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, 2005

                                       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)

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

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

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

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

           Securities Registered Pursuant to Section 12(g) of the Act:
                     Common Stock, par value $.01 per share
                          Common Stock Purchase Rights
                                (Title of class)

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

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

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

      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 National Market as of December 31, 2004, was $188,416,000. (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 2, 2005, there were issued and outstanding 13,256,056
shares of the Registrant's Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

      Part III of Form 10-K - Portions  of the Proxy  Statement  for 2005 Annual
Meeting of Stockholders.

<PAGE>

                PennFed Financial Services, Inc. and Subsidiaries
                         2005 Annual Report on Form 10-K
                                Table of Contents

                                                                            Page
                                                                          Number
                                                                          ------
PART I
ITEM 1.    Business .......................................................    1
ITEM 2.    Properties .....................................................   21
ITEM 3.    Legal Proceedings ..............................................   21
ITEM 4.    Submission of Matters to a Vote of Security Holders ............   22

PART II
ITEM 5.    Market for the Registrant's Common Equity and Related
              Stockholder Matters .........................................   23
ITEM 6.    Selected Financial Data ........................................   24
ITEM 7.    Management's Discussion and Analysis of Financial Condition
              and Results of Operations ...................................   26
ITEM 7A.   Quantitative and Qualitative Disclosures About Market Risk .....   44
ITEM 8.    Financial Statements and Supplementary Data ....................   45
ITEM 9.    Changes in and Disagreements With Accountants on Accounting
              and Financial Disclosure ....................................   78
ITEM 9A.   Controls and Procedures ........................................   78
ITEM 9B.   Other Information ..............................................   78

PART III
ITEM 10.   Directors and Executive Officers of the Registrant .............   79
ITEM 11.   Executive Compensation .........................................   79
ITEM 12.   Security Ownership of Certain Beneficial Owners and
              Management and Related Stockholder Matters ..................   79
ITEM 13.   Certain Relationships and Related Transactions .................   80
ITEM 14.   Principal Accountants Fees and Services ........................   80

PART IV
ITEM 15.   Exhibits and Financial Statement Schedules .....................   81

<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 National 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
many types of checking accounts,  as well as certificate  accounts.  The Company
generally solicits deposits in its primary market areas.

At June 30, 2005,  the Company had total assets of  approximately  $2.1 billion,
deposits of $1.3 billion, borrowings of $565 million and stockholders' equity of
$124 million.

Penn  Federal,  through its  wholly-owned  subsidiary,  Penn  Savings  Insurance
Agency, Inc., offers insurance and uninsured non-deposit  investment 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   conditions  in  the  Company's  market  area,  changes  in  laws  and
regulations  and in policies of 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 25
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  comprised 28% of total Bank deposits at June 30, 2005.
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, 2005. 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,  2005,  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 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  general policy is to originate
such loans 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  and  approved  by the Senior Vice  President  of the
Commercial/Business  Banking Group. Any commercial and multi-family  real estate
loan or relationship of $750,000 and over must be approved by the Executive Loan
Committee  which  consists  of the CEO,  COO,  CFO,  the EVP of the  Residential
Lending Group and the SVP of the Commercial/Business Banking Group. The approval
of the Company'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, 2005,  the maximum
amount  which the Bank could have lent to any one  borrower  and the  borrower's
related entities was approximately  $26.4 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, 2005,  the  Company's  largest group of
loans to one  borrower  (and any related  entities)  totaled  $10.6  million and
consisted of two commercial  real estate loans of $6.1 million and $4.5 million.
At June 30,  2005,  there  were a total of 21 loans or lender  relationships  in
excess of $1.5 million,  for a total amount of $64.0 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,
                            --------------------------------------------------------------------------------------------------------
                                   2005                 2004                  2003                 2002                 2001
                            --------------------------------------------------------------------------------------------------------
                              Amount    Percent    Amount    Percent    Amount    Percent    Amount    Percent    Amount    Percent
                            --------------------------------------------------------------------------------------------------------
                                                                      (Dollars in thousands)
<S>                         <C>         <C>      <C>         <C>      <C>         <C>      <C>         <C>      <C>         <C>
First mortgage loans:
   One- to four-
      family(1) ..........  $1,148,489    78.52% $  996,659    77.46% $  946,560    77.01% $1,172,145    81.53% $1,065,819    82.61%
   Commercial and
      multi-family(2) ....     169,765    11.61     172,244    13.39     165,905    13.50     144,585    10.06     108,625     8.42
                            --------------------------------------------------------------------------------------------------------
         Total first
            mortgage
            loans ........   1,318,254    90.13   1,168,903    90.85   1,112,465    90.51   1,316,730    91.59   1,174,444    91.03
                            --------------------------------------------------------------------------------------------------------
Other loans:
   Consumer loans:
      Second mortgages ...      91,147     6.23      67,538     5.25      67,290     5.47      58,671     4.08      48,133     3.73
      Home equity lines of
         credit ..........      49,901     3.41      46,288     3.60      44,308     3.61      55,247     3.85      60,412     4.68
      Other ..............       3,375     0.23       3,862     0.30       5,060     0.41       6,948     0.48       7,140     0.56
                            --------------------------------------------------------------------------------------------------------
         Total consumer
            loans ........     144,423     9.87     117,688     9.15     116,658     9.49     120,866     8.41     115,685     8.97
                            --------------------------------------------------------------------------------------------------------
         Total loans .....   1,462,677   100.00%  1,286,591   100.00%  1,229,123   100.00%  1,437,596   100.00%  1,290,129   100.00%
                                        =======               ======               ======               ======               ======
Add/(less):
   Unamortized premiums,
      deferred loan costs,
      and other, net .....       8,853                7,131                6,079                9,485                9,611
   Allowance for loan
      losses .............      (6,050)              (6,249)              (6,284)              (5,821)              (4,248)
                            --------------------------------------------------------------------------------------------------------
         Total loans
            receivable and
            loans held for
            sale, net ....  $1,465,480           $1,287,473           $1,228,918           $1,441,260           $1,295,492
                            ========================================================================================================
</TABLE>

----------
(1) One-to four-family loans include loans held for sale of $4.8 million,  $11.5
million,  $1.6  million  and  $83,000  at June 30,  2005,  2003,  2002 and 2001,
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 $8.6 million,  $12.6
million,  $12.6 million,  $9.1 million and $3.1 million at June 30, 2005,  2004,
2003, 2002 and 2001, respectively.

Loan Maturity. The following schedule sets forth the contractual maturity of the
Company's loan portfolio as of June 30, 2005.  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 ............  $    596   $     3,117   $     5,592   $   54,884     $    376,270  $    708,030   $ 1,148,489
   Commercial and multi-family ....     7,035         2,789         7,498       35,051          115,634         1,758       169,765
                                     -----------------------------------------------------------------------------------------------
      Total first mortgage loans ..     7,631         5,906        13,090       89,935          491,904       709,788     1,318,254
Other loans:
   Consumer loans .................     2,467         4,798         8,920       27,298           56,904        44,036       144,423
                                     -----------------------------------------------------------------------------------------------
      Total loans, gross ..........  $ 10,098   $    10,704   $    22,010   $  117,233     $    548,808  $    753,824   $ 1,462,677
                                     ===============================================================================================
</TABLE>

Loans due after June 30, 2006,  which have fixed  interest  rates amount to $1.1
billion, while those with adjustable rates amount to $361.8 million, detailed as
follows:

<TABLE>
<CAPTION>
                                                                                                      Due After June 30, 2006
                                                                                               -------------------------------------
                                                                                                 Fixed      Adjustable      Total
                                                                                               -------------------------------------
                                                                                                          (In thousands)
<S>                                                                                            <C>          <C>          <C>
First mortgage loans:
   One- to four-family ...................................................................     $  954,210   $  193,683   $1,147,893
   Commercial and multi-family ...........................................................         43,641      119,089      162,730
                                                                                               -------------------------------------
      Total first mortgage loans .........................................................        997,851      312,772    1,310,623
Other loans:
   Consumer loans ........................................................................         92,940       49,016      141,956
                                                                                               -------------------------------------
      Total loans, gross .................................................................     $1,090,791   $  361,788   $1,452,579
                                                                                               =====================================
</TABLE>

One- to  Four-Family  Residential  Mortgage  Lending.  At  June  30,  2005,  the
Company's one- to four-family  residential  mortgage loans totaled $1.1 billion,
or approximately  78.5% 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,  2005,  the  Company  originated  $350.3
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 competitively
priced according to market 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  and
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, 2005, the Company had $169.8 million of commercial and  multi-family
real estate loans which represented 11.6% of the Company's gross loan portfolio.
This amount  includes $3.2 million of lines of credit secured by non-real estate
business assets and $5.4 million of loans under an accounts receivable financing
program for small and mid-sized  businesses.  At June 30, 2005,  the average per
loan balance of the  Company's  commercial  and  multi-family  real estate loans
outstanding was $400,000.  As of June 30, 2005 approximately 73% 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 the  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, 2005, the Company's total
consumer loan portfolio was $144.4 million, or 9.9% of its gross loan portfolio,
of which  approximately  64% were fixed rate loans and 36% 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.  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,  2005,  second  mortgage  loans and home equity lines of
credit  amounted  to $141.0  million  or 97.7% 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,  2005,  the  Company  originated  $479.7  million of
loans,  compared to $528.0  million and $667.7  million in fiscal 2004 and 2003,
respectively.  Mortgage  loan  originations  are  handled  by  employees  of the
Company.

There were no loans  purchased  during the year ended June 30, 2005.  During the
years ended June 30,  2004 and 2003,  the Company  purchased  $53.0  million and
$676,000 of one- to four-family first mortgage loans, respectively. 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.  During the year
ended  June  30,  2005,   approximately  $11.0  million  and  $24.6  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,  as part of the  Company's  efforts to manage  interest rate risk.
During the year ended  June 30,  2004,  approximately  $48.4  million  and $39.0
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, 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.  During
the latter part of fiscal 2004,  loan sales were reduced and loan production was
retained in portfolio until the excess cash from prepayments was utilized.

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 $69.1 million, $66.3 million and $87.0 million at June 30, 2005, 2004
and 2003,  respectively.  The decrease in fiscal 2004,  as compared to the prior
year,  included  the effects of  accelerated  prepayments.  At June 30, 2005 and
2004,  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,
                                                  ------------------------------------
                                                     2005         2004         2003
                                                  ------------------------------------
                                                             (In thousands)
<S>                                                 <C>          <C>          <C>
Net loans receivable and loans held for sale at
  beginning of year ............................  $1,287,473   $1,228,918   $1,441,260

Plus:
   Loans originated:
      One- to four-family ......................     350,274      409,799     528,869
      Commercial and multi-family real estate ..      38,612       43,222       49,049
      Consumer .................................      90,808       75,002       89,775
                                                  ------------------------------------
         Total loans originated ................     479,694      528,023      667,693
                                                  ------------------------------------

   One- to four-family loans purchased .........          --       53,034          676
                                                  ------------------------------------

         Total loans originated and purchased ..     479,694      581,057      668,369
                                                  ------------------------------------
Less:
   Loans sold ..................................      35,643       90,395      165,180
   Loan principal payments and other, net ......     265,572      432,107      715,531
   Loans transferred to real estate owned ......         472           --           --
                                                  ------------------------------------
Net loans receivable and loans held for sale at
    end of year ................................  $1,465,480   $1,287,473   $1,228,918
                                                  ====================================
</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,
                                           -----------------------------------------------
                                            2005      2004      2003      2002      2001
                                           -----------------------------------------------
                                                       (Dollars in thousands)
<S>                                        <C>       <C>       <C>       <C>       <C>
Non-accruing loans:
   One- to four-family .................   $1,713    $2,158    $1,451    $2,905    $1,219
   Commercial and multi-family .........      904        --        --        --        49
   Consumer ............................        2        24       231       370       369
                                           -----------------------------------------------
      Total non-accruing loans .........    2,619     2,182     1,682     3,275     1,637

   Real estate owned, net ..............       --        --        28        28       500
                                           -----------------------------------------------
      Total non-performing assets ......    2,619     2,182     1,710     3,303     2,137

   Restructured loans ..................       --        --        --        --         --
                                           -----------------------------------------------
      Total risk elements ..............   $2,619    $2,182    $1,710    $3,303    $2,137
                                           ===============================================
   Non-accruing loans as a percentage
     of total loans ....................     0.18%     0.17%     0.14%     0.23%     0.13%
                                           ===============================================
   Non-performing assets as a percentage
     of total assets ...................     0.13%     0.11%     0.09%     0.17%     0.12%
                                           ===============================================
   Total risk elements as a percentage
     of total assets ...................     0.13%     0.11%     0.09%     0.17%     0.12%
                                           ===============================================
</TABLE>

For the year ended June 30, 2005,  gross  interest  income which would have been
recorded  had the  non-accruing  loans  been  current in  accordance  with their
original terms amounted to $79,000.

Non-Performing Assets.  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, 2005, there were $726,000 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.

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


                                        8

<PAGE>

with applicable  regulations.  On the basis of management's review of its assets
at June 30, 2005, the Bank's  classified  assets totaled $3.4 million,  of which
$3.3 million were classified as substandard.  At June 30, 2005, total classified
assets represented 2.74% of the Company's  stockholders' equity and 0.17% 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,
                                          --------------------------------------------------------
                                            2005        2004        2003        2002        2001
                                          --------------------------------------------------------
                                                           (Dollars in thousands)
<S>                                       <C>         <C>         <C>         <C>         <C>
Balance at beginning of year ...........  $ 6,249     $ 6,284     $ 5,821     $ 4,248     $ 3,983

Charge-offs:
   One- to four-family .................     (165)         --         (20)        (20)       (164)
   Commercial and multi-family .........       (2)         --          --          --         (35)
   Consumer ............................      (32)        (35)        (42)        (32)       (161)
                                          --------------------------------------------------------
                                             (199)        (35)        (62)        (52)       (360)
                                          --------------------------------------------------------

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

Net charge-offs ........................     (199)        (35)        (62)        (52)       (360)
Additions charged to operations ........       --          --         525       1,625         625
                                          --------------------------------------------------------
Balance at end of year .................  $ 6,050     $ 6,249     $ 6,284     $ 5,821     $ 4,248
                                          ========================================================

Ratio of net charge-offs during the
   year to average loans outstanding
   during the year .....................     0.01%       0.00%       0.00%       0.00%       0.03%
                                          ========================================================

Ratio of allowance for loan losses
   to total loans at end of year .......     0.41%       0.48%       0.51%       0.40%       0.33%
                                          ========================================================

Ratio of allowance for loan losses to
   non-accruing loans at end of year ...   231.00%     286.39%     373.60%     177.74%     259.50%
                                          ========================================================
</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,
                                 --------------------------------------------------------------------------------------------------
                                        2005                2004               2003                2002                2001
                                 --------------------------------------------------------------------------------------------------
                                          Percent             Percent             Percent             Percent             Percent
                                             of                  of                 of                   of                 of
                                          Loans in            Loans in            Loans in            Loans in            Loans in
                                            Each                Each                Each                Each                Each
                                          Category            Category            Category            Category            Category
                                          to Total            to Total            to Total            to Total            to Total
                                 Amount    Loans     Amount    Loans     Amount    Loans     Amount    Loans     Amount     Loans
                                 --------------------------------------------------------------------------------------------------
                                                                      (Dollars in thousands)
<S>                              <C>      <C>        <C>      <C>        <C>      <C>        <C>      <C>        <C>      <C>
One- to four-family ...........  $3,006     78.52%   $2,896     77.46%   $2,869     77.01%   $2,928     81.53%   $2,223     82.61%
Commercial and
  multi-family real estate ....   2,396     11.61     2,768     13.39     2,767     13.50     2,040     10.06     1,280      8.42
Consumer ......................     648      9.87       585      9.15       648      9.49       853      8.41       745      8.97
                                 -------------------------------------------------------------------------------------------------

     Total ....................  $6,050    100.00%   $6,249    100.00%   $6,284    100.00%   $5,821    100.00%   $4,248    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, 2005, 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  generally  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, 2005,  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,
                                              ------------------------------------------------------------------------------------
                                                         2005                        2004                        2003
                                              -----------------------------------------------------------------------------------
                                                       Estimated Percent           Estimated Percent           Estimated  Percent
                                                         Fair    of Total             Fair   of Total            Fair    of Total
                                              Carrying  Market   Carrying Carrying   Market  Carrying Carrying   Market  Carrying
                                               Value    Value      Value    Value    Value     Value    Value    Value    Value
                                              -----------------------------------------------------------------------------------
                                                                             (Dollars in thousands)
<S>                                           <C>      <C>       <C>      <C>      <C>       <C>      <C>      <C>       <C>
Investment securities:
Available for sale:
   Equity securities .......................  $  5,011 $   5,011    1.16% $  4,720 $   4,720    1.05% $  4,741 $   4,741    1.28%
                                              -----------------------------------------------------------------------------------
Held to maturity:
   U.S. government agency obligations ......   371,487   371,270   85.81   386,134   377,610   86.05   305,662   308,425   82.73
   Corporate bonds .........................     1,022     1,236    0.24     1,026     1,276    0.23     1,030     1,222    0.28
   Trust preferred securities ..............    32,989    34,220    7.62    33,100    34,329    7.37    32,806    35,821    8.88
                                              -----------------------------------------------------------------------------------
       Total held to maturity ..............   405,498   406,726   93.67   420,260   413,215   93.65   339,498   345,468   91.89
                                              -----------------------------------------------------------------------------------
       Total investment securities .........   410,509   411,737   94.83   424,980   417,935   94.70   344,239   350,209   93.17
FHLB of New York stock .....................    22,391    22,391    5.17    23,773    23,773    5.30    25,223    25,223    6.83
                                              -----------------------------------------------------------------------------------
       Total investment securities and FHLB
          of New York stock ................  $432,900 $ 434,128  100.00% $448,753 $ 441,708  100.00% $369,462 $ 375,432  100.00%
                                              ===================================================================================

Mortgage-backed securities:
   Ginnie Mae ..............................  $    151 $     163    0.19% $    249 $     271    0.25% $    415 $     455    0.44%
   Freddie Mac .............................    35,221    35,581   45.04    45,526    45,718   45.49    37,968    39,635   40.55
   Fannie Mae ..............................    42,529    43,204   54.38    53,860    54,430   53.82    54,430    56,896   58.13
   Collateralized Mortgage Obligations/
      REMICs/IOs ...........................       161       161    0.21       225       225    0.22       149       152    0.16
                                              -----------------------------------------------------------------------------------
                                                78,062    79,109   99.82    99,860   100,644   99.78    92,962    97,138   99.28
   Unamortized premiums, net ...............       139        --    0.18       219        --    0.22       670        --    0.72
                                              -----------------------------------------------------------------------------------
       Total mortgage-backed securities ....  $ 78,201 $  79,109  100.00% $100,079 $ 100,644  100.00% $ 93,632 $  97,138  100.00%
                                              ===================================================================================
</TABLE>

Investment  Securities.  At June 30, 2005, the Company's  investment  securities
(including  $5.0 million of investment  securities  available  for sale,  $405.5
million of investment securities held to maturity and a $22.4 million investment
in FHLB of New York stock) totaled $432.9 million, or 21.1% 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, 2005,
PennFed held $10.9 million of such non-investment grade securities. In addition,
investment  securities  at June 30, 2005  included  $22.1  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 $404.5
million have call features and, thus,  depending on future interest  rates,  may
have a much shorter life than final maturity.

<TABLE>
<CAPTION>
                                                                         June 30, 2005
                                      -----------------------------------------------------------------------------------
                                                         After           After
                                                        One Year       Five Years           After       Total Investment
                                         One Year       Through         Through              Ten        Securities Held
                                         or Less       Five Years      Ten Years            Years         to Maturity
                                      -----------------------------------------------------------------------------------
                                            Weighted       Weighted          Weighted          Weighted          Weighted
                                      Book   Average Book  Average    Book   Average    Book    Average   Book    Average
                                      Value   Yield  Value  Yield     Value   Yield     Value    Yield    Value   Yield
                                      -----------------------------------------------------------------------------------
                                                                  (Dollars in thousands)
<S>                                   <C>   <C>      <C>   <C>       <C>     <C>      <C>      <C>      <C>      <C>
U.S. government agency
  obligations ......................  $  --    --%   $  --    --%    $76,844   5.07%  $294,643   5.44%  $371,487   5.36%
Corporate bonds ....................     --    --       --    --       1,022   9.25         --     --      1,022   9.25
Trust preferred securities .........     --    --       --    --          --     --     32,989   8.00     32,989   8.00
                                      -----------------------------------------------------------------------------------
Total investment securities held to
  maturity .........................  $  --    --%   $  --    --%    $77,866   5.12%  $327,632   5.70%  $405,498   5.59%
                                    ====================================================================================
</TABLE>

The Company's  investment  securities portfolio at June 30, 2005 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, 2005, mortgage-backed securities totaled
$78.2 million,  or 3.8% of the Company's  total assets,  of which  approximately
5.0% 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, 2005
                                    ------------------------------------------------------------------------------------
                                                       After           After
                                                      One Year       Five Years           After     Total Mortgage-Backed
                                       One Year       Through         Through              Ten         Securities Held
                                       or Less       Five Years      Ten Years            Years         to Maturity
                                    ------------------------------------------------------------------------------------
                                          Weighted        Weighted          Weighted          Weighted          Weighted
                                    Book   Average Book   Average    Book   Average    Book    Average   Book    Average
                                    Value   Yield  Value   Yield     Value   Yield     Value    Yield    Value   Yield
                                    ------------------------------------------------------------------------------------
                                                                   (Dollars in thousands)
<S>                                 <C>   <C>      <C>    <C>       <C>     <C>      <C>      <C>      <C>      <C>
Ginnie Mae .......................  $  --     --%  $   61   8.05%   $    --     --%  $     90   9.16%  $    151   8.72%
Freddie Mac ......................      6   6.50    1,397   4.10      1,471   6.86     32,358   4.93     35,232   4.98
Fannie Mae .......................     --     --      938   7.04      1,681   6.81     40,038   5.24     42,657   5.34
Collateralized Mortgage
   Obligations/REMICs/IOs ........     --     --       --     --         --     --        161   6.50        161   6.50
                                    ------------------------------------------------------------------------------------
   Total mortgage-backed
     securities ..................  $   6   6.50%  $2,396   5.35%   $ 3,152   6.83%  $ 72,647   5.10%  $ 78,201   5.18%
                                    ====================================================================================
</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,
                                             -------------------------------
                                               2005       2004       2003
                                             -------------------------------
                                                      (In thousands)
Mortgage-backed securities, net:
   At beginning of year ..................   $ 100,079  $  93,632  $ 169,689
   Plus:
     Securities purchased ................          --     54,823     10,190
   Less:
     Principal repayments ................      21,739     47,976     85,489
     Amortization of premiums, net .......         139        400        758
                                             -------------------------------
   At end of year ........................   $  78,201  $ 100,079  $  93,632
                                             ===============================

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  product  mix,  competitive  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,  2005,   certificates  of  deposit  from
municipalities totaled $1.4 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
competition.  When  appropriate,  the  Company  has from  time to time  utilized
brokered deposits as an alternate source of funds. At June 30, 2005, the Company
had $66.1  million of brokered  deposits.  There were $46.1  million of brokered
deposits at June 30, 2004. 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,
                                    -------------------------------------------
                                       2005            2004           2003
                                    -------------------------------------------
                                               (Dollars in thousands)
Opening balance ..................  $ 1,188,100    $ 1,094,666    $ 1,174,507
Net deposits (withdrawals) .......      123,307         69,326       (109,429)
Interest credited ................       28,084         24,108         29,588
                                    -------------------------------------------
Ending balance ...................  $ 1,339,491    $ 1,188,100    $ 1,094,666
                                    ===========================================
Net increase (decrease) ..........  $   151,391    $    93,434    $   (79,841)
                                    ===========================================
Percent increase (decrease) ......        12.74%          8.54%         (6.80)%
                                    ===========================================


                                       13

<PAGE>

The  following  table  indicates  the amount of the  Company's  certificates  of
deposit by time remaining until maturity as of June 30, 2005.

<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 .........   $  70,634   $  96,267   $ 170,654   $ 174,025   $ 511,580
Certificates of deposit of $100,000 or more ........      14,958      22,304      63,670     113,445     214,377
                                                       ---------------------------------------------------------
Total certificates of deposit ......................   $  85,592   $ 118,571   $ 234,324   $ 287,470   $ 725,957
                                                       =========================================================
</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.  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 6.66% and 4.77% at June
30, 2005 and 2004, 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"), as of June 30, 2005, the Company's trust  subsidiaries are
not  consolidated.  Although,  in  accordance  with FIN 46,  Trust III was never
consolidated,  Trust II was  consolidated in prior years.  The primary effect of
de-consolidating  Trust II was a change in the balance sheet  classification  of
the liabilities from Guaranteed  Preferred Beneficial Interests in the Company's
Junior Subordinated Deferrable Interest Debentures to long-term borrowings.


                                       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,
                                                                 ------------------------------------
                                                                   2005         2004         2003
                                                                 ------------------------------------
                                                                        (Dollars in thousands)
<S>                                                              <C>          <C>          <C>
Maximum month-end balance for the year ended:
   FHLB of New York advances .................................   $ 435,465    $ 504,465    $ 504,465
                                                                 ====================================
   Other borrowings:
     Overnight repricing lines of credit .....................   $  68,400    $  15,200   $       --
     Reverse repurchase agreements callable or maturing
       within one year .......................................      17,567       34,260       19,350
     Reverse repurchase agreements callable or maturing
       after one year ........................................      54,461       24,986           --
     Unsecured revolving line of credit ......................       9,586        9,892        7,294
                                                                 ------------------------------------
       Total other borrowings ................................   $ 150,014    $  84,338    $  26,644
                                                                 ====================================
   Junior subordinated debentures, net .......................   $  42,082    $  42,037    $  30,005
                                                                 ====================================
Average balance for the year ended:
   FHLB of New York advances .................................   $ 425,319    $ 489,699    $ 504,465
                                                                 ====================================
   Other borrowings:
     Overnight repricing lines of credit .....................   $  48,820    $   3,452    $       1
     Reverse repurchase agreements callable or maturing
       within one year .......................................      12,437       20,590       19,350
     Reverse repurchase agreements callable or maturing
       after one year ........................................      49,461        1,898           --
     Unsecured revolving line of credit ......................       7,567        5,368        3,765
                                                                 ------------------------------------
       Total other borrowings ................................   $ 118,285    $  31,308    $  23,116
                                                                 ====================================
   Junior subordinated debentures, net .......................   $  42,059    $  42,015    $   2,376
                                                                 ====================================
Balance at June 30:
   FHLB of New York advances .................................   $ 415,465    $ 475,465    $ 504,465
                                                                 ====================================
   Other borrowings:
     Overnight repricing lines of credit .....................   $  45,150    $   7,000   $       --
     Reverse repurchase agreements callable or maturing
       within one year .......................................      15,000       17,468       19,350
     Reverse repurchase agreements callable or maturing
       after one year ........................................      39,461       24,986           --
     Unsecured revolving line of credit ......................       8,341        9,892        7,294
                                                                 ------------------------------------
       Total other borrowings ................................   $ 107,952    $  59,346    $  26,644
                                                                 ====================================
   Junior subordinated debentures, net .......................   $  42,082    $  42,037    $  30,005
                                                                 ====================================
Weighted average cost of funds for the year ended:
   FHLB of New York advances .................................        5.80%        5.76%        5.73%
   Other borrowings:
     Overnight repricing lines of credit .....................        2.30%        1.13%        2.17%
     Reverse repurchase agreements callable or maturing
       within one year .......................................        2.13%        4.38%        4.99%
     Reverse repurchase agreements callable or maturing
       after one year ........................................        3.31%        2.95%          --
     Unsecured revolving line of credit ......................        3.82%        2.66%        3.09%
   Junior subordinated debentures, net .......................        7.24%        6.42%        4.71%

Weighted average cost of funds at June 30:
   FHLB of New York advances .................................        5.75%        5.70%        5.66%
   Other borrowings:
     Overnight repricing lines of credit .....................        3.49%        1.56%          --
     Reverse repurchase agreements callable or maturing
       within one year .......................................        2.88%        1.21%        4.92%
     Reverse repurchase agreements callable or maturing
       after one year ........................................        3.42%        3.23%          --
     Unsecured revolving line of credit ......................        4.64%        2.63%        2.82%
   Junior subordinated debentures, net .......................        7.67%        6.32%        4.71%
</TABLE>


                                       15

<PAGE>

Trust  Preferred  Securities.  In  1997,  PennFed  formed a  wholly-owned  trust
subsidiary,  PennFed Capital Trust I (the "Trust I"). On October 21, 1997, Trust
I sold $34.5  million of 8.90%  cumulative  trust  preferred  securities  to the
public  which  were  reflected  on  the  Consolidated  Statements  of  Financial
Condition as Guaranteed  Preferred  Beneficial Interests in the Company's Junior
Subordinated Deferrable Interest Debentures.  Trust I used the proceeds from the
sale of its trust  preferred  securities to purchase  8.90% junior  subordinated
deferrable  interest  debentures issued by PennFed. On June 3, 2003, the Company
redeemed the $34.5  million of 8.90%  junior  subordinated  deferrable  interest
debentures,  which resulted in the trustee redeeming the related trust preferred
securities issued by Trust I.

Distributions payable on these trust preferred securities have historically been
included as a component of non-interest  expense on the Consolidated  Statements
of Income.

Subsidiary Activities

As a federally chartered savings  association,  Penn Federal is permitted by OTS
regulations to invest up to 2% of its assets, or $41.0 million at June 30, 2005,
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, 2005, the
net book values of Penn Federal's investments in PSIA and PTSC were $205,000 and
$53,000,  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.  Previously, the
sale of  securities,  such as mutual  funds and  variable  rate  annuities,  and
securities  brokerage  services  were  provided  through IFMG  Securities,  Inc.
("IFMGSI"),  a  non-affiliated  registered  broker  dealer.  Fixed  annuity  and
insurance  products  were  offered  through  IFS  Agencies,   Inc.  ("IFSA"),  a
non-affiliated  licensed insurance agency.  Effective April 18, 2005, the Bank's
agreement with IFMGSI was  terminated  and replaced by a similar  agreement with
INVEST Financial  Corporation  ("INVEST"),  a non-affiliated  registered  broker
dealer,  member NASD and SIPC. Also effective April 18, 2005,  PSIA's  agreement
with IFSA was  terminated  and  replaced  by a  similar  agreement  with  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 greater
array of insurance and uninsured non-deposit investment products than previously
offered, while continuing to offer 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,
2005, the Bank's  investment in its operating  subsidiaries,  Ferry  Development
Holding Company  ("FDHC") and Eagle Rock Investment Corp.  ("ERIC"),  was $330.6
million  and  $159.3  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 competitive 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  Savings  Association
Insurance Fund ("SAIF") 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 June 2004.

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 SAIF,  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.

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, 2005,
Penn Federal had no intangible assets other than qualifying  mortgage  servicing
rights.

At June 30, 2005, Penn Federal had tangible capital of $169.8 million,  or 8.28%
of adjusted  total  assets,  which was  approximately  $139.0  million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.


                                       17

<PAGE>

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,  2005,  Penn  Federal  did not  have  any
intangibles which were subject to these tests.

At June 30, 2005, Penn Federal had core capital of $169.8  million,  or 8.28% of
adjusted total assets,  which was approximately $87.8 million above the 4% ratio
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, 2005, the Bank had
no capital instruments that qualify as supplementary  capital. The Bank had $6.0
million of allowances  for loan and lease losses at June 30, 2005,  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, 2005,  Penn Federal had total  risk-based  capital of $175.9 million
(consisting  of $169.8  million in core  capital and $6.1  million in  allowable
supplementary capital) and risk-weighted assets of $1.1 billion (including $44.4
million in converted  off-balance  sheet items  primarily  represented by unused
lines  of  credit)  resulting  in  a  risk-based  capital  ratio  of  15.84%  of
risk-weighted  assets. This amount was $87.1 million above the 8% requirement in
effect on that date.

Penn Federal met all the  requirements  to be  considered  a "well  capitalized"
institution as of June 30, 2005. 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.

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  maintain 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, 2005, the Bank
met the QTL test and has always met the test since its effective date.


                                       18

<PAGE>

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  SAIF-insured  until the FDIC permits it to transfer to
the Bank Insurance Fund. 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.

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 provides 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.


                                       19

<PAGE>

As a member, Penn Federal is required to purchase and maintain stock in the FHLB
of New York.  At June 30, 2005,  the Bank had $22.4  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  4.36% 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.  Beginning  with tax years ending in 2003,
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.  Prior to fiscal  2003,  the Bank was taxed  under the New
Jersey Savings  Institution Tax Act. The tax was an annual privilege tax imposed
at a rate of 3% on the net income of the Bank as reported for federal income tax
purposes,  with certain modifications.  On July 2, 2002, the State of New Jersey
enacted  a new law  revising  the  state's  corporate  income  tax law.  For the
Company,  the new law was effective  beginning July 1, 2002.  Effective with the
new tax  structure,  the New  Jersey  Savings  Institution  Tax was  eliminated.
Beginning in fiscal 2003, earnings for savings  institutions are taxed at the 9%
corporate tax rate. The new tax law changes  increased the overall effective tax
rate of the Company. In addition, for taxable years beginning after December 31,
2001,  New Jersey  imposes an alternative  minimum  assessment.  The Bank is now
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 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 under the Tax Act at a 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,  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 .........   47       Senior Executive Vice President and Chief Operating Officer

Claire M. Chadwick .........   45       Executive Vice President and Chief Financial Officer

Maria F. Magurno ...........   53       Executive Vice President and Residential Lending 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. In 2002,  she was
named  Executive Vice President and Chief Financial  Officer.  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 as well as overseeing the outsourced residential  collections
and  servicing  activities.  She was named  Senior  Vice  President  in 1999 and
Executive Vice President in 2001.

Employees

At June 30, 2005, the Company and its subsidiaries had a total of 283 employees,
including 57 part-time employees. The Company's employees are not represented by
any collective bargaining group.

Item 2. Properties

The Company conducts its business at its headquarters, 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, 2005 was $20.9
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.


                                       21

<PAGE>

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, 2005, an environmental liability of $328,000 was
included in Accounts payable and other liabilities on 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, 2005.


                                       22

<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  National  Market tier of the
Nasdaq Stock Market  under the symbol  "PFSB." At September 2, 2005,  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 2005 Closing Price   Fiscal 2004 Closing Price
                                              -------------------------   -------------------------
                                                  High        Low              High        Low
                                              -------------------------   -------------------------
<S>                                              <C>        <C>               <C>        <C>
Quarter Ended:
September 30, 2004 and 2003 ...............      $16.50     $14.84            $15.25     $13.78
December 31, 2004 and 2003 ................       17.34      15.18             17.09      14.75
March 31, 2005 and 2004 ...................       16.68      14.75             18.35      16.68
June 30, 2005 and 2004 ....................       17.12      13.20             18.17      13.99
</TABLE>

The  closing  price of a common  share was $16.88 at June 30,  2005  compared to
$16.61 at June 30, 2004.

The Company initiated  quarterly cash dividend payments in the second quarter of
fiscal 1997 and has  continuously  paid quarterly cash dividends.  The quarterly
cash dividend had been $0.025 per share since the fourth quarter of fiscal 2001.
In the second quarter of fiscal 2002,  the Company  increased the quarterly cash
dividend to $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.

The Company'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 the  Company,  see
Item 1. Business --  "Regulation  -  Limitations  on Dividends and Other Capital
Distributions" and Note O -- 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, 2005. All shares repurchased during
the three months ended June 30, 2005 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
                                                 Purchased      Per Share     Announced Plan        Under the Plan
                                                ------------   ----------   -------------------   ------------------
<S>                                             <C>            <C>          <C>                   <C>
Repurchases for the Month
-------------------------
April 1 - April 30, 2005 ....................      40,800       $  13.67           40,800              571,700
May 1 - May 31, 2005 ........................     100,200          14.16          100,200              471,500
June 1 - June 30, 2005 ......................      80,500          15.18           80,500              391,000
                                                -----------------------------------------------
Total repurchases ...........................     221,500       $  14.44          221,500
                                                ===============================================
</TABLE>

At June 30, 2005, the Company had one repurchase plan under which it had not yet
completed all approved repurchases.  This repurchase plan was publicly announced
February 23, 2005 and authorized the Company to repurchase up to 5%, or 675,000,
of its outstanding shares over the following 18 months.


                                       23

<PAGE>

Item 6. Selected Financial Data

The  following  selected  consolidated  financial  data of the  Company  and its
subsidiaries  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,
                                             --------------------------------------------------------------
                                                2005         2004         2003         2002        2001
                                             --------------------------------------------------------------
                                                        (In thousands, except per share amounts)
<S>                                          <C>          <C>          <C>          <C>          <C>
Selected Financial Condition Data:
Total assets .............................   $2,050,551   $1,902,286   $1,812,452   $1,892,427   $1,849,377
Loans receivable, net ....................    1,465,480    1,287,473    1,228,918    1,441,260    1,295,492
Investment securities ....................      410,509      424,980      344,239      183,785      333,969
Mortgage-backed securities ...............       78,201      100,079       93,632      169,689      135,606
Deposits .................................    1,339,491    1,188,100    1,094,666    1,174,507    1,085,335
Total borrowings .........................      565,499      576,848      561,114      527,779      582,105
Trust preferred securities, net ..........           --           --       11,621       44,537       44,461
Stockholders' equity .....................      124,054      118,399      116,835      118,761      112,530

Book value per common share(a) ...........         9.34         8.72         8.71         8.36         7.75
Tangible book value per common share(b) ..         9.34         8.62         8.47         8.01         7.27
</TABLE>

----------
(a) In accordance with Statement of Position 93-6,  "Employers' Accounting for
    Employee Stock  Ownership  Plans," 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,
                                             --------------------------------------------------------------
                                                2005         2004         2003         2002        2001
                                             --------------------------------------------------------------
                                                        (In thousands, except per share amounts)
<S>                                          <C>          <C>          <C>          <C>          <C>
Selected Operating Data:
Total interest and dividend income .......   $  104,722   $   96,276   $  106,371   $  121,339   $  120,358
Total interest expense ...................       61,384       58,674       62,956       72,862       79,584
                                             --------------------------------------------------------------
Net interest and dividend income before
  provision for loan losses ..............       43,338       37,602       43,415       48,477       40,774
Provision for loan losses ................           --           --          525        1,625          625
                                             --------------------------------------------------------------
Net interest income after provision for
  loan losses ............................       43,338       37,602       42,890       46,852       40,149
                                             --------------------------------------------------------------
Service charges ..........................        3,096        4,175        5,232        2,961        2,495
Income on Bank Owned Life Insurance
  ("BOLI")................................          690          512           --           --           --
Net gain on sales of loans ...............          394          759        1,863          194          666
Net gain from real estate operations .....          156           58            3           87           65
Other non-interest income ................          660          925          973          975          588
                                             --------------------------------------------------------------
Total non-interest income ................        4,996        6,429        8,071        4,217        3,814
                                             --------------------------------------------------------------
Total non-interest expenses ..............       24,171       25,430(a)    29,120(b)    28,450       24,642
                                             --------------------------------------------------------------
Income before income taxes ...............       24,163       18,601       21,841       22,619       19,321
Income tax expense .......................        8,669        6,543        8,107        8,036        6,808
                                             --------------------------------------------------------------
Net income ...............................   $   15,494   $   12,058   $   13,734   $   14,583   $   12,513
                                             ==============================================================

Net income per common share(c):
  Basic ..................................   $     1.14   $     0.89   $     0.99   $     1.01   $     0.82
                                             ==============================================================
  Diluted ................................   $     1.11   $     0.83   $     0.92   $     0.94   $     0.77
                                             ==============================================================
</TABLE>

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

(b) 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.

(c) 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.


                                       24

<PAGE>

<TABLE>
<CAPTION>
                                                                                 At and for the year ended June 30,
                                                                  ----------------------------------------------------------------
Selected Financial Ratios and Other Data:                           2005          2004          2003          2002          2001
                                                                  ----------------------------------------------------------------
<S>                                                               <C>           <C>           <C>           <C>           <C>
Performance Ratios:
Return on average assets (ratio of net income to
  average total assets) .......................................      0.78%         0.67%         0.75%         0.79%         0.72%
Return on average stockholders' equity (ratio of
  net income to average stockholders' equity) .................     12.64         10.20         11.53         12.59         10.95
Net interest rate spread during the year ......................      2.14          2.02          2.19          2.37          2.06
Net interest margin (net interest and dividend
  income to average interest-earning assets) ..................      2.26          2.16          2.44          2.68          2.43
Ratio of average interest-earning assets to average
  deposits and borrowings .....................................    103.87        104.21        107.00        107.88        107.67
Ratio of earnings to fixed charges(a):
  Excluding interest on deposits ..............................      1.78x         1.58x         1.73x         1.74x         1.68x
  Including interest on deposits ..............................      1.39x         1.32x         1.35x         1.31x         1.24x
Ratio of non-interest expenses to average total assets ........      1.22%         1.41%         1.58%         1.53%         1.42%
Efficiency ratio (non-interest expenses, excluding
  amortization of intangibles, to net interest and
  dividend income and non-interest income excluding
  gains on sales and real estate operations)  .................     47.74         54.64         54.93         50.58         51.59
Dividend payout ratio .........................................     19.30         22.47         20.30         11.39         10.37

Asset Quality Ratios:
Non-accruing loans to total loans at end of year ..............      0.18          0.17          0.14          0.23          0.13
Allowance for loan losses to non-accruing loans
  at end of year ..............................................    231.00        286.39        373.60        177.74        259.50
Allowance for loan losses to total loans at end of year .......      0.41          0.48          0.51          0.40          0.33
Non-performing assets to total assets at end of year ..........      0.13          0.11          0.09          0.17          0.12
Ratio of net charge-offs during the year to average
  loans outstanding during the year ...........................      0.01          0.00          0.00          0.00          0.03

Capital Ratios:
Stockholders' equity to total assets at end of year ...........      6.05          6.22          6.45          6.28          6.08
Average stockholders' equity to average total assets ..........      6.19          6.56          6.47          6.25          6.58

Tangible capital to tangible assets at end of year(b) .........      8.28          8.61          8.73          8.37          7.87
Core capital to adjusted tangible assets at end of year(b) ....      8.28          8.61          8.73          8.37          7.87
Risk-based capital to risk-weighted assets at end of year(b) ..     15.84         16.86         17.21         15.93         15.69

Other Data:
Number of branch offices at end of year .......................        25            24            21            21            21
Number of deposit accounts at end of year .....................    71,600        69,800        74,800        84,200        88,500
Cash dividends declared per common share ......................   $  0.22       $  0.20       $  0.20       $  0.12       $  0.09
</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.


                                       25

<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  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 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.

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.


                                       26

<PAGE>

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 has 25 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  78.5% at June 30,  2005.  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
$178.0  million.  This  increase  was  primarily  attributable  to  strong  loan
origination  levels and a decline in accelerated  prepayments.  The Company sold
$35.6  million  of 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 are vital to
PennFed's  ability  to  generate  liquid  funds  and to  support  the  growth of
non-interest  income.  There has been a 2.6%  increase  in the number of deposit
accounts since June 30, 2004 and average deposit balances per account, excluding
wholesale  certificates  of deposit,  have increased  8.7%. 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
$151.4 million primarily due to a $109.3 million increase in retail certificates
of deposit,  a $24.1 million increase in core deposits  (checking,  money market
and savings accounts) and the addition of $19.9 million of brokered certificates
of deposit. The increase in core deposits was accomplished through a combination
of desirable  product  features,  focused  marketing  campaigns and  competitive
interest rates.

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,
origination  levels may be reduced  from the prior  periods.  Growth in the loan
pipeline will depend on the Company's ability to aggressively seek out customers
in spite of the higher cost of borrowing for the customer. 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 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 for
attracting  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 competitively priced products and
by striving for 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.


                                       27

<PAGE>

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.

A slowdown in loan  prepayments,  growth in the loan portfolio and the repricing
of certain deposits and other borrowings  contributed to an expansion in the net
interest  margin,  when  compared to the prior fiscal  year.  The lower level of
prepayments experienced 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 $7.5 million during the fiscal year, when compared to the prior fiscal
year. The strong origination  levels and the significant  slowdown in the amount
of  prepayments,  relative to the prior year  period,  have  contributed  to the
increase in  residential  first  mortgage loan  interest  income.  Overall,  net
interest  income  increased $5.7 million and the net interest  margin  increased
from 2.16% to 2.26%  during the fiscal year,  when  compared to the prior fiscal
year.  Lower  cost  of  funds  on  other  borrowings  due to the  interest  rate
environment  and the  maturity  of FHLB of New York  advances  were the  primary
factors  responsible for a decrease of $1.4 million in interest  expense on FHLB
of New York  advances  and other  borrowings  for the fiscal year ended June 30,
2005 when compared to the prior fiscal year.

With a  slowdown  in  refinance  activity,  non-interest  income  has  decreased
compared  to the level seen in the prior  year.  Loan  service  fees  related to
modifications  and  prepayments  were not at the levels  seen in the prior year,
when  interest  rates caused many  customers to refinance  their loans or modify
them to reduce the interest rate of their loans.

Non-interest  expenses  were reduced this fiscal year compared to the prior year
primarily due to the end of costs associated with funding the Company's Employee
Stock  Ownership  Plan  ("ESOP"),  as shares became fully  allocated in the 2004
fiscal year.  Fiscal 2005  non-interest  expenses included a much less expensive
replacement  benefit plan (essentially an increase in the 401(k) match), as well
as costs associated with four branches opened since September 2003. In addition,
costs   associated   with   regulatory   burden,   especially   compliance  with
Sarbanes-Oxley  Section 404 on internal control reporting,  required significant
additional compliance expenditures.

The Company's future earnings are inherently tied to the level of interest rates
prevailing  in the  economic  environment  in which  the  Company  operates.  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.  This  effect on  interest
expense is due to the short-term  repricing  characteristics of a portion of the
Company's  deposit  and  borrowing  portfolios.  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  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 long-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.


                                       28

<PAGE>

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 $350.3 million, $462.8 million and $529.5 million in
one- to four-family mortgage loans in fiscal 2005, 2004 and 2003,  respectively.
Of  these  amounts,   $350.3   million,   $409.8  million  and  $528.9  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 2005. Based upon the current level of
interest  rates,  refinance  activity  has  declined  and is expected to decline
further if  interest  rates  continue  to rise.  While the  Company's  customers
continue  to favor  fixed rate  products,  there has been a slight  increase  in
borrowers' preference for adjustable rate products. While origination levels may
decline,  in  response  to  rising  rates,  the  Company  would  also  expect  a
significant  decline in  prepayments  on the existing  portfolio.  The Company's
interest  income has been derived  primarily from one- to  four-family  mortgage
loans,  which  totaled  $1.1  billion,  or 78.5%,  of the  Company's  gross loan
portfolio  at June 30, 2005.  Interest  income on one- to  four-family  loans of
$57.4 million represented 75.6% 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 $129.4 million,
$118.2 million and $138.8 million of commercial  and  multi-family  and consumer
loans in fiscal 2005, 2004 and 2003, respectively. As of June 30, 2005, 2004 and
2003,  commercial and multi-family and consumer loans represented  21.5%,  22.5%
and 23.0%, respectively,  of the total gross loan portfolio.  Interest income on
commercial  and  multi-family  and consumer  loans of $18.5 million  represented
24.4% of total interest on loans for the year ended June 30, 2005. During fiscal
2005,  despite strong  origination  levels,  the commercial and multi-family and
consumer  loan  portfolios  declined  as a  percentage  of the total  gross loan
portfolio.  In addition to  accelerated  prepayments  on these  portfolios,  the
decline was  attributable to growth in the one- to four-family  residential loan
portfolio.  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 0.13%
at June 30, 2005.

Increasing  Core Deposit  Balances.  The  Company's  primary  source of funds is
deposits.  Core deposits  increased $24.1 million,  or 4.1%, in fiscal 2005. The
Company  will  continue  to  emphasize  growth in core  deposits  consisting  of
checking,  money market and savings  accounts.  These deposits provide a stable,
low cost source of funds as well as 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.  During fiscal 2005,
as in fiscal 2004,  advertising  was  increased  and expanded to include  radio,
billboard and bus shelter media in addition to traditional newspaper promotion.

Expanding the retail branch network will likely result in growing core deposits.
During fiscal 2005,  the Bank  expanded its retail  franchise by opening one new
branch,  after opening  three  branches in fiscal 2004.  In February  2005,  the
Bank's 25th branch was opened in Aberdeen, New Jersey.


                                       29

<PAGE>

Managing  the  Company's  Exposure  to  Interest  Rate Risk.  The Company has an
asset/liability committee that meets no less frequently than 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 focus 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
continually  evaluates the sale of longer-term,  fixed rate, one- to four-family
residential loan production.  During the year ended June 30, 2005, approximately
$35.6  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. Total service charges,  which
represent the primary source of non-interest  income,  reflected a $1.1 million,
or 25.8%,  decrease for fiscal 2005  compared to fiscal 2004,  primarily  due to
decreases in loan prepayment and modification fees. As prepayments and refinance
activity are  expected to continue to drop during the next fiscal year,  related
income would also  decline.  Increasing  core  deposits will likely result in an
increase in service charge income to offset this decline to some degree.

Controlling   Non-Interest   Expenses.   Non-interest   expenses  are  carefully
monitored,  which includes  ongoing reviews of staffing  levels,  facilities and
operations.  Primarily due to the full  allocation of shares under the Company's
ESOP at June 30, 2004,  non-interest  expenses decreased $1.3 million,  or 5.0%,
during  fiscal  2005.  Fiscal 2005  non-interest  expenses  included a much less
expensive  replacement benefit plan for the ESOP (essentially an increase in the
401(k) match).  This decrease in non-interest  expenses was partially  offset by
costs  associated  with the four branches  opened since  September  2003 and the
costs   associated   with   regulatory   burden,   especially   compliance  with
Sarbanes-Oxley Section 404.

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 Support 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.

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.


                                       30

<PAGE>

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 10% and 16%.  Commercial and
multi-family  real  estate  loans are  assumed to prepay at an  annualized  rate
between  5% and 40% while  consumer  loans are  assumed to prepay at a 32% rate.
Fixed  and  adjustable  rate  mortgage-backed  securities  have  annual  payment
assumptions  ranging  from 18% to 30%.  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  $120.1  million at June 30, 2005.  These  deposits are assumed to
have an average life of approximately 10 years. In addition,  a "5% Through June
2004 Savings"  account was also  promoted  during fiscal 2002. At June 30, 2005,
the balance in these  accounts  totaled $45.9 million and the rate was 3%. These
deposits  are assumed to roll off 25% within the next 12 months and 35% over the
following  three years.  The  remainder is assumed to have an average life of 10
years.  At June 30, 2005,  $282.7  million,  or 73.4%,  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.


                                       31

<PAGE>

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

                                         2006        2007        2008       2009       2010     Thereafter     Total      Fair Value
                                       ---------------------------------------------------------------------------------------------
                                                                          (Dollars in thousands)
<S>                                    <C>         <C>         <C>        <C>        <C>        <C>         <C>          <C>
Fixed rate mortgage loans including
  one- to four-family and commercial
  and multi-family ..................  $ 164,152   $ 132,287   $117,674   $106,148   $ 96,189   $  381,806  $   998,256  $ 1,001,459
  Average interest rate .............       5.59%       5.51%      5.51%      5.51%      5.52%        5.63%        5.57%

Adjustable rate mortgage loans
  including one- to four-family and
  commercial and multi-family .......  $  91,321   $  44,989   $ 45,546   $ 40,391   $ 56,485   $   38,649  $   317,381  $   313,010
  Average interest rate .............       5.88%       5.95%      5.82%      5.38%      5.35%        6.00%        5.74%

Consumer loans including demand
  loans .............................  $  86,611   $  23,628   $ 16,363   $ 11,439   $  6,380   $       --  $   144,421  $   144,822
  Average interest rate .............       5.86%       5.61%      5.61%      5.61%      5.61%          --%        5.76%

Investment securities and other .....  $  94,860   $  35,000   $ 44,265   $ 75,882   $ 45,000   $  137,893  $   432,900  $   434,128
  Average interest rate .............       5.31%       5.54%      5.45%      5.34%      5.35%        5.86%        5.53%

Mortgage-backed securities excluding
  unamortized premium ...............  $  21,292   $  14,827   $ 11,738   $  9,560   $  7,860   $   12,785  $    78,062  $    79,109
  Average interest rate .............       5.16%       5.24%      5.22%      5.22%      5.22%        5.37%        5.23%

  Total interest-earning assets .....  $ 458,236   $ 250,731   $235,586   $243,420   $211,914   $  571,133  $ 1,971,020  $ 1,972,528
                                       =============================================================================================

Savings deposits ....................  $  37,800   $  28,485   $ 18,489   $ 10,286   $  7,591   $  282,709  $   385,360  $   385,360
  Average interest rate .............       1.68%       1.71%      1.57%      1.52%      1.10%        2.88%        2.53%

Money market and demand deposits
  (transaction accounts) ............  $  50,252   $      --   $     --   $     --   $     --   $  176,779  $   227,031  $   227,031
  Average interest rate .............       2.40%         --%        --%        --%        --%        0.44%        0.88%

Certificates of deposit .............  $ 438,487   $ 157,017   $ 65,201   $ 29,313   $ 35,939   $       --  $   725,957  $   725,949
  Average interest rate .............       2.88%       3.51%      4.00%      4.13%      4.16%          --%        3.23%

FHLB of New York advances ...........  $  30,000   $  20,465   $ 55,000   $     --   $140,000   $  170,000  $   415,465  $   443,927
  Average interest rate .............       4.21%       6.11%      5.49%        --%      6.45%        5.50%        5.76%

Other borrowings ....................  $  68,491   $  29,461   $ 10,000   $     --   $     --   $       --  $   107,952  $   107,566
  Average interest rate .............       3.51%       3.36%      3.59%        --%        --%          --%        3.48%

Junior subordinated deferrable
  interest debentures ...............  $      --   $      --   $     --   $     --   $     --   $   43,300  $    43,300  $    46,556
  Average interest rate .............         --%         --%        --%        --%        --%        7.67%        7.67%

  Total deposits and borrowings .....  $ 625,030   $ 235,428   $148,690   $ 39,599   $183,530   $  672,788  $ 1,905,065  $ 1,936,389
                                       =============================================================================================

Interest earning assets less
  deposits and borrowings (interest-
  rate sensitivity gap) .............  $(166,794)  $  15,303   $ 86,896   $203,821   $ 28,384   $ (101,655) $    65,955
                                       =================================================================================

Cumulative interest-rate sensitivity
  gap ...............................  $(166,794)  $(151,491)  $(64,595)  $139,226   $167,610   $   65,955
                                       ====================================================================

Cumulative interest-rate sensitivity
  gap as a percentage of total
  assets at June 30, 2005 ...........      (8.13)%     (7.39)%    (3.15)%     6.79%      8.17%        3.22%
                                       ====================================================================

Cumulative interest-rate sensitivity
  gap as a percentage of total
  interest-earning assets at
  June 30, 2005 .....................      (8.46)%     (7.69)%    (3.28)%     7.06%      8.50%        3.35%
                                       ====================================================================

Cumulative interest-earning assets
  as a percentage of cumulative
  deposits and borrowings at June
  30, 2005 ..........................      73.31%      82.39%     93.60%    113.28%    113.60%      103.46%
                                       ====================================================================
</TABLE>

At June 30,  2005,  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 $166.8  million,  representing a one year negative
gap of 8.13% of total  assets,  compared  to a one year  negative  gap of $148.6
million,  or 7.81%,  of total  assets at June 30, 2004.  See "  -Asset/Liability
Strategy."  The Company's gap position has remained  relatively  unchanged  from
June 30, 2004 when compared to June 30, 2005.


                                       32

<PAGE>

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 indicates  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,  2005,  the Bank's  internally  generated  initial  NPV ratio was
10.19%.  Following a 2% increase in interest  rates,  the Bank's  Post-Shock NPV
ratio was 8.33%. The change in the NPV ratio, or the Bank's Sensitivity Measure,
was negative  1.86%.  As of June 30, 2005,  the Company's  internally  generated
initial NPV ratio was 9.97%, the Post-Shock ratio was 8.27%, and the Sensitivity
Measure was negative 1.70%. As of June 30, 2004, the Bank's Post-Shock NPV ratio
and  Sensitivity  Measure were 7.87% and negative 1.72%,  respectively,  and the
Company's  Post-Shock NPV ratio and Sensitivity  Measure were 7.30% and negative
1.91%,  respectively.  As of June 30,  2005,  the  effect  of a 2%  decrease  in
interest rates could not be meaningfully  simulated. As of June 30, 2004, due to
historically  low interest rate levels,  the effect of a 2% decrease in interest
rates could not be simulated. While the Post-Shock ratios have improved from the
prior year, sensitivity has remained essentially unchanged.  Over the last year,
shorter  term market  rates have  increased  while longer term market rates have
declined. The decline in long term market rates increased prepayment activity on
certain one- to four-family loans. In addition,  one- to four-family loan growth
throughout  fiscal 2005 favored  bi-weekly  and  adjustable  rate  products with
shorter average durations.  As a result, overall asset duration declined but was
principally offset by a similar decline in liability duration that resulted from
an increase in short term retail deposit balances.  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, 2005 (the latest date for which information is available),  the Bank's
initial  NPV ratio,  as measured by the OTS,  was 9.40%,  the Bank's  Post-Shock
ratio was 5.68% and the Sensitivity Measure was negative 3.72%.

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, 2005,  based on its  internally  generated  simulation  models,  the
Company's  consolidated net interest income projected for one year forward would
decrease 6.1% from the base case, or current market, as a result of an immediate
and sustained 2% increase in interest  rates.  Although  interest  rates are not
expected to rise 2% immediately,  interest rate  projections  over the next year
assume a rise in short term  interest  rates and a tightening of the rate spread
between the 3-month U.S.  treasury bill and the 10-year U.S.  treasury  bond. If
short term rates rise more  quickly  than long term  rates,  interest  rate risk
measures  would be expected to improve,  but earnings would likely be negatively
affected.


                                       33

<PAGE>

Asset/Liability Strategy

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

1. The Company has focused on  shortening  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 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 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,  2005,  each of the  strategies  noted  above was
employed to manage the Company's sensitivity to changes in interest rates.

On June 30, 2004,  the Federal Open Market  Committee  marked the beginning of a
tightening  cycle by raising  the Federal  funds rate from 1.00% to 1.25%.  This
rate has  continued to increase at a measured  pace so that at June 30, 2005, it
stood at 3.25%.  During this time,  however,  longer-term market yields declined
over 0.50%. As the steepness of the Treasury curve declined,  loan  originations
accelerated  and  disintermediation  between  retail  deposit  products began to
emerge due to strong competitive pricing for short-term retail deposits.

One- to four-family residential mortgage activity and consumer mortgage activity
remained  strong in fiscal 2005,  reflective  of continued  low market rates and
competitive  pricing.  Bi-weekly and adjustable  rate  production  dominated new
volumes and helped to reduce the duration of these loan portfolios. Furthermore,
the majority of the commercial and multi-family loan production added during the
year ended June 30, 2005 was also adjustable rate. Loan sale activities included
primarily  lower  coupon,  fixed rate products with longer terms to maturity and
supported efforts to reduce interest rate risk.

Retail  funding  supported  most of the asset growth  experienced  during fiscal
2005.  Significant  focus was placed on  generating  new and  building  existing
retail core deposit relationships. Efforts were rewarded with significant growth
in checking and money market balances, but were partially offset by a decline in
savings balances as certain funds previously  "parked" in such accounts began to
roll into more  competitively  priced  certificate  of  deposit  products.  Most
certificate  of  deposit  growth  was  found  in  shorter  term  maturities,  as
depositors  were generally  unwilling to lock in their deposits for terms longer
than one year.  Wholesale funding  increased only slightly,  as FHLB of New York
advances that matured during the year were replaced with  overnight  borrowings,
reverse repurchase agreements and brokered certificates of deposit.

By the end of fiscal 2005,  the Company's NPV ratios had improved as the overall
value of assets and liabilities increased,  but its sensitivity to rising market
rates did not significantly  change, due to the offsetting effects of variations
in market rates and portfolio composition.

As a result of the above  activity,  one- to four-family  mortgage loan balances
increased  $151.8  million  between June 30, 2004 and June 30, 2005.  Adjustable
rate one- to four-family  mortgage loan balances  increased  $73.5 million while
fixed rate balances increased $78.3 million. Additionally,  approximately 70% of
the fiscal 2005 fixed rate loan  originations  were for terms less than 30 years
or for bi-weekly products. Consumer loan balances increased $26.7 million. Prime


                                       34

<PAGE>

based home equity lines of credit  increased  $3.6 million while other  consumer
products,  principally  fixed  rate  second  mortgages  generally  with  shorter
durations  than  one- to  four-family  residential  mortgages,  increased  $23.1
million.  The commercial and multi-family  real estate loan portfolio  decreased
$2.5  million  during the current  fiscal  year with  adjustable  rate  products
declining $3.1 million and fixed rate loans rising $600,000.

At June 30, 2005,  medium and  long-term  certificate  of deposit  balances with
remaining  maturities  greater than one year totaled $287.5  million,  including
$66.1 million of wholesale  certificates of deposit,  compared to $247.0 million
at June 30, 2004. There were $46.1 million of wholesale  certificates of deposit
at June 30, 2004. Certificate of deposit balances,  excluding brokered deposits,
increased  $107.4  million as short-term  interest  rates  increased  during the
fiscal year,  while core  deposit  balances  increased  $24.1  million.  Savings
balances fell $33.3 million,  while  checking and money market account  balances
increased $57.4 million.  Wholesale borrowings with remaining maturities greater
than one year totaled $424.9  million at June 30, 2005,  reflecting a decline of
$15.5  million  during the  current  fiscal  year.  However,  $100.0  million of
convertible  advances from the FHLB of New York with one-time call features were
not called and  subsequently  were  extended  five to seven years to their final
maturity.  Short-term  retail  certificate  of deposit  balances with  remaining
maturities  of one  year  or  less  increased  $86.8  million  while  short-term
wholesale  funding  balances  increased  $34.1 million between June 30, 2004 and
2005, as a portion of such borrowings shifted to within one year of maturity. In
fiscal 2005, $185.5 million of new, short-term  wholesale borrowings were added,
including a net increase of $38.2 million drawn on an overnight  repricing  line
of credit and a net decrease of $1.6 million 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,  which  represented  45.7% of total
deposits  at June 30,  2005,  tend to be less  susceptible  to rapid  changes in
interest rates than certificate of deposit balances.

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,
2005, 2004 and 2003 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.


                                       35

<PAGE>

<TABLE>
<CAPTION>
                                                                            Year ended June 30,
                                      ---------------------------------------------------------------------------------------------
                                                      2005                           2004                            2003
                                      ---------------------------------------------------------------------------------------------
                                         Average    Interest            Average    Interest            Average     Interest
                                      Outstanding   Earned/   Yield/  Outstanding  Earned/   Yield/  Outstanding   Earned/   Yield/
                                        Balance       Paid     Rate     Balance     Paid      Rate     Balance      Paid      Rate
                                      ---------------------------------------------------------------------------------------------
                                                                          (Dollars in thousands)
<S>                                   <C>          <C>        <C>     <C>          <C>       <C>     <C>          <C>        <C>
Interest-earning assets:
  One- to four-family mortgage
     loans .......................... $ 1,082,952  $  57,358    5.30% $   915,316  $ 49,831    5.44% $ 1,087,196  $  63,940    5.88%
  Commercial and multi-family real
     estate loans ...................     168,556     11,638    6.90      162,855    12,029    7.39      157,365     12,373    7.86
  Consumer loans ....................     127,020      6,834    5.38      115,793     6,353    5.49      115,295      7,096    6.15
                                      -----------  ---------          -----------  --------          -----------  ---------

     Total loans receivable .........   1,378,528     75,830    5.50    1,193,964    68,213    5.71    1,359,856     83,409    6.13

  Federal funds sold ................          --         --      --       17,918       178    0.99       19,361        233    1.20
  Investment securities and other ...     446,903     24,384    5.46      428,104    22,816    5.33      266,364     15,167    5.69
  Mortgage-backed securities ........      88,286      4,508    5.11       98,828     5,069    5.13      131,815      7,562    5.74
                                      -----------  ---------          -----------  --------          -----------  ---------
     Total interest-earning assets ..   1,913,717  $ 104,722    5.47    1,738,814  $ 96,276    5.54    1,777,396  $ 106,371    5.98
                                                   =========                       ========                       =========

Non-interest earning assets .........      67,373                          63,978                         63,475
                                      -----------                     -----------                    -----------
     Total assets ................... $ 1,981,090                     $ 1,802,792                    $ 1,840,871
                                      ===========                     ===========                    ===========
Deposits and borrowings:
  Money market and demand
     deposits ....................... $   191,747  $   1,144    0.60% $   167,569  $    315    0.19% $   168,767  $     833    0.49%
  Savings deposits ..................     420,852      9,901    2.35      388,552     9,931    2.56      336,856      8,782    2.61
  Certificates of deposit ...........     644,112     19,311    3.00      549,480    16,388    2.98      625,468     23,255    3.72
                                      -----------  ---------          -----------  --------          -----------  ---------
     Total deposits .................   1,256,711     30,356    2.42    1,105,601    26,634    2.41    1,131,091     32,870    2.91

  FHLB of New York advances .........     425,319     24,668    5.80      489,699    28,203    5.76      504,465     28,892    5.73
  Other borrowings ..................     118,285      3,313    2.80       31,308     1,139    3.64       23,116      1,082    4.68
  Junior subordinated debentures ....      42,059      3,047    7.24       42,015     2,698    6.42        2,376        112    4.71
                                      -----------  ---------          -----------  --------          -----------  ---------
     Total deposits and borrowings ..   1,842,374  $  61,384    3.33    1,668,623  $ 58,674    3.52    1,661,048  $  62,956    3.79
                                                   =========                       ========                       =========
Other liabilities ...................      16,095                          15,899                         18,755
                                      -----------                     -----------                    -----------
     Total liabilities ..............   1,858,469                       1,684,522                      1,679,803

Trust Preferred securities ..........          --                              --                         41,954
Stockholders' equity ................     122,621                         118,270                        119,114
                                      -----------                     -----------                    -----------
     Total liabilities and
        stockholders' equity ........ $ 1,981,090                     $ 1,802,792                    $ 1,840,871
                                      ===========                     ===========                    ===========

Net interest income and net interest
  rate spread .......................              $  43,338    2.14%              $ 37,602    2.02%              $  43,415    2.19%
                                                   =========  ======               ========  ======               =========  ======

Net interest-earning assets and net
  interest margin ................... $    71,343               2.26% $    70,191              2.16% $   116,348               2.44%
                                      ===========             ======  ===========            ======  ===========             ======

Ratio of interest-earning assets to
  deposits and borrowings ...........                         103.87%                        104.21%                         107.00%
                                                              ======                         ======                          ======
</TABLE>


                                       36

<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,
                                         --------------------------------------------------------------------------------------
                                                         2005 vs. 2004                              2004 vs. 2003
                                         -------------------------------------------  -----------------------------------------
                                                      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 ..................  $   9,127  $  (1,352) $    (248)  $  7,527   $ (10,108) $  (4,752) $   751  $ (14,109)
   Commercial and multi-family
      real estate loans ...............        421       (785)       (27)      (391)        432       (750)     (26)      (344)
   Consumer loans .....................        616       (123)       (12)       481          31       (771)      (3)      (743)
                                         --------------------------------------------------------------------------------------
      Total loans receivable ..........     10,164     (2,260)      (287)     7,617      (9,645)    (6,273)     722    (15,196)
   Federal funds sold .................       (178)      (178)       178       (178)        (17)       (41)       3        (55)
   Investment securities and other ....      1,002        542         24      1,568       9,210       (971)    (590)     7,649
   Mortgage-backed securities .........       (540)       (23)         2       (561)     (1,892)      (801)     200     (2,493)
                                         --------------------------------------------------------------------------------------
      Total interest-earning assets ...  $  10,448  $  (1,919) $     (83)  $  8,446   $  (2,344) $  (8,086) $   335  $ (10,095)
                                         ======================================================================================

Deposits and borrowings:
   Money market and demand
      deposits ........................  $      45  $     685  $      99   $    829   $      (6) $    (516) $     4  $    (518)
   Savings deposits ...................        826       (790)       (66)       (30)      1,347       (172)     (26)     1,149
   Certificates of deposit ............      2,822         86         15      2,923      (2,825)    (4,601)     559     (6,867)
                                         --------------------------------------------------------------------------------------
      Total deposits ..................      3,693        (19)        48      3,722      (1,484)    (5,289)     537     (6,236)
   FHLB of New York advances ..........     (3,708)       199        (26)    (3,535)       (845)       161       (5)      (689)
   Other borrowings ...................      3,164       (262)      (728)     2,174         383       (241)     (85)        57
   Junior subordinated debentures .....          3        346         --        349       1,868         41      677      2,586
                                         --------------------------------------------------------------------------------------
      Total deposits and borrowings ...  $   3,152  $     264  $    (706)  $  2,710   $     (78) $  (5,328) $ 1,124  $  (4,282)
                                         ======================================================================================
   Net change in net interest income ..  $   7,296  $  (2,183) $     623   $  5,736   $  (2,266) $  (2,758) $  (789) $  (5,813)
                                         ======================================================================================
</TABLE>

Financial Condition

Comparison of Financial Condition at June 30, 2005 and June 30, 2004

Assets. Total assets increased $148.3 million to $2.051 billion at June 30, 2005
from total assets of $1.902  billion at June 30, 2004.  The increase at June 30,
2005 was primarily due to a $173.2 million  increase in net loans receivable and
a $4.8  million  increase  in loans  held for sale  partially  offset by a $21.9
million decrease in net mortgage-backed  securities and a $14.8 million decrease
in investment securities held to maturity.  The increase in total assets at June
30, 2005 was also partially due to a $10.7 million increase in the investment in
BOLI.

The increase in net loans  receivable was reflective of strong loan  origination
levels and a slowdown  in loan  prepayment  activity.  Loan sales in fiscal 2005
were $35.6 million, compared to $90.4 million in fiscal 2004, as originations of
long term, fixed rate conforming  balance loans were reduced in fiscal 2005 when
compared to fiscal 2004. The interest rate


                                       37

<PAGE>

environment in fiscal 2005, when compared to fiscal 2004, allowed the Company to
utilize  available  funds for the origination of loans at higher rates of return
than would have been achieved by re-investing in mortgage-backed  securities and
investment securities, as these securities rolled off during the fiscal year.

Liabilities.  Deposits  increased  $151.4  million to $1.339 billion at June 30,
2005 from $1.188 billion at June 30, 2004. The increase was  attributable  to an
increase  in short- and  medium-term  retail  certificates  of deposit of $109.3
million, core deposit accounts (checking,  money market and savings accounts) of
$24.1  million and the addition of $19.9  million of wholesale  certificates  of
deposit.  At June 30,  2005,  FHLB of New York  advances  and  other  borrowings
totaled  $523.4  million,  reflecting an $11.4 million  decrease from the $534.8
million at June 30, 2004.

Stockholders'  Equity.  Stockholders'  equity at June 30,  2005  totaled  $124.1
million  compared to $118.4  million at June 30, 2004.  The  increase  primarily
reflects  the net  income  recorded  for the year  ended  June 30,  2005 and the
exercise of stock options, including the related tax effect, partially offset by
the  repurchase  of  731,800  shares of the  Company's  outstanding  stock at an
average price of $15.41 per share and the declaration of cash dividends.

Results of Operations

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 O -
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 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 last year. 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 last
twelve months. 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


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<PAGE>

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 is 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  reflects the offering of attractive and  competitive  deposit  products,
which are promoted through various marketing strategies.

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 is consistent with the maintenance
of the  Company's  historically  low  levels  of  non-accruing  loans  and  loan
chargeoffs.  Management  believes that the current  allowance for loan losses is
adequate  to  absorb   probable   losses  on  existing  loans  that  may  become
uncollectible. The allowance for loan losses at June 30, 2005 of $6.1 million is
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



                                       39

<PAGE>

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 service
charges and net gain on sales of loans when  compared to the year ended June 30,
2004.

Service charge income for the year ended June 30, 2005 was $3.1 million compared
to $4.2  million  recorded  for the prior year.  The  decline in service  charge
income 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 can be  attributed to a reduction
in  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.

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 reflect the end of costs  associated  with funding the Company's
ESOP, expenses in fiscal 2005 included a much less expensive replacement benefit
plan for the ESOP,  increased  advertising expense and costs associated with the
four branches opened since September  2003. In addition,  costs  associated with
regulatory  burden,  especially  compliance with SOX 404,  required  significant
additional  expenditures  and are 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 an
adjustment  in  the  first  quarter  of  fiscal  2005  in  valuation  allowances
established against state deferred tax assets.

Comparison  of Operating  Results for the Years Ended June 30, 2004 and June 30,
2003

General.  For the year ended June 30,  2004,  net income was $12.1  million,  or
$0.83 per diluted share,  compared to net income of $13.7 million,  or $0.92 per
diluted share, for the year ended June 30, 2003. 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. For the year
ended  June  30,  2003,  as a  result  of  the  redemption  of  trust  preferred
securities,  the  Company  recognized  a $1.5  million  charge  associated  with
unamortized issuance costs related to these securities.

Interest and Dividend  Income.  Interest and dividend  income for the year ended
June 30, 2004  decreased to $96.3 million from $106.4 million for the year ended
June 30, 2003. In general,  the decline in interest and dividend income reflects
a lower  level of  interest-earning  assets due to the effects of loan sales and
accelerated  prepayments,  and  a  lower  yield  earned  on  these  assets  as a
cumulative result of prepayments of higher yielding loans and the origination of
loans at lower  market  interest  rates.  Average  interest-earning  assets were
$1.739  billion for the year ended June 30, 2004 compared to $1.777  billion for
the prior year. The average yield earned on interest-earning assets decreased to
5.54% for the year  ended  June 30,  2004 from 5.98% for the year ended June 30,
2003.

Interest income on residential  one- to four-family  mortgage loans for the year
ended June 30, 2004 decreased $14.1 million when compared to the prior year. The
decrease in interest  income on residential  one- to four-family  mortgage loans
was due to a decrease  in the average  yield  earned on this loan  portfolio  to
5.44% for the year ended June 30, 2004 from 5.88% for the prior year period,

                                       40
<PAGE>

reflecting the payoff or refinance of higher  yielding loans and the origination
of lower  yielding  loans.  In  addition,  the  decrease in  interest  income on
residential  one- to  four-family  mortgage  loans was due to a decrease  in the
average balance of residential one- to four-family mortgage loans outstanding of
$171.9  million  for the year ended June 30,  2004,  when  compared to the prior
year, as the result of accelerated prepayments and loan sales. At June 30, 2004,
one- to four-family mortgage loans represented 77.5% of the total loan portfolio
and 73.1% of interest income on loans.

Interest  income on  commercial  and  multi-family  real estate loans  decreased
$344,000 for the year ended June 30, 2004,  when compared to the year ended June
30, 2003. 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 7.39% for the year ended June 30,  2004  compared to 7.86% for the
year ended June 30,  2003.  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 of the  commercial  and  multi-family  real  estate  loan
portfolio.  The decrease in yield for this portfolio was partially  offset by an
increase in the average  outstanding balance of commercial and multi-family real
estate loans of $5.5 million for the year ended June 30, 2004,  when compared to
the prior year.

Interest income on consumer loans decreased $743,000 for the year ended June 30,
2004,  when  compared to the year ended June 30, 2003.  The decrease in interest
income for this loan  portfolio  was  reflective  of the lower  market  interest
rates.  The average  yield earned on consumer  loans  decreased to 5.49% for the
year ended June 30, 2004 from 6.15% for the prior year. The decrease in yield on
consumer  loans  for the year  ended  June 30,  2004 was  partially  offset by a
$498,000  increase in the average  balance  outstanding of this loan  portfolio,
when compared to the year ended June 30, 2003.

Interest  income on  investment  securities  and other  interest-earning  assets
increased  $7.6  million for the year ended June 30, 2004  compared to the prior
year. The increase in interest income on these  securities was attributable to a
$161.7 million  increase in the average  balance  outstanding for the year ended
June 30,  2004,  when  compared  to the prior year.  As a partial  offset to the
reduction in the average balance of loans and mortgage-backed  securities due to
increased  prepayments,  additional  investment  securities were purchased.  The
interest income on investment securities and other  interest-earning  assets for
the year ended June 30,  2004 was  negatively  impacted  by  approximately  $1.0
million due to declines in the average  yield  earned on these  securities.  The
average  yield  decreased to 5.33% for the year ended June 30, 2004  compared to
5.69% for the year ended June 30, 2003,  as called  investment  securities  were
replaced with lower yielding investments.

Interest  income on the  mortgage-backed  securities  portfolio  decreased  $2.5
million  for the year  ended  June 30,  2004  compared  to the prior  year.  The
decrease in interest  income on  mortgage-backed  securities  for the year ended
June  30,  2004  was due to a  decrease  in the  average  yield  earned  on this
portfolio to 5.13% from 5.74% for the year ended June 30, 2003. In addition, the
decrease in interest income on mortgage-backed  securities was due to a decrease
in the average balance  outstanding of $33.0 million for the year ended June 30,
2004, when compared to the prior year, primarily due to accelerated prepayments.

Interest  Expense.  Interest  expense  decreased $4.3 million for the year ended
June 30, 2004 from the year ended June 30, 2003. The decrease in the 2004 fiscal
year was attributable to a decrease in the Company's cost of funds to an average
rate of 3.52%  from  3.79%  for the  prior  year,  as a result  of lower  market
interest  rates.  The  decrease in the cost of funds for the year ended June 30,
2004  was  partially  offset  by an  increase  in  total  average  deposits  and
borrowings of $7.6 million, when compared to the year ended June 30, 2003.

The average rate paid on deposits decreased to 2.41% for the year ended June 30,
2004 from 2.91% for the year  ended  June 30,  2003.  Average  deposit  balances
decreased  $25.5 million to $1.106 billion for the year ended June 30, 2004 from
$1.131  billion for the prior year. The lower level of interest rates during the
2004 fiscal year, when compared to the prior year, resulted in a decrease in the
balance of certificates of deposit while total core deposit balances  increased.
With a reduction in the  Company's  funding  needs as a result of loan sales and
accelerated loan prepayments,  maturing,  higher costing certificates of deposit
were priced to allow runoff.

The average cost of FHLB of New York  advances  increased  slightly to 5.76% for
the year  ended  June  30,  2004  from  5.73%  for the  prior  year,  due to the
maturities of lower yielding  advances.  The average balance of FHLB of New York
advances decreased $14.8 million for the year ended June 30, 2004, when compared
to the year ended June 30, 2003.  For the year ended June 30, 2004,  the average
balance of other borrowings  increased $8.2 million,  when compared to the prior
year. The


                                       41

<PAGE>

average  rate  paid on other  borrowings  decreased  to 3.64%  for  fiscal  2004
compared to 4.68% for fiscal  2003.  During  fiscal 2004,  the vast  majority of
other  borrowings were those with maturities  within one year; thus, the cost of
these borrowings reflected the lower levels of interest rates experienced during
the year, when compared to the prior year.

Effective July 1, 2003, the Company fully adopted Financial Accounting Standards
Board Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN
46") as it relates to PennFed  Capital  Trust II and PennFed  Capital Trust III,
which were  formed by the Company  for the  purpose of issuing  trust  preferred
securities.  Pursuant to FIN 46,  these  trust  preferred  subsidiaries  are not
consolidated and their junior  subordinated  deferrable  interest debentures are
reflected as long term borrowings.  As such, interest expense for the year ended
June 30,  2004  included  the  costs  associated  with the  junior  subordinated
deferrable  interest  debentures.  For the year ended June 30, 2004,  the junior
subordinated  deferrable  interest  debentures  had an average  balance of $42.0
million and an average cost of 6.42%.

Net Interest  and Dividend  Income.  Net  interest  and dividend  income  before
provision  for loan  losses for the year ended June 30,  2004 was $37.6  million
compared  to  $43.4   million   recorded   in  the  prior   year.   Average  net
interest-earning  assets  decreased  $46.2  million  for the year ended June 30,
2004,  when  compared to the prior year.  The net  interest  rate spread and net
interest margin for fiscal 2004 were 2.02% and 2.16%,  respectively,  a decrease
from 2.19% and 2.44% for the year ended June 30, 2003.  The net interest  margin
was reduced during fiscal 2004 when compared to the prior year  principally  due
to the effect of accelerated  prepayments  resulting from lower market  interest
rates.

Provision for Loan Losses.  There was no provision for loan losses  recorded for
the year ended June 30, 2004,  which is consistent with the  continuation of the
Company's  historically  low levels of non-accruing  loans and loan  chargeoffs.
Management  believes the allowance for loan losses at June 30, 2004 was adequate
to absorb  probable  losses on existing loans that may become  uncollectible.  A
loan loss  provision  of $525,000 was recorded for the year ended June 30, 2003.
The  allowance  for loan losses at June 30, 2004 of $6.2  million is  relatively
unchanged  from the $6.3 million at June 30, 2003. The allowance for loan losses
as a percentage of non-accruing loans was 286.39% at June 30, 2004,  compared to
373.60% at June 30, 2003.  Non-accruing loans were $2.2 million at June 30, 2004
compared to $1.7 million at June 30, 2003.  The  allowance  for loan losses as a
percentage  of total loans at June 30, 2004 was 0.48%  compared to 0.51% at June
30,  2003,  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, 2004,  non-interest income was
$6.4  million  compared  to $8.1  million for the prior  year.  The  decrease in
non-interest  income for fiscal 2004 was  primarily  due to decreases in service
charges and net gain on sales of loans partially  offset by an increase in other
non-interest income, when compared to the year ended June 30, 2003.

Service charge income for the year ended June 30, 2004 was $4.2 million compared
to $5.2 million  recorded for the prior year.  Due to increased  interest  rates
during the last three quarters of the 2004 fiscal year when compared to the same
periods  during  the prior  fiscal  year,  loan  prepayments  and  modifications
decreased significantly, resulting in a decline in service charge income for the
year ended June 30, 2004.

During the year ended June 30, 2004, the net gain on sales of loans was $759,000
compared to $1.9 million for the year ended June 30, 2003.  Approximately  $48.4
million of conforming, fixed rate one- to four-family residential mortgage loans
were sold into the  secondary  market  during the 2004 fiscal year. In addition,
during  the year ended June 30,  2004,  the  Company  sold  approximately  $39.0
million of primarily fixed rate one- to four-family  residential  mortgage loans
to other financial  institutions.  For the year ended June 30, 2003,  there were
$7.7 million of such sales to other financial institutions. Approximately $154.8
million of conforming, fixed rate one- to four-family residential mortgage loans
were sold  into the  secondary  market  during  the year  ended  June 30,  2003.
Furthermore, during the years ended June 30, 2004 and 2003, a $3.0 million and a
$4.0 million commercial real estate loan  participation was sold,  respectively,
as a means to reduce the Company's  credit  exposure on a large  commercial real
estate  loan  relationship,  realizing  a net gain  each  year of  approximately
$183,000.  During the second and third quarters of the 2004 fiscal year, one- to
four-family residential loan production slowed significantly as applications for
refinances  slowed  due to a rise in  interest  rates.  Due to this  significant
slowdown in mortgage loan  applications and as a means to  alternatively  invest
available cash at higher yields, in late December 2003, the Company discontinued
its loan  sale  strategy  and  began to retain  originated  one- to  four-family
residential loans for portfolio.

Other non-interest income increased $464,000 for the year ended June 30, 2004 to
$1.4  million  compared to $973,000  for the prior year.  The  increase in other
non-interest  income  for the year  ended  June 30,  2004 was  primarily  due to
$512,000 of income from the investment in BOLI.  Other  non-interest  income for
the  2004  fiscal  year  also  included  the  earnings  of  the   unconsolidated
subsidiaries Trust II and Trust III, pursuant to FIN 46.

                                       42
<PAGE>

Non-Interest  Expenses.  Non-interest  expenses for the year ended June 30, 2004
were $25.4 million  compared to $29.1 million for the prior year, which included
$5.6 million of preferred  securities expense.  With the adoption of FIN 46, the
cost of the  trust  preferred  securities  was  included  in  interest  expense.
Excluding  the effect of preferred  securities  expense for the prior year,  the
increase in non-interest expenses for the year ended June 30, 2004 was partially
attributable to an increase in compensation expense related to the ESOP. For the
year ended June 30, 2004, the Company recorded  compensation  expense related to
the ESOP of $4.0 million compared to $3.1 million for the prior year, reflecting
the appreciation of the Company's stock price over the year. The majority of the
ESOP expense represented a non-cash valuation adjustment to reflect the value of
the Company's stock. The Company ceased recognizing compensation expense related
to the ESOP as of July 1, 2004,  as all ESOP  shares  were fully  allocated.  In
addition,  during 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. The Company's non-interest expenses as a
percent of average  assets  decreased  to 1.41% for the year ended June 30, 2004
from 1.58% for the prior year.

Income Tax Expense. Income tax expense for the year ended June 30, 2004 was $6.5
million compared to $8.1 million for the year ended June 30, 2003. The effective
tax rate for the year ended June 30,  2004 was 35.2%  compared  to 37.1% for the
prior year.  The decrease in the  effective  tax rate was  primarily  due to the
purchase  of BOLI,  for which the  increase in the cash  surrender  value is not
subject to tax.

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 has  competitively set 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 $50.0 million
overnight  repricing line of credit and a $50.0 million  variable rate one-month
overnight  repricing  line of credit from the FHLB of New York,  which expire in
July 2005. The Company expects to renew these lines of credit after  expiration.
Furthermore, the Company has $90.0 million of overnight variable repricing lines
of credit available from other correspondent  banks. 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, 2005, the Company had
outstanding  commitments  to extend  credit  which  amounted  to $130.8  million
(including $88.8 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.

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


                                       43

<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.

During  fiscal 2003,  the  Company's  cash inflows  included  $167.0  million of
proceeds from the sale of loans,  $286.6 million of proceeds from  maturities of
investment  securities  and principal  repayments  of loans and  mortgage-backed
securities.  In  addition,  fiscal  2003 cash  inflows  included a $3.3  million
increase in other short term  borrowings.  During the year ended June 30,  2003,
the cash  provided was used to fund  investing  activities,  which  included the
origination  and  purchase  of loans  and the  purchase  of  $457.1  million  of
investment and mortgage-backed securities.  Additionally,  during the year ended
June 30, 2003,  the cash provided was used to fund a $79.5  million  decrease in
deposits  (net of accrued  interest  payable);  to  repurchase  $15.5 million of
outstanding common shares, net of reissuances; and to pay cash dividends of $2.8
million.

Total dividends paid for the years ended June 30, 2005, 2004 and 2003 were $0.22
per share,  $0.20 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  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  N - 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, 2005 (in thousands).  Further  discussion of these
commitments  is included in Item 8 - Financial  Statements  - Notes I and N - of
the Notes to Consolidated Financial Statements.

<TABLE>
<CAPTION>
                                                Less than     1 Year      3 Years      More than
                                       Total     One Year   to 3 Years   to 5 Years     5 Years
                                    ------------------------------------------------------------
<S>                                 <C>         <C>         <C>          <C>          <C>
Contractual obligations:
   Long term debt obligations.....  $ 677,390   $ 170,447   $ 171,665    $ 166,574    $ 168,704
   Operating lease and other
      contractual obligations.....      6,959       1,124       2,261        1,305        2,269
                                    ------------------------------------------------------------
                                    $ 684,349   $ 171,571   $ 173,926    $ 167,879    $ 170,973
                                    ============================================================
</TABLE>

Long-term 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."


                                       44

<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  statement of financial condition
of PennFed Financial Services,  Inc. and Subsidiaries (the "Company") as of June
30,  2005,  and the related  consolidated  statements  of income,  comprehensive
income, changes in stockholders' equity, and cash flows for the year 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 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, 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, 2005, and the results of their
operations and their cash flows for the year 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,  2005,  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 12,
2005 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 12, 2005


                                       45

<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  statement of financial condition
of PennFed Financial Services,  Inc. and Subsidiaries (the "Company") as of June
30,  2004,  and the related  consolidated  statements  of income,  comprehensive
income, changes in stockholders' equity and cash flows for each of the two years
in the period ended June 30, 2004. 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 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,  such consolidated  financial  statements present fairly, in all
material respects,  the financial position of PennFed Financial  Services,  Inc.
and  Subsidiaries  as of June 30, 2004, and the results of their  operations and
their cash flows for each of the two years in the period  ended June 30, 2004 in
conformity with accounting principles generally accepted in the United States of
America.

As discussed in Note A to the  consolidated  financial  statements,  the Company
fully adopted FASB  Interpretation  No. 46  "Consolidation  of Variable Interest
Entities" as of July 1, 2003.

As  discussed  in  Note  V  to  the  consolidated   financial  statements,   the
consolidated statements of cash flows for the years ended June 30, 2004 and 2003
have been restated.

/s/ Deloitte & Touche LLP

Parsippany, New Jersey
August 27, 2004
(September 12, 2005 as to Note V)


                                       46

<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,  2005,  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,  2005,  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, 2005,  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, 2005, and the related consolidated statements of income,  comprehensive
income, changes in stockholders' equity, and cash flows for the year then ended,
and our report dated  September  12, 2005  expressed an  unqualified  opinion on
those consolidated financial statements.

/s/ KPMG LLP

Short Hills, New Jersey
September 12, 2005


                                       47

<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, 2005, 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,  2005,  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,  2005  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, 2005. This report appears on page 47.

    /s/ Joseph L. LaMonica         /s/ Claire M. Chadwick

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

    September 12, 2005


                                       48

<PAGE>

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

                 Consolidated Statements of Financial Condition

<TABLE>
<CAPTION>
                                                                                                      June 30,
                                                                                              --------------------------
                                                                                                 2005           2004
                                                                                              --------------------------
                                                                                                (Dollars in thousands)
<S>                                                                                           <C>            <C>
Assets
Cash and amounts due from depository institutions .......................................     $    15,220    $    14,859
Federal funds sold ......................................................................              --             --
                                                                                              --------------------------
   Cash and cash equivalents ............................................................          15,220         14,859
Investment securities available for sale, at market value, amortized cost of
   $4,849 and $4,672 at June 30, 2005 and 2004 ..........................................           5,011          4,720
Investment securities held to maturity, at amortized cost, market value of
   $406,726 and $413,215 at June 30, 2005 and 2004 ......................................         405,498        420,260
Mortgage-backed securities held to maturity, at amortized cost, market value of
   $79,109 and $100,644 at June 30, 2005 and 2004 .......................................          78,201        100,079
Loans held for sale .....................................................................           4,826             --
Loans receivable, net of allowance for loan losses of
   $6,050 and $6,249 at June 30, 2005 and 2004 ..........................................       1,460,654      1,287,473
Premises and equipment, net .............................................................          20,903         21,690
Federal Home Loan Bank of New York stock, at cost .......................................          22,391         23,773
Accrued interest receivable, net ........................................................           9,808         10,195
Intangible assets .......................................................................              --          1,361
Bank owned life insurance ("BOLI") ......................................................          23,202         12,512
Other assets ............................................................................           4,837          5,364
                                                                                              --------------------------
                                                                                              $ 2,050,551    $ 1,902,286
                                                                                              ==========================
Liabilities and Stockholders' Equity
Liabilities:
   Deposits .............................................................................     $ 1,339,491    $ 1,188,100
   Federal Home Loan Bank of New York advances ..........................................         415,465        475,465
   Other borrowings .....................................................................         107,952         59,346
   Junior Subordinated Deferrable Interest Debentures,
      net of unamortized issuance expenses of $1,218 and $1,263 at June 30, 2005
      and 2004 ..........................................................................          42,082         42,037
   Mortgage escrow funds ................................................................          10,398          9,739
   Accounts payable and other liabilities ...............................................          11,109          9,200
                                                                                              --------------------------
   Total liabilities ....................................................................       1,926,497      1,783,887
                                                                                              --------------------------

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, 13,280,038 and
      13,576,060 shares issued and outstanding at June 30, 2005 and 2004 ................             133              9
   Additional paid-in capital ...........................................................          39,092         36,866
   Retained earnings ....................................................................          84,734         81,496
   Accumulated other comprehensive income, net of taxes .................................              95             28
                                                                                              --------------------------
   Total stockholders' equity ...........................................................         124,054        118,399
                                                                                              --------------------------
                                                                                              $ 2,050,551    $ 1,902,286
                                                                                              ==========================
</TABLE>

See notes to consolidated financial statements.


                                       49

<PAGE>

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

                        Consolidated Statements of Income

<TABLE>
<CAPTION>
                                                                                  For the years ended June 30,
                                                                         ----------------------------------------------
                                                                             2005             2004              2003
                                                                         ----------------------------------------------
                                                                         (Dollars in thousands,except per share amounts)
<S>                                                                      <C>            <C>                 <C>
Interest and Dividend Income:
   Interest and fees on loans .......................................    $     75,830   $         68,213    $    83,409
   Interest on federal funds sold ...................................              --                178            233
   Interest and dividends on investment securities ..................          24,384             22,816         15,167
   Interest on mortgage-backed securities ...........................           4,508              5,069          7,562
                                                                         ----------------------------------------------
                                                                              104,722             96,276        106,371
                                                                         ----------------------------------------------
Interest Expense:
   Deposits .........................................................          30,356             26,634         32,870
   Borrowed funds ...................................................          27,981             29,342         29,974
   Junior subordinated deferrable interest debentures ...............           3,047              2,698            112
                                                                         ----------------------------------------------
                                                                               61,384             58,674         62,956
                                                                         ----------------------------------------------
Net Interest and Dividend Income Before
   Provision for Loan Losses ........................................          43,338             37,602         43,415
Provision for Loan Losses ...........................................              --                 --            525
                                                                         ----------------------------------------------
Net Interest and Dividend Income After
   Provision for Loan Losses ........................................          43,338             37,602         42,890
                                                                         ----------------------------------------------

Non-Interest Income:
   Service charges ..................................................           3,096              4,175          5,232
   Income on BOLI ...................................................             690                512             --
   Net gain on sales of loans .......................................             394                759          1,863
   Net gain from real estate operations .............................             156                 58              3
   Other ............................................................             660                925            973
                                                                         ----------------------------------------------
                                                                                4,996              6,429          8,071
                                                                         ----------------------------------------------
Non-Interest Expenses:
   Compensation and employee benefits ...............................          12,263             14,593         13,454
   Net occupancy expense ............................................           2,319              1,894          1,692
   Equipment ........................................................           2,140              2,057          2,085
   Amortization of intangible assets ................................           1,361              1,816          1,866
   Advertising ......................................................             719                390            210
   Federal deposit insurance premium ................................             172                168            192
   Preferred securities expense .....................................              --                 --          5,638
   Other ............................................................           5,197              4,512          3,983
                                                                         ----------------------------------------------
                                                                               24,171             25,430         29,120
                                                                         ----------------------------------------------
Income Before Income Taxes ..........................................          24,163             18,601         21,841
Income Tax Expense ..................................................           8,669              6,543          8,107
                                                                         ----------------------------------------------
Net Income ..........................................................    $     15,494   $         12,058    $    13,734
                                                                         ==============================================

Weighted average number of common shares outstanding:
   Basic ............................................................      13,612,502         13,548,796     13,922,466
                                                                         ==============================================
   Diluted ..........................................................      14,010,684         14,449,170     14,971,562
                                                                         ==============================================
Net income per common share:
   Basic ............................................................    $       1.14   $           0.89    $      0.99
                                                                         ==============================================
   Diluted ..........................................................    $       1.11   $           0.83    $      0.92
                                                                         ==============================================
</TABLE>

See notes to consolidated financial statements.


                                       50

<PAGE>

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

                Consolidated Statements of Comprehensive Income

<TABLE>
<CAPTION>
                                                                                For the years ended June 30,
                                                                              -------------------------------
                                                                                 2005       2004       2003
                                                                              -------------------------------
                                                                                      (In thousands)
<S>                                                                           <C>         <C>       <C>
Net income .............................................................      $   15,494  $ 12,058  $  13,734
Other comprehensive income (loss), net of tax:
   Unrealized holding gains (losses) arising during period
      on investment securities available for sale, net of tax ..........              67      (149)       159
                                                                              -------------------------------
Comprehensive income ...................................................      $   15,561  $ 11,909  $  13,893
                                                                              ===============================
</TABLE>

See notes to consolidated financial statements.


                                       51

<PAGE>

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

                           Consolidated Statements of
                        Changes in Stockholders' Equity
                For the Years Ended June 30, 2005, 2004 and 2003

<TABLE>
<CAPTION>
                                                                                      Employee
                                                Serial                  Additional     Stock
                                              Preferred      Common       Paid-In    Ownership
                                                Stock        Stock        Capital       Plan
                                              -------------------------------------------------
                                               (Dollars in thousands,except per share amounts)
<S>                                            <C>          <C>         <C>           <C>
Balance at June 30, 2002                       $  --        $  60       $  61,717     $ (1,244)
Allocation of Employee Stock
   Ownership Plan ("ESOP") stock                                                           600
ESOP adjustment                                                             1,869
Purchase of 1,200,000 shares
   of treasury stock
Issuance of 180,954 shares
   of treasury stock for options
   exercised and Dividend
   Reinvestment Plan ("DRP")                                                 (561)
Cash dividends of $0.20 per
   common share
Increase in unrealized gain on
   investment securities available
   for sale, net of income taxes of $87
Net income for the year ended
   June 30, 2003
                                              --------------------------------------------------

Balance at June 30, 2003                          --           60          63,025         (644)
Allocation of 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 DRP                                                       (3,309)
Cash dividends of $ 0.20 per
   common share
Decrease in unrealized gain
   on investment securities
   available for sale, net of income
   taxes of $(77)
Reclassification of treasury shares                           (51)        (25,509)
Net income for the year ended
   June 30, 2004
                                              --------------------------------------------------
Balance at June 30, 2004                          --            9          36,866           --
Repurchase of 731,800
   outstanding shares                                          (6)         (1,823)
Issuance of 435,778 shares of
   stock for options exercised
   and DRP                                                      2           1,087
Tax benefit from stock option plan                                          2,962
Cash dividends of $0.22 per
   common share
Increase in unrealized gain 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
Net income for the year ended
   June 30, 2005
                                              --------------------------------------------------
Balance at June 30, 2005                       $  --        $ 133       $  39,092     $     --
                                              ==================================================

<CAPTION>
                                                       Accumulated
                                                          Other
                                           Retained   Comprehensive    Treasury
                                           Earnings       Income         Stock        Total
                                          -----------------------------------------------------
                                             (Dollars in thousands,except per share amounts)
<S>                                       <C>          <C>             <C>          <C>
Balance at June 30, 2002                  $ 116,547    $     18        $ (58,337)   $ 118,761
Allocation of Employee Stock
   Ownership Plan ("ESOP") stock                                                          600
ESOP adjustment                                                                         1,869
Purchase of 1,200,000 shares
   of treasury stock                                                     (16,106)     (16,106)
Issuance of 180,954 shares
   of treasury stock for options
   exercised and Dividend
   Reinvestment Plan ("DRP")                    (48)                       1,199          590
Cash dividends of $0.20 per
   common share                              (2,772)                                   (2,772)
Increase in unrealized gain on
   investment securities available
   for sale, net of income taxes of $87                     159                           159
Net income for the year ended
   June 30, 2003
                                             13,734                                    13,734
                                          -----------------------------------------------------

Balance at June 30, 2003                    127,461         177          (73,244)     116,835
Allocation of 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 DRP                            (40)                       5,259        1,910
Cash dividends of $ 0.20 per
   common share                              (2,650)                                   (2,650)
Decrease in unrealized gain
   on investment securities
   available for sale, net of income
   taxes of $(77)                                          (149)                         (149)
Reclassification of treasury shares         (55,333)                      80,893           --
Net income for the year ended
   June 30, 2004                             12,058                                    12,058
                                          -----------------------------------------------------
Balance at June 30, 2004                     81,496          28               --      118,399
Repurchase of 731,800
   outstanding shares                        (9,451)                                  (11,280)
Issuance of 435,778 shares of
   stock for options exercised
   and DRP                                      247                                     1,336
Tax benefit from stock option plan                                                      2,962
Cash dividends of $0.22 per
   common share                              (2,924)                                   (2,924)
Increase in unrealized gain 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               (128)                                       --
Net income for the year ended
   June 30, 2005                             15,494                                    15,494
                                          -----------------------------------------------------
Balance at June 30, 2005                  $  84,734    $     95        $      --    $ 124,054
                                          =====================================================
</TABLE>

See notes to consolidated financial statements.


                                       52

<PAGE>

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

                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                                   For the years ended June 30,
                                                                                              --------------------------------------
                                                                                                 2005         2004          2003
                                                                                                          As restated   As restated
                                                                                                            (Note V)      (Note V)
                                                                                              --------------------------------------
                                                                                                        (In thousands)
<S>                                                                                           <C>         <C>           <C>
Cash Flows from Operating Activities:
  Net income ..............................................................................   $  15,494   $    12,058   $    13,734
  Adjustments to reconcile net income to net cash provided by operating activities:
  Net gain on sales of loans ..............................................................        (394)         (759)       (1,863)
  Proceeds from sales of loans held for sale ..............................................      11,154        48,667       154,811
  Originations of loans held for sale .....................................................     (12,051)      (42,266)     (158,050)
  Net gain on sales of real estate owned ..................................................        (158)          (57)           --
  Amortization of investment and mortgage-backed securities premium, net ..................         249           503           856
  Depreciation and amortization ...........................................................       1,920         1,733         1,717
  Provision for loan losses ...............................................................          --            --           525
  Amortization of cost of stock plans .....................................................          --         3,304         2,469
  Tax benefit related to stock options ....................................................       2,962            --            --
  Amortization of intangible assets .......................................................       1,361         1,816         1,866
  Amortization of premiums on loans and loan fees .........................................       1,824         2,878         7,068
  Amortization of trust preferred securities and junior subordinated debentures
    issuance costs ........................................................................          45            38         1,587
  Income on BOLI ..........................................................................        (690)         (512)           --
  Increase (decrease) in deferred income tax liability ....................................       1,219           163        (1,539)
  (Increase) decrease in accrued interest receivable, net of accrued interest payable .....         329        (1,627)          552
  (Increase) decrease in other assets .....................................................         527          (590)       (3,788)
  Increase (decrease) in accounts payable and other liabilities ...........................         644        (8,611)        5,106
  Increase (decrease) in mortgage escrow funds ............................................         659          (752)       (2,281)
  Other, net ..............................................................................          --             6            --
                                                                                              --------------------------------------
  Net cash provided by operating activities ...............................................      25,094        15,992        22,770
                                                                                              --------------------------------------

Cash Flows From Investing Activities:
  Proceeds from maturities of investment securities held to maturity ......................      44,652        96,275       286,571
  Purchases of investment securities held to maturity .....................................     (30,000)     (177,140)     (446,677)
  Purchases of investment securities available for sale ...................................        (177)         (205)         (201)
  Proceeds from principal repayments of mortgage-backed securities ........................      21,739        47,976        85,489
  Purchases of mortgage-backed securities .................................................          --       (54,823)      (10,190)
  Net proceeds (outflow) from principal repayments of loans and loan originations .........    (203,896)      (56,769)      198,296
  Proceeds from loans sold ................................................................      24,883        42,729        12,232
  Purchases of loans ......................................................................          --       (53,034)         (676)
  Purchases of premises and equipment .....................................................      (1,133)       (2,326)       (3,222)
  Net inflow from real estate owned activity ..............................................         630            84            --
  Purchases of BOLI .......................................................................     (10,000)      (12,000)           --
  Redemptions of Federal Home Loan Bank of New York stock .................................       1,382         1,450           433
                                                                                              --------------------------------------
  Net cash provided by (used in) investing activities .....................................    (151,920)     (167,783)      122,055
                                                                                              --------------------------------------

Cash Flows From Financing Activities:
  Net increase (decrease) in deposits .....................................................     151,449        93,550       (79,513)
  Proceeds from advances from the Federal Home Loan Bank of New York and other
     borrowings ...........................................................................      29,475        24,986            --
  Repayment of advances from the Federal Home Loan Bank of New York and other borrowings ..     (60,000)      (48,350)           --
  Increase in other short term borrowings .................................................      19,131        27,066         3,330
  Net proceeds from issuance of junior subordinated debentures ............................          --            --        30,003
  Redemption of trust preferred securities ................................................          --            --       (34,500)
  Cash dividends paid .....................................................................      (2,924)       (2,650)       (2,772)
  Repurchases of outstanding shares, net of reissuances ...................................      (9,944)      (10,998)      (15,516)
                                                                                              --------------------------------------
  Net cash provided by (used in) financing activities .....................................     127,187        83,604       (98,968)
                                                                                              --------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents ......................................         361       (68,187)       45,857
Cash and Cash Equivalents, Beginning of Year ..............................................      14,859        83,046        37,189
                                                                                              --------------------------------------
Cash and Cash Equivalents, End of Year ....................................................   $  15,220   $    14,859   $    83,046
                                                                                              ======================================

Supplemental Disclosures of Cash Flow Information:
  Cash paid during the year for:
  Interest ................................................................................   $  61,510   $    59,335   $    63,453
                                                                                              ======================================
  Income taxes ............................................................................   $   3,649   $     7,105   $    11,616
                                                                                              ======================================

Supplemental Schedule of Non-Cash Activities:
  Transfer of loans receivable to loans held for sale, at lower of cost or market .........   $  28,417   $    33,876   $    13,047
                                                                                              ======================================
  Transfer of loans receivable to real estate owned, net ..................................   $     472   $        --   $        --
                                                                                              ======================================
</TABLE>

See notes to consolidated financial statements.


                                       53

<PAGE>

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

                   Notes to Consolidated Financial Statements
                    Years Ended June 30, 2005, 2004 and 2003

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, amounts due from depository  institutions and Federal
funds sold.

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  in
stockholders'  equity.  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 to hold the security to maturity.  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 interest applicable  to prior  years,


                                       54

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

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 future 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,  historical
loss experience,  review of specific problem loans,  current economic conditions
that may  affect  the  borrowers'  ability to pay and other  factors  which,  in
management's  judgement,  deserve  consideration  in estimating  probable credit
losses.  Economic conditions may result in the necessity to change the allowance
quickly 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.

                                       55
<PAGE>

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



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.

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 O -  Stockholders'  Equity  and
Regulatory Capital.

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

Recently  Adopted  Accounting  Standards - Effective  July 1, 2003,  the Company
fully  adopted  Financial  Accounting  Standards  Board  Interpretation  No. 46,
"Consolidation  of  Variable  Interest  Entities"  ("FIN  46") as it  relates to
PennFed  Capital  Trust II ("Trust  II") and PennFed  Capital  Trust III ("Trust
III"),  which were  formed by the  Company  for the  purpose  of  issuing  trust
preferred  securities  in March 2001 and June 2003,  respectively.  Although the
required adoption date was extended,  the Company elected to early adopt FIN 46,
as permitted.  FIN 46 is an interpretation  of Accounting  Research Bulletin No.
51, "Consolidated  Financial Statements" and addresses consolidation by business
enterprises of variable interest entities having certain  characteristics.  As a
result of the  adoption of FIN 46,  Trust III was not  consolidated  at June 30,
2003 and Trust II was de-consolidated  effective July 1, 2003. The full adoption
of FIN 46 did not have an overall impact on the Company's consolidated financial
condition,   results  of  operations  or  cash  flows.  The  primary  effect  of
de-consolidating  Trust II was a change in the balance sheet  classification  of
the liabilities from Guaranteed  Preferred Beneficial Interests in the Company's
Junior Subordinated  Deferrable Interest Debentures to long-term borrowings.  In
December  2003, FIN 46 was revised ("FIN 46R") to clarify some of the provisions
in the original FIN 46 and to exempt certain entities from its requirements. The
revisions to FIN 46 contained in FIN 46R 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,  2004 and
2003,  amortization of the deposit premium intangible of $1,361,000,  $1,814,000
and $1,814,000 was recorded,  respectively.  The deposit premium  intangible was
fully  amortized  by June  30,  2005.  At June 30,  2004,  the  deposit  premium
intangible was $1,361,000.


                                       56

<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, 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
                                                 =================================================

June 30, 2004
Available for Sale:
Equity securities ............................   $   4,672   $       48   $       --   $     4,720
                                                 =================================================
Held to Maturity:
U.S. government agency obligations ...........   $ 386,134   $       41   $   (8,565)  $   377,610
Corporate bonds ..............................       1,026          250           --         1,276
Trust preferred securities ...................      33,100        1,370         (141)       34,329
                                                 -------------------------------------------------
   Total held to maturity ....................   $ 420,260   $    1,661   $   (8,706)  $   413,215
                                                 =================================================
</TABLE>

The amortized cost and estimated fair market value of investment securities held
to maturity at June 30, 2005,  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.

<TABLE>
<CAPTION>
                                                                               June 30, 2005
                                                                          ------------------------
                                                                                        Estimated
                                                                          Amortized    Fair Market
                                                                             Cost         Value
                                                                          ------------------------
                                                                               (In thousands)
<S>                                                                       <C>          <C>
Held to Maturity:
Maturing after five years but within ten years ........................   $   77,866   $    78,157
Maturing after ten years ..............................................      327,632       328,569
                                                                          ------------------------
  Total held to maturity ..............................................   $  405,498   $   406,726
                                                                          ========================
</TABLE>

At June 30,  2005 and  2004,  investment  securities  with a  carrying  value of
$189,814,000 and $138,403,000, 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, 2005,
2004 and 2003.


                                       57

<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, 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>
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>

<TABLE>
<CAPTION>
                                                                              June 30, 2004
                                                 ------------------------------------------------------------------------
                                                   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>
U.S. Government agency obligations ...........   $ 372,614   $   (8,565)  $      --      $  --     $ 372,614   $ (8,565)
Trust preferred securities ...................       2,234         (138)      1,083         (3)        3,317       (141)
                                                 ------------------------------------------------------------------------
  Total ......................................   $ 374,848   $   (8,703)  $   1,083      $  (3)    $ 375,931   $ (8,706)
                                                 ========================================================================
</TABLE>

At June 30,  2005,  the  majority  of the  unrealized  losses in the  investment
portfolio were comprised of securities  issued by U.S.  Government  agencies and
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.

D. Mortgage-Backed Securities

<TABLE>
<CAPTION>
                                                                                                          June 30,
                                                                                                   ----------------------
                                                                                                      2005        2004
                                                                                                   ----------------------
                                                                                                       (In thousands)
<S>                                                                                                <C>         <C>
Ginnie Mae .....................................................................................   $     151   $      249
Freddie Mac ....................................................................................      35,221       45,526
Fannie Mae .....................................................................................      42,529       53,860
Collateralized Mortgage Obligations/REMICs/IOs .................................................         161          225
                                                                                                   ----------------------
                                                                                                      78,062       99,860
Unamortized premiums, net ......................................................................         139          219
                                                                                                   ----------------------
                                                                                                   $  78,201   $  100,079
                                                                                                   ======================
</TABLE>

The amortized cost and estimated fair market value of mortgage-backed securities
held to maturity at June 30, 2005, by contractual maturity, are shown below.

<TABLE>
<CAPTION>
                                                                                                       June 30, 2005
                                                                                                   ----------------------
                                                                                                               Estimated
                                                                                                   Amortized  Fair Market
                                                                                                     Cost         Value
                                                                                                   ----------------------
                                                                                                       (In thousands)
<S>                                                                                                <C>        <C>
Maturing within one year .......................................................................   $       6   $        6
Maturing after one year but within five years ..................................................       2,396        2,491
Maturing after five years but within ten years .................................................       3,152        3,295
Maturing after ten years .......................................................................      72,647       73,317
                                                                                                   ----------------------
                                                                                                   $  78,201   $   79,109
                                                                                                   ======================
</TABLE>


                                       58

<PAGE>

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

There were no sales of  mortgage-backed  securities  in the years ended June 30,
2005, 2004 and 2003.

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

                                                                   June 30,
                                                            --------------------
                                                              2005        2004
                                                            --------------------
                                                               (In thousands)
Pledged to secure:
  Federal Home Loan Bank of New York advances ...........   $ 29,561    $ 39,954
  Other borrowings ......................................     15,154      34,555
  Public funds on deposit ...............................        361         554
                                                            --------------------
                                                            $ 45,076    $ 75,063
                                                            ====================

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, 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>
Ginnie Mae .......................................    $ --      $   --     $    --    $  --      $    --   $    --
Freddie Mac ......................................      --          --      24,443      (42)      24,443       (42)
Fannie Mae .......................................      --          --       7,363      (68)       7,363       (68)
Collateralized Mortgage Obligations/REMICs/IOs ...      --          --          --       --           --        --
                                                     ---------------------------------------------------------------
  Total ..........................................    $ --      $   --     $31,806    $(110)     $31,806   $  (110)
                                                     ===============================================================
</TABLE>

<TABLE>
<CAPTION>
                                                                              June 30, 2004
                                                     ---------------------------------------------------------------
                                                     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>
Ginnie Mae .......................................   $    --   $    --      $  --     $  --      $    --   $    --
Freddie Mac ......................................    28,807      (528)        --        --       28,807      (528)
Fannie Mae .......................................    22,710      (437)        --        --       22,710      (437)
Collateralized Mortgage Obligations/REMICs/IOs ...        --        --         --        --           --        --
                                                     ---------------------------------------------------------------
  Total ..........................................   $51,517   $  (965)     $  --     $  --      $51,517   $  (965)
                                                     ===============================================================
</TABLE>

At June 30, 2005,  mortgage-backed  securities  issued by Freddie Mac and Fannie
Mae had  unrealized  losses 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.


                                       59

<PAGE>

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

E. Loans Receivable and Loans Held For Sale, Net

                                                              June 30,
                                                      --------------------------
                                                         2005           2004
                                                      --------------------------
                                                           (In thousands)
First Mortgage Loans:
   Conventional ...................................   $1,147,798     $  995,335
   FHA insured ....................................          605          1,178
   VA guaranteed ..................................           86            146
                                                      --------------------------
   Total one- to four-family ......................    1,148,489        996,659
   Commercial and multi-family ....................      169,765        172,244
                                                      --------------------------
Total first mortgage loans ........................    1,318,254      1,168,903
                                                      --------------------------
Consumer:
   Second mortgages ...............................       91,147         67,538
   Home equity lines of credit ....................       49,901         46,288
   Other ..........................................        3,375          3,862
                                                      --------------------------
Total consumer loans ..............................      144,423        117,688
                                                      --------------------------
Total loans .......................................    1,462,677      1,286,591
                                                      --------------------------
Add (Less):
   Allowance for loan losses ......................       (6,050)        (6,249)
   Unamortized premium ............................          519            655
   Net deferred loan costs ........................        8,334          6,476
                                                      --------------------------
                                                           2,803            882
                                                      --------------------------
                                                      $1,465,480     $1,287,473
                                                      ==========================

At June 30, 2005,  there were  $4,826,000 of one- to four-family  mortgage loans
included in loans held for sale and there were  commitments to sell these loans.
At June 30, 2004, there were no commitments to sell loans.

Non-accruing  loans at June 30, 2005 and 2004 were  $2,619,000  and  $2,182,000,
respectively,  which  represents 0.18% and 0.17%,  respectively,  of total loans
outstanding.  The total  interest  income that would have been  recorded for the
years ended June 30, 2005 and 2004,  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 $79,000 and $113,000, respectively.

At June 30, 2005 and 2004, there were no impaired loans.

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

                                                      Year ended June 30,
                                                 -----------------------------
                                                  2005       2004       2003
                                                 -----------------------------
                                                        (In thousands)
Balance, beginning of year ...................   $6,249     $6,284     $5,821
Provisions for loan losses ...................       --         --        525
Losses charged to allowance ..................     (199)       (35)       (62)
                                                 -----------------------------
Balance, end of year .........................   $6,050     $6,249     $6,284
                                                 =============================

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, 2005 and 2004,  the  commercial  and  multi-family  real estate loan
portfolio totaled $169,765,000 and $172,244,000,  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  $47,281,000 and $47,890,000 at June
30, 2005 and 2004,  respectively.  In addition,  at June 30, 2005 and 2004,  the
commercial and multi-family real estate loan portfolio  included  $3,185,000 and
$1,590,000, respectively, of lines of credit secured by non-real estate business
assets. Furthermore,  there were $5,439,000 and $11,001,000 of loans outstanding
at June 30, 2005 and 2004, respectively, under the accounts receivable financing


                                       60

<PAGE>

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

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 totaled  approximately  $69,062,000 and $66,329,000 at
June 30,  2005 and 2004,  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 $715,000 and $1,064,000 at June 30,
2005 and 2004, respectively.

F. Premises and Equipment, Net

                                                                 June 30,
                                                           --------------------
                                                            2005         2004
                                                           --------------------
                                                              (In thousands)
Land ....................................................  $ 5,577      $ 5,577
Buildings and improvements ..............................   18,326       18,017
Leasehold improvements ..................................    2,316        2,139
Furniture and equipment .................................   15,758       15,255
                                                           --------------------
                                                            41,977       40,988
Less: accumulated depreciation and amortization .........   21,074       19,298
                                                           --------------------
                                                           $20,903      $21,690
                                                           ====================

G. Real Estate Owned

                                                                 June 30,
                                                           -------------------
                                                            2005         2004
                                                           -------------------
                                                              (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,
                                                      ------------------------
                                                       2005      2004    2003
                                                      ------------------------
                                                           (In thousands)
Net gain on sales of real estate owned ............    $158      $ 57    $  --
Holding costs, net ................................      (2)        1        3
Provision for losses on real estate owned .........      --        --       --
                                                      ------------------------
Net gain from real estate operations ..............    $156      $ 58    $   3
                                                      ========================

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

                                                         Year ended June 30,
                                                      ------------------------
                                                       2005      2004    2003
                                                      ------------------------
                                                           (In thousands)
Balance, beginning of year ........................    $ 50      $ 82    $  82
Provisions charged to operations ..................      --        --       --
Losses charged to allowance .......................      --       (32)      --
                                                      ------------------------
Balance, end of year ..............................    $ 50      $ 50    $  82
                                                      ========================


                                       61

<PAGE>

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

H.  Deposits

<TABLE>
<CAPTION>
                                                    June 30, 2005                  June 30, 2004
                                             ----------------------------------------------------------
                                                             Weighted                        Weighted
                                                              Average                        Average
                                               Amount      Interest Rate      Amount      Interest Rate
                                             ----------------------------------------------------------
                                                               (Dollars in thousands)
<S>                                          <C>           <C>              <C>           <C>
Non-interest-bearing demand ..............   $   71,769                     $   66,991
Interest-bearing demand ..................      105,011        0.95%            84,118        0.21%
Money market accounts ....................       50,251        2.59             18,501        0.66
Savings accounts .........................      385,360        2.53            418,678        2.57

Certificates with remaining maturities of:
  One year or less .......................      438,487        2.88            351,646        2.73
  Over one year to three years ...........      222,218        3.66            199,240        3.02
  Over three years to five years .........       65,252        4.15             47,725        4.07
                                             ----------                     ----------

Total certificates .......................      725,957        3.23            598,611        2.93
Accrued interest payable .................        1,143                          1,201
                                             ----------                     ----------

                                             $1,339,491        2.65%        $1,188,100        2.41%
                                             ==========                     ==========
</TABLE>

The  aggregate  amount of accounts with a  denomination  of $100,000 or more was
approximately   $464,579,000  and  $374,179,000  at  June  30,  2005  and  2004,
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 at the earlier of the callable date or maturity date:

<TABLE>
<CAPTION>
                                                    June 30, 2005                  June 30, 2004
                                             ----------------------------------------------------------
                                                             Weighted                        Weighted
                                                              Average                        Average
                                               Amount      Interest Rate      Amount      Interest Rate
                                             ----------------------------------------------------------
                                                                 (Dollars in thousands)
<S>                                          <C>           <C>              <C>           <C>
Within one year ..........................   $  130,000        5.24%        $  160,000        5.86%
After one year but within two years ......       40,465        5.51            130,000        5.24
After two years but within three years ...       55,000        5.49             40,465        5.51
After three years but within four years ..           --          --             55,000        5.49
After four years but within five years ...      140,000        6.46                 --          --
After five years .........................       50,000        5.61             90,000        6.29
                                             ----------                     ----------
                                             $  415,465        5.75%        $  475,465        5.70%
                                             ==========                     ==========
</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.

At June  30,  2005,  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 $50,000,000.  Both credit lines renew annually and
currently expire in July 2005. Each line of credit has a variable interest rate.
At June 30, 2005, the Company had  $32,350,000 of overnight  borrowings from the
FHLB of New York with an interest rate of 3.49%. At June 30, 2004, there were no
overnight  borrowings  under either  credit line.  In addition,  the Company had
available  overnight variable repricing lines of credit with other correspondent
banks totaling  $90,000,000  on an unsecured  basis.  There were  $12,800,000 of
borrowings  under these  lines at June 30, 2005 with an interest  rate of 3.50%.
There were  $7,000,000 of borrowings  under these lines at June 30, 2004 with an
interest rate of 1.56%. The Company also has a $10,000,000  unsecured  revolving
line of credit.  This line of credit has a variable interest rate tied to 30-day
LIBOR.  At June 30, 2005,  the Company had  $8,341,000 of borrowings  under this
line of credit with an  interest  rate of 4.64%.  Borrowings  under this line at
June 30, 2004 were $9,892,000 with an interest rate of 2.63%.


                                       62

<PAGE>

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

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  $57,414,000  and  $45,240,000  and a
market  value  of  $57,296,000  and  $44,191,000  at June  30,  2005  and  2004,
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 at the maturity date:

<TABLE>
<CAPTION>
                                                    June 30, 2005                  June 30, 2004
                                             ----------------------------------------------------------
                                                             Weighted                       Weighted
                                                              Average                       Average
                                               Amount      Interest Rate      Amount      Interest Rate
                                             ----------------------------------------------------------
                                                              (Dollars in thousands)
<S>                                          <C>           <C>              <C>           <C>
Within one year ..........................   $   15,000        2.88%        $   17,468        1.21%
After one year but within five years .....       39,461        3.42             24,986        3.23
                                             ----------                     ----------
                                             $   54,461        3.27%        $   42,454        2.40%
                                             ==========                     ==========
</TABLE>

The average  balance of reverse  repurchase  agreements for the years ended June
30, 2005 and 2004 was $61,898,000 and $22,488,000, 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 6.66% and 4.77% at June
30, 2005 and 2004, 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.


                                       63

<PAGE>

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

K. Guaranteed   Preferred   Beneficial   Interests  in  the  Company's   Junior
   Subordinated Deferrable Interest Debentures

In 1997, PennFed formed a wholly-owned trust subsidiary, PennFed Capital Trust I
("Trust I"). On October 21, 1997, Trust I sold $34.5 million of 8.90% cumulative
trust preferred securities to the public which are reflected on the Consolidated
Statements of Financial Condition as Guaranteed  Preferred  Beneficial Interests
in the Company's Junior  Subordinated  Deferrable Interest  Debentures.  Trust I
used the proceeds  from the sale of its trust  preferred  securities to purchase
8.90% junior  subordinated  deferrable interest debentures issued by PennFed. On
June  3,  2003,  the  Company   redeemed  the  $34.5  million  of  8.90%  junior
subordinated  deferrable  interest  debentures,  which  resulted  in the trustee
redeeming the related trust preferred securities issued by Trust I.

Distributions payable on these trust preferred securities have historically been
included as a component of non-interest  expense on the Consolidated  Statements
of Income.

L. Employee Benefit Plans

401(k) Plan

The Company's  employee  benefits  include the Penn Federal  Savings Bank 401(k)
Plan (the  "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 in the Plan.
For the year ended June 30, 2005, the Plan provided a safe harbor profit sharing
contribution  of $641,000.  For the years ended June 30, 2004 and 2003, the Plan
provided for a discretionary Company match of employee contributions of $106,000
and $139,000,  respectively. At June 30, 2005 and 2004, the Plan assets included
common  stock of the  Company  with a market  value of  $926,000  and  $831,000,
respectively.  Effective  July 1,  2005,  the  Company  merged the Plan with the
Employee Stock Ownership Plan.

Employee Stock Ownership Plan ("ESOP")

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 years  ended  June 30,  2004 and 2003,  the Bank  recorded  compensation
expense  related to the ESOP of $4,045,000  and  $3,105,000,  respectively.  The
compensation  expense  related to the ESOP included  $3,453,000 and  $2,606,000,
respectively,  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 and 239,772 shares for the years
ended June 30, 2004 and 2003, respectively, to participants in the plan.

As noted above,  effective  July 1, 2005,  the Company  merged the ESOP with the
401(k) 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


                                       64

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

the options  are  established,  by the  Compensation  Committee  of the Board of
Directors.  Transactions  during the years  ended June 30,  2005,  2004 and 2003
relating to the Option Plan are as follows:

                                                                      Weighted
                                                                      Average
                                                                      Exercise
                                                         Options        Price
                                                        ----------------------
Balance, June 30, 2002 ............................     2,397,032     $   5.21
  Granted .........................................            --           --
  Exercised .......................................      (173,826)        3.40
  Expired .........................................            --           --
  Forfeited .......................................            --           --
                                                        ----------------------
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
                                                        ======================

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 three years in the
period  ended June 30,  2005,  as all grants had fully  vested prior to June 30,
2002.

In December 2004, the Financial  Accounting  Standards Board issued 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.

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  expects to adopt SFAS 123R by  recognizing  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 June 30, 2005,
the Company had no stock  options  outstanding  for which  compensation  expense
would be recognized after adoption of SFAS 123R.

At June 30, 2005,  1,104,944  options were  exercisable,  with  exercise  prices
ranging from $3.97 to $8.59.  At June 30, 2004 and 2003,  1,536,244  options and
2,217,206 options,  respectively,  were exercisable with exercise prices ranging
from $2.63 to $8.59.


                                       65

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

The following table summarizes  information about stock options  outstanding and
exercisable as of June 30, 2005:

                                                           Weighted
                                 Number                     Average
   Exercise                   Outstanding                  Remaining
    Prices                  at June 30, 2005                 Life
--------------------------------------------------------------------
     $3.97                        149,940                 1.06 years
     $6.94                         77,200                 2.06
     $8.41                        118,504                 4.08
     $8.59                        759,300                 2.44
                                ---------
$3.97 to $8.59                  1,104,944                 2.40 years
                                =========

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, 2005
and 2004,  the benefit  obligation  of $698,000 and $387,000,  respectively,  is
included  in  Accounts  payable  and  other   liabilities  in  the  Consolidated
Statements of Financial  Condition.  For both periods,  the assumptions  used in
calculating the benefit obligation 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  year  ending June 30, 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:

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

Service cost ..........................   $  245     $  43     $ 227     $  40
Interest cost .........................       27         5         9         2
Amortization of prior service cost ....       (6)       (2)       (6)       (2)
                                          -------------------------------------
Net periodic pension expense ..........   $  266     $  46     $ 230     $  40
                                          =====================================

Long-Term Care Insurance Program

In January 2005, Penn Federal Savings Bank (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.  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.


                                       66

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

M. Income Taxes

The income tax provision is comprised of the following components:

                                                     Year ended June 30,
                                               --------------------------------
                                                 2005        2004        2003
                                               --------------------------------
                                                       (In thousands)
Current provision .........................    $ 7,450     $ 6,380     $ 9,646
Deferred expense (benefit) ................      1,219         163      (1,539)
                                               --------------------------------
Total income tax provision ................    $ 8,669     $ 6,543     $ 8,107
                                               ================================

Income taxes payable is included in Accounts  payable and other  liabilities  in
the  Consolidated  Statements of Financial  Condition at June 30, 2005 and 2004.
The financial  statements  also include a net deferred tax asset of $99,000 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, 2005 and
2004 is as follows:

                                                                 June 30,
                                                           --------------------
                                                             2005        2004
                                                           --------------------
                                                              (In thousands)
Deferred tax assets:
  Allowance for loan losses ............................   $ 2,468     $ 2,544
  Environmental reserves ...............................       134         135
  Deposit premium intangible ...........................     2,347       2,223
  Depreciation .........................................        --         170
  SERP and DP accrual ..................................       285         158
  New Jersey Alternative Minimum Assessment credit .....       641         310
  State net operating loss carryforward ................     1,406         593
                                                           --------------------
Total deferred tax assets ..............................     7,281       6,133
Valuation allowance for state deferred tax assets ......    (2,063)     (1,130)
                                                           --------------------
Deferred tax asset after valuation allowance ...........     5,218       5,003
                                                           --------------------
Deferred tax liabilities:
  Net deferred loan costs ..............................     4,151       3,333
  Depreciation .........................................       550          --
  Purchase accounting ..................................       155         155
  Servicing asset ......................................       197         138
  Unrealized gain on investment securities available
    for sale ...........................................        66          20
                                                           --------------------
Total deferred tax liabilities .........................     5,119       3,646
                                                           --------------------
Net deferred tax asset .................................   $    99     $ 1,357
                                                           ====================

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

                                                         Year ended June 30,
                                                    ----------------------------
                                                      2005      2004      2003
                                                    ----------------------------
                                                           (In thousands)
Income tax provision at Federal statutory rate ..   $ 8,457   $ 6,510   $ 7,644
Amortization of intangible assets................        --         1        18
State and local income tax provision ............       417       180       598
Income on BOLI ..................................      (241)     (179)       --
Other, net ......................................        36        31      (153)
                                                    ----------------------------
Total income tax provision ......................   $ 8,669   $ 6,543   $ 8,107
                                                    ============================

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 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.

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

The Company has state net operating  loss  carryforwards  of $15.6 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.

N. Commitments and Contingencies

Lease  Commitments  -- At June 30, 2005,  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)
--------------------                                            --------------
2006 .......................................................        $  710
2007 .......................................................           762
2008 .......................................................           672
2009 .......................................................           501
2010 .......................................................           390
2011 and later .............................................         2,269
                                                                    ------
                                                                    $5,304
                                                                    ======

Rent  expense  under  long-term  operating  leases for  certain  branch  offices
amounted to  $717,000,  $472,000 and $348,000 for the years ended June 30, 2005,
2004 and 2003,  respectively.  Rental income of $532,000,  $534,000 and $532,000
for the  years  ended  June 30,  2005,  2004 and 2003,  respectively,  is netted
against occupancy expense in the Consolidated Statements of Income.

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,
                                                         -----------------------
                                                          2005            2004
                                                         -----------------------
                                                             (In thousands)
Commitments to extend credit ...................         $35,711         $15,997
Unused lines of credit .........................          88,789          89,153
Commitments to sell loans ......................           1,447             --

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.

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,  2005,  an  environmental
liability of $328,000 was included in Accounts payable and other  liabilities on
the  Company's  Consolidated  Statements  of  Financial  Condition.   Management
believes  the total  current  liability  of  $328,000  represents  the  probable
liability at this time.

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

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.

O. 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.

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
the year ended June 30, 2003, the Company  repurchased  1,200,000  shares of its
outstanding common stock. The prices paid for the repurchased shares ranged from
$12.68 to $14.15 per share, for a total cost of $16,106,000. 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.

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,  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.

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, 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.


                                       69

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

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, 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%

As of June 30, 2004
   Tangible capital, and ratio to
      adjusted total assets ......................     $163,676     8.61%   $ 28,509      1.50%        N/A        N/A
   Tier 1 (core) capital, and ratio to
      adjusted total assets ......................     $163,676     8.61%   $ 76,024      4.00%   $ 95,029       5.00%
   Tier 1 (core) capital, and ratio to
      risk-weighted assets .......................     $163,676    16.24%        N/A       N/A    $ 60,468       6.00%
   Risk-based capital, and ratio to
      risk-weighted assets .......................     $169,926    16.86%   $ 80,624      8.00%   $100,781      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
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").

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, 2005, the Bank
could have paid dividends totaling approximately $1.0 million.


                                       70

<PAGE>

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

P. 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 O -
Stockholders' Equity and Regulatory Capital.

<TABLE>
<CAPTION>
                                                                             For the year ended June 30,
                                                                  ------------------------------------------------
                                                                     2005               2004              2003
                                                                  ------------------------------------------------
                                                                  (Dollars in thousands, except per share amounts)
<S>                                                               <C>               <C>               <C>
Net income .................................................      $    15,494       $    12,058       $    13,734
                                                                  ===============================================
Number of shares outstanding:
Weighted average shares issued and outstanding .............       13,612,502        13,645,770        14,270,450
Less: Average shares held by the ESOP ......................               --         1,904,000         1,904,000
Plus: ESOP shares released or committed to be released .....               --         1,807,026         1,556,016
                                                                  -----------------------------------------------
Average basic shares .......................................       13,612,502        13,548,796        13,922,466
Plus: Average common stock equivalents .....................          398,182           900,374         1,049,096
                                                                  -----------------------------------------------
Average diluted shares .....................................       14,010,684        14,449,170        14,971,562
                                                                  ===============================================

Earnings per common share:
   Basic ...................................................      $      1.14       $      0.89       $      0.99
                                                                  ===============================================
   Diluted .................................................      $      1.11       $      0.83       $      0.92
                                                                  ===============================================
</TABLE>


                                       71

<PAGE>

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

Q. Disclosure About Fair Value of Financial Instruments

The  carrying  amounts  and  estimated  fair  value of the  Company's  financial
instruments at June 30, 2005 and 2004 were as follows:

<TABLE>
<CAPTION>
                                                                      June 30, 2005                 June 30, 2004
                                                               -------------------------------------------------------
                                                                 Carrying       Estimated      Carrying      Estimated
                                                                  Amount       Fair Value       Amount      Fair Value
                                                               -------------------------------------------------------
                                                                                   (In thousands)
<S>                                                            <C>             <C>           <C>            <C>
Financial assets:
   Cash and cash equivalents ..............................    $   15,220      $   15,220    $   14,859     $   14,859
   Investment securities ..................................       410,509         411,737       424,980        417,935
   Mortgage-backed securities .............................        78,201          79,109       100,079        100,644
   FHLB of New York stock .................................        22,391          22,391        23,773         23,773
                                                               -------------------------------------------------------
   Total cash and investments .............................       526,321         528,457       563,691        557,211
                                                               -------------------------------------------------------
   Loans held for sale ....................................         4,826           4,864            --             --
   Loans receivable, less allowance for loan losses .......     1,460,654       1,459,988     1,287,473      1,283,861
                                                               -------------------------------------------------------
   Total loans ............................................     1,465,480       1,464,852     1,287,473      1,283,861
   Accrued interest receivable, net .......................         9,808           9,808        10,195         10,195
                                                               -------------------------------------------------------
Total financial assets ....................................    $2,001,609      $2,003,117    $1,861,359     $1,851,267
                                                               =======================================================
Financial liabilities:
   Deposits ...............................................    $1,339,491      $1,339,483    $1,188,100     $1,189,739
   FHLB of New York advances ..............................       415,465         443,927       475,465        509,568
   Other borrowings .......................................       107,952         107,566        59,346         59,283
   Junior subordinated deferrable interest debentures .....        42,082          45,338        42,037         43,358
   Mortgage escrow funds ..................................        10,398          10,398         9,739          9,739
                                                               -------------------------------------------------------
Total financial liabilities ...............................    $1,915,388      $1,946,712    $1,774,687     $1,811,687
                                                               =======================================================
</TABLE>

<TABLE>
<CAPTION>
                                                                      June 30, 2005                 June 30, 2004
                                                               -------------------------------------------------------
                                                                 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 ..............................    $   35,711      $       --    $   15,997     $       --
Unused lines of credit ....................................        88,789              --        89,153             --
Commitments to sell loans .................................         1,447              --            --             --
</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 market prices.

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.


                                       72

<PAGE>
                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, 2005 and 2004.  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  is estimated to be zero since the fees  collected on commitments to
extend credit approximates the amount of costs incurred. No estimated fair value
is presented for unused lines of credit 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 Statement of Financial  Condition  date.  The  estimated  fair
value is not significant.

R. Related Party Transactions

In the ordinary  course of business,  the Company at times has 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,
                                                          ----------------------
                                                           2005           2004
                                                          ----------------------
                                                              (In thousands)
Balance, beginning of year ............................   $ 7,102       $ 8,564
New loans granted .....................................     2,419           951
Repayments/reductions .................................    (1,517)       (2,413)
                                                          ----------------------
Balance, end of year ..................................   $ 8,004       $ 7,102
                                                          ======================

In addition to the above amount of loans,  at June 30, 2005 and 2004,  there was
$45,000 and $46,000, respectively, of outstanding balances on overdraft checking
lines for directors, officers and employees.

                                       73
<PAGE>

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

S. Recently Issued Accounting Standards

In December 2004, the Financial  Accounting  Standards Board (the "FASB") issued
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. SFAS 153 will be effective for
nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005.
The  adoption  of SFAS 153 is not  expected  to have an impact on the  Company's
consolidated financial condition, results of operations or cash flows.

In May 2005,  the 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.  The adoption of SFAS 154 is not expected to have an
impact on the Company's consolidated financial condition,  results of operations
or cash flows.


                                       74

<PAGE>

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

T. 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, 2005 and 2004 and for the years ended June 30, 2005,  2004
and 2003 and  should  be read in  conjunction  with the  Consolidated  Financial
Statements and Notes thereto.

Condensed Statements of Financial Condition

<TABLE>
<CAPTION>
                                                                                           June 30,
                                                                                    ---------------------
                                                                                       2005        2004
                                                                                    ---------------------
                                                                                        (In thousands)
<S>                                                                                 <C>         <C>
Assets
Cash ............................................................................   $      22   $      27
Intercompany overnight investment ............................ ..................          --         640
                                                                                    ---------------------
   Total cash and cash equivalents ..............................................          22         667
Investment securities held to maturity, at amortized cost .......................      10,899      10,924
Investment in subsidiaries ......................................................     171,530     166,572
Prepaid trust preferred securities expenses .....................................       1,218       1,263
Accrued interest receivable .....................................................         282         293
Other assets ....................................................................       2,720       1,409
                                                                                    ---------------------
                                                                                    $ 186,671   $ 181,128
                                                                                    =====================

Liabilities and Stockholders' Equity
Junior subordinated deferrable interest debentures ..............................   $  43,300   $  43,300
Intercompany loan payable .......................................................       8,400       8,400
Unsecured revolving line of credit ..............................................       8,341       9,892
Accrued interest payable ........................................................         202         167
Other accrued expenses and other liabilities ....................................       2,374         970
Stockholders' equity ............................................................     124,054     118,399
                                                                                    ---------------------
                                                                                    $ 186,671   $ 181,128
                                                                                    =====================
</TABLE>

Condensed Statements of Income

<TABLE>
<CAPTION>
                                                                                 Year ended June 30,
                                                                           -------------------------------
                                                                             2005       2004       2003
                                                                           -------------------------------
                                                                                    (In thousands)
<S>                                                                        <C>        <C>        <C>
Income
Interest income on intercompany balances ...............................   $     --   $     49   $     98
Interest income on investment securities ...............................        950        926        979
Other income ...........................................................          1         --          1
                                                                           -------------------------------
                                                                                951        975      1,078
Expenses
Interest expense on junior subordinated deferrable interest
   debentures ..........................................................      3,002      2,654      4,291
Interest on intercompany loan ..........................................        498        402        431
Interest on unsecured revolving line of credit .........................        289        143        116
Other expenses .........................................................        791        578      2,092
                                                                           -------------------------------
                                                                              4,580      3,777      6,930
                                                                           -------------------------------
Loss before undistributed net income of subsidiaries ...................     (3,629)    (2,802)    (5,852)
Equity in undistributed net income of subsidiaries .....................     17,884     13,907     17,583
                                                                           -------------------------------
Income before income taxes .............................................     14,255     11,105     11,731
Income tax benefit .....................................................     (1,239)      (953)    (2,003)
                                                                           -------------------------------
Net income .............................................................   $ 15,494   $ 12,058   $ 13,734
                                                                           ===============================
</TABLE>


                                       75

<PAGE>

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

Condensed Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                 Year ended June 30,
                                                                           -------------------------------
                                                                             2005       2004       2003
                                                                           -------------------------------
                                                                                   (In thousands)
<S>                                                                        <C>        <C>        <C>
Cash Flows From Operating Activities:
Net income .............................................................   $ 15,494   $ 12,058   $ 13,734
Adjustments to reconcile net income to net cash used in
  operating activities:
      Equity in undistributed net income of subsidiaries ...............    (17,884)   (13,907)   (17,583)
      Amortization of investment securities premium ....................         25         23         21
      Increase (decrease) in accrued interest payable, net of accrued
         interest receivable ...........................................         46        (77)      (415)
      (Increase) decrease in prepaid trust preferred securities
         expense and other assets ......................................     (1,266)      (584)     1,076
      Increase (decrease) in other accrued expenses and
         other liabilities .............................................      1,404        624     (1,350)
                                                                           -------------------------------
         Net cash used in operating activities .........................     (2,181)    (1,863)    (4,517)
                                                                           -------------------------------

Cash Flows From Investing Activities:
   Proceeds from maturities of investment securities ...................         --      1,605        395
   Purchases of investment securities held to maturity .................         --     (2,000)        --
   Investment in Trust I ...............................................         --         --      1,602
   Investment in Trust III .............................................         --         --       (928)
   Dividends received from subsidiary bank .............................     15,955     12,478     21,334
   Proceeds from principal repayment of ESOP loan ......................         --        644        600
                                                                           -------------------------------
         Net cash provided by investing activities .....................     15,955     12,727     23,003
                                                                           -------------------------------

Cash Flows From Financing Activities:
   Increase (decrease) in unsecured revolving line of credit ...........     (1,551)     2,598      3,330
   Increase in intercompany loan .......................................         --        300      1,000
   Net proceeds from issuance of junior subordinated deferrable
      interest debentures ..............................................         --         --     30,928
   Redemption of junior subordinated deferrable interest debentures ....         --         --    (35,568)
   Cash dividends paid .................................................     (2,924)    (2,650)    (2,772)
   Repurchases of outstanding shares, net of reissuances ...............     (9,944)   (10,998)   (15,516)
                                                                           -------------------------------
         Net cash used in financing activities .........................    (14,419)   (10,750)   (18,598)
                                                                           -------------------------------
Net increase (decrease) in cash and cash equivalents ...................       (645)       114       (112)
Cash and cash equivalents, beginning of year ...........................        667        553        665
                                                                           -------------------------------
Cash and cash equivalents, end of year .................................   $     22   $    667   $    553
                                                                           ===============================
</TABLE>


                                       76

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

U. Quarterly Financial Data (Unaudited)

<TABLE>
<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
Provision for loan losses ........................................           --               --          --         --
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
                                                                     ==================================================
<CAPTION>
                                                                                       Quarter ended
                                                                     --------------------------------------------------
                                                                                  2003                      2004
                                                                     --------------------------------------------------
                                                                     September 30     December 31   March 31    June 30
                                                                     --------------------------------------------------
                                                                           (In thousands, except per share amounts)
<S>                                                                  <C>              <C>           <C>        <C>
Total interest and dividend income ...............................     $ 23,741         $ 23,658    $ 24,326   $ 24,551
Total interest expense ...........................................       14,804           14,620      14,598     14,652
                                                                     --------------------------------------------------
Net interest and dividend income .................................        8,937            9,038       9,728      9,899
Provision for loan losses ........................................           --               --          --         --
Non-interest income ..............................................        2,010            1,564       1,374      1,481
Non-interest expenses ............................................        5,699            6,257       6,637      6,837
Income tax expense ...............................................        1,875            1,464       1,499      1,705
                                                                     --------------------------------------------------
   Net income ....................................................     $  3,373         $  2,881    $  2,966   $  2,838
                                                                     ==================================================

Net income per common share:
   Basic .........................................................     $   0.25         $   0.21    $   0.22   $   0.21
                                                                     ==================================================
   Diluted .......................................................     $   0.23         $   0.20    $   0.21   $   0.20
                                                                     ==================================================
</TABLE>

V. Restatement of Prior Years Consolidated Statements of Cash Flow

The Consolidated  Statements of Cash Flows for the years ended June 30, 2004 and
2003  have  been  restated  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  Statements  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          For the year ended June 30, 2003
                                                          As Previously                             As Previously
                                                            Reported           As Restated            Reported           As Restated
                                                          -------------        -----------          -------------        -----------
                                                                                        (In thousands)
<S>                                                          <C>                <C>                    <C>                <C>
Cash Flows from Operating Activities:
Proceeds from sales of loans held for sale                $  88,214          $  48,667              $ 162,873          $ 154,811
Originations of loans held for sale                              --           (42,266)                     --          (158,050)
Net cash provided by operating activities                    97,805             15,992                188,882             22,770

Cash Flows from Investing Activities:
Net proceeds (outflow) from loan originations net
 of principal repayments of loans                          (99,034)           (56,769)                 40,246            198,296
Proceeds from loans sold                                      3,181             42,729                  4,170             12,232

Net cash provided by (used in) investing activities       (249,596)          (167,783)               (44,057)            122,055
Supplemental Schedule of Non-Cash Activities:
Transfer of loans receivable to loans held for sale,
 at cost                                                     76,142             33,876                171,097             13,047

</TABLE>
                                       77
<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, 2005 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, 2005, 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)
in a timely manner, 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,  2005,  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.


                                       78

<PAGE>

                                    PART III

Item 10. Directors and Executive Officers of the Registrant

Information Concerning Directors and Executive Officers

Information  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 28,  2005,  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  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  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 28, 2005, 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   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 28,  2005,  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  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  28,  2005,   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.


                                       79

<PAGE>

The following table sets forth information as of June 30, 2005 with respect to
compensation plans under which shares of Company common stock were issued.

                      Equity Compensation Plan Information

<TABLE>
<CAPTION>
                                                                                                         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) ...        1,104,944              $ 7.83                   --
Equity compensation plans not approved by stockholders ..              N/A                 N/A                  N/A
Total ...................................................        1,104,944              $ 7.83                   --
</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   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
28, 2005,  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  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 28, 2005, a copy
of which  will be filed not later  than 120 days  after the close of the  fiscal
year.


                                       80

<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, 2005 and
            2004

          Consolidated Statements of Income for the Years Ended June 30, 2005,
            2004 and 2003

          Consolidated Statements of Comprehensive Income for the Years Ended
            June 30, 2005, 2004 and 2003

          Consolidated Statements of Changes in Stockholders' Equity for the
            Years Ended June 30, 2005, 2004 and 2003

          Consolidated Statements of Cash Flows for the Years Ended June 30,
            2005, 2004 (restated) and 2003 (restated)

          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.


                                       81

<PAGE>

(a) (3) Exhibits:

                                  Exhibit Index

<TABLE>
<CAPTION>
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                                 10.1
             (xii) Description of Director Fees                                                                        10.2
             (xiii) Description of Long-Term Care Insurance Program                                                    10.3
   11        Statement re: computation of per share earnings                                                            (i)
   12        Statements re: computation ratios                                                                          12
   14        Code of Ethics                                                                                             (j)
   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


                                       82

<PAGE>

      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 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)   Refer to Note P - Computation of Earnings Per Share ("EPS") in the Notes
      to Consolidated Financial Statements included in the June 30, 2005 Form
      10-K.

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


                                       83

<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.

                                           PENNFED FINANCIAL SERVICES, INC.



Date: September 13, 2005                   By:  /s/ Joseph L. LaMonica
                                                Joseph L. LaMonica
                                                President and Chief
                                                Executive Officer
                                                (Duly Authorized Representative)

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.



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, 2005                            Date: September 13, 2005


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, 2005                            Date: September 13, 2005


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

Date: September 13, 2005                            Date: September 13, 2005


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

Date: September 13, 2005


                                       84