  adversely  affect future earnings and,  consequently,  the ability of the
Bank to meet its future minimum capital requirements.

The previous table reflects  information for the Bank.  Savings and loan holding
companies,  such as PennFed, are not subject to capital requirements for capital
adequacy  purposes or for prompt corrective  action  requirements.  Bank holding
companies, however, are subject to capital requirements established by the Board
of Governors of the Federal Reserve System (the "FRB").

Dividends and Other Capital Distributions

Federal  regulations impose certain  limitations on the payment of dividends and
other capital  distributions  by the Bank.  Under current  regulations,  savings
institutions,  such  as the  Bank,  are  generally  permitted  to  make  capital
distributions  without OTS approval  during any  calendar  year equal to 100% of
calendar  year-to-date  net income plus retained net income for the two previous
calendar years. A savings  institution,  such as the Bank, which is a subsidiary
of a savings  and loan  holding  company,  must  file a notice  of the  proposed
dividend or other  capital  distribution  with the OTS at least 30 days prior to
the  declaration  of such dividend or  distribution.  At June 30, 2006, the Bank
could have paid dividends totaling approximately $5.9 million.

O. Computation of Earnings Per Share ("EPS")

The computation of EPS is presented in the following  table. All share and share
related  amounts  reflect the effect of a stock  dividend  described in Note N -
Stockholders' Equity and Regulatory Capital.

<TABLE>
<CAPTION>

                                                                      For the year ended June 30,
                                                            -----------------------------------------------
                                                                 2006             2005             2004
                                                            -----------------------------------------------
                                                            (Dollars in thousands, except per share amounts)

<S>                                                          <C>              <C>              <C>
Net income ............................................      $    13,398      $    15,494      $    12,058
                                                             =============================================
Number of shares outstanding:
Weighted average shares issued and outstanding ........       13,053,853       13,612,502       13,645,770
Less:  Average shares held by the ESOP ................               --               --        1,904,000
Plus:  ESOP shares released or committed to be released               --               --        1,807,026
                                                             ---------------------------------------------
Average basic shares ..................................       13,053,853       13,612,502       13,548,796
Plus:  Average common stock equivalents ...............          397,152          398,182          900,374
                                                             ---------------------------------------------
Average diluted shares ................................       13,451,005       14,010,684       14,449,170
                                                             =============================================

Earnings per common share:
    Basic .............................................      $      1.03      $      1.14      $      0.89
                                                             =============================================
    Diluted ...........................................      $      1.00      $      1.11      $      0.83
                                                             =============================================
</TABLE>


                                       72
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               PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

P. Disclosure About Fair Value of Financial Instruments

The carrying  amounts (or notional  amounts)  and  estimated  fair values of the
Company's financial instruments at June 30, 2006 and 2005 were as follows:

<TABLE>
<CAPTION>
                                                                    June 30, 2006                  June 30, 2005
                                                            ----------------------------------------------------------
                                                              Carrying      Estimated         Carrying      Estimated
                                                               Amount       Fair Value         Amount       Fair Value
                                                            ----------------------------------------------------------
                                                                                   (In thousands)
<S>                                                         <C>             <C>             <C>             <C>
Financial assets:
    Cash and cash equivalents ........................      $   16,614      $   16,614      $   15,220      $   15,220
    Investment securities ............................         445,296         425,599         410,509         411,737
    Mortgage-backed securities .......................          62,963          60,893          78,201          79,109
    FHLB of New York stock ...........................          27,714          27,714          22,391          22,391
                                                            ----------------------------------------------------------
    Total cash and investments .......................         552,587         530,820         526,321         528,457
                                                            ----------------------------------------------------------
    Loans held for sale ..............................             217             218           4,826           4,864
    Loans receivable, less allowance for loan losses .       1,684,007       1,621,189       1,460,654       1,459,988
                                                            ----------------------------------------------------------
    Total loans ......................................       1,684,224       1,621,407       1,465,480       1,464,852
    Accrued interest receivable, net .................          11,145          11,145           9,808           9,808
                                                            ----------------------------------------------------------
Total financial assets ...............................      $2,247,956      $2,163,372      $2,001,609      $2,003,117
                                                            ==========================================================
Financial liabilities:
    Deposits .........................................      $1,414,588      $1,408,261      $1,339,491      $1,339,483
    FHLB of New York advances ........................         465,465         464,946         415,465         443,927
    Other borrowings .................................         240,193         239,730         107,952         107,566
    Junior subordinated deferrable interest debentures          42,126          45,372          42,082          45,338
    Mortgage escrow funds ............................          11,877          11,877          10,398          10,398
                                                            ----------------------------------------------------------
Total financial liabilities ..........................      $2,174,249      $2,170,186      $1,915,388      $1,946,712
                                                            ==========================================================

<CAPTION>
                                                                    June 30, 2006                  June 30, 2005
                                                            ----------------------------------------------------------
                                                             Notional        Estimated        Notional       Estimated
                                                              Amount        Fair Value         Amount       Fair Value
                                                            ----------------------------------------------------------
                                                                                   (In thousands)
<S>                                                         <C>             <C>             <C>             <C>
Off-balance sheet financial instruments:
Commitments to extend credit .........................      $   30,346      $       --      $   35,711      $       --
Unused lines of credit ...............................          90,688              --          88,789              --
Commitments to sell loans ............................              --              --           1,447              --
Commitments to purchase loans ........................           6,274              --              --              --
</TABLE>

The following  methods and  assumptions  were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate fair
value:

Cash and Cash  Equivalents  -- For these  short-term  instruments,  the carrying
amount is a reasonable estimate of fair value.

Investment  Securities and  Mortgage-Backed  Securities -- For these securities,
fair  values are based on quoted  dealer  market  prices or  subscribed  pricing
services.

FHLB of New York Stock -- For this security,  the carrying amount, which is par,
is a reasonable estimate of fair value. All transactions in the capital stock of
the FHLB of New York are executed at par.

Loans Held for Sale -- Fair value is based on the actual committed sales price.

Loans  Receivable  -- Fair values are  estimated  for  portfolios  of loans with
similar  financial  characteristics.  The total loan  portfolio is first divided
into performing,  held for sale and non-performing categories.  Performing loans
are then  segregated  into adjustable and fixed rate interest terms.  Fixed rate
loans  are  segmented  by  type,  such  as  residential  real  estate  mortgage,
commercial real estate and consumer  loans.  Adjustable rate loans are segmented
by  repricing   characteristics.  Residential  loans are  further  segmented  by
maturity.


                                       73
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               PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

For loans,  fair value is calculated by discounting  scheduled future cash flows
through estimated maturity using a discount rate equivalent to the rate at which
the  Company  would  currently  make  loans  which are  similar  with  regard to
collateral,  maturity and type of  borrower.  The  discounted  value of the cash
flows  is  reduced  by  a  credit  risk   adjustment   based  on  internal  loan
classifications.  Based  on  the  current  composition  of  the  Company's  loan
portfolio,  as well as both past experience and current economic  conditions and
trends,  future cash flows are adjusted by prepayment  assumptions which shorten
the estimated remaining time to maturity and, therefore,  impact the fair market
valuation.

Accrued  Interest  Receivable  --  For  this  asset,  the  carrying  value  is a
reasonable estimate of fair value.

Deposits -- The fair value of deposits with no stated maturity, such as savings,
money market and other demand accounts, is equal to the amount payable on demand
as of June 30, 2006 and 2005.  Time deposits are segregated by type and original
term.  The fair  value of time  deposits  is  based on the  discounted  value of
contractual  cash flows.  The discount rate is equivalent to the rate  currently
offered by the Company for deposits of similar type and maturity.

FHLB of New York  Advances  -- The fair  value of FHLB of New York  advances  is
based on the discounted  value of contractual  cash flows.  The discount rate is
equivalent to the rate currently  offered by the FHLB of New York on  borrowings
of similar type and maturity.

Other Borrowings -- For these short-term borrowings,  the fair value is based on
the discounted  value of contractual cash flows. The discount rate is equivalent
to the rate currently offered for borrowings of similar type and maturity.

Junior Subordinated Deferrable Interest Debentures -- For these securities, fair
value is based on quoted market prices for similar securities.

Mortgage Escrow Funds -- For these short-term  liabilities,  the carrying amount
is a reasonable estimate of fair value.

Commitments  to Extend  Credit and  Unused  Lines of Credit -- The fair value of
commitments to extend credit is estimated to be zero since the fees collected on
commitments to extend credit  approximates the amount of costs incurred.  Unused
lines of credit have a zero fair value because the rates  associated  with these
lines are market rates.

Commitments  to Sell Loans -- The fair  value of  commitments  to sell  loans is
estimated based on the change in the interest rate environment  between the rate
lock date and the  Consolidated  Statement  of  Financial  Condition  date.  The
estimated fair value at June 30, 2005 was not significant.

Commitments to Purchase Loans -- The estimated fair value is not significant due
to the short-term nature of these commitments.

Q. Related Party Transactions

In the ordinary  course of business,  the Company has at times made loans to and
engaged  in other  financial  transactions  with  its  directors,  officers  and
employees.  Such  transactions are made on the same terms as those prevailing at
the time for  comparable  transactions  with others and do not involve more than
normal risk of collectibility.

The  following  sets forth an analysis of loans,  all of which are  current,  to
directors, officers and employees:

                                                               June 30,
                                                     ---------------------------
                                                        2006               2005
                                                     ---------------------------
                                                            (In thousands)
Balance, beginning of year .....................     $ 8,004            $ 7,102
New loans granted ..............................       1,251              2,419
Repayments/reductions ..........................      (1,072)            (1,517)
                                                     --------------------------
Balance, end of year ...........................     $ 8,183            $ 8,004
                                                     ==========================

In addition to the above amount of loans,  at June 30, 2006 and 2005,  there was
$43,000 and $45,000, respectively, of outstanding balances on overdraft checking
lines for directors, officers and employees.


                                       74
<PAGE>

               PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

R. Recently Issued Accounting Standards

In May 2005, the Financial  Accounting Standards Board ("FASB") issued Statement
of  Financial  Accounting  Standards  No.  154,  "Accounting  Changes  and Error
Corrections  - a  replacement  of APB Opinion No. 20 and FASB  Statement  No. 3"
("SFAS  154").  SFAS 154 changes the  requirements  for the  accounting  for and
reporting  of a voluntary  change in  accounting  principle.  SFAS 154  requires
retrospective  application  to  prior  periods'  financial  statements  of  such
changes,  unless it is  impracticable  to determine  either the  period-specific
effects or the  cumulative  effect of the change.  When it is  impracticable  to
determine the   period-specific  effects of an accounting  change on one or more
individual  prior periods  presented,  SFAS 154 requires that the new accounting
principle  be  applied  to the  balances  of assets  and  liabilities  as of the
beginning  of  the  earliest  period  for  which  retrospective  application  is
practicable and that a  corresponding  adjustment be made to the opening balance
of retained  earnings  for that period  rather than being  reported in an income
statement.  When it is  impracticable  to  determine  the  cumulative  effect of
applying  a change  in  accounting  principle  to all  prior  periods,  SFAS 154
requires  that the new  accounting  principle  be applied as if it were  adopted
prospectively from the earliest date practicable. SFAS 154 will be effective for
accounting  changes and  corrections  of errors made in fiscal  years  beginning
after December 15, 2005.

In March 2006,  the FASB issued  Statement  of  Financial  Accounting  Standards
("SFAS") No. 156,  "Accounting for Servicing of Financial Assets." SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and  Extinguishments
of  Liabilities,"  establishes,  among  other  things,  the  accounting  for all
separately recognized servicing assets and servicing  liabilities.  SFAS No. 156
amends SFAS No. 140 to require that all separately  recognized  servicing assets
and servicing  liabilities be initially  measured at fair value, if practicable.
SFAS No. 156  permits,  but does not  require,  the  subsequent  measurement  of
separately  recognized servicing assets and servicing liabilities at fair value.
SFAS No. 156 is effective in the first fiscal year beginning after September 15,
2006 with earlier adoption  permitted.  The Company does not expect the adoption
of  SFAS  No.  156 to  have a  material  impact  on its  consolidated  financial
condition, results of operations or cash flows.

In June 2006,  the FASB  issued  FASB  Interpretation  No. 48,  "Accounting  for
Uncertainty  in Income  Taxes"  ("FIN 48").  FIN 48  establishes  a  recognition
threshold and measurement  for income tax positions  recognized in the financial
statements in accordance  with Statement of Financial  Accounting  Standards No.
109,  "Accounting  for Income Taxes." FIN 48  establishes a two-step  evaluation
process for tax positions.  The first step is recognition,  to determine whether
it  is  more-likely-than-not   that  a  tax  position  will  be  sustained  upon
examination,  including  resolution of related appeals or litigation  processes,
based on the technical  merits of the position.  The second step is measurement.
If the tax position meets the more-likely-than-not  recognition threshold, it is
measured and recognized in the financial statements as the largest amount of the
tax benefit that is greater than 50% likely of being realized. If a tax position
does not meet the  more-likely-than-not  recognition  threshold,  the benefit of
that position is not recognized in the financial statements.  Tax positions that
meet the more-likely-than-not recognition threshold at the effective date of FIN
48 may be recognized or,  continue to be  recognized,  upon the adoption of this
Interpretation. The cumulative effect of applying the provisions of FIN 48 shall
be reported as an adjustment to the opening balance of retained earning for that
fiscal year. FIN 48 is effective for fiscal years  beginning  after December 15,
2006.  The Company is evaluating the impact of adoption of FIN 48 and is unable,
at this time, to quantify the impact,  if any, to retained  earnings at the time
of adoption.


                                       75
<PAGE>

               PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

S. Condensed Financial  Information of PennFed Financial Services,  Inc. (Parent
Company Only)

The following are the condensed financial statements for PennFed, parent company
only,  as of June 30, 2006 and 2005 and for the years ended June 30, 2006,  2005
and 2004 and  should  be read in  conjunction  with the  Consolidated  Financial
Statements and Notes thereto.

Condensed Statements of Financial Condition

<TABLE>
<CAPTION>
                                                                       June 30,
                                                               ----------------------
                                                                 2006          2005
                                                               ----------------------
<S>                                                            <C>           <C>
                                                                    (In thousands)
Assets
Cash cash and cash equivalents ..........................      $     27      $     22
Investment securities held to maturity, at amortized cost        10,871        10,899
Investment in subsidiaries ..............................       170,413       171,530
Prepaid trust preferred securities expenses .............         1,174         1,218
Accrued interest receivable .............................           282           282
Other assets ............................................         1,696         2,720
                                                               ----------------------
                                                               $184,463      $186,671
                                                               ======================

Liabilities and Stockholders' Equity
Junior subordinated deferrable interest debentures ......      $ 43,300      $ 43,300
Intercompany loan payable ...............................         8,325         8,400
Borrowings under unsecured revolving line of credit .....         7,772         8,341
Accrued interest payable ................................           238           202
Other accrued expenses and other liabilities ............         1,407         2,374
Stockholders' equity ....................................       123,421       124,054
                                                               ----------------------
                                                               $184,463      $186,671
                                                               ======================
</TABLE>

Condensed Statements of Income

<TABLE>
<CAPTION>
                                                                                       Year ended June 30,
                                                                            --------------------------------------
                                                                               2006           2005           2004
                                                                            --------------------------------------
                                                                                        (In thousands)
<S>                                                                         <C>            <C>            <C>
Income
Interest income on intercompany balances .............................      $      2       $     --       $     49
Interest income on investment securities .............................           947            950            926
Other income .........................................................             2              1             --
                                                                            --------------------------------------
                                                                                 951            951            975
Expenses
Interest expense on junior subordinated deferrable interest debentures         3,612          3,002          2,654
Interest on intercompany loan ........................................           671            498            402
Interest on borrowings under unsecured revolving line of credit ......           365            289            143
Other expenses .......................................................           603            791            578
                                                                            --------------------------------------
                                                                               5,251          4,580          3,777
                                                                            ---------------------------------------
Loss before undistributed net income of subsidiaries .................        (4,300)        (3,629)        (2,802)
Equity in undistributed net income of subsidiaries ...................        16,233         17,884         13,907
                                                                            --------------------------------------
Income before income taxes ...........................................        11,933         14,255         11,105
Income tax benefit ...................................................        (1,465)        (1,239)          (953)
                                                                            --------------------------------------
Net income ...........................................................      $ 13,398       $ 15,494       $ 12,058
                                                                            ======================================
</TABLE>


                                       76
<PAGE>

               PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

Condensed Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                        Year ended June 30,
                                                                             -------------------------------------
                                                                                2006           2005           2004
                                                                             -------------------------------------
                                                                                        (In thousands)
<S>                                                                         <C>            <C>            <C>
Cash Flows From Operating Activities:
Net income ...........................................................      $ 13,398       $ 15,494       $ 12,058
Adjustments to reconcile net income to net cash used in
     operating activities:
       Equity in undistributed net income of subsidiaries ............       (16,233)       (17,884)       (13,907)
       Amortization of investment securities premium .................            28             25             23
       Increase (decrease) in accrued interest payable, net of accrued
          interest receivable ........................................            36             46            (77)
       (Increase) decrease in prepaid trust preferred securities
           expense and other assets ..................................         1,068         (1,266)          (584)
       Increase (decrease) in other accrued expenses and
           other liabilities .........................................          (967)         1,404            624
                                                                            --------------------------------------
       Net cash used in operating activities .........................        (2,670)        (2,181)        (1,863)
                                                                            --------------------------------------
Cash Flows From Investing Activities:
  Proceeds from maturities of investment securities ..................            --             --          1,605
  Purchases of investment securities held to maturity ................            --             --         (2,000)
  Dividends received from subsidiary bank ............................        17,455         15,955         12,478
  Proceeds from principal repayment of ESOP loan .....................            --             --            644
                                                                            --------------------------------------
       Net cash provided by investing activities .....................        17,455         15,955         12,727
                                                                            --------------------------------------
Cash Flows From Financing Activities:
  Increase (decrease) in unsecured revolving line of credit ..........          (569)        (1,551)         2,598
  Increase (decrease) in intercompany loan ...........................           (75)            --            300
  Cash dividends paid ................................................        (3,575)        (2,924)        (2,650)
  Repurchases of outstanding shares, net of reissuances ..............       (10,561)        (9,944)       (10,998)
                                                                            --------------------------------------
       Net cash used in financing activities .........................       (14,780)       (14,419)       (10,750)
                                                                            --------------------------------------
Net increase (decrease) in cash and cash equivalents .................             5           (645)           114
Cash and cash equivalents, beginning of year .........................            22            667            553
                                                                            --------------------------------------
Cash and cash equivalents, end of year ...............................      $     27       $     22       $    667
                                                                            ======================================
</TABLE>


                                       77
<PAGE>

               PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

T.  Quarterly Financial Data (Unaudited)

<TABLE>
<CAPTION>
                                                                 Quarter ended
                                           ----------------------------------------------------------
                                                      2005                          2006
                                           ----------------------------------------------------------
                                           September 30   December 31        March 31        June 30
                                           ----------------------------------------------------------
                                                   (In thousands, except per share amounts)
<S>                                        <C>            <C>            <C>            <C>
Total interest and dividend income .....   $     27,683   $     28,350   $     28,973   $     30,270
Total interest expense .................         17,491         18,715         19,762         21,814
                                           ----------------------------------------------------------
Net interest and dividend income .......         10,192          9,635          9,211          8,456
Non-interest income ....................          3,986          1,099          1,215          1,213
Non-interest expenses ..................          7,753          5,388          5,660          5,397
Income tax expense .....................          2,293          1,892          1,717          1,509
                                           ----------------------------------------------------------
   Net income ..........................   $      4,132   $      3,454   $      3,049   $      2,763
                                           ==========================================================

Net income per common share:
   Basic ...............................   $       0.31   $       0.26   $       0.24   $       0.21
                                           ==========================================================
   Diluted .............................   $       0.30   $       0.26   $       0.23   $       0.21
                                           ==========================================================

<CAPTION>

                                                                 Quarter ended
                                           ----------------------------------------------------------
                                                      2004                           2005
                                           ----------------------------------------------------------
                                           September 30    December 31       March 31        June 30
                                           ----------------------------------------------------------
                                                    (In thousands, except per share amounts)
<S>                                        <C>            <C>            <C>            <C>
Total interest and dividend income .....   $     25,805   $     25,999   $     26,167   $     26,751
Total interest expense .................         14,734         15,060         15,300         16,290
                                           ----------------------------------------------------------
Net interest and dividend income .......         11,071         10,939         10,867         10,461
Non-interest income ....................          1,100          1,355          1,244          1,297
Non-interest expenses ..................          6,119          6,181          6,143          5,728
Income tax expense .....................          2,264          2,133          2,114          2,158
                                           ----------------------------------------------------------
   Net income ..........................   $      3,788   $      3,980   $      3,854   $      3,872
                                           ==========================================================

Net income per common share:
   Basic ...............................   $       0.28   $       0.29   $       0.28   $       0.29
                                           ==========================================================
   Diluted .............................   $       0.27   $       0.28   $       0.28   $       0.28
                                           ==========================================================
</TABLE>


                                       78
<PAGE>

               PENNFED FINANCIAL SERVICES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

U. Restatement of Prior Year Consolidated Statement of Cash Flow

The  Consolidated  Statement  of Cash Flows for the year ended June 30, 2004 was
restated in the Company's fiscal 2005 Form 10-K to correct the classification of
sales  of  loans  initially  originated  by the  Company  for  retention  in its
portfolio (as opposed to loans originated for the purpose of resale).  Such cash
flows had been  accounted  for in the  Consolidated  Statement  of Cash Flows as
operating  activities  and should have been reported as investing  activities in
accordance with Statement of Financial  Accounting Standards No. 102, "Statement
of Cash Flows, Exemption of Certain Enterprises and Classification of Cash Flows
from Certain Securities Acquired for Resale."

The following table sets forth the data as previously  reported in the Company's
fiscal 2004 Form 10-K and the data as adjusted:

<TABLE>
<CAPTION>
                                                                   For the year ended June 30, 2004
                                                                   ---------------------------------
                                                                    As Previously
                                                                      Reported         As Restated
                                                                   ---------------------------------
                                                                             (In thousands)
<S>                                                                 <C>              <C>
Cash Flows from Operating Activities:
    Proceeds from sales of loans held for sale ..................   $      88,214    $      48,667
    Originations of loans held for sale .........................              --          (42,266)
    Net cash provided by operating activities ...................          97,805           15,992

Cash Flows from Investing Activities:
    Net outflow from loan originations net of
        principal repayments of loans ...........................         (99,034)         (56,769)
    Proceeds from loans sold ....................................           3,181           42,729
    Net cash used in investing activities .......................        (249,596)        (167,783)

Supplemental Schedule of Non-Cash Activities:
    Transfer of  loans receivable to loans held for sale, at cost          76,142           33,876
</TABLE>


                                       79
<PAGE>

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

No information is required to be disclosed under this item.

Item 9A. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures:

An evaluation of the Company's disclosure controls and procedures (as defined in
Rule  13a-15(e)  under the  Securities  Exchange  Act of 1934 (the  "Act"))  was
carried out as of June 30, 2006 under the supervision and with the participation
of the Company's Chief Executive  Officer,  Chief Financial  Officer and several
other members of the Company's senior management.  The Company's Chief Executive
Officer and Chief  Financial  Officer  concluded  that, as of June 30, 2006, the
Company's disclosure controls and procedures were effective in ensuring that the
information  required to be  disclosed by the Company in the reports it files or
submits  under the Act is (i)  accumulated  and  communicated  to the  Company's
management  (including the Chief Executive Officer and Chief Financial  Officer)
as appropriate to allow timely decisions  regarding required disclosure and (ii)
recorded,  processed,  summarized and reported within the time periods specified
in the SEC's rules and forms.

(b) Changes in Internal Controls:

During the quarter  ended June 30,  2006,  no change  occurred in the  Company's
internal control over financial  reporting that has materially  affected,  or is
reasonably  likely to materially  affect,  the Company's  internal  control over
financial reporting.

The Company  does not expect that its  disclosure  controls and  procedures  and
internal control over financial  reporting will prevent all error and all fraud.
A control procedure, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control procedure
are met.  Because of the inherent   limitations  in all control  procedures,  no
evaluation of controls can provide  absolute  assurance  that all control issues
and instances of fraud,  if any,  within the Company have been  detected.  These
inherent limitations include the realities that judgments in decision-making can
be faulty,  and that  breakdowns  can occur  because of simple error or mistake.
Additionally,  controls  may be  circumvented  by the  individual  acts  of some
persons, by collusion of two or more people, or by override of the control.  The
design of any control  procedure also is based in part upon certain  assumptions
about the  likelihood of future  events,  and there can be no assurance that any
design will succeed in achieving  its stated  goals under all  potential  future
conditions;  over time,  controls  may become  inadequate  because of changes in
conditions,  or the degree of  compliance  with the policies or  procedures  may
deteriorate.  Because of the inherent  limitations in a  cost-effective  control
procedure, misstatements due to error or fraud may occur and not be detected.

(c) Management's Annual Report on Internal Control Over Financial Reporting:

The annual report of management on the  effectiveness of the Company's  internal
control over financial  reporting and the  attestation  report thereon issued by
the Company's independent  registered public accounting firm are set forth under
"Report of Management on Internal Control Over Financial  Reporting" and "Report
of  Independent  Registered  Public  Accounting  Firm on Internal  Control  Over
Financial Reporting" under Item 8. Financial Statements and Supplementary Data.

Item 9B. Other Information

No information is required to be disclosed under this item.


                                       80
<PAGE>

                                    PART III

Item 10. Directors and Executive Officers of the Registrant

Information Concerning Directors and Executive Officers

Information  required by this item  concerning  Directors of the  Registrant  is
incorporated  herein  by  reference  from  the  Registrant's   definitive  Proxy
Statement for the Annual Meeting of Stockholders scheduled to be held on October
26, 2006,  except for information  contained under the headings "Audit Committee
Reports,"  "Compensation  Committee Report on Executive Compensation" and "Stock
Performance Presentation," a copy of which will be filed not later than 120 days
after  the close of the  fiscal  year.  For  information  required  by this item
concerning Executive Officers of the Registrant who are not also Directors,  see
"Executive Officers" in Part I of this Annual Report on Form 10-K.

Section 16(a) Beneficial Ownership Reporting Compliance

Information  required  by this item  concerning  compliance  with the  reporting
requirements  of  Section  16(a)  of the  Securities  Exchange  Act of  1934  by
Directors,  Officers  and ten percent  beneficial  owners of the  Registrant  is
incorporated  herein  by  reference  from  the  Registrant's   definitive  Proxy
Statement for the Annual Meeting of Stockholders scheduled to be held on October
26,  2006, a copy of which will be filed not later than 120 days after the close
of the fiscal year.

Code of Ethics

The  Registrant  has  adopted a code of ethics  that  applies  to its  principal
executive officer,  principal financial officer,   principal accounting officer,
and persons performing similar functions,  and to all of its other employees and
directors.  A copy  of the  Registrant's  code of  ethics  is  available  on its
Internet  website,  at  www.pennfsb.com,   under  "Investor  Relations"  on  the
"Corporate Governance" page of the website.

Item 11. Executive Compensation

Information  required  by  this  item  concerning   executive   compensation  is
incorporated  herein  by  reference  from  the  Registrant's   definitive  Proxy
Statement for the Annual Meeting of Stockholders scheduled to be held on October
26, 2006,  except for   information  contained under the headings  "Compensation
Committee   Report   on   Executive   Compensation"   and   "Stock   Performance
Presentation,"  a copy of which  will be filed not later than 120 days after the
close of the fiscal year.

Item 12.  Security  Ownership of Certain  Beneficial  Owners and  Management and
Related Stockholder Matters

Information  required  by this item  concerning  security  ownership  of certain
beneficial  owners and management is incorporated  herein by  reference from the
Registrant's  definitive  Proxy Statement for the Annual Meeting of Stockholders
scheduled to be held on October 26, 2006, except for information contained under
the  headings  "Compensation  Committee  Report on Executive  Compensation"  and
"Stock  Performance  Presentation," a copy of which will be filed not later than
120 days after the close of the fiscal year.


                                       81
<PAGE>

The following  table sets forth  information as of June 30, 2006 with respect to
compensation plans under which shares of Company common stock were issued.

<TABLE>
<CAPTION>


                                           Equity Compensation Plan Information

                                                                                                          Number of Shares
                                                                                                         Remaining Available
                                                                                                         for Future Issuance
                                                                                                            Under Equity
                                                   Number of Shares to                                   Compensation Plans
                                                     be Issued Upon            Weighted Average           (Excluding Shares
                                                       Exercise of             Exercise Price of          Reflected in the
Plan Category                                      Outstanding Options        Outstanding Options           First Column)
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>                         <C>                           <C>
Equity compensation plans approved
   by stockholders(1) .......................         899,146                     $8.43                         --
Equity compensation plans not approved
   by stockholders ..........................             N/A                       N/A                         N/A
Total .......................................         899,146                     $8.43                         --
</TABLE>

-----------------------
(1)   The only equity  compensation  plan approved by  stockholders  under which
      there are  outstanding  awards is the  Company's  1994  Stock  Option  and
      Incentive Plan.

Item 13. Certain Relationships and Related Transactions

Information  required by this item concerning certain  relationships and related
transactions  is  incorporated   herein  by  reference  from  the   Registrant's
definitive  Proxy Statement for the Annual Meeting of Stockholders  scheduled to
be held on October 26, 2006, except for information contained under the headings
"Compensation Committee Report on Executive Compensation" and "Stock Performance
Presentation,"  a copy of which  will be filed not later than 120 days after the
close of the fiscal year.

Item 14. Principal Accountants Fees and Services

Information  required by this item  concerning  principal  accountants  fees and
services is incorporated  herein by reference from the  Registrant's  definitive
Proxy Statement for the Annual Meeting of  Stockholders  scheduled to be held on
October  26,  2006,  a copy of which will be filed not later than 120 days after
the close of the fiscal year.


                                       82
<PAGE>

                                     PART IV

Item 15. Exhibits and Financial Statement Schedules

      (a) (1) Financial Statements:

      The following  information  appearing in Part II, Item 8 of this Form 10-K
        is incorporated herein by reference.

      Reports of Independent Registered Public Accounting Firms
            Consolidated  Statements of Financial Condition at June 30, 2006 and
             2005
            Consolidated Statements of Income for the Years Ended June 30, 2006,
             2005 and 2004
            Consolidated  Statements of Comprehensive Income for the Years Ended
             June 30, 2006, 2005 and 2004
            Consolidated  Statements of Changes in Stockholders'  Equity for the
             Years Ended June 30, 2006, 2005 and 2004
            Consolidated  Statements  of Cash Flows for the Years Ended June 30,
             2006, 2005 and 2004
            Notes to Consolidated Financial Statements

      (a) (2) Financial Statement Schedules:

      All financial  statement schedules have been omitted as the information is
      not required under the related instructions or is not applicable.


                                       83
<PAGE>

(a) (3) Exhibits:

<TABLE>
<CAPTION>
                                                    Exhibit Index

   Regulation                                                                                                         Reference to
      S-K                                                                                                              Prior Filing
    Exhibit                                                                                                             or Exhibit
    Number                                             Document                                                          Number
------------------------------------------------------------------------------------------------------------------------------------
<S>            <C>                                                                                                   <C>
     2         Plan of acquisition, reorganization, arrangement, liquidation or succession                                None
     3 (i)     Articles of Incorporation                                                                                   (a)
     3 (ii)    Bylaws                                                                                                      (a)
     4         Instruments defining the rights of security holders, including indentures                                   (b)
     4 (i)     Stockholder Protection Rights Agreement                                                                     (c)
    10         Material contracts:
               (i) 1994 Amended and Restated Stock Option and Incentive Plan                                               (d)
               (ii) Employment Agreement with Joseph L. LaMonica                                                           (e)
               (iii) Employment Agreement with Patrick D. McTernan                                                         (e)
               (iv) Employment Agreement with Jeffrey J. Carfora                                                           (e)
               (v) Employment Agreement with Claire M. Chadwick                                                            (e)
               (vi) Employment Agreement with Maria F. Magurno                                                             (e)
               (vii) Supplemental Executive Retirement Plan                                                                (f)
                     (a) First Amendment to the Supplemental Executive Retirement Plan                                     (g)
                     (b) Second Amendment to the Supplemental Executive Retirement Plan                                    (h)
               (viii) Amended and Restated Supplemental Executive Death Benefit Plan                                       (h)
               (ix) Outside Directors' Retirement Plan                                                                     (f)
               (x) Form of Consulting Agreement                                                                            (f)
               (xi) Description of Named Executive Officer Salary and Bonus Arrangements                                   (i)
               (xii) Description of Director Fees                                                                          (i)
               (xiii) Description of Long-Term Care Insurance Program                                                      (i)
    11         Statement re: computation of per share earnings                                                             (j)
    12         Statements re: computation ratios                                                                            12
    14         Code of Ethics                                                                                              (k)
    16         Letter re: change in certifying accountant                                                                 None
    18         Letter re: change in accounting principles                                                                 None
    19         Report furnished to security holders                                                                       None
    21         Subsidiaries of the registrant                                                                              21
    22         Published report regarding matters submitted to vote of security holders                                   None
    23         Consents of independent registered public accounting firm and counsel
                   (a) Consent of KPMG LLP                                                                                23.1
                   (b) Consent of Deloitte & Touche LLP                                                                   23.2
    24         Power of Attorney                                                                                          None
    31.1       Certification Required by Securities Exchange Act of 1934 Rule 13a-14(a) (Chief Executive Officer)         31.1
    31.2       Certification Required by Securities Exchange Act of 1934 Rule 13a-14(a) (Chief Financial Officer)         31.2
    32         Certifications Required by Section 1350 of Title 18 of the United States Code                               32
    99         Additional Exhibits                                                                                   Not applicable
</TABLE>

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

   (a)Included as an appendix to the Company's definitive proxy statement under
      the Securities Exchange Act of 1934, filed with the Securities and
      Exchange Commission on September 22, 2003 (File No. 0-24040). Such
      previously filed document is hereby incorporated by reference in
      accordance with Item 601 of Regulation S-K.

   (b)The Company hereby agrees to furnish the Securities and Exchange
      Commission, upon request, the instruments defining the rights of the
      holders of each issue of the Company's long-term debt.

   (c)Filed as an exhibit to the Company's Registration Statement on Form 8-A
      under the Securities Exchange Act of 1934, filed with the Securities and
      Exchange Commission on March 28, 1996 as amended on Form 8-A/A (the "Form
      8-A/A") filed with the Securities and Exchange Commission on February 11,
      1998, as further amended on Form 8-A/A-2 (the "Form 8-A/A-2") filed with
      the Securities and Exchange Commission on October 14, 1998 and as further
      amended on Form 8-A/A-3 (the "Form 8-A/A-3") filed with the Securities and
      Exchange Commission on March 1, 2004. The First Amendment to the
      Stockholders Protection Rights Agreement is filed as an exhibit to the
      Form 8-A/A, the Second Amendment to the Stockholders Protection Rights
      Agreement is filed as an exhibit to the Form 8-A/A-2, the Third Amendment
      to the Stockholder Protection Rights Agreement is filed as an exhibit to
      the Current Report on Form


                                       84
<PAGE>

      8-K filed by the Company with the Securities and Exchange Commission on
      October 29, 2003 and the Fourth Amendment to the Stockholder Protection
      Rights Agreement is filed as an exhibit to the Form 8-A/A-3. These
      documents are hereby incorporated by reference in accordance with Item 601
      of Regulation S-K.

   (d)Filed as an exhibit to the Company's Form 10-K under the Securities
      Exchange Act of 1934, filed with the Securities and Exchange Commission on
      September 24, 2001 (File No. 0-24040). Such previously filed document is
      hereby incorporated by reference in accordance with Item 601 of Regulation
      S-K.

   (e)Filed as an exhibit to the Company's Current Report on Form 8-K under the
      Securities Exchange Act of 1934, filed with the Securities and Exchange
      Commission on September 15, 2004 (File No. 0-24040). Such previously filed
      document is hereby incorporated by reference in accordance with Item 601
      of Regulation S-K.

   (f)Filed as an exhibit to the Company's Form 10-K under the Securities
      Exchange Act of 1934, filed with the Securities and Exchange Commission on
      September 22, 2003 (File No. 0-24040). Such previously filed document is
      hereby incorporated by reference in accordance with Item 601 of Regulation
      S-K.

   (g)Filed as an exhibit to the Company's Form 10-Q under the Securities
      Exchange Act of 1934, filed with the Securities and Exchange Commission on
      February 17, 2004 (File No. 0-24040). Such previously filed document is
      hereby incorporated by reference in accordance with Item 601 of Regulation
      S-K.

   (h)Filed as exhibits to the Company's Current Report on Form 8-K under the
      Securities Exchange Act of 1934, filed with the Securities and Exchange
      Commission on February 14, 2005 (File No. 0-24040). Such previously filed
      document is hereby incorporated by reference in accordance with Item 601
      of Regulation S-K.

   (i)Filed as an exhibit to the Company's Form 10-K under the Securities
      Exchange Act of 1934, filed with the Securities and Exchange Commission on
      September 13, 2005 (File No. 0-24040). Such previously filed document is
      hereby incorporated by reference in accordance with Item 601 of Regulation
      S-K.

   (j)Refer to Note O - Computation of Earnings Per Share ("EPS") in the Notes
      to Consolidated Financial Statements included in the June 30, 2006 Form
      10-K.

   (k)Available on the Company's website at www.pennfsb.com.


                                       85
<PAGE>




                                   SIGNATURES


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

<TABLE>
<CAPTION>
<S>                                               <C>
                                                  PENNFED FINANCIAL SERVICES, INC.



Date: September 13, 2006                          By:   /s/ Joseph L. LaMonica
                                                      ---------------------------------
                                                        Joseph L. LaMonica
                                                        President and Chief
                                                        Executive Officer
                                                        (Duly Authorized Representative)
<CAPTION>

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



<S>                                               <C>
By: /s/ Joseph L. LaMonica                        By: /s/ William C. Anderson
    ------------------------------------------        ---------------------------------
      Joseph L. LaMonica                                William C. Anderson
      President, Chief Executive Officer                Chairman of the Board
      and Director
      (Principal Executive Officer)

Date: September 13, 2006                          Date: September 13, 2006


By: /s/ Patrick D. McTernan                       By: /s/ Amadeu L. Carvalho
    ------------------------------------------        ---------------------------------
      Patrick D. McTernan                               Amadeu L. Carvalho
      Senior Executive Vice President, General          Director
      Counsel, Secretary and Director

Date: September 13, 2006                          Date: September 13, 2006


By: /s/ Marvin D. Schoonover                      By: /s/ Mario Teixeira, Jr.
    ------------------------------------------        --------------------------------
      Marvin D. Schoonover                              Mario Teixeira, Jr.
      Director                                          Director

Date: September 13, 2006                          Date: September 13, 2006


By: /s/ Claire M. Chadwick
    ------------------------------------------
      Claire M. Chadwick
      Senior Executive Vice President,
      Chief Financial Officer and Controller
      (Principal Financial and Accounting Officer)

Date: September 13, 2006

</TABLE>

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