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

[ X ]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

                     For the fiscal year ended June 30, 2002

                                       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)


          Delaware                                            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
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. [_]

           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 September 6, 2002, was $177,591,000. (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 6, 2002, there were issued and outstanding 7,321,678
shares of the Registrant's Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

                  Part III of Form 10-K - Portions of the Proxy Statement for
2002 Annual Meeting of Stockholders.


<PAGE>

                                     PART I

Item 1.  Business

General

PennFed  Financial  Services,  Inc.  ("PennFed" and with its  subsidiaries,  the
"Company"), a Delaware 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 a variety of deposit accounts having a wide range of interest
rates and terms, which generally include savings, money market, and a variety of
checking  accounts,  as well as  certificate  accounts.  The  Company  generally
solicits deposits in its primary market areas.

At June 30, 2002,  the Company had total assets of  approximately  $1.9 billion,
deposits of $1.2 billion, borrowings of $528 million and stockholders' equity of
$119 million.

At June 30, 2002,  the  Company's  gross loan  portfolio  totaled $1.4  billion,
including $1.2 billion of one- to four-family  residential first mortgage loans,
$145 million of commercial and  multi-family  real estate loans and $121 million
of consumer  loans.  In  addition,  on that date the Company had $170 million of
mortgage-backed  securities and $209 million of other investment  securities and
FHLB of New York stock.

At June 30, 2002,  nearly all of the Company's  first and second  mortgage loans
(excluding mortgage-backed securities) were secured by properties located in New
Jersey.  See  "Originations,  Purchases,  Sales and  Servicing  of  Loans."  The
Company's revenues are derived primarily from interest on loans, mortgage-backed
securities and investments, and income from service charges.

Penn  Federal,  through its  wholly-owned  subsidiary,  Penn  Savings  Insurance
Agency, Inc., offers insurance and uninsured non-deposit  investment products to
its customers. See "Subsidiary Activities."

In October  1997,  Penn Federal  formed Ferry  Development  Holding  Company,  a
Delaware operating subsidiary, to hold and manage an investment portfolio.

PennFed formed PennFed  Capital Trust I in fiscal 1998 and PennFed Capital Trust
II in fiscal  2001.  These two  entities are  wholly-owned  trust  subsidiaries,
established for the purpose of selling cumulative trust preferred securities.

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.


                                        2
<PAGE>

Forward-Looking Statements

When  used in this  Form  10-K and in future  filings  by the  Company  with the
Securities and Exchange  Commission (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. Such statements are subject to certain risks and
uncertainties,  including, among other things, changes in economic conditions in
the  Company's  market  area,  changes  in  policies  by  regulatory   agencies,
fluctuations  in  interest  rates and demand for loans in the  Company's  market
area, the relationship of short-term interest rates to long-term interest rates,
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 such 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
such  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 urban communities, the suburban Essex County area
and selected areas of central/southern New Jersey, which are serviced through 21
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.  Deposits at Bank branches
in these  areas  comprise  29% of total  Bank  deposits  at June 30,  2002.  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, 2002. 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 28% of total Bank deposits
at  June  30,  2002,  serve  retirement  populations  and  expanding  townhouse,
multi-family and single family home developments. The Bank also originates loans
secured by properties throughout New Jersey. See "Originations, Purchases, Sales
and Servicing of Loans."

Lending Activities

General.  The Company  primarily  originates and purchases  fixed and adjustable
rate, one- to four-family  first mortgage loans. The Company's general policy is
to originate  and purchase 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  conforming  loan limit is based upon
national housing median sales prices. 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.

Residential and consumer loan  applications  may be approved by various officers
up to $1.25 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.  Loans  greater than $500,000 but less than
$750,000 require  approval of either the Chief Executive  Officer ("CEO") or the
Chief Operating Officer ("COO"). Any commercial and multi-


                                       3

<PAGE>

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 and  certain
executive and senior officers.  The approval of the Company's Board of Directors
is required for all loans or relationships above $1.25 million.

The  aggregate  amount of loans  that the  Company  is  permitted  to make under
applicable federal regulations to any one borrower,  including related entities,
or the aggregate  amount that the Company could have lent to any one borrower is
generally the greater of 15% of unimpaired capital and surplus or $500,000.  See
"Regulation-Federal  Regulation of Savings Associations by the OTS." At June 30,
2002,  the maximum  amount which the Company could have lent to any one borrower
and the  borrower's  related  entities  was  approximately  $24.6  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, 2002, the
Company's  largest  group of loans to one  borrower  (and any related  entities)
totaled $7.9 million and consisted of a $4.6 million commercial real estate loan
and a $3.3 million loan under an Accounts Receivable  Financing Program. At June
30, 2002,  there were a total of 39 loans or lender  relationships  in excess of
$1.0 million,  for a total amount of $73.9  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,
                                       ---------------------------------------------------------------------------------------------
                                                 2002                   2001                   2000                     1999
                                       ---------------------------------------------------------------------------------------------
                                          Amount     Percent     Amount     Percent      Amount     Percent      Amount      Percent
                                       ---------------------------------------------------------------------------------------------
                                                                          (Dollars in thousands)
<S>                                    <C>            <C>     <C>            <C>      <C>            <C>      <C>             <C>
First mortgage loans:
  One- to four-family(1) ...........   $ 1,172,145    81.53%  $ 1,065,819    82.61%   $ 1,070,048    85.34%   $   915,244     86.15%
  Commercial and multi-family(2)....       144,585    10.06       108,625     8.42         86,257     6.88         74,613      7.02
                                       ---------------------------------------------------------------------------------------------
      Total first mortgage loans ...     1,316,730    91.59     1,174,444    91.03      1,156,305    92.22        989,857     93.17
                                       ---------------------------------------------------------------------------------------------
Other loans:
  Consumer loans:
    Second mortgages ...............        58,671     4.08        48,133     3.73         45,659     3.64         37,243      3.50

    Home equity lines of credit ....        55,247     3.85        60,412     4.68         46,394     3.70         31,754      2.99

    Other ..........................         6,948     0.48         7,140     0.56          5,534     0.44          3,575      0.34
                                       ---------------------------------------------------------------------------------------------
      Total consumer loans .........       120,866     8.41       115,685     8.97         97,587     7.78         72,572      6.83
                                       ---------------------------------------------------------------------------------------------
      Total loans ..................     1,437,596   100.00%    1,290,129   100.00%     1,253,892   100.00%     1,062,429    100.00%
                                                     ======                 ======                  ======                   ======

Add/(less):
  Unamortized premiums,
   deferred loan fees, and
    other, net .....................         9,485                  9,611                   9,339                   7,391

  Allowance for loan losses ........        (5,821)                (4,248)                 (3,983)                 (3,209)
                                       ---------------------------------------------------------------------------------------------
      Total loans receivable, net ..   $ 1,441,260            $ 1,295,492           $   1,259,248             $ 1,066,611
                                       =============================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                                  June 30,
                                       -------------------------
                                                   1998
                                       -------------------------
                                            Amount      Percent
                                       -------------------------
                                         (Dollars in thousands)
<S>                                       <C>             <C>
First mortgage loans:
  One- to four-family(1) ...........      $   971,668     89.01%
  Commercial and multi-family(2)....           65,833      6.03
                                       -------------------------
      Total first mortgage loans ...        1,037,501     95.04
                                       -------------------------
Other loans:
  Consumer loans:
    Second mortgages ...............           27,232      2.49

    Home equity lines of credit ....           23,538      2.16

    Other ..........................            3,331      0.31
                                       -------------------------
      Total consumer loans .........           54,101      4.96
                                       -------------------------
      Total loans ..................        1,091,602    100.00%
                                                         ======

Add/(less):
  Unamortized premiums,
   deferred loan fees, and
    other, net .....................            7,026

  Allowance for loan losses ........           (2,776)
                                       -------------------------
      Total loans receivable, net ..    $   1,095,852
                                       ========================
</TABLE>


(1)  One-to  four-family  loans  include  loans  held for sale of $1.6  million,
     $83,000,  $5.2 million and $565,000 at June 30, 2002,  2001, 1999 and 1998,
     respectively. There were no loans held for sale at June 30, 2000.

(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 $9.1 million, $3.1 million and $814,000 at June 30, 2002, 2001 and
     2000,  respectively.  Business  lines of credit  included in commercial and
     multi-family loans totaled $605,000 and $475,000 at June 30, 1999 and 1998,
     respectively.


Loan Maturity. The following schedule sets forth the contractual maturity of the
Company's loan portfolio as of June 30, 2002.  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,  include no premium or discount
adjustments.


                                        4
<PAGE>

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.

<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 .............    $      293    $    1,853    $    5,184    $   88,544    $  279,019    $  797,252    $1,172,145
Commercial and multi-family .....         9,637         1,486         7,580        27,727        95,130         3,025       144,585
                                     -----------------------------------------------------------------------------------------------
Total first mortgage loans ......         9,930         3,339        12,764       116,271       374,149       800,277     1,316,730
Other loans:
Consumer loans ..................         3,579         2,768         9,998        22,279        55,112        27,130       120,866
                                     -----------------------------------------------------------------------------------------------
Total loans, gross ..............    $   13,509    $    6,107    $   22,762    $  138,550    $  429,261    $  827,407    $1,437,596
                                     ===============================================================================================
</TABLE>


Loans due after June 30, 2003, which have fixed interest rates amount to $968.5
million, while those with adjustable rates amount to $455.5 million, detailed as
follows:

                                           Due After June 30, 2003
                               ----------------------------------------------
                                  Fixed           Adjustable         Total
                               ----------------------------------------------
                                               (In thousands)

First mortgage loans:
One- to four-family .......    $  886,629        $  285,223        $1,171,852

Commercial and multi-family        19,756           115,192           134,948
                               ----------------------------------------------
Total first mortgage loans        906,385           400,415         1,306,800

Other loans:
Consumer loans ............        62,161            55,126           117,287
                               ----------------------------------------------
Total loans, gross ........    $  968,546        $  455,541        $1,424,087
                               ===============================================


One- to  Four-Family  Residential  Mortgage  Lending.  At  June  30,  2002,  the
Company's one- to four-family  residential  mortgage loans totaled $1.2 billion,
or approximately  81.5% 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 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,  2002,  the Company  originated  $497.5  million of real  estate  loans
secured by one- to four-family residential real estate. Substantially all of the
Company's one- to four-family  residential mortgage  originations are secured by
properties located in the State of New Jersey.

During fiscal 2002, the Company had one correspondent  relationship with another
institution  through  which it  purchased  $11.0  million  of  newly  originated
adjustable  rate and  $20.9  million  of newly  originated  fixed  rate  one- to
four-family  residential  first  mortgages.   Purchased  loans  are  secured  by
properties  primarily  located  in New  Jersey.  Loans are  underwritten  by the
correspondent  institutions  using the Bank's  guidelines and a portion of those
loans are  re-underwritten  by the Bank on a test basis. All loans purchased are
supported  by  customary   representations   and  warranties   provided  by  the
correspondent institution. See "Originations,  Purchases, Sales and Servicing of
Loans."

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

                                       5

<PAGE>


loans made by the Company are  appraised  by licensed  in-house  appraisers  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, if necessary) in the amount of the loan or
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, 2002, the Company had $144.6 million of commercial and  multi-family
real estate loans which represented 10.1% of the Company's gross loan portfolio.
This amount  includes $1.8 million of lines of credit secured by non-real estate
business assets and $7.3 million of loans under an Accounts Receivable Financing
Program for small and mid-sized  businesses.  At June 30, 2002,  the average per
loan balance of the  Company's  commercial  and  multi-family  real estate loans
outstanding was $304,000.  As of June 30, 2002 approximately 81% of the loans in
the commercial and multi-family  real estate loan portfolio were adjustable rate
loans.

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 receivables 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, 2002, the Company's total
consumer loan portfolio was $120.9 million, or 8.4% of its gross loan portfolio,
of which  approximately  53% were fixed rate loans and 47% were  adjustable rate
loans. The Company currently originates all of its consumer loans throughout the
State of New Jersey.


                                       6

<PAGE>

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
75% 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,  2002,  second  mortgage  loans and home equity lines of
credit  amounted  to $113.9  million  or 94.3% of the  Company's  consumer  loan
portfolio.

Consumer loan terms vary according to the type and value of  collateral,  length
of contract and  creditworthiness  of the borrower.  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.

Originations, Purchases, Sales and Servicing of Loans

For the fiscal year ended June 30, 2002, the Company  originated  $648.0 million
of loans, compared to $380.3 million and $267.9 million in fiscal 2001 and 2000,
respectively.  The higher amount in fiscal 2002 was due principally to increased
refinancing activity. Mortgage loan originations are handled by employees of the
Company.

During  the  fiscal  years  ended  June 30,  2002,  2001 and 2000,  the  Company
purchased $31.9 million, $36.3 million and $106.0 million of one- to four-family
first mortgage loans,  respectively,  through  correspondent  relationships with
other institutions. The purchased loans represent adjustable rate and fixed rate
first mortgages secured by properties primarily located throughout New Jersey. A
limited  amount  of  loans  secured  by  properties   located  in  Pennsylvania,
Massachusetts and Connecticut have been purchased.

From time to time,  the Company has engaged in loan sale  strategies  -- selling
loans to Freddie Mac, Fannie Mae and other secondary market purchasers. In April
2002, the Company  re-instituted  a strategy of selling  conforming,  fixed rate
one-  to  four-family  residential  mortgage  loans  in  an  effort  to  improve
liquidity,  interest rate risk and net interest  margin.  Prior to this point in
fiscal  year 2002,  loan  production  was  retained  in  portfolio  as a partial
replacement of the investment securities called and as a means of leveraging the
March 2001 proceeds from the $12 million issuance of Trust Preferred securities.
During the majority of fiscal 2001, the Company's  strategy included the sale of
conforming,  fixed rate one- to four-family  residential loan production.  Loans
sold under this strategy totaled  approximately $29 million for the fiscal year.
In addition, the Company sold approximately $65 million of longer duration, one-
to four-family  residential  mortgage  loans in an effort to improve  liquidity,
interest  rate risk and net  interest  margin.  As noted  above,  in March 2001,
PennFed  issued $12  million of Trust  Preferred  securities.  See - "Sources of
Funds - Trust  Preferred  Securities."  Effective  with the  issuance of the $12
million  of  Trust  Preferred  securities,  a  determination  was  made  whereby
conforming, fixed rate one- to four-family mortgage loan production would not be
sold for a period of time to leverage the proceeds of such issuance.  Due to the
majority of one- to  four-family  residential  mortgage  loan  production  being
adjustable rate and due to the higher interest rate environment  during the year
ended  June 30,  2000,  loan sale  activity  was  minimal,  as the  majority  of
production  was retained in  portfolio.  For the year ended June 30,  2000,  the
Company sold loans totaling $5.5 million.

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

                                        7
<PAGE>


During the year ended June 30, 2002, the Company  securitized  approximately $66
million of one- to  four-family  mortgage  loans as Freddie Mac  mortgage-backed
securities.  During the year ended June 30, 2001,  approximately  $48 million of
one- to  four-family  mortgage  loans were  securitized  with Fannie Mae. All of
these securities are held in the Company's  securities  portfolio for collateral
purposes.

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 one- to
four-family  mortgage loans with an aggregate  outstanding  principal balance of
$167.8  million,  $141.5 million and $108.5  million at June 30, 2002,  2001 and
2000, respectively.

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

<TABLE>
<CAPTION>
                                                                     Year ended June 30,
                                                         --------------------------------------------
                                                            2002            2001            2000
                                                         --------------------------------------------
                                                                        (In thousands)
<S>                                                       <C>             <C>             <C>
Net loans receivable at beginning of year ..........      $1,295,492      $1,259,248      $1,066,611

Plus:
Loans originated:
One- to four-family ................................         497,450         269,607         172,201

Commercial and multi-family real estate ............          64,131          40,020          30,364
Consumer ...........................................          86,370          70,626          65,325
                                                          ------------------------------------------
Total loans originated .............................         647,951         380,253         267,890
                                                          ------------------------------------------

One- to four-family loans purchased ................          31,861          36,319         106,049
                                                          ------------------------------------------

Total loans originated and purchased ...............         679,812         416,572         373,939
Less:                                                     ------------------------------------------
One- to four-family loans sold .....................          16,652          94,099           5,532

Loans securitized ..................................          65,923          47,661              --

Loan principal payments and other, net .............         451,463         237,876         175,388

Loans transferred to real estate owned .............               6             692             382
                                                          ------------------------------------------
Net loans receivable at end of year ................      $1,441,260      $1,295,492      $1,259,248
                                                          ==========================================
</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 the Company institutes  collection procedures
by mailing a delinquency  notice. The customer is contacted again, by telephone,
if the delinquency is not promptly cured. In many cases, delinquencies are cured
promptly; however, if a loan secured by real estate or other collateral has been
delinquent  for more than 60 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 90 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.

At June 30, 2002, the Company's loans delinquent 60 to 89 days totaled $68,000,
of which $63,000 represented two one- to four-family mortgage loans and $5,000
represented two consumer loans.

                                       8


<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 settlement of loans
and is shown net of valuation allowances.  Restructured loans are all performing
in accordance with modified terms and are, therefore, considered performing.

<TABLE>
<CAPTION>
                                                                              At June 30,
                                                       ----------------------------------------------------------
                                                        2002         2001         2000         1999         1998
                                                       ----------------------------------------------------------
                                                                         (Dollars in thousands)
<S>                                                    <C>          <C>          <C>          <C>          <C>
Non-accruing loans:
One- to four-family .............................      $2,905       $1,219       $2,152       $2,937       $2,575
Commercial and multi-family .....................          --           49           95           46          414
Consumer ........................................         370          369          468          687          753
                                                       ----------------------------------------------------------
Total non-accruing loans ........................       3,275        1,637        2,715        3,670        3,742

Real estate owned, net ..........................          28          500          334          936        1,643
                                                       ----------------------------------------------------------
Total non-performing assets .....................       3,303        2,137        3,049        4,606        5,385

Restructured loans ..............................          --           --           --           --        1,415
                                                       ----------------------------------------------------------
Total risk elements .............................      $3,303       $2,137       $3,049       $4,606       $6,800
                                                       ==========================================================
Non-accruing loans as a percentage
of total loans ..................................        0.23%        0.13%        0.21%        0.34%        0.34%
                                                       ==========================================================
Non-performing assets as a percentage
of total assets .................................        0.17%        0.12%        0.18%        0.30%        0.35%
                                                       ==========================================================
Total risk elements as a percentage
of total assets .................................        0.17%        0.12%        0.18%        0.30%        0.44%
                                                       ==========================================================
</TABLE>


For the year ended June 30, 2002,  gross  interest  income which would have been
recorded  had the  non-accruing  loans  been  current in  accordance  with their
original  terms  amounted to  $121,000,  none of which was  included in interest
income during this period.

Non-Performing Assets.  Non-accruing loans at June 30, 2002 were comprised of 18
one-  to  four-family  loans  aggregating   $2,905,000  and  19  consumer  loans
aggregating $370,000.

Real  estate  owned at June 30,  2002  totaled  $28,000  representing  a one- to
four-family property.

Restructured   Loans.   In  the  normal  course  of  business  the  Company  has
restructured the terms of certain loans. No loans have been restructured  within
the last five fiscal  years.  Any loan that has been  restructured  continues to
perform in accordance with the restructured terms.

Other Loans of Concern.  As of June 30, 2002, there were $842,000 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.

Included  in other  loans of  concern  at June  30,  2002 are four  loans to one
borrower  and one loan to a related  party  totaling  $804,000.  The four  loans
consist of one commercial real estate loan of $405,000,  two one- to four-family
loans totaling $97,000 and a $59,000 line of credit. The loan to a related party
consists of a commercial  real estate loan of  $243,000.  All of these loans are
secured by real estate properties located in New Jersey. As of June 30, 2002 all
of the loans were  performing  in  accordance  with their  respective  repayment
terms.  The Company  continues to monitor these loans due to their past periodic
delinquencies.

All of the  other  loans of  concern  have  been  considered  by  management  in
conjunction with the analysis of the adequacy of the allowance for loan losses.


                                        9

<PAGE>


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 with applicable regulations. On the basis of
management's review of its assets at June 30, 2002, the Bank's classified assets
totaled $4.2 million, of which $4.1 million is classified as substandard. At
June 30, 2002 total classified assets represented 3.6% of the Company's
stockholders' equity and 0.22% of the Company's total assets.

Allowance for Loan Losses. The allowance for loan losses is established through
a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and changes in the nature and volume of its loan
activity. This evaluation, which includes a review of loans for which full
collectibility may not be reasonably assured, considers among other matters, the
loan classifications discussed above, the estimated fair value of the underlying
collateral, economic conditions, historical loan loss experience 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 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 operations.

Although management believes that it uses the best information available to
determine the allowances, unforeseen market conditions could result in
adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the Company's allowances 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. Such 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.

                                       10

<PAGE>


The following  table sets forth an analysis of the Company's  allowance for loan
losses at, and for, the dates indicated.

<TABLE>
<CAPTION>

                                                                          Year ended June 30,
                                                 ----------------------------------------------------------------------
                                                   2002          2001            2000           1999           1998
                                                 ----------------------------------------------------------------------
                                                                         (Dollars in thousands)
<S>                                              <C>            <C>            <C>            <C>            <C>
Balance at beginning of year ..............      $ 4,248        $ 3,983        $ 3,209        $ 2,776        $ 2,622
Charge-offs:
 One- to four-family ......................          (20)          (164)          (105)           (60)          (306)
 Commercial and multi-family ..............           --            (35)            --           (165)           (44)
 Consumer .................................          (32)          (161)           (18)          (171)           (96)
                                                 ----------------------------------------------------------------------
                                                     (52)          (360)          (123)          (396)          (446)
                                                 ----------------------------------------------------------------------

Recoveries:
 One- to four-family ......................           --             --             37             --             --
 Commercial and multi-family ..............           --             --             --             49             --
 Consumer .................................           --             --             --             --             --
                                                 ----------------------------------------------------------------------
                                                      --             --             37             49             --
                                                 ----------------------------------------------------------------------
Net charge-offs............................          (52)          (360)           (86)          (347)          (446)
Additions charged to operations ...........        1,625            625            860            780            600
                                                 ----------------------------------------------------------------------
Balance at end of year ....................      $ 5,821        $ 4,248        $ 3,983        $ 3,209        $ 2,776
                                                 ======================================================================

Ratio of net charge-offs during the
  year to average loans outstanding
  during the year..........................         0.00%          0.03%          0.01%          0.03%          0.04%
                                                 ======================================================================

Ratio of allowance for loan losses
to total loans at end of year .............         0.40%          0.33%          0.32%          0.30%          0.25%
                                                 ======================================================================

Ratio of allowance for loan losses to
non-accruing loans at end of year .........       177.74%        259.50%        146.70%         87.44%         74.18%
                                                 ======================================================================
</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,
                                  ------------------------------------------------------------------------------------------------
                                        2002               2001                 2000              1999                 1998
                                  ------------------------------------------------------------------------------------------------
                                         Percent of        Percent of          Percent of           Percent of          Percent 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............   $2,928      81.53%   $2,223   82.61%    $2,244    85.34%    $1,797     86.15%    $1,502   89.01%
Commercial and
  multi-family real estate.....    2,040      10.06     1,280    8.42      1,051     6.88        855      7.02        740    6.03
Consumer.......................      853       8.41       745    8.97        688     7.78        557      6.83        534    4.96
                                  ------------------------------------------------------------------------------------------------
  Total........................   $5,821     100.00%   $4,248  100.00%    $3,983   100.00%    $3,209    100.00%    $2,776  100.00%
                                  ================================================================================================
</TABLE>


                                       11
<PAGE>


Critical Accounting Policy

Allowance for Loan Losses-- The allowance for loan losses is established through
charges to  earnings.  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 possible 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  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.

Investment Activities

General.The Bank maintains minimum 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 requirements of normal daily activities,  repayment of maturing
debt and potential deposit outflows.

At June 30, 2002, the Company had a securities portfolio consisting  principally
of U.S.  government agency  securities,  including  mortgage-backed  securities.
These  investments  carry  a low  risk  weighting  for  OTS  risk-based  capital
purposes, are generally considered liquid assets and are generally of relatively
short duration. See  "Regulation-Regulatory  Capital Requirements." The majority
of investment  securities and all mortgage-backed  securities were classified as
held to maturity  at June 30,  2002,  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.


                                       12


<PAGE>

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,
                                   -----------------------------------------------------------------------------------------------
                                                2002                            2001                            2000
                                   -----------------------------------------------------------------------------------------------
                                             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..............   $  4,295   $  4,295    2.05%    $     --   $     --       --%   $     --     $  --        --%
                                   -----------------------------------------------------------------------------------------------
Held to maturity:
  U.S. government
   agency obligations............    145,160    144,495   69.31      304,538    299,056    84.55     274,532    254,066    84.39
  Obligations of states and
   political subdivisions........         --         --      --           10         11       --          30         32     0.01
  Corporate bonds................      1,034      1,080    0.49        1,038      1,062     0.29          --         --       --
  Trust preferred securities.....     33,296     33,101   15.90       28,383     27,116     7.88      28,464     24,545     8.75
                                   -----------------------------------------------------------------------------------------------
  Total held to maturity.........    179,490    178,676   85.70      333,969    327,245    92.72     303,026    278,643    93.15
                                   -----------------------------------------------------------------------------------------------
  Total investment securities....    183,785    182,971   87.75      333,969    327,245    92.72     303,026    278,643    93.15
FHLB of New York stock...........     25,656     25,656   12.25       26,218     26,218     7.28      22,295     22,295     6.85
                                   -----------------------------------------------------------------------------------------------
  Total investment securities
   and FHLB of New York stock....   $209,441   $208,627  100.00%    $360,187   $353,463   100.00%   $325,321   $300,938   100.00%
                                   ===============================================================================================

Mortgage-backed securities:
  Ginnie Mae.....................   $    642   $    696    0.38%    $  1,035   $  1,107     0.76%   $  1,358   $  1,392     1.55%
  Freddie Mac....................     84,757     87,727   49.95       42,961     43,942    31.68      48,759     48,507    55.69
  Fannie Mae.....................     82,891     85,570   48.85       90,662     91,485    66.86      37,197     36,886    42.48
  Collateralized Mortgage
    Obligations/REMICs...........         42         43    0.02           59         58     0.04          79         76     0.09
                                   -----------------------------------------------------------------------------------------------
                                     168,332    174,036   99.20      134,717    136,592    99.34      87,393     86,861    99.81
Unamortized premiums, net........      1,357         --    0.80          889         --     0.66         168         --     0.19
                                   -----------------------------------------------------------------------------------------------
Total mortgage-backed securities    $169,689   $174,036  100.00%    $135,606   $136,592   100.00%   $ 87,561   $ 86,861   100.00%
                                   ===============================================================================================
</TABLE>


Investment  Securities.  At June 30, 2002, the Company's  investment  securities
(including  $4.3 million of investment  securities  available  for sale,  $179.5
million of investment securities held to maturity and a $25.7 million investment
in FHLB of New York stock) totaled $209.4  million,  or 11% of its total assets.
It is the Company's  general policy 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, 2002,
PennFed held $11.0 million of such non-investment grade securities. In addition,
investment  securities  at June 30, 2002  included  $22.3  million of investment
grade trust preferred securities.

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.


                                       13

<PAGE>

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. $178,456,000 of the securities in the investment portfolio have call
features and, thus, will likely have a much shorter life than final maturity.

<TABLE>
<CAPTION>
                                                          June 30, 2002
                               -------------------------------------------------------------------------
                                     After
                                   Five Years                 After              Total Investment
                                    Through                    Ten               Securities Held
                                   Ten Years                  Years                to Maturity
                               -------------------------------------------------------------------------
                                Book      Weighted      Book       Weighted      Book       Weighted
                                Value   Average Yield   Value    Average Yield   Value    Average Yield
                               -------------------------------------------------------------------------
                                                       (Dollars in thousands)
<S>                            <C>          <C>       <C>            <C>       <C>            <C>
U.S. government
  agency obligations ......    $4,700       6.75%     $140,460       6.53%     $145,160       6.54%
Corporate bond ............     1,034       9.88            --         --         1,034       9.88
Trust preferred
  securities ..............        --         --        33,296       8.74        33,296       8.74
                               -------------------------------------------------------------------------
Total investment securities
  held to maturity ........    $5,734       7.31%     $173,756       6.95%     $179,490       6.97%
                               =========================================================================
</TABLE>


The Company's investment securities portfolio at June 30, 2002 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, 2002, mortgage-backed securities totaled
$169.7 million, or 9% of the Company's total assets, of which approximately 15%
consisted of adjustable rate securities. The Company has invested primarily in
government agency securities, principally those of Ginnie Mae, Freddie Mac and
Fannie Mae.

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

<TABLE>
<CAPTION>
                                                                 June 30, 2002
                            -------------------------------------------------------------------------------------------
                                              After          After
                            One            One Year     Five Years            After                Total
                            Year or         Through        Through              Ten           Mortgage-backed
                            Less         Five Years      Ten Years            Years              Securities
                            -------------------------------------------------------------------------------------------
                                                                                                         Estimated Fair
                             Book Value   Book Value    Book Value       Book Value       Book Value     Market Value
                            -------------------------------------------------------------------------------------------
                                                              (Dollars in thousands)


<S>                              <C>         <C>          <C>             <C>              <C>              <C>
Ginnie Mae ................      $--         $101         $   208         $    333         $    642         $    696
Freddie Mac ...............        6          524          14,424           69,803           84,757           87,727
Fannie Mae ................       --           --           8,450           74,441           82,891           85,570
Collateralized Mortgage
  Obligations/REMICs ......       --           --              --               42               42               43
                            -------------------------------------------------------------------------------------------
  Total mortgage-backed
   securities .............      $ 6         $625         $23,082         $144,619         $168,332         $174,036
                            ===========================================================================================

Weighted average yield at
 year end .................     8.00%        6.74%           6.92%            6.63%           6.67%
                            =======================================================================
</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.


                                       14

<PAGE>


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

                                                    Year ended June 30,
                                           -------------------------------------
                                             2002          2001          2000
                                           -------------------------------------
                                                     (In thousands)
Mortgage-backed securities, net:
  At beginning of year ..............      $135,606      $ 87,561      $127,983
  Plus:
   Securities purchased .............        20,364        32,383           220
   Securitization of loans receivable        65,923        47,661            --
Less:
  Principal repayments ..............        51,797        31,908        40,522
  Amortization of premiums ..........           407            91           120
                                           ------------------------------------
At end of year ......................      $169,689      $135,606      $ 87,561
                                           ====================================

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  primarily  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, 2002, certificates of deposit
from municipalities totaled $2.4 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.  For example,  late in
fiscal 2002 the Company  promoted a premium savings account which had the effect
of increasing  savings  balances by $63.5 million at June 30, 2002. 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.  There were no  brokered  deposits  at June 30, 2002 and
2001.  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,
                                   -------------------------------------------
                                       2002           2001              2000
                                   -------------------------------------------
                                             (Dollars in thousands)
Opening balance ................   $ 1,085,335    $ 1,080,350     $ 1,063,600
Net deposits (withdrawals) .....        51,591        (40,991)        (24,630)
Interest credited ..............        37,581         45,976          41,380
                                   -------------------------------------------
Ending balance .................   $ 1,174,507    $ 1,085,335     $ 1,080,350
                                   ===========================================
Net increase ...................   $    89,172    $     4,985     $    16,750
                                   ===========================================
Percent increase ...............          8.22%          0.46%           1.57%
                                   ===========================================

                                       15
<PAGE>


The following table indicates the amount of the Company's certificates of
deposit by time remaining until maturity as of June 30, 2002.

<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......  $105,819      $131,527      $130,656      $219,292      $587,294
Certificates of deposit of $100,000 or more.....    17,275        25,221        22,312        40,025       104,833
                                                  -----------------------------------------------------------------
Total certificates of deposit ..................  $123,094      $156,748      $152,968      $259,317      $692,127
                                                  =================================================================
</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.


                                       16

<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 and
other borrowings for the periods indicated.

<TABLE>
<CAPTION>

                                                                        Year ended June 30,
                                                              ---------------------------------------
                                                                2002           2001           2000
                                                              ---------------------------------------
                                                                        (In thousands)
<S>                                                           <C>            <C>            <C>
Maximum month-end balance for the year ended:
 FHLB of New York advances .............................      $504,465       $454,465       $364,465
                                                              ========================================
 Other borrowings:
   Overnight repricing lines of credit .................      $ 55,300       $ 84,400       $ 80,200
   FHLB of New York one-month overnight repricing
    line of credit .....................................            --             --         30,000
   Reverse repurchase agreements callable or maturing
    within one year ....................................        48,540         48,840          9,563
   Reverse repurchase agreements maturing after one year        19,350         19,350         49,275
   Unsecured revolving line of credit ..................         3,964          4,705             --
                                                              ---------------------------------------
     Total other borrowings ............................      $127,154       $157,295       $169,038
                                                              ========================================

Average balance for the year ended:
 FHLB of New York advances .............................      $477,935       $397,614       $322,754
                                                              ========================================

 Other borrowings:
   Overnight repricing lines of credit .................      $ 18,764       $ 27,438       $ 30,393
   FHLB of New York one-month overnight repricing
    line of credit .....................................            --             --          5,706
   Reverse repurchase agreements callable or maturing
    within one year ....................................        20,508         30,638          5,353
   Reverse repurchase agreements maturing after one year        19,350          2,050         39,601
   Unsecured revolving line of credit ..................         1,426          2,038             --
                                                              ---------------------------------------
     Total other borrowings ............................      $ 60,048       $ 62,164       $ 81,053
                                                              ========================================


Balance at June 30:
 FHLB of New York advances .............................      $504,465       $454,465       $364,465
                                                              ========================================

 Other borrowings:
   Overnight repricing lines of credit .................      $     --       $ 59,450       $ 72,900
   FHLB of New York one-month overnight repricing
    line of credit .....................................            --             --             --
   Reverse repurchase agreements callable or maturing
    within one year ....................................            --         48,840         19,875
   Reverse repurchase agreements maturing after one year        19,350         19,350         19,400
   Unsecured revolving line of credit ..................         3,964             --             --
                                                              ---------------------------------------
    Total other borrowings .............................      $ 23,314       $127,640       $112,175
                                                              ========================================


Weighted average cost of funds for the year ended:
 FHLB of New York advances .............................          5.85%          6.18%          6.07%
 Other borrowings:
   Overnight repricing lines of credit .................          3.35%          6.02%          6.00%
   FHLB of New York one-month overnight repricing
    line of credit .....................................            --             --           5.96%
   Reverse repurchase agreements callable or maturing
    within one year ....................................          5.36%          5.92%          5.69%
   Reverse repurchase agreements maturing after one year          4.99%          5.07%          6.02%
   Unsecured revolving line of credit ..................          3.40%          7.81%            --

Weighted average cost of funds at June 30:
 FHLB of New York advances .............................          5.66%          6.00%          6.13%
 Other borrowings:
   Overnight repricing lines of credit .................            --           4.23%          7.23%
   FHLB of New York one-month overnight repricing
     line of credit ....................................            --             --             --
   Reverse repurchase agreements callable or maturing
     within one year ...................................            --           4.69%          5.77%
   Reverse repurchase agreements maturing after one year          4.92%          4.92%          6.10%
   Unsecured revolving line of credit ..................          3.34%            --             --
</TABLE>

                                       17

<PAGE>

Trust  Preferred  Securities.During  fiscal 1998,  PennFed formed a wholly-owned
trust subsidiary, PennFed Capital Trust I (the "Trust I"). Effective 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  Statement of Financial
Condition as Guaranteed  Preferred  Beneficial Interests in the Company's Junior
Subordinated  Debentures (the "Trust  Preferred  securities").  Trust I used the
proceeds  from the sale of the Trust  Preferred  securities  to  purchase  8.90%
junior  subordinated  deferrable  interest  debentures  issued by  PennFed.  The
obligations  of PennFed  related to Trust I constitute a full and  unconditional
guarantee  by  PennFed  of  Trust  I  obligations   under  the  Trust  Preferred
securities.  PennFed used the proceeds from the junior  subordinated  debentures
for general corporate purposes,  including a $20 million capital contribution to
the Bank to support growth.

In March 2001, PennFed formed a second  wholly-owned  trust subsidiary,  PennFed
Capital Trust II (the "Trust II").  Effective March 28, 2001,  Trust II sold $12
million of 10.18% cumulative trust preferred securities in a private transaction
exempt from registration under the Securities Act of 1933, as amended.  Trust II
used the proceeds  from the sale of the  securities  to purchase  10.18%  junior
subordinated  deferrable interest debentures issued by PennFed.  The obligations
of PennFed related to Trust II constitute a full and unconditional  guarantee by
PennFed of Trust II obligations  under the Trust Preferred  securities.  PennFed
used the proceeds from the junior subordinated  debentures for general corporate
purposes,  including a $4.2 million capital  contribution to the Bank to support
growth.

Subsidiary Activities

As a federally chartered savings  association,  Penn Federal is permitted by OTS
regulations to invest up to 2% of its assets, or $37.8 million at June 30, 2002,
in the stock of, or loans to,  service  corporation  subsidiaries.  Penn Federal
currently has one service corporation,  which is known as Penn Savings Insurance
Agency,  Inc.  ("PSIA").  At June 30, 2002, the net book value of Penn Federal's
investment in PSIA was $91,000.

PSIA offers  insurance  and  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,a  service  of  IFMG  Securities,   Inc.
("IFMGSI").  Securities are offered through IFMGSI, a registered  broker dealer,
member NASD and SIPC.  Annuities and insurance are offered through IFS Agencies,
Inc.  ("IFSA"),  a  licensed  insurance  agency.  Neither  IFMGSI  nor  IFSA  is
affiliated  with the Bank.  The Bank's  relationship  with IFMGSI and IFSA gives
customers  convenient access to financial  consulting and uninsured  non-deposit
investment  products,  such as fixed and variable annuities and mutual funds. In
addition,  securities  brokerage  services are available  through IFMGSI.  Life,
health and  disability  insurance  are also  available  through  IFSA. To a much
lesser extent, PSIA also offers homeowners insurance to Bank customers.

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,
2002,  the Bank's  investment in its  operating  subsidiary,  Ferry  Development
Holding  Company  ("FDHC"),  was  $346.7  million.  FDHC  holds and  manages  an
investment portfolio.

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.  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.


                                       18

<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 March 2002.

All savings associations are subject to a semi-annual OTS assessment, based upon
the savings  association's total assets and supervisory  evaluation.  The Bank's
OTS assessment for the fiscal year ended June 30, 2002 was $303,000.

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  imposes   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 30,2002,
Penn  Federal  had $5.0  million of  intangible  assets  other  than  qualifying
mortgage servicing rights.


                                       19

<PAGE>

At June 30, 2002, Penn Federal had tangible capital of $158.0 million,  or 8.37%
of adjusted  total  assets,  which was  approximately  $129.7  million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.

The capital standards also require core capital equal to at least 3% of adjusted
total assets and 4% of risk-weighted assets (as described below). As a result of
the prompt  corrective  action provisions  discussed below,  however,  a savings
association must maintain a ratio of core capital to adjusted total assets of at
least  4%  to  be  considered  adequately  capitalized  unless  its  supervisory
condition is such as to allow it to maintain a 3% ratio.  Core capital generally
consists  of  tangible  capital  plus  certain  intangible  assets  up to 25% of
adjusted  total  assets.  At June  30,  2002,  Penn  Federal  did not  have  any
intangibles which were subject to these tests.

At June 30, 2002, Penn Federal had core capital of $158.0  million,  or 8.37% of
adjusted total assets,  which was approximately $82.5 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 30,2002, the Bank had no
capital  instruments  that qualify as supplementary  capital.  The Bank had $5.8
million of allowances  for loan and lease losses at June 30, 2002,  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%  assigned by the OTS capital  regulation  based on the risk inherent in the
type of assets.

On June 30, 2002,  Penn Federal had total  risk-based  capital of $163.8 million
(consisting  of $158.0  million in core  capital and $5.8  million in  allowable
supplementary capital) and risk-weighted assets of $1.0 billion (including $46.1
million in converted  off-balance  sheet items  primarily  represented by unused
lines  of  credit)  resulting  in  a  risk-based  capital  ratio  of  15.93%  of
risk-weighted  assets. This amount was $81.5 million above the 8% requirement in
effect on that date.

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.  The OTS is generally required to take action to restrict
the activities of an "undercapitalized association" (generally defined to be one
with less than a 4% core capital ratio,  a 4% Tier 1 risked-based  capital ratio
or an 8% risk-based  capital ratio).  Any such association must submit a capital
restoration  plan and,  until such plan is approved by the OTS, may not increase
its assets, acquire another institution, establish a branch or engage in any new
activities,  and  generally  may  not  make  capital  distributions.  The OTS is
mandated to impose additional  restrictions that are applicable to significantly
undercapitalized associations.

Any  savings  association  that  fails to  comply  with its  capital  plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios
of less  than 3% or a  risk-based  capital  ratio of less  than 6%) must be made
subject to one or more  additional  mandated  specified  actions  and  operating
restrictions, which may cover all aspects of its operations and include a forced
divestiture,  merger or acquisition  of the  association.  An  association  that
becomes "critically undercapitalized" (i.e., a ratio of tangible equity to total
assets  of 2% or less) is  subject  to  further  mandatory  restrictions  on its
activities  in addition to those  applicable to  significantly  undercapitalized
associations.

Any  undercapitalized  association  is also  subject to  actions by the  general
enforcement  authority of the OTS and the FDIC,  including the  appointment of a
conservator  or a  receiver.  The  OTS  is  also  authorized  to  reclassify  an
association into a lower capital category and impose the restrictions applicable
to such category if the institution is engaged in unsafe or unsound practices or
is found to be in an unsafe or unsound condition.

The  imposition by the OTS or the FDIC of any of these  measures on Penn Federal
may have a substantial adverse effect on the Bank's operations and profitability
and on the market value of PennFed's common stock.


                                       20

<PAGE>

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 during any calendar year
equal to 100% of net income for the  calendar  year-to-date  plus  retained  net
income for the two previous  calendar  years without OTS  approval.  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) 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 30,2002, the Bank met
the QTL test and has always met the test since its effective date.

Any  savings  association  that  fails to meet the QTL test  must  convert  to a
national bank charter,  unless it requalifies as a QTL and thereafter  remains a
QTL. If an  association  does not  requalify  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 requalified 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 requalified 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 community and
to take this record into account in its evaluation of certain applications, such
as a merger or the  establishment  of a  branch,  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
may be required to devote  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 examined for CRA  compliance in February 2001 and received a rating
of "satisfactory."

                                       21

<PAGE>


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.  In addition,  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.

As a member, Penn Federal is required to purchase and maintain stock in the FHLB
of New York.  At June 30, 2002,  the Bank had $25.7  million in FHLB of New York
stock, which was in compliance with this requirement.  Over the past five fiscal
years,  the yields earned on its FHLB of New York stock have averaged  6.35% per
annum.

For the year ended June 30, 2002, the Company recorded $1.3 million in dividends
from the FHLB of New York resulting in a 4.87% yield.

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,  generally  are 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  subsidiary  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 could have a
material  adverse  effect on the  financial  condition  of the  Company  and its
consolidated subsidiaries.

New Jersey Taxation.  The Bank has historically  been taxed under the New Jersey
Savings  Institution  Tax Act. The tax is an annual  privilege  tax imposed at a
rate of 3% on the net income of the Bank as reported for federal income


                                       22


<PAGE>

 tax  purposes,  with  certain  modifications.  PennFed is taxed under the New
Jersey Corporation  Business Tax Act (the "Act"), and if it meets certain tests,
will be taxed as an  investment  company  at an  effective  annual  rate for the
taxable  year  ending June 30,  2002 of 2.25% of New Jersey  taxable  income (as
defined  in the Act).  If it fails to meet these  tests,  it will be taxed at an
annual rate of 9% of New Jersey taxable income.  It is anticipated  that PennFed
will be taxed as an investment  company.  Penn Savings Insurance Agency is taxed
under the Act at a rate of 9% on its New Jersey taxable income.

On July 2, 2002, the State of New Jersey enacted a new tax law revising the
state's corporate income tax law. For the Company, the new law is effective
beginning July 1, 2002. Effective with the new tax structure, the New Jersey
Savings Institution Tax is eliminated. Earnings for savings institutions will be
taxed at the 9% corporate tax rate and the tax rate for New Jersey investment
companies will be increased to 3.6% (or 40% of the corporate tax rate). Although
additional clarification of certain aspects of the law is expected, the new tax
law changes are expected to increase the overall effective tax rate of the
Company. The Company's effective tax rate for the year ended June 30, 2002 was
35.5%. Although the Company's effective tax rate may remain relatively stable,
based upon internal analysis, the total effective tax rate could increase to a
maximum of 41%. In addition, for taxable years beginning after December 31,
2001, New Jersey imposes an alternative minimum tax. The Company will be
required to pay the greater of the regular corporate tax or the alternative
minimum tax. The amount of alternative minimum tax can be used as a credit to
offset the income tax liability calculated under the regular corporate business
tax. The alternative minimum tax is based on either 0.4% of gross receipts or
0.8% of gross profits.

Delaware Taxation. PennFed, as a Delaware holding company, and Ferry Development
Holding Company ("FDHC"), a Delaware investment company, are exempt from
Delaware corporate income tax, but are required to file an annual report with
and pay annual fees to the State of Delaware. PennFed and FDHC are also subject
to an annual franchise tax imposed by the State of Delaware. As Delaware
business trusts, PennFed Capital Trust I and PennFed Capital Trust II are not
required to pay income or franchise taxes to the State of Delaware.




                                       23
<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 were 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...........   44         Senior Executive Vice President and Chief Operating Officer

Claire M. Chadwick...........   42         Executive Vice President and Chief Financial Officer

Barbara A. Flannery..........   46         Executive Vice President and Retail Banking Group Executive

Maria F. Magurno.............   50         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.

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 has served
as the Bank's Senior Vice  President and  Controller  since 1999.  She was named
Executive Vice President and Chief Financial Officer in 2002.

Barbara A. Flannery - Ms. Flannery is responsible for the retail branch network.
Ms.  Flannery has served Penn Federal in various  capacities  since  joining the
Bank in 1980,  including the  management of product  development,  marketing and
various aspects of branch activities.  She was named Executive Vice President in
1999.

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 the collections and servicing departments. She was
named Senior Vice President in 1999 and Executive Vice President in 2001.  Prior
to joining Penn Federal, Ms. Magurno was with NatWest Mortgage.

Employees

At June 30, 2002, the Company and its subsidiaries had a total of 294 employees,
including 50 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 30,2002 was $19.6
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.

                                       24

<PAGE>

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.

In  1987,  the New  Jersey  Department  of  Environmental  Protection  ("NJDEP")
conducted an environment  contamination  investigation of the Orange Road branch
site of  First  Federal  Savings  and  Loan  Association  of  Montclair  ("First
Federal"). Prior to the acquisition by First Federal, the location was used as a
gasoline  service  station.  On August 16, 1989,  the NJDEP issued a "no further
action"  letter to First  Federal  with regard to this site.  The Bank  acquired
First  Federal  effective  September 11, 1989.  Notwithstanding  the earlier "no
further  action" letter,  on June 25, 1997, the NJDEP issued a letter  demanding
that Penn  Federal  Savings  Bank  develop a remedial  action  work plan for the
Orange Road branch site as a result of an  investigation  conducted on behalf of
an adjacent  property  owner.  The Bank  disputed the NJDEP  position  that Penn
Federal Savings Bank was a responsible  party. On July 1, 1998, the NJDEP issued
a letter  determining that Penn Federal Savings Bank, Mobil Oil Corporation (now
ExxonMobil) and the former  gasoline  service station owner were all responsible
parties for the clean up at the subject site. Responsible parties may ultimately
have  full or  partial  obligation  for the  cost of  remediation.  The Bank has
continued to  vigorously  deny  liability  but has engaged in  discussions  with
ExxonMobil.  The Bank may be willing to enter  into a cost  sharing  arrangement
with  ExxonMobil if ExxonMobil  will agree to develop and implement the remedial
action  work plan  required by the NJDEP.  A written  proposal is expected to be
submitted to the Bank by ExxonMobil.  Currently,  no written  agreement has been
signed and neither party is bound by any verbal conversations.

Based upon an environmental  engineering report, a remedial  investigation would
cost  approximately  $30,000.  The  environmental  engineering  company has also
indicated  that,  based upon their  experience  with similar type projects,  the
majority of cases are  addressed  by natural  remediation.  Natural  remediation
costs, if needed,  range from $60,000 to $150,000.  At June 30, 2002 and 2001, a
contingent  environmental  liability of $45,000 is included in Accounts  payable
and other  liabilities  on the  Company's  Consolidated  Statements of Financial
Condition.  The  $45,000  represents  one-half  of  the  remedial  investigation
(one-half of $30,000,  or $15,000)  plus  one-half of the lower end of the range
for natural remediation  (one-half of $60,000, or $30,000).  Based upon the most
current  information  available,  management believes the $45,000 represents the
most likely 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, 2002.

                                       25
<PAGE>

                                     PART II

Item 5. Market for the  Registrant's  Common Stock and Related  Security  Holder
Matters

The  Company's  common  stock trades on the Nasdaq  National  Market tier of the
Nasdaq Stock Market  under the symbol  "PFSB." At September 6, 2002,  there were
approximately  470  stockholders  of record for the Company's  common stock (not
including  the number of persons or entities  holding stock in nominee or street
name through various brokerage firms).

Market Information

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

<TABLE>
<CAPTION>
                                            Fiscal 2002 Closing Price      Fiscal 2001 Closing Price
                                           ---------------------------    ----------------------------
                                              High            Low             High             Low
                                           ---------------------------    ----------------------------
<S>                                         <C>             <C>             <C>             <C>
Quarter Ended:
September 30, 2001 and 2000...............  $22.480         $19.250         $15.375         $13.000
December 31, 2001 and 2000................   24.820          18.800          17.063          13.625
March 31, 2002 and 2001...................   27.250          23.160          21.000          16.875
June 30, 2002 and 2001....................   28.250          23.700          23.100          19.200

</TABLE>


The  closing  price of a common  share was $27.90 at June 30,  2002  compared to
$23.10 at June 30, 2001.

In the second quarter of fiscal 2002,  the Company  increased the quarterly cash
dividend on its common stock to $0.06 per share. Previously,  the quarterly cash
dividend  was $0.05 per share  since the fourth  quarter of fiscal  2001.  Prior
quarterly cash dividends were $0.04 per share since the second quarter of fiscal
1999. Quarterly cash dividend payments of $0.035 per share were initiated in the
second quarter of fiscal 1997. Subsequent to the end of fiscal 2002, the Company
increased the quarterly cash dividend to $0.10 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 N --Stockholders'  Equity and Regulatory Capital in the
Notes to Consolidated Financial Statements.

The following  table sets forth  information as of June 30, 2002 with respect to
compensation plans under which shares of Company common stock may be issued.


<TABLE>
<CAPTION>

                                           Equity Commpensation Plan Information
                                                                                                        Number of Shares
                                                                                                        Remaining Available
                                                                                                        for Future Issuance
                                                                                                        Under Equity
                                                    Number of Shares to                                 Compensation Plans
                                                    be Issued Upon           Weighted-Average           (Excluding Shares
                                                    Exercise of              Exercise Price of          Reflected in the
Plan Category                                       Outstanding Options      Outstanding Options        First Column)
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>                      <C>                         <C>
Equity compensation plans approved
  by stockholders(1).............................        1,198,516                $10.42                      0
Equity compensation plans not approved
  by stockholders................................              N/A                   N/A                    N/A
Total............................................        1,198,516                $10.42                      0

</TABLE>

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


                                       26
<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,
                                             ----------------------------------------------------------------------------
                                                2002            2001            2000            1999            1998
                                             ----------------------------------------------------------------------------
                                                             (In thousands, except per share amounts)
<S>                                          <C>             <C>             <C>             <C>             <C>
Selected Financial Condition Data:
Total assets ..........................      $1,892,427      $1,849,377      $1,729,219      $1,558,763      $1,551,938
Loans receivable, net .................       1,441,260       1,295,492       1,259,248       1,066,611       1,095,852
Investment securities .................         183,785         333,969         303,026         293,282         178,310
Mortgage-backed securities ............         169,689         135,606          87,561         127,983         204,452
Deposits ..............................       1,174,507       1,085,335       1,080,350       1,063,600       1,028,100
Total borrowings ......................         527,779         582,105         476,640         333,203         361,965
Trust Preferred securities, net .......          44,537          44,461          32,805          32,743          32,681
Stockholders' equity ..................         118,761         112,530         113,981         107,500         103,703

Book value per common share(1) ........           16.73           15.50           14.37           13.03           11.87
Tangible book value per common share(1)           16.02           14.54           13.24           11.68           10.33

</TABLE>


(1)  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.

<TABLE>
<CAPTION>

                                                                                    Year ended June 30,
                                                                 2002           2001         2000         1999          1998
                                                               ---------------------------------------------------------------
                                                                           (In thousands, except per share amounts)
<S>                                                            <C>           <C>           <C>           <C>         <C>
Selected Operating Data:
Total interest and dividend income ......................      $121,339      $120,358      $111,763      $105,557    $ 100,805
Total interest expense ..................................        72,862        79,584        71,201        68,786       65,869
                                                               ---------------------------------------------------------------
Net interest and dividend income ........................        48,477        40,774        40,562        36,771       34,936
Provision for loan losses ...............................         1,625           625           860           780          600
                                                               ---------------------------------------------------------------
Net interest income after provision for
loan losses .............................................        46,852        40,149        39,702        35,991       34,336
                                                               ---------------------------------------------------------------
Service charges .........................................         2,961         2,495         2,172         2,113        1,974
Net gain (loss) from real estate operations .............            87            65           114            31         (156)
Net gain on sales of loans ..............................           194           666            36           860          528
Other non-interest income ...............................           975           588           625           542          321
                                                               ---------------------------------------------------------------
Total non-interest income ...............................         4,217         3,814         2,947         3,546        2,667
                                                               ---------------------------------------------------------------
Total non-interest expenses .............................        28,450        24,642        22,728        21,776       19,563
                                                               ---------------------------------------------------------------
Income before income taxes ..............................        22,619        19,321        19,921        17,761       17,440
Income tax expense ......................................         8,036         6,808         7,051         6,304        6,242
                                                               ---------------------------------------------------------------
Net income ..............................................      $ 14,583      $ 12,513      $ 12,870      $ 11,457    $  11,198
                                                               ===============================================================

Net income per common share:
Basic...................................................       $   2.02      $   1.64      $   1.58      $   1.36    $    1.25
                                                               ===============================================================
Diluted.................................................       $   1.88      $   1.55      $   1.50      $   1.29    $    1.16
                                                               ===============================================================
</TABLE>


                                       27

<PAGE>

<TABLE>
<CAPTION>

                                                                               At and for the year ended June 30,
                                                               -------------------------------------------------------------------
Selected Financial Ratios and Other Data:                        2002            2001           2000           1999         1998
                                                               -------------------------------------------------------------------
<S>                                                            <C>             <C>            <C>            <C>           <C>
Performance Ratios:
Return on average assets (ratio of net income to
   average total assets) ...................................     0.79%           0.72%          0.79%          0.74%         0.78%
Return on average stockholders' equity (ratio of
   net income to average stockholders' equity) .............    12.59           10.95          11.61          11.03         10.96
Net interest rate spread during the year ...................     2.37            2.06           2.22           2.11          2.20
Net interest margin (net interest and dividend
   income to average interest-earning assets) ..............     2.68            2.43           2.57           2.45          2.54
Ratio of average interest-earning assets to average
   deposits and borrowings .................................   107.88          107.67         107.64         107.27        107.07
Ratio of earnings to fixed charges(1):
   Excluding interest on deposits ..........................     1.74x           1.68x          1.81x          1.88x         1.99x
   Including interest on deposits ..........................     1.31x           1.24x          1.28x          1.26x         1.26x
Ratio of non-interest expense to average total assets ......     1.53%           1.42%          1.39%          1.40%         1.37%
Efficiency ratio (non-interest expense, excluding
   amortization of intangibles, to net interest and
   dividend income and non-interest income excluding
   gains on sales and real estate operations) ..............    50.58           51.59          47.53          49.24         46.00
Dividend payout ratio ......................................    11.39           10.37          10.13          11.40         11.20

Asset Quality Ratios:
Non-accruing loans to total loans at end of year ...........     0.23            0.13           0.21           0.34          0.34
Allowance for loan losses to non-accruing loans
   at end of year ..........................................   177.74          259.50         146.70          87.44         74.18
Allowance for loan losses to total loans at end of year ....     0.40            0.33           0.32           0.30          0.25
Non-performing assets to total assets at end of year .......     0.17            0.12           0.18           0.30          0.35
Ratio of net charge-offs during the year to average
   loans outstanding during the year .......................     0.00            0.03           0.01           0.03          0.04

Capital Ratios:
Stockholders' equity to total assets at end of year ........     6.28            6.08           6.59           6.90          6.68
Average stockholders' equity to average total assets .......     6.25            6.58           6.78           6.67          7.14

Tangible capital to tangible assets at end of year(2) ......     8.37            7.87           7.76           7.88          7.09
Core capital to adjusted tangible assets at end of year(2) .     8.37            7.87           7.76           7.88          7.11
Risk-based capital to risk-weighted assets at end of year(2)    15.93           15.69          15.50          16.29         15.16

Other Data:
Number of branch offices at end of year ....................       21              21             20             20            18
Number of deposit accounts at end of year ..................   84,200          88,500         88,300         88,200        87,500
Cash dividends declared per common share ................... $  0.230       $   0.170      $   0.160      $   0.155      $  0.140

</TABLE>


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

(1)  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.

(2)  Represents regulatory capital ratios for the Bank.


                                       28
<PAGE>

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

General

In July 1994,  PennFed became the savings and loan holding  company of the Bank.
Currently,  the results of operations of the Company are primarily  those of the
Bank and its subsidiaries and the Trusts.

The  Company's  results of operations  are  dependent  primarily on net interest
income,  which  is the  difference  between  the  income  earned  on  its  loan,
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.

Management Strategy

Management's  primary goal is to enhance  stockholder value, while fostering and
maintaining  customer  confidence 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.
The Company  will  continue to emphasize  production,  through  origination  and
purchase,  of traditional  one- to  four-family  first mortgage loans secured by
properties located primarily in New Jersey. The Company produced $529.3 million,
$305.9  million  and $278.3  million in one- to  four-family  mortgage  loans in
fiscal 2002, 2001 and 2000, respectively. The Company's interest income has been
derived  primarily from one- to four-family  mortgage loans,  which totaled $1.2
billion or 81.5% of the Company's gross loan portfolio at June 30, 2002.

The  Company  generally  sells its  conforming,  fixed rate one- to  four-family
residential loan production.  Sales have been periodically  suspended in certain
circumstances.  For example,  loans were held in portfolio as part of a leverage
strategy  associated with the Trust Preferred  securities offering in March 2001
and as a partial  replacement of investment  securities  called before  maturity
during fiscal 2002. In addition,  in fiscal 2001 the Company sold  approximately
$65 million of longer duration,  one- to four-family  residential mortgage loans
in an effort to improve  liquidity,  interest rate risk and net interest margin.
Total  loans sold  during  fiscal  2002 and fiscal 2001 were $17 million and $94
million,  respectively. 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.

Increasing the  Commercial and  Multi-Family  and Consumer Loan  Portfolios.  In
addition to one- to four-family  residential first mortgage lending, the Company
will continue its emphasis on increasing  the commercial  and  multi-family  and
consumer loan  porfolios as a percentage of total loans.  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 $150.5 million,
$110.6  million and $95.7 million of commercial  and  multi-family  and consumer
loans in fiscal 2002, 2001 and 2000, respectively. As of June 30, 2002, 2001 and
2000,  commercial and multi-family and consumer loans represented  18.5%,  17.4%
and 14.7%, respectively, of the total gross loan portfolio.

Maintaining Asset Quality.  The Company's loan portfolio  consists  primarily of
one- to  four-family  mortgages,  which  are  considered  to have less risk than
commercial and multi-family real estate or consumer loans.

The  Company's  non-performing  assets  consist of  non-accruing  loans and real
estate owned. The Company focuses on strong  underwriting and collection efforts
and aggressive marketing of real estate owned properties.  Non-performing assets
as a percentage of total assets were 0.17% at June 30, 2002.

Increasing  Core Deposit  Balances.  The  Company's  primary  source of funds is
deposits.  The Company  will  continue to emphasize  growth in  generally  lower
costing core deposits consisting of checking, money market and savings accounts.
The Company  utilizes  various  techniques  to generate  these types of deposits
including  special  promotional  rates and  offerings.  Core deposits  increased
$163.3 million, or 51%, in fiscal 2002.


                                       29

<PAGE>

Managing  the  Company's  Exposure  to  Interest  Rate Risk.  The Company has an
asset/liability  committee  that  meets no less than  weekly  to price  loan and
deposit  products and 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   deposits   and   utilized
intermediate/longer-term  borrowings and has, at select times, emphasized 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 the focus on the production of loans with  adjustable  rate
features and/or with shorter terms to maturity.  The Company has also engaged in
one- to  four-family  mortgage loan sales whereby longer  duration  conventional
loans  have  been  sold.   See   "Interest   Rate   Sensitivity   Analysis"  and
"Asset/Liability Strategy."

Improving  Non-Interest  Income.  The  Company  has and  will  continue  to seek
additional  ways of improving  non-interest  income.  Total service  charges and
other  non-interest  income,  excluding  the net gain on sales of loans and real
estate  operations,  reflected  a  $853,000,  or 28%,  increase  for fiscal 2002
compared to fiscal 2001,  due, in part,  to growth in core deposits and earnings
from the Bank's Investment Services at Penn Federal program.  This program gives
customers  convenient  access  to  financial  consulting/advisory  services  and
related uninsured non-deposit  investment and insurance products at local branch
offices through a non-affiliated entity.

Controlling   Non-Interest   Expenses.   Non-interest   expenses  are  carefully
monitored,  which includes  ongoing reviews of staffing  levels,  facilities and
operations. The Company's ratio of non-interest expenses to average total assets
was 1.53% for the year ended June 30, 2002.


Interest Rate Sensitivity  Analysis

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  positive  gap if the  amount  of  interest-earning  assets  maturing  or
repricing within a specified time period exceeds the amount of  interest-bearing
liabilities   maturing   or   repricing   within  the  same   period.   If  more
interest-bearing  liabilities  than  interest-earning  assets  mature or reprice
within a specified period, then the institution is considered to have a negative
gap. Accordingly,  in a rising interest rate environment, in an institution with
a positive gap, the yield on its rate sensitive assets would  theoretically rise
at a  faster  pace  than the cost of its  rate  sensitive  liabilities,  thereby
improving future net interest income. In a falling interest rate environment,  a
positive  gap would  indicate  that the  yield on rate  sensitive  assets  would
decline  at a  faster  pace  than  the cost of rate  sensitive  liabilities  and
diminish  net  interest  income.  For an  institution  with a negative  gap, the
reverse would be expected.

In an attempt to manage its  exposure to changes in interest  rates,  management
closely  monitors  the  Company's  exposure  to interest  rate risk.  Management
maintains  an  asset/liability  committee  consisting  of  the  Chief  Executive
Officer,   the  Chief  Operating  Officer,  the  Chief  Financial  Officer,  the
Residential  Lending Group Executive,  the Retail Banking Group  Executive,  the
Treasurer  and the  Customer  Support/Operations  Group  Executive,  which meets
regularly  and reviews  the  Company's  interest  rate risk  position  and makes
recommendations for adjusting this position. In addition, the Board 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 following table 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. 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 an estimated
average life of approximately 4 years.

Residential  fixed  and  adjustable  rate  loans  are  assumed  to  prepay at an
annualized  rate between 10% and 42%.  Commercial and  multi-family  real estate
loans are assumed to prepay at an annualized rate between 8% and 38%


                                       30

<PAGE>


while consumer  loans are assumed to prepay at a 34% rate.  Fixed and adjustable
rate mortgage-backed securities have annual payment assumptions ranging from 10%
to 35%. 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 fees.

The Company assumes that variable rate savings account  balances decay gradually
over time.  Based on  historical  information,  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 $72.5 million at June 30,
2002.  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, 2002,  the balance in these  accounts  totaled
$63.5 million. These deposits are assumed to have no decay through June 2004 and
then  roll-off 60% over the  following  four years.  The remainder is assumed to
have an average life of 10 years. At June 30, 2002,  $222.4 million,  or 71%, 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 ended June 30,
                                                ---------------------------------------------------------------------------------
                                                   2003         2004         2005           2006         2007       Thereafter
                                                ---------------------------------------------------------------------------------
                                                                           (Dollars in thousands)
<S>                                             <C>          <C>          <C>           <C>          <C>          <C>
Fixed rate mortgage loans including
  one- to four-family and commercial
  and multi-family .........................    $ 208,415    $ 124,597    $ 109,347     $  96,566    $  86,042    $   288,770

  Average interest rate ....................         7.10%        6.89%        6.89%         6.89%        6.90%          6.96%


Adjustable rate mortgage loans including
  one- to four-family and commercial
   and multi-family ........................    $ 172,056    $  73,738    $  71,568     $  42,808    $  26,720    $   13,198
  Average interest rate ....................         6.68%        6.92%        7.11%         7.52%        7.67%         7.67%

Consumer loans including
  demand loans .............................    $  85,698    $  15,264    $  10,339     $   7,108    $   2,087    $       --
  Average interest rate ....................         6.54%        7.44%        7.44%         7.44%        7.44%         0.00%

Investment securities and other ............    $  44,255    $  26,958    $  26,952     $  17,900    $  15,767    $   36,500
  Average interest rate ....................         6.62%        6.72%        6.64%         6.73%        6.64%         6.71%

Mortgage-backed securities .................    $  64,550    $ 125,160    $      --     $      --    $  22,328    $   10,002
  Average interest rate ....................         4.86%        6.46%        0.00%         0.00%        7.72%         9.03%

  Total interest-earning assets ............    $ 574,974    $ 365,717    $ 218,206     $ 164,382    $ 152,944    $  348,470
                                                =================================================================================
Savings deposits ...........................    $  21,086    $  15,463    $  27,008     $  15,927    $   9,892    $  222,364
  Average interest rate ....................         1.05%        1.05%        3.37%         3.41%        2.57%         2.95%

Money market and demand deposits
  (transaction accounts) ...................    $  20,397    $      --    $      --     $      --    $      --    $  148,597
  Average interest rate ....................         1.50%        0.00%        0.00%         0.00%        0.00%         0.74%

Certificates of deposit ....................    $ 432,809    $ 139,025    $  85,039     $  25,082    $  10,172    $       --
  Average interest rate ....................         4.03%        3.97%        5.53%         4.81%        4.60%         0.00%


FHLB of New York advances ..................    $      --    $  29,000    $  60,000     $  30,000    $  20,465    $  365,000
  Average interest rate ....................         0.00%        5.09%        5.31%         4.21%        6.03%         5.86%

Other borrowings ...........................    $   3,964    $  19,350    $      --     $      --    $      --    $       --
  Average interest rate ....................         4.25%        4.92%        0.00%         0.00%        0.00%         0.00%

  Total deposits and borrowings ............    $ 478,256    $ 202,838    $ 172,047     $  71,009    $  40,529    $  735,961
                                                =================================================================================

Interest earning assets less deposits and
  borrowings (interest-rate sensitivity gap)    $  96,718    $ 162,879    $  46,159     $  93,373    $ 112,415   ($ 387,491)
                                               ==================================================================================

Cumulative interest-rate sensitivity gap ...    $  96,718    $ 259,597    $ 305,756     $ 399,129    $ 511,544    $ 124,053
                                               ===============================================================================

Cumulative interest-rate sensitivity
  gap as a percentage of total assets
  at June 30, 2002 .........................         5.11%       13.72%       16.16%        21.09%       27.03%         6.56%
                                               ===============================================================================

Cumulative interest-rate sensitivity gap
  as a percentage of total interest-
  earning assets at June 30, 2002 ..........         5.30%       14.23%       16.76%        21.87%       28.03%         6.80%
                                               ===============================================================================

Cumulative interest-earning assets as a
  percentage of cumulative deposits and
  borrowings at June 30, 2002 ..............       120.22%      138.11%      135.84%       143.19%      153.03%       107.29%
                                               ===============================================================================
</TABLE>


<TABLE>
<CAPTION>
                                                   Maturing or Repricing
                                              ----------------------------
                                                   Year ended June 30,
                                              ----------------------------
                                                  Total        Fair Value
                                              ----------------------------

<S>                                            <C>             <C>
Fixed rate mortgage loans including
  one- to four-family and commercial
  and multi-family .........................   $  913,737      $  927,004

  Average interest rate ....................         6.96%


Adjustable rate mortgage loans including
  one- to four-family and commercial
   and multi-family ........................   $  400,088      $  409,516
  Average interest rate ....................         6.99%

Consumer loans including
  demand loans .............................   $  120,496      $  120,815
  Average interest rate ....................         6.80%

Investment securities and other ............   $  168,332      $  174,036
  Average interest rate ....................         6.67%

Mortgage-backed securities .................   $  222,040      $  221,226
  Average interest rate ....................         6.24%

  Total interest-earning assets ............   $1,824,693      $1,852,597
                                               ==========================
Savings deposits ...........................   $  311,740      $  311,740
  Average interest rate ....................         2.78%

Money market and demand deposits
  (transaction accounts) ...................   $  168,994      $  168,994
  Average interest rate ....................         0.83%

Certificates of deposit ....................   $  692,127      $  705,786
  Average interest rate ....................         4.24%


FHLB of New York advances ..................   $  504,465      $  536,767
  Average interest rate ....................         5.66%

Other borrowings ...........................   $   23,314      $   24,031
  Average interest rate ....................         4.81%

  Total deposits and borrowings ............   $1,700,640      $1,747,318
                                              ============================

Interest earning assets less deposits and
  borrowings (interest-rate sensitivity gap)   $ 124,053
                                              ==============

Cumulative interest-rate sensitivity gap ...


Cumulative interest-rate sensitivity
  gap as a percentage of total assets
  at June 30, 2002 .........................


Cumulative interest-rate sensitivity gap
  as a percentage of total interest-
  earning assets at June 30, 2002 ..........


Cumulative interest-earning assets as a
  percentage of cumulative deposits and
  borrowings at June 30, 2002 ..............

</TABLE>


At June 30,  2002,  the  Company's  total  interest-earning  assets  maturing or
repricing within one year exceeded its total deposits and borrowings maturing or
repricing within one year by $96.7 million, representing a one year positive gap
of 5.11% of total assets, compared to a one year negative gap of 14.48% of total
assets at June 30, 2001.  See  "Asset/Liability  Strategy."  The  Company's  gap
position  changed from June 30, 2001.  The decline in market  interest rates has
resulted  in the  redemption  of certain  investment  securities  with  callable
features and has increased  prepayment  activity on residential  mortgage loans,
thereby  shifting a larger  portion of estimated  asset cash flows to within one
year.  The  proceeds  from  such  activities  were  used  to  reduce  short-term
borrowings  and fund  growth in the loan  portfolio.  Also  contributing  to the
change in the gap  position  was the  maturity of FHLB of New York  advances and
subsequent

                                       32

<PAGE>



replacement with advances that have terms in excess of three years. Furthermore,
growth in core deposits and  medium-term  certificates of deposit coupled with a
decline in short-term certificates of deposit,  including municipal certificates
of deposit,  also reduced the  short-term  estimated cash flows of the Company's
interest-bearing liabilities.

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. Further, 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 low initial NPV ratio or 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. 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.  A 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.

As of June 30,  2002,  the Bank's  internally  generated  initial  NPV ratio was
5.57%.  Following a 2% increase in interest  rates,  the Bank's  Post-Shock  NPV
ratio was 6.62%. The change in the NPV ratio, or the Bank's Sensitivity Measure,
was 1.05%. As of June 30, 2002, the Company's  internally  generated initial NPV
ratio was 5.18%, the Post-Shock ratio was 6.11%, and the Sensitivity Measure was
0.93%.  The  duration  of  assets  has  declined  principally  due to  increased
prepayment  estimates.  Conversely,  the  duration of  liabilities  has extended
principally  due to the  decline in  short-term  fundings,  both  wholesale  and
retail,  the  extension  of FHLB of New York  advances  and the  growth  in core
deposits.  Variances  between  the  Bank's  and the  Company's  NPV  ratios  are
attributable  to balance  sheet items which are adjusted  during  consolidation,
such as investments, intercompany borrowings and capital.

Internally  generated NPV  measurements  are based on simulations  which utilize
institution  specific assumptions and, as such, generally result in lower levels
of presumed  interest  rate risk (i.e.,  higher  Post-Shock  NPV ratio and lower
Sensitivity Measure) than OTS measurements indicate.

The OTS measures the Bank's (unconsolidated) 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 June 30, 2002, the Bank's initial NPV ratio, as measured by the
OTS, was 9.24% the Bank's Post-Shock ratio was 6.20% and the Sensitivity Measure
was 3.04%.

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, 2002,  based on its  internally  generated  simulation  models,  the
Company's  consolidated net interest income projected for one year forward would
increase 1% from the base case, or current  market,  as a result of an immediate
and sustained 2% increase in interest rates.

Asset/Liability Strategy

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

1. The Company has focused on  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, 5 and 7 years, 15, 20 and 30
year  bi-weekly  mortgages  and fixed rate  products with terms of 10, 15 and 20
years.


                                       33
<PAGE>


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 whole
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   developing   and   strengthening   customer
relationships in an effort to improve earnings and funding stability.

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

During fiscal 2002,  each of the  strategies  noted above was employed to manage
the Company's  sensitivity  to changes in interest  rates.  In the first half of
fiscal year 2002,  short-term  market rates declined  rapidly while  longer-term
market  rates  followed  more  gradually  and  the  yield  curve   significantly
steepened.  This shift in rates led to a significant improvement in net interest
rate spread,  as  short-term  wholesale  and retail  funding  costs were sharply
reduced.  The decline in long-term rates led to an increase in residential  loan
refinance and U.S. government agency security redemption  activities.  Cash flow
from these asset  repayments was partially used to reduce  short-term  wholesale
funding  balances.  As market rates  continued to fall in the second half of the
fiscal  year,  it became  increasingly  difficult to build  longer-term  deposit
relationships  --  customers  were not  willing  to place  their  funds in lower
yielding,  longer-term certificates of deposit. In response, the Bank emphasized
several  core  deposit  account  promotions,  including  personal  and  business
checking, and premium savings accounts.  Deposit growth through these promotions
allowed the Bank to avoid premium pricing on certificates of deposit and to take
advantage of  historically  low-cost,  longer-term  wholesale  borrowings.  As a
result,  the Company's net interest rate spread continued to grow throughout the
fiscal  year  and  its   sensitivity  to  rising  interest  rates  was  reduced.
Residential mortgage loan sale activities were reestablished in late fiscal 2002
to  manage  interest  rate  risk,  as  fixed  rate,  long-term  loan  production
accelerated.

As a result of the above  activity,  one- to  four-family  first  mortgage  loan
balances grew $106.3 million between June 30, 2001 and June 30, 2002; adjustable
rate balances fell $93.5 million,  despite attractive pricing of these products,
while fixed rate  balances  increased  $199.8  million.  Consumer  loan balances
increased  $5.2  million.  Prime-based  home  equity  lines of credit  fell $5.2
million while other consumer  products,  principally fixed rate second mortgages
generally with shorter durations than one- to four-family residential mortgages,
increased $10.3 million.  Commercial and multi-family  real estate loan balances
grew $36.0  million  during the current  fiscal  year with $23.4  million of the
growth in adjustable rate products.

At June 30, 2002,  medium and long-term  certificates of deposits with remaining
maturities  greater  than one year  totaled  $259.3  million  compared to $275.4
million at June 30, 2001. The reduction of certificates of deposit was more than
offset by a $163.3 million increase in core deposit balances. Checking and money
market account  balances grew $35.4 million,  while savings  balances  increased
$127.9 million.  Furthermore,  wholesale  borrowings  with remaining  maturities
greater than one year totaled $523.8 million at June 30, 2002, reflecting growth
of $120.0  million  during the current  fiscal year.  Short-term  retail deposit
balances  with  remaining  maturities  less than one year,  including  municipal
deposit balances,  fell $57.3 million and short-term  wholesale funding balances
fell $174.3 million between June 30, 2001 and June 30, 2002.

Additionally,  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
approximately  41%  of  total  deposits  at  June  30,  2002,  tend  to be  less
susceptible  to rapid  changes in interest  rates than  certificates  of deposit
balances.

                                       34

<PAGE>


Management will continue to monitor and employ such strategies, as necessary, in
conjunction with its overall strategic objectives.

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,
2002, 2001 and 2000 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.

<TABLE>
<CAPTION>
                                                                              Year ended June 30,
                                     -----------------------------------------------------------------------------------------------
                                                     2002                             2001                            2000
                                     -----------------------------------------------------------------------------------------------
                                       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 ...........................  $1,135,205  $  75,201    6.62%  $1,040,942   $ 73,480    7.06% $  988,454    $ 69,085   6.99%
  Commercial and multi-family real
   estate loans ....................     124,669     10,277    8.24       97,921      8,455    8.63      79,604       6,788   8.53
  Consumer loans ...................     118,576      8,018    6.76      107,695      8,311    7.72      83,187       6,153   7.40
                                      ----------  ---------           ----------   --------          ----------    --------

   Total loans receivable ..........   1,378,450     93,496    6.78    1,246,558     90,246    7.24   1,151,245      82,026   7.12

  Federal funds sold ...............          34          1    2.94        1,013         61    6.02         307          17   5.54
  Investment securities and other ..     262,379     17,323    6.60      327,208     22,716    6.94     323,190      22,547   6.98
  Mortgage-backed securities .......     164,671     10,519    6.39      105,297      7,335    6.97     105,913       7,173   6.77
                                      ----------  ---------           ----------   --------          ----------    --------
   Total interest-earning assets ...   1,805,534  $ 121,339    6.72    1,680,076   $120,358    7.16   1,580,655    $111,763   7.07
                                                  =========                        ========                        ========
Non-interest earning assets ........      48,849                          55,173                         55,857
                                      ----------                      ----------                     ----------
   Total assets ....................  $1,854,383                      $1,735,249                     $1,636,512
                                      ==========                      ==========                     ==========


Deposits and borrowings:
  Money market and demand
   deposits ........................  $  144,657  $   1,206    0.83%  $  124,926   $  1,468    1.18% $  115,827    $  1,329   1.15%
  Savings deposits .................     230,691      5,131    2.22      163,292      2,830    1.73     161,845       2,645   1.63
  Certificates of deposit ..........     760,339     35,844    4.71      812,440     46,987    5.78     786,949      42,784   5.44
                                      ----------  ---------           ----------   --------          ----------    --------
   Total deposits ..................   1,135,687     42,181    3.71    1,100,658     51,285    4.66   1,064,621      46,758   4.39

  FHLB of New York advances ........     477,935     27,940    5.85      397,614     24,571    6.18     322,754      19,591   6.07
  Other borrowings .................      60,048      2,741    4.56       62,164      3,728    6.00      81,053       4,852   5.99
                                      ----------  ---------           ----------   --------          ----------    --------
   Total deposits and borrowings ...   1,673,670  $  72,862    4.35    1,560,436   $ 79,584    5.10   1,468,428    $ 71,201   4.85
                                                  =========                        ========                        ========
Other liabilities ..................      20,352                          24,734                         24,417
                                      ----------                      ----------                     ----------

   Total liabilities ...............   1,694,022                       1,585,170                      1,492,845


Trust Preferred securities .........      44,499                          35,849                         32,774
Stockholders' equity ...............     115,862                         114,230                        110,893
                                      ----------                      ----------                     ----------
   Total liabilities and
     stockholders' equity ..........  $1,854,383                      $1,735,249                     $1,636,512
                                      ==========                      ==========                     ==========

Net interest income and net interest
  rate spread ......................              $  48,477    2.37%             $   40,774    2.06%             $   40,562   2.22%
                                                  =========    ====              ==========    ====              ==========   ====


Net interest-earning assets and
  interest margin ..................  $  131,864               2.68%  $  119,640               2.43% $  112,227               2.57%
                                      ==========               ====   ==========               ====  ==========               ====

Ratio of interest-earning assets to
  deposits and borrowings ..........                         107.88%                         107.67%                        107.64%
                                                             ======                          ======                         ======
</TABLE>


                                       35

<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
interest-bearing  liabilities  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,
                                      -------------------------------------------------------------------------------------------
                                                     2002 vs. 2001                                  2001 vs. 2000
                                      ----------------------------------------------  -------------------------------------------
                                                   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 ...............    $ 6,654     $ (4,523)    $  (410)    $  1,721     $ 3,668     $   690     $  37     $ 4,395
Commercial and multi-family
   real estate loans ............      2,310         (383)       (105)       1,822       1,562          85        20       1,667

Consumer loans ..................        840       (1,029)       (104)        (293)      1,813         266        79       2,158
                                     ---------------------------------------------------------------------------------------------
   Total loans receivable .......      9,804       (5,935)       (619)       3,250       7,043       1,041       136       8,220
Federal funds sold ..............        (59)         (31)         30          (60)         39           2         3          44

Investment securities and other .     (4,500)      (1,113)        220       (5,393)        280        (110)       (1)        169

Mortgage-backed securities ......      4,136         (609)       (343)       3,184         (42)        205        (1)        162
                                     ---------------------------------------------------------------------------------------------
   Total interest-earning assets     $ 9,381     $ (7,688)    $  (712)    $    981     $ 7,320     $ 1,138     $ 137     $ 8,595
                                     =============================================================================================

Deposits and borrowings:
Money market and demand
deposits ........................    $   232     $   (427)    $   (67)    $   (262)    $   104     $    32     $   3     $   139

Savings deposits ................      1,168          802         331        2,301          24         160         1         185

Certificates of deposit .........     (3,013)      (8,687)        557      (11,143)      1,386       2,729        88       4,203
                                     ---------------------------------------------------------------------------------------------
  Total deposits ................     (1,613)      (8,312)        821       (9,104)      1,514       2,921        92       4,527

FHLB of New York advances .......      4,964       (1,327)       (268)       3,369       4,544         354        82       4,980
Other borrowings ................       (127)        (890)         30         (987)     (1,131)          9        (2)     (1,124)
                                     ---------------------------------------------------------------------------------------------
  Total deposits and borrowings .    $ 3,224     $(10,529)    $   583     $ (6,722)    $ 4,927     $ 3,284     $ 172     $ 8,383
                                     =============================================================================================
Net change in net interest income    $ 6,157     $  2,841     $(1,295)    $  7,703     $ 2,393     $(2,146)    $ (35)    $   212
                                     =============================================================================================
</TABLE>


                                       36

<PAGE>

Financial Condition

Comparison of Financial Condition at June 30, 2002 and June 30, 2001

Total assets  increased  $43.1  million to $1.892  billion at June 30, 2002 from
total assets of $1.849  billion at June 30, 2001. The increase was primarily due
to the  origination  and  purchase of loans  offset by a decrease in  investment
securities and principal payments on loans and mortgage-backed securities. Lower
market  interest  rates have  resulted in certain  investment  securities  being
called  before  maturity.  A decision to retain  conforming,  fixed rate one- to
four-family  residential  mortgage  loans in the  portfolio  throughout  most of
fiscal  2002,  coupled with the lower market  interest  rates and the  resulting
effect of loan refinancing activity,  led to growth in the loan portfolio during
fiscal 2002.

During the year ended June 30, 2002, the Company  securitized  approximately $66
million of one- to  four-family  mortgage  loans as Freddie Mac  mortgage-backed
securities.   These  securities  are  held  in  the  Company's   mortgage-backed
securities portfolio for collateral purposes.

Deposits  increased $89.2 million to $1.174 billion at June 30, 2002 from $1.085
billion at June 30, 2001. An increase in core deposit accounts (checking,  money
market and  savings  accounts)  and  medium-term  certificates  of  deposit  was
partially offset by a decrease in short-term certificates of deposit,  including
municipal  certificates  of deposit.  FHLB of New York advances  increased $50.0
million from $454.5 million at June 30, 2001 to $504.5 million at June 30, 2002,
while other borrowings  decreased $104.3 million from $127.6 million at June 30,
2001 to $23.3  million  at June  30,  2002.  The  decrease  in other  borrowings
primarily  reflects the use of funds received from investment  securities  being
called before maturity and the increase in medium-term and core deposits.

Non-performing assets at June 30, 2002 totaled $3.3 million,  representing 0.17%
of total assets, compared to $2.1 million, or 0.12% of total assets, at June 30,
2001.  Non-accruing  loans  totaled $3.3 million,  with a ratio of  non-accruing
loans to total loans of 0.23% at June 30, 2002 as compared to $1.6  million,  or
0.13% of total loans,  at June 30, 2001.  Real estate owned decreased to $28,000
at June 30, 2002 from $500,000 at June 30, 2001.

Stockholders'  equity at June 30, 2002 totaled $118.8 million compared to $112.5
million  at June 30,  2001.  The  increase  primarily  reflects  the net  income
recorded  for the year ended June 30, 2002 and the  exercise  of stock  options,
offset by the repurchase of 500,000 shares of the Company's outstanding stock at
an average market price of $22.24 per share and the declaration of dividends.


Results of Operations

Comparison  of Operating  Results for the Years Ended June 30, 2002 and June 30,
2001

General.  For the year ended June 30,  2002,  net income was $14.6  million,  or
$1.88 per diluted share,  compared to net income of $12.5 million,  or $1.55 per
diluted share, for the year ended June 30, 2001.

Interest and Dividend  Income.  Interest and dividend  income for the year ended
June 30, 2002 increased to $121.3 million from $120.4 million for the year ended
June 30,  2001.  The  increase  in the year  ended  June 30,  2002 was due to an
increase in average interest-earning assets, offset by a decrease in the average
yield earned on interest-earning  assets. Average  interest-earning  assets were
$1.8  billion for the year ended June 30, 2002  compared to $1.7 billion for the
prior fiscal year.  The average yield on  interest-earning  assets  decreased to
6.72% for the year  ended  June 30,  2002 from 7.16% for the year ended June 30,
2001.

Interest income on residential  one- to four-family  mortgage loans for the year
ended June 30, 2002  increased  $1.7 million  when  compared to the prior fiscal
year.  The  increase  in  interest  income on  residential  one- to  four-family
mortgage  loans was due to an increase of $94.3  million in the average  balance
outstanding  for the year ended June 30, 2002 over the prior  fiscal  year.  The
increase in interest  income on residential  one- to four-family  mortgage loans
was  partially  offset by a decrease  in the average  yield  earned on this loan
portfolio  to 6.62% for the year ended June 30,  2002  compared to 7.06% for the
prior fiscal year.

Interest income on commercial and multi-family  real estate loans increased $1.8
million  for the year ended June 30, 2002 when  compared to the prior year.  The
increase in interest income on commercial and multi-family real estate loans was
attributable to an increase of $26.7 million in the average  outstanding balance
for the year ended  June 30,  2002  compared  to the prior  year.  The growth in
interest income on this portfolio was partially offset by a decrease in

                                       37

<PAGE>


the average yield earned on commercial and  multi-family  real estate loans. The
average yield  decreased to 8.24% for the current year compared to 8.63% for the
year ended June 30, 2001.

Interest income on consumer loans decreased $293,000 for the year ended June 30,
2002 compared to the prior year.  The decrease in interest  income for this loan
portfolio was due to a decrease in the average yield earned on these loans.  The
average  yield  decreased to 6.76% for the year ended June 30, 2002  compared to
7.72% for the prior  year.  Substantially  offsetting  the  decrease in interest
income on consumer  loans for the current year was an increase of $10.9  million
in the average balance outstanding when compared to the prior year.

Interest  income on  investment  securities  and other  interest-earning  assets
decreased  $5.4  million for the year ended June 30, 2002  compared to the prior
year.  The  decrease  in  interest  income  on  these  securities  is  partially
attributable to a $64.8 million decrease in the average balance  outstanding for
the year ended June 30, 2002, when compared to the prior year. In addition,  the
decrease in interest income on investment securities and other  interest-earning
assets was due to a decline in the average yield earned on these securities. The
average yield  decreased to 6.60% for the current year compared to 6.94% for the
prior year.

Interest  income on the  mortgage-backed  securities  portfolio  increased  $3.2
million  for the year  ended  June 30,  2002  compared  to the prior  year.  The
increase in interest income on mortgage-backed  securities  primarily reflects a
$59.4 million  increase in the average  balance  outstanding  for the year ended
June 30, 2002  compared to the prior year.  The increase in interest  income was
partially   offset  by  a  decrease   in  the  average   yield   earned  on  the
mortgage-backed  securities  portfolio to 6.39% for the year ended June 30, 2002
compared to 6.97% for the year ended June 30, 2001.

Interest  Expense.  Interest  expense  decreased $6.7 million for the year ended
June 30, 2002 from $79.6  million for fiscal  2001.  The decrease in the current
year was  attributable  to a decrease in the Company's cost of funds from a rate
of 5.10% to 4.35%,  when compared to the prior year, as a result of lower market
interest  rates.  Partially  offsetting  the decrease in rate during the current
year was a $113.2  million  increase in total average  deposits and  borrowings,
when compared to the year ended June 30, 2001.

For the year ended June 30, 2002, the average rate paid on deposits decreased to
3.71%  from  4.66% for the year  ended June 30,  2001.  The  average  balance of
deposits  increased  $35.0 million from the $1.1 billion for the year ended June
30, 2001.

The average cost of FHLB of New York advances  decreased to 5.85% from 6.18% for
the year  ended  June 30,  2002  while the  average  balance of FHLB of New York
advances  increased  $80.3 million when compared to the prior year. For the year
ended June 30,  2002,  the average  rate paid on other  borrowings  decreased to
4.56% from 6.00% for the year ended June 30, 2001. The average  balance of other
borrowings decreased $2.1 million compared to the prior year.

Net Interest  and Dividend  Income.  Net  interest  and dividend  income  before
provision  for loan losses for the year ended June 30,  2002 was $48.5  million,
reflecting a $7.7 million  increase from the $40.8 million recorded in the prior
fiscal year. Average net interest-earning assets increased $12.2 million for the
year ended June 30, 2002 when  compared to the prior year,  and the net interest
margin of 2.68% for the current year  reflected a 0.25%  increase from 2.43% for
the year ended June 30, 2001. A decline in short-term  market interest rates and
growth in the Company's loan portfolio and core deposit accounts  contributed to
the improvements in net interest margin.

Provision for Loan Losses. The provision for loan losses for the year ended June
30, 2002 was $1.6 million  compared to $625,000  for the prior fiscal year.  The
allowance  for loan  losses at June 30,  2002 of $5.8  million  reflects  a $1.6
million  increase from the $4.2 million at June 30, 2001. The allowance for loan
losses as a  percentage  of  non-accruing  loans was  177.74% at June 30,  2002,
compared to 259.50% at June 30, 2001. The decrease is  principally  attributable
to an increase in the Company's non-performing loans.  Non-performing loans were
$3.3 million at June 30, 2002  compared to $1.6  million at June 30,  2001.  The
allowance  for loan losses as a  percentage  of total loans at June 30, 2002 was
0.40% compared to 0.33% at June 30, 2001.

Non-Interest  Income. For the year ended June 30, 2002,  non-interest income was
$4.2 million compared to $3.8 million for the prior fiscal year. The increase in
non-interest  income was  primarily  due to an increase  in service  charges and
other  non-interest  income  offset  by a  decrease  in the net gain on sales of
loans, when compared to the year ended June 30, 2001.

Service  charge  income  for the  year  ended  June 30,  2002 was $3.0  million,
reflecting an increase of $466,000 over the $2.5 million  recorded for the prior
year. Service charges were positively impacted by fees associated with various

                                       38

<PAGE>


loan prepayments and refinances. Other non-interest income increased to $975,000
for the year ended June 30, 2002 from $588,000 for the year ended June 30, 2001.
Other  non-interest  income included  $283,000 from an increase in earnings from
the Investment Services at Penn Federal program for the year ended June 30, 2002
when compared to the prior year. Through this program, customers have convenient
access  to  financial   consulting/advisory   services  and  related   uninsured
non-deposit investment and insurance products.

During the year ended June 30, 2002, the net gain on sales of loans was $194,000
as compared to $666,000 for the year ended June 30, 2001.  Loan  production  was
retained in portfolio  during most of the current year as a partial  replacement
of the investment securities called before maturity. In addition, effective with
the issuance of the $12 million of Trust  Preferred  securities in March 2001, a
determination  was made to suspend  the sale of  conforming,  fixed rate one- to
four-family  mortgage loan  production to leverage the proceeds of the issuance.
However,  prior to the issuance of these Trust Preferred securities,  nearly $29
million of  conforming,  fixed rate one- to four-family  residential  loans were
sold, generating gains of $259,000. In addition,  during the year ended June 30,
2001, the Company sold  approximately  $65 million of longer  duration,  one- to
four-family  residential  mortgage  loans  in  an  effort  to  improve  funding,
liquidity,  interest rate risk and net interest margin and recorded net gains on
sales of these loans of $407,000.  In April 2002, the Company  re-instituted its
strategy of selling conforming, fixed rate one- to four-family mortgage loans.

Non-Interest  Expenses.  The Company's  non-interest expenses were $28.5 million
for the year ended June 30, 2002  compared to $24.6  million for the prior year.
An increase in preferred  securities  expense due to the issuance of $12 million
of Trust  Preferred  securities  in March 2001,  additional  "non-cash"  expense
related to the Employee Stock  Ownership Plan,  additional  costs related to the
Bank's new Business Development department and expenses related to the Company's
development of an internet presence  contributed to the increase in non-interest
expenses  during the current year when compared to the prior year. The Company's
non-interest  expenses as a percent of average assets increased to 1.53% for the
year ended June 30, 2002 from 1.42% for the prior year.

Income Tax Expense. Income tax expense for the year ended June 30, 2002 was $8.0
million  compared to $6.8 million for the prior fiscal year.  The  effective tax
rate was 35.5% for the year ended June 30,  2002  compared to 35.2% for the year
ended June 30, 2001.  As a result of  legislation  enacted in New Jersey in July
2002 revising the state's  corporate  income tax law, the Company believes based
on an internal analysis, that its effective tax rate could increase to a maximum
of 41%. See Item 1. Business -- "Regulation - Federal and State Taxation."


Comparison  of Operating  Results for the Years Ended June 30, 2001 and June 30,
2000

General. For the year ended June 30, 2001 net income was $12.5 million, or $1.55
per diluted share, compared to net income of $12.9 million, or $1.50 per diluted
share, for the year ended June 30, 2000.

Interest and Dividend  Income.  Interest and dividend  income for the year ended
June 30, 2001 increased to $120.4 million from $111.8 million for the year ended
June 30,  2000.  The  increase  in the year  ended  June 30,  2001 was due to an
increase in average  interest-earning  assets,  coupled  with an increase in the
average yield earned on interest-earning assets. Average interest-earning assets
were $1.7 billion for the year ended June 30, 2001  compared to $1.6 billion for
the prior fiscal year. The average yield on interest-earning assets increased to
7.16% for the year  ended  June 30,  2001 from 7.07% for the year ended June 30,
2000.

Interest income on residential  one- to four-family  mortgage loans for the year
ended June 30, 2001  increased  $4.4 million  when  compared to the prior fiscal
year.  The  increase  in  interest  income on  residential  one- to  four-family
mortgage  loans was due to an increase of $52.5  million in the average  balance
outstanding  for the year ended June 30, 2001 over the prior  fiscal  year.  The
increase in interest  income on residential  one- to four-family  mortgage loans
was also the result of an  increase  in the  average  yield  earned on this loan
portfolio  to 7.06% for the year ended June 30,  2001  compared to 6.99% for the
prior fiscal year.

Interest income on commercial and multi-family  real estate loans increased $1.7
million  for the year ended June 30, 2001 when  compared to the prior year.  The
increase in interest income on commercial and multi-family real estate loans was
attributable to an increase of $18.3 million in the average  outstanding balance
for the year ended  June 30,  2001  compared  to the prior  year.  The growth in
interest  income on this  portfolio  was also due to an  increase in the average
yield earned on commercial and multi-family real estate loans. The average yield
increased to 8.63% for fiscal 2001 compared to 8.53% for the year ended June 30,
2000.

                                       39

<PAGE>

Interest income on consumer loans increased $2.2 million for the year ended June
30, 2001  compared to the prior year.  The increase in interest  income for this
loan  portfolio was due to an increase of $24.5  million in the average  balance
outstanding  for the year ended June 30,  2001 when  compared to the prior year.
Also  contributing  to the increase in interest  income on consumer loans was an
increase in the average yield earned on these loans. The average yield increased
to 7.72% for the year ended June 30, 2001 compared to 7.40% for the prior year.

Interest  Expense.  Interest  expense  increased $8.4 million for the year ended
June 30, 2001 from $71.2 million for fiscal 2000. The increase was  attributable
to an increase in total average  deposits and  borrowings as well as an increase
in the Company's cost of funds.  Average deposits and borrowings increased $92.0
million  for the year ended  June 30,  2001  compared  to the 2000  period.  The
average  rate paid on deposits  and  borrowings  increased to 5.10% for the year
ended June 30, 2001 from 4.85% for the prior fiscal year.

Net Interest and Dividend Income.  Net interest and dividend income for the year
ended June 30, 2001 was $40.8 million, reflecting an increase from $40.6 million
recorded in the prior fiscal year. Average net interest-earning assets increased
$7.4  million for the year ended June 30, 2001 when  compared to the prior year,
while the net interest margin of 2.43% for fiscal 2001 reflected a 0.14% decline
from 2.57% for the year ended June 30, 2000. The compression in the net interest
margin when compared to the prior year was attributable to increased  short-term
interest rates and the resulting rise in the Company's cost of funds, as well as
continued stock repurchases by the Company.  However,  the margin for the fourth
quarter of fiscal 2001 of 2.53% improved from a margin of 2.45% for the June 30,
2000 quarter as short term market interest rates began to decline  substantially
during the latter half of fiscal 2001.

Provision for Loan Losses. The provision for loan losses for the year ended June
30, 2001 was  $625,000  compared  to $860,000  for the prior  fiscal  year.  The
allowance  for loan losses at June 30, 2001 of $4.2 million  reflects a $265,000
increase  from the June 30,  2000  level.  The  allowance  for loan  losses as a
percentage  of  non-performing  loans was 259.50% at June 30, 2001,  compared to
146.70% at June 30, 2000. The increase was principally attributable to a decline
in the  Company's  non-performing  loans.  The  allowance  for loan  losses as a
percentage of total loans at June 30, 2001 was 0.33%.

Non-Interest  Income. For the year ended June 30, 2001,  non-interest income was
$3.8 million compared to $2.9 million for the prior fiscal year. The increase in
non-interest income was primarily due to an increase in the net gain on sales of
loans during  fiscal 2001 when  compared to fiscal  2000.  During the year ended
June 30,  2001,  the net gain on sales of loans  was  $666,000  as  compared  to
$36,000 for the year ended June 30,  2000.  Under a Company  strategy of selling
conforming,   fixed  rate  one-  to  four-family  residential  loan  production,
approximately $29 million of such loans were sold during fiscal 2001, generating
gains of $259,000 for the year ended June 30, 2001. In addition, during the year
ended June 30,  2001,  the  Company  sold  approximately  $65  million of longer
duration, one- to four-family residential mortgage loans in an effort to improve
liquidity,  interest rate risk and net interest  margin and recorded net gain on
sales of such loans of $407,000.  Effective with the issuance of the $12 million
of Trust Preferred  securities in March 2001, a  determination  was made whereby
conforming, fixed rate one- to four-family mortgage loan production would not be
sold for a period of time to leverage  the  proceeds of such  issuance.  Service
charge income  increased to $2.5 million for the year ended June 30, 2001 versus
$2.2  million  for the  comparable  prior  year.  The net gain from real  estate
operations was $65,000 for the year ended June 30, 2001 compared to $114,000 for
the year ended June 30, 2000. Other non-interest  income for the year ended June
30, 2000 included a $48,000 gain on the sale of a former branch location.

Non-Interest  Expenses.  The Company's  non-interest expenses were $24.6 million
for the year ended June 30, 2001  compared to $22.7  million for the prior year.
Additional  "non-cash"  expense related to the Employee Stock Ownership Plan, an
increase in occupancy expense  attributable to harsh winter weather,  additional
costs for the Bank's new Business Development department and expenses related to
the expansion of network  capacity and the Company's  development of an internet
presence all  contributed  to the increased  non-interest  expenses for the year
ended June 30, 2001,  when  compared to the prior year.  However,  the Company's
non-interest  expenses as a percent of average assets only increased slightly to
1.42% for the year ended June 30, 2001 from 1.39% for the prior year.

Income Tax Expense. Income tax expense for the year ended June 30, 2001 was $6.8
million  compared to $7.1 million for the prior fiscal year.  The  effective tax
rate was 35.2% for the year ended June 30,  2001  compared to 35.4% for the year
ended June 30, 2000.


                                       40

<PAGE>

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. 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, 2002, the
Company had  outstanding  commitments  to extend credit which amounted to $130.9
million  (including $92.1 million in available lines of credit),  commitments to
sell loans of $4.4  million  and  commitments  to  purchase  loans of  $455,000.
Management  believes  that loan  repayments  and other  sources of funds will be
adequate to meet the Company's foreseeable liquidity needs.

The  Company's  cash  needs for the year ended June 30,  2002 were  provided  by
operating  activities,  including the sale of loans, proceeds from maturities of
investment securities,  increased deposits and principal repayments of loans and
mortgage-backed securities.  During fiscal 2002, the cash provided was primarily
used to fund investing  activities,  which included the origination and purchase
of loans and the purchase of investment  and  mortgage-backed  securities and to
paydown  other  borrowings.  During fiscal 2001,  the Company's  cash needs were
provided by operating activities, including the sales of loans, by proceeds from
the  Trust  Preferred  securities  offering  and  by  maturities  of  investment
securities. The Company's fiscal 2001 cash needs were also provided by increased
deposits, an increase in advances from the FHLB of New York and other borrowings
and principal repayments of loans and mortgage-backed securities.  During fiscal
2001,  the cash provided was used for investing  activities,  which included the
origination   and  purchase  of  loans  and  the  purchase  of  investment   and
mortgage-backed securities.  Additionally, in fiscal 2001 cash provided was used
for the repurchase of common stock.  The Company's cash needs for the year ended
June 30, 2000 were provided by operating activities, proceeds from maturities of
investment  securities,  an increase  in advances  from the FHLB of New York and
other  borrowings,  increased  deposits and  principal  repayments  on loans and
mortgage-backed securities.  During fiscal 2000, the cash provided was primarily
used to fund investing  activities,  which included the origination and purchase
of loans and the purchase of investment securities.

Current  regulatory  standards  impose the  following  capital  requirements:  a
risk-based capital standard expressed as a percentage of risk-adjusted assets; a
ratio of core capital to risk-adjusted  assets; a leverage ratio of core capital
to total adjusted assets; and a tangible capital ratio expressed as a percentage
of total adjusted assets.  As of June 30, 2002, the Bank exceeded all regulatory
capital  requirements  and qualified as a  "well-capitalized"  institution.  See
"Regulation" and Note N - Stockholders'  Equity and Regulatory  Capital,  in the
Notes to Consolidated Financial Statements.

The Company  initiated a quarterly  cash  dividend on its common stock of $0.035
per share in the second  quarter of fiscal 1997. The quarterly cash dividend was
increased to $0.04 per share in the second  quarter of fiscal 1999 and increased
to $0.05 per share in the fourth  quarter of fiscal  2001.  The  quarterly  cash
dividend was  increased to $0.06 per share in the second  quarter of fiscal 2002
and was recently  increased  again to $0.10 per share  effective  with the first
quarter  dividend for fiscal 2003. Total dividends paid for the years ended June
30,  2002,  2001,  and 2000 were $0.23 per share,  $0.17 per share and $0.16 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.

                                       41

<PAGE>

Item 8. Financial Statements and Supplementary Data

Independent Auditors' Report

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

We have audited the accompanying  consolidated statements of financial condition
of PennFed Financial Services,  Inc. and Subsidiaries (the "Company") as of June
30,  2002  and  2001,  and  the  related  consolidated   statements  of  income,
comprehensive income, changes in stockholders' equity and cash flows for each of
the three years in the period ended June 30, 2002. 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 auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the 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, 2002 and 2001, and the results of
their  operations and their cash flows for each of the three years in the period
ended June 30, 2002 in conformity with accounting  principles generally accepted
in the United States of America.



/s/ Deloitte & Touche LLP
-------------------------
DELOITTE & TOUCHE LLP


Parsippany, New Jersey
July 26, 2002



                                       42

<PAGE>

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

                 Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>

                                                                                                  June 30,
                                                                                        -----------------------------
                                                                                           2002             2001
                                                                                        -----------------------------
                                                                                            (Dollars in thousands)
<S>                                                                                     <C>             <C>
Assets
Cash and cash equivalents ..........................................................    $    37,189     $    15,771
Investment securities available for sale, at market value, amortized cost of
   $4,266 at June 30, 2002 .........................................................          4,295              --
Investment securities held to maturity, at amortized cost, market value
   of $178,676 and $327,245 at June 30, 2002 and 2001 ..............................        179,490         333,969
Mortgage-backed securities held to maturity, at amortized cost, market value
   of $174,036 and $136,592 at June 30, 2002 and 2001 ..............................        169,689         135,606
Loans held for sale ................................................................          1,592              83
Loans receivable, net of allowance for loan losses of $5,821 and $4,248
   at June 30, 2002 and 2001 .......................................................      1,439,668       1,295,409
Premises and equipment, net ........................................................         19,598          20,354
Real estate owned, net .............................................................             28             500
Federal Home Loan Bank of New York stock, at cost ..................................         25,656          26,218
Accrued interest receivable, net ...................................................          9,564          11,590
Goodwill and other intangible assets ...............................................          5,043           6,983
Other assets .......................................................................            615           2,894
                                                                                        -----------------------------
                                                                                        $ 1,892,427     $ 1,849,377
                                                                                        ===========================
Liabilities and Stockholders' Equity
Liabilities:
   Deposits ........................................................................    $ 1,174,507     $ 1,085,335
   Federal Home Loan Bank of New York advances .....................................        504,465         454,465
   Other borrowings ................................................................         23,314         127,640
   Mortgage escrow funds ...........................................................         12,772          11,979
   Accounts payable and other liabilities ..........................................         14,071          12,967
                                                                                        -----------------------------
   Total liabilities ...............................................................      1,729,129       1,692,386
                                                                                        -----------------------------
   Guaranteed Preferred Beneficial Interests in the
    Company's Junior Subordinated Debentures .......................................         46,500          46,500
   Unamortized issuance expenses ...................................................         (1,963)         (2,039)
                                                                                        -----------------------------
   Net Trust Preferred securities ..................................................         44,537          44,461
                                                                                        -----------------------------
Commitments and Contingencies (Note M)

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,
     11,900,000 shares issued and 7,347,552 and 7,620,329 shares
     outstanding at June 30, 2002 and 2001 (excluding shares held in treasury of
     4,552,448 and4,279,671 at June 30, 2002 and 2001) .............................             60              60
   Additional paid-in capital ......................................................         63,820          61,504
   Employee Stock Ownership Plan Trust debt ........................................         (1,244)         (1,801)
   Retained earnings, partially restricted .........................................        114,444         102,694
   Accumulated other comprehensive income, net of taxes ............................             18              --
   Treasury stock, at cost, 4,552,448 and 4,279,671 shares at June 30, 2002 and 2001        (58,337)        (49,927)
                                                                                        -----------------------------
   Total stockholders' equity ......................................................        118,761         112,530
                                                                                        -----------------------------
                                                                                        $ 1,892,427     $ 1,849,377
                                                                                        =============================
</TABLE>

See notes to consolidated financial statements

                                       43

<PAGE>


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

                       Consolidated Statements of Income

<TABLE>
<CAPTION>
                                                                           For the years ended June 30,
                                                               ---------------------------------------------------
                                                                   2002                2001               2000
                                                               ---------------------------------------------------
                                                                              (Dollars in thousands)
<S>                                                            <C>                 <C>               <C>
Interest and Dividend Income:
 Interest and fees on loans . . . . . . . . . . . . . . .      $   93,496          $   90,246        $    82,026
 Interest on federal funds sold . . . . . . . . . . . . .               1                  61                 17
 Interest and dividends on investment securities . . . . .         17,323              22,716             22,547
 Interest on mortgage-backed securities . . . . . . . . .          10,519               7,335              7,173
                                                               ---------------------------------------------------
                                                                  121,339             120,358            111,763
                                                               ---------------------------------------------------
Interest Expense:
 Deposits . . . . . . . . . . . . . . . . . . . . . . . .          42,181              51,285             46,758
 Borrowed funds . . . . . . . . . . . . . . . . . . . . .          30,681              28,299             24,443
                                                               ---------------------------------------------------
                                                                   72,862              79,584             71,201
                                                               ---------------------------------------------------
Net Interest and Dividend Income Before
Provision for Loan Losses . . . . . . . . . . . . . . . .          48,477              40,774             40,562
Provision for Loan Losses . . . . . . . . . . . . . . . .           1,625                 625                860
                                                               ---------------------------------------------------
Net Interest and Dividend Income After
Provision for Loan Losses . . . . . . . . . . . . . . . .          46,852              40,149             39,702
                                                               ---------------------------------------------------

Non-Interest Income:
 Service charges . . . . . . . . . . . . . . . . . . . . .          2,961               2,495              2,172
 Net gain from real estate operations . . . . . . . . . .              87                  65                114
 Net gain on sales of loans . . . . . . . . . . . . . . .             194                 666                 36
 Other . . . . . . . . . . . . . . . . . . . . . . . . . .            975                 588                625
                                                               ---------------------------------------------------
                                                                    4,217               3,814              2,947
                                                               ---------------------------------------------------

Non-Interest Expenses:
 Compensation and employee benefits . . . . . . . . . . .          13,203              11,283              9,843
 Net occupancy expense . . . . . . . . . . . . . . . . . .          1,603               1,659              1,663
 Equipment . . . . . . . . . . . . . . . . . . . . . . . .          2,318               1,877              1,763
 Advertising . . . . . . . . . . . . . . . . . . . . . . .            484                 475                393
 Amortization of intangibles . . . . . . . . . . . . . . .          1,940               2,014              2,121
 Federal deposit insurance premium . . . . . . . . . . . .            203                 217                429
 Preferred securities expense . . . . . . . . . . . . . .           4,368               3,452              3,132
 Other . . . . . . . . . . . . . . . . . . . . . . . . . .          4,331               3,665              3,384
                                                               ---------------------------------------------------
                                                                   28,450              24,642             22,728
                                                               ---------------------------------------------------
Income Before Income Taxes . . . . . . . . . . . . . . . .         22,619              19,321             19,921
Income Tax Expense . . . . . . . . . . . . . . . . . . . .          8,036               6,808              7,051
                                                               ---------------------------------------------------
Net Income . . . . . . . . . . . . . . . . . . . . . . . .     $   14,583          $   12,513         $   12,870
                                                               ===================================================

Weighted average number of common shares outstanding:
 Basic . . . . . . . . . . . . . . . . . . . . . . . . . .      7,225,613           7,609,221          8,138,104
                                                               ===================================================
 Diluted . . . . . . . . . . . . . . . . . . . . . . . . .      7,768,422           8,098,603          8,582,513
                                                               ===================================================
Net income per common share:
 Basic . . . . . . . . . . . . . . . . . . . . . . . . . .     $     2.02          $     1.64         $     1.58
                                                               ===================================================
 Diluted . . . . . . . . . . . . . . . . . . . . . . . . .     $     1.88          $     1.55         $     1.50
                                                               ===================================================
</TABLE>


See notes to consolidated financial statements.


                                       44


<PAGE>

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

                  Consolidated Statements of Comprehensive Income

<TABLE>
<CAPTION>

                                                                                      For the years ended June 30,
                                                                              -------------------------------------------
                                                                                2002              2001            2000
                                                                              -------------------------------------------
                                                                                             (In thousands)
<S>                                                                            <C>              <C>              <C>
Net income ............................................................        $14,583          $12,513          $12,870
Other comprehensive income, net of tax:
 Unrealized gains (losses) on investment securities available for sale:
   Unrealized holding gains arising during period .....................             18               --               --
                                                                              -------------------------------------------
Comprehensive income ..................................................        $14,601          $12,513          $12,870
                                                                              ===========================================
</TABLE>


See notes to consolidated financial statements.


                                       45

<PAGE>

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


                           Consolidated Statements of
                        Changes in Stockholders' Equity
                For the Years Ended June 30, 2002, 2001 and 2000

<TABLE>
<CAPTION>

                                                                           Restricted   Employee
                                                                             Stock -      Stock               Accumulated
                                                Serial          Additional Management   Ownership               Other
                                              Preferred Common   Paid-In   Recognition  Plan Trust  Retained Comprehensive Treasury
                                                Stock   Stock    Capital       Plan        Debt     Earnings     Income     Stock
                                              --------------------------------------------------------------------------------------
                                                                                   (Dollars in thousands)

<S>                                            <C>     <C>       <C>          <C>       <C>         <C>        <C>        <C>
Balance at June 30, 1999...................... $  --   $   59    $59,488      $  --     $(2,804)    $ 80,673   $  --      $(29,916)
Allocation of Employee Stock Ownership
 Plan (ESOP) stock............................                                              484
ESOP and Management Recognition
 Plan (MRP) adjustment........................                       999
Purchase of 492,000 shares of treasury stock                                                                                (6,931)
Issuance of 72,461 shares of treasury stock
 for options exercised and Dividend
 Reinvestment Plan (DRP)......................                                                          (362)                 725
Reissuance of 2,142 shares for MRP............              1         36        (36)
Amortization of MRP stock.....................                                   36
Cash dividends of $0.16 per common share......                                                        (1,341)
Net income for the year ended June 30, 2000                                                           12,870
                                              --------------------------------------------------------------------------------------
Balance at June 30, 2000......................    --       60     60,523         --      (2,320)      91,840      --        (36,122)
Allocation of ESOP stock......................                                              519
ESOP adjustment...............................                       981
Purchase of 845,000 shares of treasury stock                                                                                (14,545)
Issuance of 69,310 shares of treasury stock
 for options exercised and DRP................                                                          (343)                   740
Cash dividends of $0.17 per common share......                                                        (1,316)
Net income for the year ended June 30, 2001                                                           12,513
                                              --------------------------------------------------------------------------------------
Balance at June 30, 2001......................    --       60     61,504         --      (1,801)     102,694      --        (49,927)
Allocation of ESOP stock......................                                              557
ESOP adjustment...............................                     2,316
Purchase of 500,000 shares of treasury stock                                                                                (11,119)
Issuance of 227,223 shares of treasury stock
 for options exercised and DRP................                                                        (1,157)                 2,709
Cash dividends of $0.23 per common share......                                                        (1,676)
Unrealized gain on investment securities
 available for sale, net of income taxes......                                                                     18
Net income for the year ended June 30, 2002                                                           14,583
                                               -------------------------------------------------------------------------------------
Balance at June 30, 2002...................... $  --   $   60    $63,820      $  --     $(1,244)    $114,444      $18      $(58,337)
                                               =====================================================================================
</TABLE>

See notes to consolidated financial statements



                                       46

<PAGE>


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


Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>

                                                                                  For the years ended June 30,
                                                                             --------------------------------------
                                                                                2002          2001          2000
                                                                             --------------------------------------
                                                                                         (In thousands)
<S>                                                                          <C>           <C>           <C>
Cash Flows from Operating Activities:
  Net income ............................................................    $  14,583     $  12,513     $  12,870
  Adjustments to reconcile net income to net cash provided by operating
   activities:
  Net gain on sales of loans ............................................         (194)         (666)          (36)
  Proceeds from sales of loans held for sale ............................       16,846        94,765         5,568
  Net gain on sales of real estate owned ................................         (218)         (101)         (126)
  Amortization of investment and mortgage-backed securities premium, net           448           171           192
  Depreciation and amortization .........................................        1,887         1,421         1,385
  Provision for losses on loans and real estate owned ...................        1,676           641           860
  Amortization of cost of stock plans ..................................         2,873         1,499         1,520
  Amortization of intangibles ...........................................        1,940         2,014         2,121
  Amortization of premiums on loans and loan fees .......................        3,703         2,278         1,437
  Amortization of Trust Preferred securities issuance costs .............           76            65            62
  (Increase) decrease in accrued interest receivable, net of accrued
   interest payable ......................................................       1,339        (1,076)       (1,659)
  (Increase) decrease in other assets ...................................        2,279           696          (200)
  Decrease in deferred income tax liability .............................         (396)         (320)         (118)
  Increase (decrease) in accounts payable and other liabilities .........        1,490          (268)        2,058
  Increase in mortgage escrow funds .....................................          793            91         1,786
  Other, net ............................................................          (19)           --           (34)
                                                                             --------------------------------------
  Net cash provided by operating activities .............................       49,106       113,723        27,686
                                                                             --------------------------------------
Cash Flows From Investing Activities:
  Proceeds from sale of investment securities available for sale ........           14            --            --
  Proceeds from maturities of investment securities .....................      304,586        50,011        10,175
  Purchases of investment securities held to maturity ...................     (150,148)      (81,034)      (19,991)
  Purchases of investment securities available for sale .................       (4,281)           --            --
  Net outflow from loan originations net of principal repayments of loans     (201,815)     (145,281)      (94,799)
  Purchases of loans ....................................................      (31,861)      (36,319)     (106,049)
  Proceeds from principal repayments of mortgage-backed securities ......       51,797        31,908        40,522
  Purchases of mortgage-backed securities ...............................      (20,364)      (32,383)         (220)
  Proceeds from sale of premises and equipment ..........................           14            --           250
  Purchases of premises and equipment ...................................       (1,126)       (1,699)       (2,487)
  Net inflow from real estate owned activity ............................          644           612         1,161
  (Purchases) redemptions of Federal Home Loan Bank of New York stock ...          562        (3,923)       (5,672)
                                                                             --------------------------------------
  Net cash used in investing activities .................................      (51,978)     (218,108)     (177,110)
                                                                             --------------------------------------

Cash Flows From Financing Activities:
  Net increase in deposits ..............................................       89,859         4,698        17,862
  Increase (decrease) in advances from the Federal Home Loan Bank of New
   York and other borrowings ............................................      (54,326)      105,465       143,437
  Net proceeds from issuance of Trust Preferred securities ..............           --        11,591            --
  Cash dividends paid ...................................................       (1,676)       (1,316)       (1,341)
  Purchases of treasury stock, net of reissuance ........................       (9,567)      (14,148)       (6,568)
                                                                             --------------------------------------
  Net cash provided by financing activities .............................       24,290       106,290       153,390
                                                                             --------------------------------------
  Net Increase in Cash and Cash Equivalents .............................       21,418         1,905         3,966
  Cash and Cash Equivalents, Beginning of Year ..........................       15,771        13,866         9,900
                                                                             --------------------------------------
  Cash and Cash Equivalents, End of Year ................................    $  37,189     $  15,771     $  13,866
                                                                             ======================================

Supplemental Disclosures of Cash Flow Information:
  Cash paid during the year for:
  Interest ..............................................................    $  73,401     $  78,790     $  71,043
                                                                             ======================================
  Income taxes ..........................................................    $   7,743     $   6,951     $   7,608
                                                                             ======================================
Supplemental Schedule of Non-Cash Activities:
  Transfer of loans receivable to real estate owned, net ................    $       6     $     692     $     382
                                                                             ======================================
  Transfer of loans receivable to loans held for sale, at market ........    $  18,160     $  94,182     $     352
                                                                             ======================================
  Securitization of loans receivable and transfer to mortgage-backed
  securities ............................................................    $  65,923     $  47,661     $      --
                                                                             ======================================
  Transfer of premises and equipment, net to real estate owned, net .....    $      --     $      --     $      50
                                                                             ======================================
</TABLE>

  See notes to consolidated financial statements.


                                       47


<PAGE>

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

                   Notes to Consolidated Financial Statements
                    Years Ended June 30, 2002, 2001 and 2000

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  (the Bank,  PennFed  Capital  Trust I and PennFed
Capital Trust II). PennFed owns all of the outstanding  stock of the Bank issued
on  July  14,  1994.  All  intercompany  accounts  and  transactions  have  been
eliminated in consolidation.

Use of Estimates -- The  preparation of financial  statements in conformity with
accounting  principles  generally  accepted  in the  United  States  of  America
requires  management to make estimates and assumptions  that affect the reported
amounts  of assets and  liabilities  and  disclosure  of  contingent  assets and
liabilities at the date of the financial  statements and the reported amounts of
revenues and expenses during the reporting  period.  Actual results could differ
from those estimates.  The most  significant area in the accompanying  financial
statements where estimates have an impact is in the allowance for loan losses.

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

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

The Company classifies investment  securities and mortgage-backed  securities as
either  held to  maturity  or  available  for sale.  Investment  securities  and
mortgage-backed  securities  held to maturity  are stated at cost,  adjusted for
amortization of premiums and accretion of discounts,  since the Company has both
the ability and intent to hold the securities to maturity. Investments available
for sale are carried at market value with  unrealized  gains and losses excluded
from  earnings  and  reported  as  accumulated  other  comprehensive  income  in
stockholders'  equity.  Unrealized  gains  and  losses  are  accounted  for on a
specific  identification method.  Declines in the fair value of held to maturity
and available for sale  securities  below their cost that are deemed to be other
than temporary are reflected in earnings as realized losses.

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 fees. 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, 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


                                       48

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

Impairment of a Loan - Income  Recognition and  Disclosures"  ("SFAS 118"),  the
Company  accounts for impaired loans,  except those loans that are accounted for
at fair value or at the lower of cost or fair 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  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 loans on a total portfolio basis.

Allowance  for Loan  Losses -- The  allowance  for loan  losses  is  established
through  charges to earnings.  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 possible 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  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.

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.

Goodwill--  The excess of cost over fair value of assets  acquired  ("goodwill")
arising from the acquisitions  discussed in Note B is amortized to expense by an
accelerated   method  over  the   estimated   remaining   lives  of   long-term,
interest-bearing  assets  acquired (14 years) in  accordance  with  Statement of
Financial  Accounting  Standards No. 72, "Accounting for Certain Acquisitions of
Banking or Thrift Institutions."

Core  Deposit  Premium  -- The  premium  resulting  from the  valuation  of core
deposits  arising from the  aforementioned  acquisitions  is being  amortized to
expense over the  estimated  average  remaining  life of the  existing  customer
deposit base acquired (10 years).

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.

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 the dilutive  potential  common shares had been
issued.

                                       49

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

Loan  Origination  Fees  and  Discounts  and  Premiums  --  Nonrefundable   loan
origination fees net of certain direct loan origination costs are deferred.  Net
deferred fees 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 fees 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 as income/expense  over the estimated life of the asset
purchased using the level-yield method.

B.  Branch Acquisitions

In 1995, the Bank acquired the deposit liabilities and certain of the assets and
other liabilities of three of the Company's branch offices.  The Bank recorded a
total deposit  premium  intangible  asset of $18,141,000 in connection  with the
acquisition.  For the years ended June 30, 2002, 2001 and 2000,  amortization of
the deposit premium intangible of $1,814,000 was recorded each year. At June 30,
2002 and 2001, the deposit  premium  intangible  was $4,989,000 and  $6,803,000,
respectively.

The Company  acquired  First Federal  Savings and Loan  Association of Montclair
effective  September  1989. The acquisition was accounted for as a purchase and,
accordingly, the purchase price was allocated to assets and liabilities acquired
based on their fair value at their  date of  acquisition.  For each of the years
ended June 30, 2002,  2001 and 2000, the effect of the  amortization of goodwill
was to reduce income before income taxes by approximately $126,000, $200,000 and
$274,000,  respectively.  At June 30,  2002 and 2001,  goodwill  was $54,000 and
$180,000, respectively.

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, 2002
Available for Sale:
Equity securities ........................................    $   4,266    $      29     $      --     $   4,295
                                                              =====================================================
Held to Maturity:
U.S. government agency obligations .......................    $ 145,160    $     429     $  (1,094)    $ 144,495
Corporate bonds ..........................................        1,034           46            --         1,080
Trust preferred securities ...............................       33,296          301          (496)       33,101
                                                              -----------------------------------------------------
 Total held to maturity ..................................    $ 179,490    $     776     $  (1,590)    $ 178,676
                                                              =====================================================


June 30, 2001
Held to Maturity:
U.S. government agency obligations .......................    $ 304,538    $      --     $  (5,482)    $ 299,056
Obligations of states and political subdivisions .........           10            1            --            11
Corporate bonds ..........................................        1,038           24            --         1,062
Trust preferred securities ...............................       28,383           26        (1,293)       27,116
                                                              -----------------------------------------------------
 Total held to maturity ..................................    $ 333,969    $      51     $  (6,775)    $ 327,245
                                                              =====================================================
</TABLE>


                                       50
<PAGE>

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

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

The amortized cost and estimated fair market value of investment securities held
to maturity at June 30, 2002,  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.

                                                                   Estimated
                                                      Amortized   Fair Market
                                                        Cost         Value
                                                      ------------------------
June 30, 2002                                              (In thousands)
Held to Maturity:
Maturing after five years but within ten years ....... $  5,734     $  5,775
Maturing after ten years .............................  173,756      172,901
                                                       ----------------------
  Total held to maturity ............................. $179,490     $178,676
                                                       ======================

At June 30,  2002 and  2001,  investment  securities  with a  carrying  value of
$49,265,000 and $ 174,879,000, respectively, were pledged to secure Federal Home
Loan Bank of New York advances and other borrowings.

For the year  ended June 30,  2002,  the  Company  sold  $14,800  of  investment
securities available for sale for proceeds of $14,500. Gross losses of less than
$1,000 were recognized on the sale. There were no sales of investment securities
for the years ended June 30, 2001 and 2000.

D.  Mortgage-Backed Securities
                                                       June 30,
                                               -----------------------
                                                 2002           2001
                                               -----------------------
                                                     (In thousands)
Ginnie Mae ...............................     $    642       $  1,035
Freddie Mac ..............................       84,757         42,961
Fannie Mae ...............................       82,891         90,662
Collateralized Mortgage Obligations/REMICs           42             59
                                               -----------------------
                                                168,332        134,717
Unamortized premiums, net ................        1,357            889
                                               -----------------------
                                               $169,689       $135,606
                                               =======================

The estimated fair market values of mortgage-backed securities were $174,036,000
and $136,592,000 at June 30, 2002 and 2001, respectively. There were no sales of
mortgage-backed securities in the years ended June 30, 2002, 2001 and 2000.

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

                                                              June 30,
                                                      ------------------------
                                                        2002            2001
                                                      ------------------------
                                                           (In thousands)
Pledged to secure:
Federal Home Loan Bank of New York advances ......... $130,817       $ 52,530
Other borrowings ....................................   10,318         40,700
Public funds on deposit..............................    1,871          2,816
                                                      ------------------------
                                                      $143,006       $ 96,046
                                                      ========================

Collateralized  mortgage  obligations  consist primarily of fixed and adjustable
rate sequentially paying securities with short durations.


                               51


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


The gross unrealized gains and losses of mortgage-backed securities held at June
30, 2002 and 2001 were as follows:

<TABLE>
<CAPTION>

                                                June 30, 2002          June 30, 2001
                                            ----------------------------------------------
                                              Gross       Gross       Gross       Gross
                                            Unrealized  Unrealized  Unrealized  Unrealized
                                              Gains       Losses      Gains       Losses
                                            ----------------------------------------------
                                                            (In thousands)
<S>                                           <C>        <C>         <C>            <C>
Ginnie Mae ...............................    $   54     $   --      $   71         $--
Freddie Mac ..............................     2,384         --         823          78
Fannie Mae ...............................     1,929         21         822         652
Collateralized Mortgage Obligations/REMICs         1         --          --          --
                                            ----------------------------------------------
                                              $4,368     $   21      $1,716      $  730
                                            ==============================================
</TABLE>


E. Loans Receivable, Net
                                                           June 30,
                                                  --------------------------
                                                     2002              2001
                                                  --------------------------
                                                        (In thousands)
First Mortgage Loans:
  Conventional ................................  $ 1,168,914     $ 1,061,343
  FHA insured..................................        2,838           3,865
  VA guaranteed ...............................          393             611
                                                  --------------------------
  Total one- to four-family ...................    1,172,145       1,065,819
  Commercial and multi-family .................      144,585         108,625
                                                  --------------------------
Total first mortgage loans ....................    1,316,730       1,174,444
                                                  --------------------------
Consumer:
  Second mortgages ............................       58,671          48,133
  Home equity lines of credit .................       55,247          60,412
  Other .......................................        6,948           7,140
                                                   --------------------------
Total consumer loans...........................      120,866         115,685
                                                   --------------------------
Total loans....................................    1,437,596       1,290,129
                                                   --------------------------
Add (Less):
  Allowance for loan losses....................       (5,821)         (4,248)
  Unamortized premium .........................        1,764           2,764
  Unearned income on consumer loans ...........           (1)             (1)
  Net deferred loan fees ......................        7,722           6,848
                                                  --------------------------
                                                       3,664           5,363
                                                  --------------------------
                                                  $1,441,260      $1,295,492
                                                  ==========================

At June 30, 2002,  there were  $1,592,000  one- to  four-family  mortgage  loans
included in loans held for sale.  At June 30, 2002,  there were  commitments  to
sell these loans. At June 30, 2001, there was an $83,000 FHA one- to four-family
mortgage loan  included in loans held for sale.  At June 30, 2001,  there was no
commitment to sell this loan.

Non-accruing  loans at June 30, 2002 and 2001 were  $3,275,000  and  $1,637,000,
respectively,  which  represents 0.23% and 0.13%,  respectively,  of total loans
outstanding.  The total  interest  income that would have been  recorded for the
years ended June 30, 2002 and 2001,  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 $121,000 and $60,000, respectively.

At June 30, 2002 there were no impaired  loans.  At June 30, 2001 impaired loans
totaled $49,000.  The average balance of impaired loans for the years ended June
30, 2002 and 2001 was  $121,000 and $61,000,  respectively.  All impaired  loans
have a related  allowance  for losses,  which totaled $0 and $12,000 at June 30,
2002 and 2001,  respectively.  Interest  income  related  to  impaired  loans is
recognized under the cash-basis  method.  Interest income recognized on impaired
loans  for the years  ended  June 30,  2002 and 2001 was  $23,000  and  $12,000,
respectively.


                                       52

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

Total interest income that would have been recorded for the years ended June 30,
2002 and 2001, had these loans been current in accordance with their loan terms,
was approximately $5,000 and $7,000, respectively.

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

<TABLE>
<CAPTION>
                                                                Year ended June 30,
                                                        -----------------------------------
                                                           2002        2001        2000
                                                        -----------------------------------
                                                                 (In thousands)
<S>                                                      <C>         <C>         <C>
Balance, beginning of year ..........................    $ 4,248     $ 3,983     $ 3,209
Provisions for losses on loans.......................      1,625         625         860
Recoveries ..........................................         --          --          37
Losses  charged to  allowance .......................        (52)       (360)       (123)
                                                        -----------------------------------
Balance,  end of year ...............................    $ 5,821     $ 4,248     $ 3,983
                                                        ===================================
</TABLE>

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, 2002 and 2001, commercial and multi-family real estate loans totaled
$144,585,000  and  $108,625,000,  respectively.  These loans are  considered  by
management  to be of  somewhat  greater  risk  of  collectibility  due to  their
dependency on income  production.  The majority of the Company's  commercial and
multi-family real estate loans were collateralized by real estate located in New
Jersey.   Commercial  and  multi-family  real  estate  loans  collateralized  by
multi-family  or mixed use properties  were  $41,971,000 and $35,239,000 at June
30, 2002 and 2001,  respectively.  At June 30, 2002 and 2001, the commercial and
multi-family  real estate loan portfolio  included  $1,791,000  and  $1,923,000,
respectively,  of lines of credit secured by non-real  estate  business  assets.
Furthermore,  there were $7,278,000 and $1,217,000 of loans  outstanding at June
30, 2002 and 2001, respectively, under the Accounts Receivable Financing Program
for small and mid-sized  businesses.  The remaining loans in this portfolio were
collateralized  by  other  types  of  non-residential,  commercial  real  estate
properties.

Loans serviced for others totaled approximately $167,829,000 and $141,488,000 at
June 30,  2002 and 2001,  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 $1,739,000 and $1,588,000 at June 30,
2002 and 2001, respectively.

F.  Premises and Equipment, Net
                                                              June 30,
                                                         --------------------
                                                           2002        2001
                                                         --------------------
                                                            (In thousands)
Land ................................................    $ 4,622    $ 4,563
Buildings and improvements ..........................     16,343     16,137
Leasehold improvements ..............................      1,624      1,612
Furniture and equipment .............................     12,879     12,066
                                                         --------------------
                                                          35,468     34,378

Less: accumulated depreciation and amortization .....     15,870     14,024
                                                         --------------------
                                                         $19,598    $20,354
                                                         ====================

                                       53

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

G. Real Estate Owned
                                                                June 30,
                                                          -------------------
                                                            2002       2001
                                                          -------------------
                                                             (In thousands)
Acquired by foreclosure or deed in lieu of foreclosure...  $ 110      $ 531
Allowance for losses on real estate owned ...............    (82)       (31)
                                                          --------------------
Real estate owned, net ..................................  $  28      $  50
                                                          ===================

Results of real estate operations were as follows:

                                                     Year ended June 30,
                                                 ---------------------------
                                                  2002      2001      2000
                                                 ---------------------------
                                                       (In thousands)
Net gain on sales of real estate owned ......    $ 218     $ 101     $ 126
Holding costs ...............................      (80)      (20)      (12)
Provision for losses on real estate owned....      (51)      (16)       --
                                                 ---------------------------
Net gain from real estate operations ........    $  87     $  65     $ 114
                                                 ===========================


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

                                                      Year ended June 30,
                                                 -----------------------------
                                                   2002      2001       2000
                                                 -----------------------------
                                                         (In thousands)
Balance, beginning of year ...................    $ 31      $ 33       $ 82
Provisions charged to operations..............      51        16         --
Losses charged to allowance ..................      --       (18)       (49)
                                                 -----------------------------
Balance, end of year .........................    $ 82      $ 31       $ 33
                                                 =============================

H. Deposits

<TABLE>
<CAPTION>
                                                   June 30, 2002           June 30, 2001
                                              -------------------------------------------------
                                                           Weighted                Weighted
                                                            Average                Average
                                                Amount  Interest Rate    Amount  Interest Rate
                                              -------------------------------------------------
                                                          (Dollars in thousands)
<S>                                           <C>            <C>        <C>           <C>
Non-interest-bearing demand ..............    $   57,285               $   50,677
Interest-bearing demand ..................        91,392     1.28%         65,857     1.10%
Money market accounts ....................        20,317     1.48          17,091     2.80
Savings accounts .........................       311,740     2.72         183,806     1.88
Certificates with remaining maturities of:
 One year or less ........................       432,807     4.03         490,118     4.97
 Over one year to three years ............       224,065     4.56         219,215     5.86
 Over three years to five years ..........        35,255     4.75          56,238     6.09
                                              ----------               ----------

Total certificates .......................       692,127     4.24         765,571     5.30
Accrued interest payable .................         1,646                    2,333
                                              ----------               ----------
                                              $1,174,507     3.35%     $1,085,335     4.17%
                                              ==========               ==========
</TABLE>


The  aggregate  amount of accounts with a  denomination  of $100,000 or more was
approximately   $234,551,000  and  $167,393,000  at  June  30,  2002  and  2001,
respectively.

                                       54
<PAGE>

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

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, 2002                June 30, 2001
                                                  ---------------------------------------------------
                                                              Weighted                    Weighted
                                                               Average                     Average
                                                   Amount   Interest Rate      Amount   Interest Rate
                                                  ---------------------------------------------------
                                                               (Dollars in thousands)
<S>                                               <C>            <C>         <C>             <C>
Within one year ..............................    $125,000       5.98%       $ 70,000        6.06%
After one year but within two years ..........      79,000       5.48         145,000        5.98
After two years but within three years .......     160,000       5.86          79,000        5.48
After three years but within four years.......     120,000       5.30          90,000        6.37
After four years but within five years .......      20,465       5.02          70,000        6.09
After five years .............................          --         --             465        7.39
                                                  --------                   --------
                                                  $504,465       5.66%       $454,465        6.00%
                                                  ========                   ========
</TABLE>


The FHLB of New York  advances  are all  fixed  rate  borrowings  collateralized
either under a blanket pledge agreement by one- to four-family mortgage loans or
with investment and mortgage-backed securities.

At June  30,  2002,  the  Company  had  available  from  the FHLB of New York an
overnight repricing line of credit for $50,000,000 which expires on May 9, 2003.
The line of credit has a variable  interest rate. At June 30, 2002 there were no
overnight  borrowings  under this credit line. At June 30, 2001, the Company had
$59,450,000  of  overnight  borrowings  with an  interest  rate of 4.23% under a
$100,000,000  overnight repricing line of credit which expired on May 9 2002. In
addition, the Company had available overnight variable repricing lines of credit
with other  correspondent  banks totaling  $7,000,000.  There were no borrowings
under these lines at June 30, 2002 or 2001. Also, the Company had available from
the FHLB of New York a  variable  rate  one-month  overnight  repricing  line of
credit for  $50,000,000  which expires on May 9, 2003.  There were no borrowings
under this line at June 30,  2002 or 2001.  The  Company  also has a  $5,000,000
unsecured  revolving line of credit. This line of credit has a variable interest
rate tied to 30-day  LIBOR.  At June 30,  2002,  the Company had  $3,964,000  of
borrowings under this line of credit with an interest rate of 3.34%.  There were
no borrowings under this line at June 30, 2001.

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  $20,318,000  and  $70,700,000  and a
market  value  of  $20,512,000  and  $69,929,000  at June  30,  2002  and  2001,
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 earlier of the
callable date or the maturity date:

<TABLE>
<CAPTION>
                                                              June 30, 2002            June 30, 2001
                                                   ---------------------------------------------------
                                                                Weighted                 Weighted
                                                                Average                  Average
                                                     Amount  Interest Rate   Amount    Interest Rate
                                                   ---------------------------------------------------
                                                                 (Dollars in thousands)
<S>                                                  <C>                     <C>            <C>
Within one year ................................     $    --       --%       $48,840        4.69%
After one year but within five years............      19,350      4.92        19,350        4.92
                                                     -------                 -------
                                                     $19,350      4.92%      $68,190        4.76%
                                                     =======                 =======
</TABLE>

The average  balance of reverse  repurchase  agreements for the years ended June
30, 2002 and 2001 was $39,858,000 and $32,688,000, respectively.


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


J.  Guaranteed   Preferred   Beneficial   Interests  in  the  Company's   Junior
Subordinated  Debentures

In October 1997, PennFed formed a wholly-owned trust subsidiary, PennFed Capital
Trust I (the "Trust I").  Effective 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 Debentures (the "Trust
Preferred  securities").  Trust I used the  proceeds  from the sale of the Trust
Preferred  securities to purchase 8.90% junior subordinated  deferrable interest
debentures  issued by PennFed.  The sole assets of Trust I are $35.6  million of
junior  subordinated  debentures  which mature in 2027 and are redeemable at any
time after five years.  The obligations of PennFed related to Trust I constitute
a full and  unconditional  guarantee by PennFed of Trust I Issuer's  obligations
under the Trust  Preferred  securities.  The Company used the proceeds  from the
junior subordinated  debentures for general corporate purposes,  including a $20
million capital contribution to the Bank to support future growth.

In March 2001, PennFed formed a second  wholly-owned  trust subsidiary,  PennFed
Capital Trust II (the "Trust II").  Effective March 28, 2001,  Trust II sold $12
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"). Therefore,  these securities have not been registered under the Act. The
trust  preferred  securities  are  reflected on the  Consolidated  Statements of
Financial  Condition  as  Guaranteed   Preferred  Beneficial  Interests  in  the
Company's Junior Subordinated  Debentures.  Distributions payable on these Trust
Preferred securities,  as well as the distributions payable on the $34.5 million
of Trust  Preferred  securities  issued  in  October  1997,  are  included  as a
component of  non-interest  expense on the  Consolidated  Statements  of Income.
Trust II used the proceeds  from the sale of the Trust  Preferred  securities to
purchase 10.18% junior  subordinated  deferrable  interest  debentures issued by
PennFed.  The sole assets of Trust II are $12.4  million of junior  subordinated
debentures  which 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 Issuer's  obligations  under the
Trust  Preferred  securities.  The  Company  used the  proceeds  from the junior
subordinated debentures for general corporate purposes, including a $4.2 million
capital contribution to the Bank to support future growth.

K.  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 20 1/2 years old are  eligible to  participate  in the
Plan.  The  Plan  provides  for  a  discretionary   Company  match  of  employee
contributions. For the years ended June 30, 2002, 2001 and 2000, expense related
to the Plan was $155,000, $110,000 and $111,000,  respectively. At June 30, 2002
and 2001,  the Plan assets  included  common  stock of the Company with a market
value of $755,000 and $538,000, respectively.

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 952,000 shares of common
stock  issued in the  Conversion.  This loan is to be repaid from  discretionary
contributions  by the  Bank to the ESOP  trust.  The  Bank  has and  intends  to
continue  to make  contributions  to the ESOP in amounts  at least  equal to the
principal and interest  requirement of the debt, assuming a ten year term and an
interest rate of 7.46%. Annual contributions to the ESOP, which are used to fund
principal and interest  payments on the ESOP debt,  total $692,000.  At June 30,
2002 and 2001, the loan had an outstanding  balance of $1,244,000 and $1,801,000
and the ESOP had unallocated shares of


                                       56
<PAGE>

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

248,716 and 360,280,  respectively.  Based upon a $27.90 closing price per share
of common stock on June 30,  2002,  the  unallocated  shares had a fair value of
$6,939,000. The unamortized balance of the ESOP debt is reflected as a reduction
of stockholders' equity.

For the years ended June 30, 2002, 2001 and 2000, the Bank recorded compensation
expense   related  to  the  ESOP  of  $2,494,000,   $1,680,000  and  $1,256,000,
respectively.  The compensation expense related to the ESOP includes $2,020,000,
$1,242,000 and $865,000, 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 111,564, 103,818 and
96,612 shares for the years ended June 30, 2002, 2001 and 2000, respectively, to
participants in the plan.

Management Recognition Plan

In  connection  with  the  Conversion,  the  Company  established  a  Management
Recognition Plan ("MRP") as a means of enhancing and encouraging the recruitment
and retention of directors and officers.  A maximum  amount of an additional 4%,
or 476,000 shares,  of the shares  outstanding upon Conversion were permitted to
be awarded under the plan. All 476,000  shares of restricted  stock were awarded
under  the MRP.  The  shares  vested  in equal  installments,  generally  over a
five-year period,  with the final installment  vesting on April 28, 1999. Of the
total original  shares  awarded,  2,142 shares did not vest and were  cancelled.
These 2,142  shares were  re-awarded  and vested  during the year ended June 30,
2000.  No MRP expense was  recorded  for the years ended June 30, 2002 and 2001.
For the year  ended  June 30,  2000,  the  Company  recorded  expense of $36,000
related to the MRP.

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 1,190,000 to 1,671,246.  The exercise  price for the options  granted under
the  Option  Plan  cannot be less than the fair  market  value of the  Company's
common stock on the date of the grant. The options are granted, and the terms of
the options  are  established,  by the  Compensation  Committee  of the Board of
Directors.  Transactions  during the years  ended June 30,  2002,  2001 and 2000
relating to the Option Plan are as follows:

<TABLE>
<CAPTION>

                                                                               Weighted
                                                                               Average
                                                                               Exercise
                                                             Options           Price
                                                           -----------------------------
<S>                                                         <C>                <C>
Balance, June 30, 1999 ..................................   1,485,950          $ 9.13
  Granted ...............................................      74,336           16.81
  Exercised .............................................     (69,270)           5.25
  Expired ...............................................        (666)          17.19
  Forfeited .............................................        (333)          17.19
                                                           -----------------------------
Balance, June 30, 2000 ..................................   1,490,017            9.69
  Granted ...............................................          --              --
  Exercised .............................................     (66,650)           5.95
  Expired ...............................................          --              --
  Forfeited .............................................          --              --
                                                           -----------------------------
Balance, June 30, 2001 ..................................   1,423,367            9.86
  Granted ...............................................          --              --
  Exercised .............................................    (224,851)           6.90
  Expired ...............................................          --              --
  Forfeited .............................................          --              --
                                                           -----------------------------
Balance, June 30, 2002 ..................................   1,198,516          $10.42
                                                           =============================
</TABLE>


At June 30,  2002,  2001 and 2000,  1,192,516  options,  1,414,366  options  and
1,474,267 options were exercisable,  respectively,  with exercise prices ranging
from $5.25 to $17.19.

Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation"  ("SFAS 123"),  if fully  adopted,  requires  companies to measure
employee stock  compensation plans based on the fair value method of accounting.
The Company has adopted the disclosure-only provisions of SFAS 123. Accordingly,
the Company

                                       57
<PAGE>

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

continues to apply Accounting  Principles Board Opinion No. 25,  "Accounting for
Stock Issued to Employees," ("APB 25") and related interpretations in accounting
for its plans.  In  accordance  with APB 25, no  compensation  expense  has been
recognized  for its  stock-based  compensation  plans other than for  restricted
stock.

No pro forma  disclosures as required under SFAS 123 are presented for the years
ended  June 30,  2002 and 2001 as there  were no options  granted  during  those
fiscal  years.  The estimated  weighted  average fair value of each stock option
granted during fiscal 2000 was estimated as $8.83 on the date of grant. The fair
value of options at date of grant was estimated  using the  Black-Scholes  model
with the following  weighted  average  assumptions:  stock volatility of 26.14%;
risk-free  interest  rate  of  5.83%;  and an  expected  life of 10  years.  Had
compensation  cost for the grants been  determined  based upon the fair value at
the grant date consistent with the  methodology  prescribed  under SFAS 123, the
Company's  fiscal 2000 pro forma net income and diluted earnings per share would
have been approximately $12.5 million and $1.46,  respectively.  As the SFAS 123
method of accounting has not been applied to stock options granted prior to July
1, 1996, the resulting pro forma effect on net income is not  representative  of
the pro forma effect on net income in future years.

Supplemental Retirement Plan

The  Board  of  Directors  has  approved  the  establishment  of a  Supplemental
Retirement  Plan for key executive  employees and directors.  In connection with
the adoption of this plan, an initial  funding amount of $150,000 was accrued at
June 30, 2002.

L.  Income Taxes
The income tax provision is comprised of the following components:

                                                     Year ended June 30,
                                             -----------------------------------
                                              2002         2001            2000
                                             -----------------------------------
                                                      (In thousands)
Current provision..........................  $8,432       $7,128         $7,169
Deferred benefit...........................    (396)        (320)          (118)
                                             -----------------------------------
Total income tax provision.................  $8,036       $6,808         $7,051
                                             ===================================

Income taxes payable is included in Accounts  payable and other  liabilities  in
the  Consolidated  Statements of Financial  Condition at June 30, 2002 and 2001.
The  financial  statements  also include a net deferred tax liability of $10,000
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, 2002
and 2001 is as follows:

<TABLE>
<CAPTION>
                                                                           June 30,
                                                                    ----------------------
                                                                       2002        2001
                                                                    ----------------------
                                                                        (In thousands)
<S>                                                                  <C>         <C>

Deferred tax assets:
Allowance for loan losses .......................................    $ 1,877     $ 1,227
Litigation reserves .............................................         16          16
Deposit premium intangible.......................................      1,534       1,323
Depreciation ....................................................        505         480
                                                                    ----------------------
Total deferred tax assets........................................      3,932       3,046
                                                                    ----------------------
Deferred tax liabilities:
Deferred loan fees ..............................................      3,622       3,049
Loan sale premiums ..............................................         --           8
Purchase accounting .............................................        133         137
Servicing asset .................................................        176         247
Unrealized gain on investment securities available for sale .....         11          --
                                                                    ----------------------
Total deferred tax liabilities ..................................      3,942       3,441
                                                                    ----------------------
Net deferred tax asset (liability) ..............................    $   (10)    $  (395)
                                                                    ======================
</TABLE>

                                       58

<PAGE>


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

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

<TABLE>
<CAPTION>
                                                      Year ended June 30,
                                               -------------------------------
                                                 2002       2001         2000
                                               -------------------------------
                                                       (In thousands)
<S>                                            <C>        <C>         <C>
Income tax provision at statutory rate.....    $ 7,917    $ 6,762     $ 6,972
Amortization of intangibles ...............         44         70          96
State and local income tax provision ......         64         --          --
Other, net ................................         11        (24)        (17)
                                               ------------------------------
Total income tax provision ................    $ 8,036    $ 6,808     $ 7,051
                                               ==============================
</TABLE>


Pursuant to SFAS 109, the Company is not required to provide  deferred  taxes on
its 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 Company'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 Company fails to qualify as
a Bank,  as provided by the Internal  Revenue  Code; or (3) there is a change in
federal tax law.

M.  Commitments and Contingencies

Lease  Commitments  -- At June 30, 2002,  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)
--------------------                                           --------------
2003............................................................. $  296
2004.............................................................    230
2005.............................................................    192
2006.............................................................    197
2007.............................................................    201
2008 and later...................................................    526
                                                                  ------
                                                                  $1,642
                                                                  ======

Rentals under long-term  operating leases for certain branch offices amounted to
$341,000,  $328,000 and  $345,000  for the years ended June 30,  2002,  2001 and
2000,  respectively.  Rental  income of $490,000,  $470,000 and $439,000 for the
years  ended  June 30,  2002,  2001 and 2000,  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,  unused lines
of credit,  commitments to sell loans and commitments to purchase  loans.  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.


                                       59
<PAGE>


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


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

                                                       June 30,
                                                -----------------------
                                                  2002          2001
                                                -----------------------
                                                    (In thousands)
Commitments to extend credit................    $38,781       $63,951
Unused lines of credit .....................     92,138        85,816
Commitments to sell loans ..................      2,805            --
Commitments to purchase loans...............        455        17,699

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.

Commitments to sell loans  represent  agreements to sell loans prior to the time
the loan is closed and funded.  The Company  currently sells one- to four-family
mortgage loans, meeting certain criteria, on a forward basis. The loans are sold
and the  selling  price  determined  prior to the time  the loan is  closed  and
funded.

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

Other  Contingencies  -- In 1987,  the New Jersey  Department  of  Environmental
Protection ("NJDEP") conducted an environment contamination investigation of the
Orange  Road  branch  site of First  Federal  Savings  and Loan  Association  of
Montclair  ("First  Federal").  Prior to the  acquisition by First Federal,  the
location was used as a gasoline service  station.  On August 16, 1989, the NJDEP
issued a "no further  action"  letter to First Federal with regard to this site.
The Bank acquired First Federal  effective  September 11, 1989.  Notwithstanding
the earlier "no further  action"  letter,  on June 25, 1997,  the NJDEP issued a
letter  demanding that Penn Federal  Savings Bank develop a remedial action work
plan for the Orange Road branch site as a result of an  investigation  conducted
on behalf of an adjacent  property  owner.  The Bank disputed the NJDEP position
that Penn Federal  Savings Bank was a responsible  party.  On July 1, 1998,  the
NJDEP issued a letter  determining  that Penn Federal  Savings  Bank,  Mobil Oil
Corporation  (now ExxonMobil) and the former gasoline service station owner were
all  responsible  parties  for the  clean up at the  subject  site.  Responsible
parties  may  ultimately  have  full  or  partial  obligation  for  the  cost of
remediation. The Bank has continued to vigorously deny liability but has engaged
in  discussions  with  ExxonMobil.  The Bank may be willing to enter into a cost
sharing  arrangement  with  ExxonMobil if  ExxonMobil  will agree to develop and
implement  the  remedial  action  work plan  required  by the  NJDEP.  A written
proposal is expected to be submitted to the Bank by  ExxonMobil.  Currently,  no
written  agreement  has been  signed  and  neither  party is bound by any verbal
conversations.

Based upon an environmental  engineering report, a remedial  investigation would
cost  approximately  $30,000.  The  environmental  engineering  company has also
indicated  that,  based upon their  experience  with similar type projects,  the
majority of cases are  addressed  by natural  remediation.  Natural  remediation
costs, if needed,  range from $60,000 to $150,000.  At June 30, 2002 and 2001, a
contingent  environmental  liability of $45,000 is included in Accounts  payable
and other  liabilities  on the  Company's  Consolidated  Statements of Financial
Condition.  The  $45,000  represents  one-half  of  the  remedial  investigation
(one-half of $30,000,  or $15,000)  plus  one-half of the lower end of the range
for natural remediation  (one-half of $60,000, or $30,000).  Based upon the most
current  information  available,  management believes the $45,000 represents the
most likely liability at this time.


                                       60

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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.

N.  Stockholders' Equity and Regulatory Capital
On January 13, 1998, the Company's Board of Directors declared a two-for-one
stock split in the form of a 100% stock dividend, payable on February 10, 1998
to common stockholders of record as of January 27, 1998.

During the year ended June 30, 2002, the Company  repurchased  500,000 shares of
its outstanding  common stock at prices ranging from $19.25 to $27.14 per share,
for a total  cost of  $11,119,000.  During the year  ended  June 30,  2001,  the
Company  repurchased  845,000 shares of its outstanding common stock. The prices
paid for the  repurchased  shares ranged from $13.13 to $22.65 per share,  for a
total cost of  $14,545,000.  During the year ended June 30,  2000,  the  Company
repurchased  492,000  shares of its  outstanding  common stock at prices ranging
from $11.06 to $15.81 per share, for a total cost of $6,931,000.

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, 2002,  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.


                                       61

<PAGE>

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


The Bank's 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, 2002
  Tangible capital, and ratio to
    adjusted total assets................................  $158,034      8.37%     $28,323      1.50%          N/A         N/A
  Tier 1 (core) capital, and ratio to
    adjusted total assets................................  $158,034      8.37%     $75,529      4.00%     $ 94,411        5.00%
  Tier 1 (core) capital, and ratio to
    risk-weighted assets.................................  $158,034     15.36%         N/A       N/A      $ 61,722        6.00%
  Risk-based capital, and ratio to
    risk-weighted assets.................................  $163,828     15.93%     $82,296      8.00%     $102,869       10.00%

As of June 30, 2001
  Tangible capital, and ratio to
    adjusted total assets................................  $144,825      7.87%     $27,617      1.50%          N/A         N/A
  Tier 1 (core) capital, and ratio to
    adjusted total assets................................  $144,825      7.87%     $73,645      4.00%     $ 92,056        5.00%
  Tier 1 (core) capital, and ratio to
    risk-weighted assets.................................  $144,825     15.25%         N/A       N/A      $ 56,999        6.00%
  Risk-based capital, and ratio to
    risk-weighted assets.................................  $149,050     15.69%     $75,998      8.00%     $ 94,998       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").


                                       62

<PAGE>

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


The following  table  summarizes the Company's  capital amounts and ratios under
the FRB's capital requirements for bank holding companies.



<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, 2002
Tangible capital, and ratio to
    adjusted total assets..........................     $151,600          8.02%    $28,349      1.50%           N/A        N/A
Tier 1 (core) capital, and ratio to
  adjusted total assets............................     $151,600          8.02%    $75,597      4.00%      $ 94,496      5.00%
Tier 1 (core) capital, and ratio to
  risk-weighted assets.............................     $151,600         14.87%        N/A       N/A       $ 61,150      6.00%
Risk-based capital, and ratio to
  risk-weighted assets.............................     $157,386         15.44%    $81,534      8.00%      $101,917     10.00%

As of June 30, 2001
Tangible capital, and ratio to
    adjusted total assets..........................     $140,729          7.64%    $27,638      1.50%           N/A        N/A
Tier 1 (core) capital, and ratio to
  adjusted total assets............................     $140,729          7.64%    $73,702      4.00%      $ 92,127      5.00%
Tier 1 (core) capital, and ratio to
  risk-weighted assets.............................     $140,729         14.97%        N/A       N/A       $ 56,401      6.00%
Risk-based capital, and ratio to
  risk-weighted assets.............................     $144,954         15.42%     $75,202     8.00%      $ 94,002     10.00%

</TABLE>

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 a  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, 2002, the Bank
could have paid dividends totaling approximately $17.4 million.


                                       63

<PAGE>


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


O. Computation of EPS
The computation of EPS is presented in the following table.

<TABLE>
<CAPTION>
                                                                   For the year ended June 30,
                                                         ------------------------------------------------
                                                             2002              2001             2000
                                                         ------------------------------------------------
                                                         (Dollars in thousands, except per share amounts)

<S>                                                      <C>               <C>              <C>
Net income.............................................  $    14,583       $    12,513      $      12,870
                                                         ================================================
Number of shares outstanding:
Weighted average shares issued.........................   11,900,000        11,900,000         11,899,842
Less: Weighted average shares held in treasury.........    4,383,643         3,891,390          3,261,279
Less: Average shares held by the ESOP..................      952,000           952,000            952,000
Plus: ESOP shares released or committed to be
     released during the fiscal year...................      661,256           552,611            451,541
                                                         ------------------------------------------------
Average basic shares...................................    7,225,613         7,609,221          8,138,104
Plus: Average common stock equivalents.................      542,809           489,382            444,409
                                                         ------------------------------------------------
Average diluted shares.................................    7,768,422         8,098,603          8,582,513
                                                         ================================================
Earnings per common share:
  Basic................................................  $      2.02       $      1.64      $        1.58
                                                         ================================================
  Diluted..............................................  $      1.88       $      1.55      $        1.50
                                                         ================================================
</TABLE>



P. Disclosure About Fair Value of Financial Instruments

The carrying amounts and estimated fair value of the Company's financial
instruments at June 30, 2002 and 2001 were as follows:

<TABLE>
<CAPTION>

                                                            June 30, 2002                June 30, 2001
                                                      ----------------------------------------------------
                                                        Carrying    Estimated      Carrying     Estimated
                                                         Amount     Fair Value      Amount      Fair Value
                                                      ----------------------------------------------------
                                                                          (In thousands)
Financial assets:
<S>                                                   <C>           <C>           <C>           <C>
  Cash and cash equivalents ......................    $   37,189    $   37,189    $   15,771    $   15,771
  Investment securities ..........................       183,785       182,971       333,969       327,245
  Mortgage-backed securities .....................       169,689       174,036       135,606       136,592
  FHLB of New York stock .........................        25,656        25,656        26,218        26,218
                                                      ----------------------------------------------------
  Total cash and investments .....................       416,319       419,852       511,564       505,826
                                                      ----------------------------------------------------
  Loans held for sale ............................         1,592         1,592            83            83
  Loans receivable, less allowance for loan losses     1,439,668     1,462,682     1,295,409     1,303,741
                                                      ----------------------------------------------------
  Total loans ....................................     1,441,260     1,464,274     1,295,492     1,303,824
  Accrued interest receivable, net ...............         9,564         9,564        11,590        11,590
                                                      ----------------------------------------------------
Total financial assets ...........................    $1,867,143    $1,893,690    $1,818,646    $1,821,240
                                                      ====================================================
Financial liabilities:
  Deposits .......................................    $1,174,507    $1,188,166    $1,085,335    $1,096,859
  FHLB of New York advances ......................       504,465       536,767       454,465       470,466
  Other borrowings ...............................        23,314        24,031       127,640       128,024
  Mortgage escrow funds ..........................        12,772        12,772        11,979        11,979

  Net Trust Preferred securities .................        44,537        46,490        44,461        47,798
                                                      ----------------------------------------------------
Total financial liabilities ......................    $1,759,595    $1,808,226    $1,723,880    $1,755,126
                                                      ====================================================
</TABLE>


                                         64


<PAGE>


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

<TABLE>
<CAPTION>
                                                              June 30, 2002               June 30, 2001
                                                          ---------------------------------------------------
                                                          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...........................    $38,781      $    --     $63,951      $    --
Unused lines of credit.................................     92,138           --      85,816           --
Commitments to sell loans..............................      2,805           --          --           --
Commitments to purchase loans..........................        455           --      17,699           --

</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.

Federal  Home Loan Bank 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 market 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.

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,  Net -- For these short-term  assets, the carrying
amount 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, 2002 and 2001.  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.

Federal Home Loan Bank 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.

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

Trust  Preferred  Securities -- For these  securities,  fair value is based on a
quoted market price or prices for similar securities.


                                       65
<PAGE>


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

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 -- No fair value is estimated as no unrealized  gains
or losses are  assumed to occur due to the sales price being fixed when the loan
is sold forward.

Commitments  to  Purchase  Loans  -- No  fair  value  is  estimated  due  to the
short-term nature of these commitments.

Q.  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,
                                                         ---------------------
                                                          2002          2001
                                                         ---------------------
                                                             (In thousands)
Balance, beginning of year............................   $4,888        $4,780
New loans granted.....................................    2,424         2,146
Repayments/reductions.................................   (1,322)       (2,038)
                                                         --------------------
Balance, end of year..................................   $5,990        $4,888
                                                         ====================

In addition to the above amount of loans,  at June 30, 2002 and 2001,  there was
$43,000 and $48,000, respectively, of outstanding balances on overdraft checking
lines for  directors,  officers and  employees.

R. Recently  Issued  Accounting Standards

In July 2001,  the  Financial  Accounting  Standards  Board (the "FASB")  issued
Statement No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142
requires that upon  adoption,  amortization  of goodwill will cease and instead,
the carrying  value of goodwill  will be evaluated  for  impairment on an annual
basis.  Identifiable  intangible assets will continue to be amortized over their
useful  lives  and  reviewed  for  impairment  upon  adoption  and then at least
annually thereafter. SFAS 142 will be effective for fiscal years beginning after
December 15, 2001. The Company has not determined the impact,  if any, that this
statement  will  have on its  consolidated  financial  position  or  results  of
operations.

In July  2001,  the  FASB  issued  Statement  No.  143,  "Accounting  for  Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 requires that the fair value of a
liability  for an asset  retirement  obligation  be  recognized in the period in
which it is incurred,  if a reasonable  estimate of fair value can be made.  The
associated  asset  retirement  cost would be capitalized as part of the carrying
amount of the  long-lived  asset.  SFAS 143 will be  effective  for fiscal years
beginning  after June 15, 2002. The Company has not  determined  the impact,  if
any, that this statement  will have on its  consolidated  financial  position or
results of operations.

In  August  2001,  the  FASB  issued  Statement  No.  144,  "Accounting  for the
Impairment or Disposal of Long-Lived  Assets" ("SFAS 144").  SFAS 144 supersedes
Statement No. 121,  "Accounting for the Impairment of Long-Lived  Assets and for
Long-Lived  Assets  to be  Disposed  Of " ("SFAS  121").  SFAS 144  retains  the
requirements  of SFAS 121 for  recognizing  and measuring the impairment loss of
long-lived  assets to be held and used. For long-lived  assets to be disposed of
by sale, SFAS 144 requires a single  accounting model be used for all long-lived
assets, whether previously held and used or newly acquired. Long-lived assets to
be  disposed  of other  than by sale  would be  considered  held and used  until
disposition.  SFAS 144 also broadens the presentation of discontinued operations
in the income  statement  to include  more  disposal  transactions.  SFAS 144 is
effective for fiscal years  beginning  after  December 15, 2001. The Company has
not  determined  the  impact,  if any,  that  this  statement  will  have on its
consolidated financial position or results of operations.


                                       66

<PAGE>


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

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

The following are the condensed financial statements for PennFed, parent company
only,  as of June 30, 2002 and 2001 and for the years ended June 30, 2002,  2001
and 2000 and  should  be read in  conjunction  with  the  Notes to  Consolidated
Financial Statements.

Condensed Statements of Financial Condition

<TABLE>
<CAPTION>
                                                                                      June 30,
                                                                             --------------------------
                                                                                2002            2001
                                                                             --------------------------
                                                                                   (In thousands)
<S>                                                                          <C>             <C>
Assets
Cash......................................................................   $     26        $     25
Intercompany overnight investment.........................................        639           1,582
                                                                             --------------------------
Total cash and cash equivalents...........................................        665           1,607
Investment securities held to
 maturity, at amortized cost............................................       10,968          10,987
Investment in subsidiaries.............................................       165,030         153,609
Prepaid Trust Preferred securities expenses...........................          1,963           2,039
Accrued interest receivable..............................................         267             267
Other assets.........................................................           1,201           1,054
                                                                             --------------------------
                                                                             $180,094        $169,563
                                                                             ==========================

Liabilities and Stockholders' Equity
Junior subordinated debentures........................................       $ 47,940        $ 47,940
Intercompany loan payable............................................           7,100           7,100
Unsecured revolving line of credit....................................          3,964              --
Accrued interest payable...............................................           633             608
Other accrued expenses and other liabilities.........................           1,696           1,385
Stockholders' equity..................................................        118,761         112,530
                                                                             --------------------------
                                                                             $180,094        $169,563
                                                                             ==========================
</TABLE>

Condensed Statements of Operations

<TABLE>
<CAPTION>
                                                                                    Year ended June 30,
                                                                            -----------------------------------
                                                                               2002        2001         2000
                                                                            -----------------------------------
                                                                                      (In thousands)
<S>                                                                         <C>          <C>          <C>
Income
Interest income on intercompany balances ...............................    $    158     $    243     $    301
Interest income on investment securities ...............................         988          990          992
Other income ...........................................................           2            4            4
                                                                            -----------------------------------
                                                                               1,148        1,237        1,297
Expenses
Interest expense on Junior subordinated debentures .....................       4,425        3,491        3,166
Interest on intercompany loan ..........................................         466          718          666
Interest on unsecured revolving line of credit .........................          49          159           --
Other expenses .........................................................         492          428          412
                                                                            -----------------------------------
                                                                               5,432        4,796        4,244
                                                                            -----------------------------------
Loss before undistributed net income of subsidiaries ...................      (4,284)      (3,559)      (2,947)
Equity in undistributed net income of subsidiaries......................      17,414       14,863       14,819
                                                                            -----------------------------------
Income before income taxes .............................................      13,130       11,304       11,872
Income tax benefit .....................................................      (1,453)      (1,209)        (998)
                                                                            -----------------------------------
Net income .............................................................    $ 14,583     $ 12,513     $ 12,870
                                                                            ====================================
</TABLE>

                                       67


<PAGE>

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


Condensed Statements of Cash Flows

<TABLE>
<CAPTION>

                                                                                    Year ended June 30,
                                                                           ---------------------------------------
                                                                             2002           2001            2000
                                                                           ---------------------------------------
                                                                                       (In thousands)
<S>                                                                        <C>            <C>            <C>
Cash Flows From Operating Activities:
Net income ............................................................... $ 14,583       $ 12,513       $ 12,870
Adjustments to reconcile net income to net cash used in
  operating activities:
    Equity in undistributed net income of subsidiaries ...................  (17,414)       (14,863)       (14,819)
    Amortization of investment securities premium ........................       19             18             15
    Amortization of cost of stock plans ..................................       --             --             36
    Increase in accrued interest payable, net of accrued
     interest receivable .................................................       25             80              4
   (Increase) decrease in prepaid Trust Preferred securities
     expense and other assets ............................................      (71)          (840)         1,064
    Increase (decrease) in accrued expenses and other liabilities ........      311            531           (282)
                                                                           ---------------------------------------
     Net cash used in operating activities ...............................   (2,547)        (2,561)        (1,110)
                                                                           ---------------------------------------

Cash Flows From Investing Activities:
Investment in subsidiary bank ............................................       --         (4,200)            --
Investment in Trust II ...................................................       --           (372)            --
Dividends received from subsidiary bank ..................................    8,327         10,492          6,492
Proceeds from principal repayment on ESOP loan ...........................      557            519            484
Proceeds from maturities of investment securities ........................       --             --            165
                                                                           ---------------------------------------
  Net cash provided by investing activities ..............................    8,884          6,439          7,141
                                                                           ---------------------------------------

Cash Flows From Financing Activities:
Increase in unsecured revolving line of credit ...........................    3,964             --             --
Proceeds from issuance of junior subordinated debentures .................       --         12,372             --
Purchases of treasury stock, net of reissuance ...........................   (9,567)       (14,148)        (6,568)
Cash dividends paid ......................................................   (1,676)        (1,316)        (1,341)
                                                                           ---------------------------------------
  Net cash used in financing activities ..................................   (7,279)        (3,092)        (7,909)
                                                                           ---------------------------------------
Net increase (decrease) in cash and cash equivalents .....................     (942)           786         (1,878)
Cash and cash equivalents, beginning of year .............................    1,607            821          2,699
                                                                           ---------------------------------------

Cash and cash equivalents, end of year ................................... $    665       $  1,607       $    821
                                                                           =======================================
</TABLE>

                                       68


<PAGE>


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

T. Quarterly Financial Data (Unaudited)

                                                 Quarter ended
                                -----------------------------------------------
                                          2001                    2002
                                -----------------------------------------------
                                September 30  December 31  March 31    June 30
                                -----------------------------------------------
                                   (In thousands,  except per share amounts)

Total interest income .........   $31,934      $30,330     $28,992     $30,083
Total interest expense ........    19,779       18,600      17,145      17,338
                                -----------------------------------------------
Net interest income ...........    12,155       11,730      11,847      12,745
Provision for loan losses .....       550          375         300         400
Non-interest income ...........       845        1,009       1,048       1,315
Non-interest expenses .........     6,930        6,844       7,027       7,649
Income tax expense ............     1,967        1,949       1,964       2,156
                                -----------------------------------------------
 Net income ...................   $ 3,553      $ 3,571     $ 3,604     $ 3,855
                                ===============================================
Net income per common share:
 Basic ........................   $  0.49      $  0.49     $  0.50     $  0.54
                                ===============================================
 Diluted ......................   $  0.45      $  0.46     $  0.47     $  0.50
                                ===============================================


                                                 Quarter ended
                                -----------------------------------------------
                                          2000                    2001
                                -----------------------------------------------
                                September 30  December 31  March 31    June 30
                                -----------------------------------------------
                                   (In thousands,  except per share amounts)

Total interest income ..........  $ 30,436     $30,020     $29,657     $30,245
Total interest expense .........    20,581      20,280      19,364      19,359
                                -----------------------------------------------
Net interest income ............     9,855       9,740      10,293      10,886
Provision for loan losses ......       200         125         125         175
Non-interest income ............     1,059         975         833         947
Non-interest expenses ..........     5,804       5,906       6,313       6,619
Income tax expense .............     1,734       1,651       1,649       1,774
                                -----------------------------------------------
 Net income.....................  $  3,176     $ 3,033    $  3,039     $ 3,265
                                ===============================================
Net income per common share:
 Basic..........................  $   0.41     $  0.40     $   0.40    $  0.44
                                ===============================================
 Diluted........................  $   0.39     $  0.38     $   0.38    $  0.41
                                ===============================================


                                       69

<PAGE>

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

There  has been no  Current  Report  on Form 8-K  filed  reporting  a change  of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.


                                    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 23,  2002,  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 23, 2002.

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 23,  2002,  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

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  23,  2002,   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 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
23, 2002,  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.  Controls and Procedures

In the  fiscal  year  ended  June  30,  2002,  the  Registrant  did not make any
significant changes in, nor take any corrective actions regarding,  its internal
controls or other factors that could  significantly  affect these controls.  The
Registrant periodically reviews its internal controls for effectiveness, but did
conduct such a review during the fiscal year ended June 30, 2002. In the future,
the  Registrant  plans to conduct an evaluation of its  disclosure  controls and
procedures each quarter.


                                       70
<PAGE>

                                     PART IV

Item 15.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K
    (a) (1) Financial Statements:
    The following information appearing in Part II, Item 8 of this Form 10-K is
    incorporated herein by reference.

        Independent Auditors' Report
        Consolidated Statements of Financial Condition at June 30, 2002 and 2001
        Consolidated Statements of Income for the Years Ended June 30, 2002,
         2001 and 2000
        Consolidated Statements of Comprehensive Income for the Years Ended
         June 30, 2002, 2001 and 2000
        Consolidated Statements of Changes in Stockholders' Equity for the Years
         Ended June 30, 2002, 2001 and 2000
        Consolidated Statements of Cash Flows for the Years Ended June 30,
         2002, 2001 and 2000
        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.



                                       71
<PAGE>


<TABLE>
<CAPTION>


(a) (3)      Exhibits:

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)        Certificate of Incorporation                                                  *
3 (ii)       Bylaws                                                                        **
4            Instruments defining the rights of security holders, including indentures     *
4 (i)        Stockholder Protection Rights Agreement                                       ***
9            Voting trust agreement                                                        None
10           Material contracts:
             (a) Employee Stock Ownership Plan                                             *
             (b) 1994 Amended and Restated Stock Option and Incentive Plan                 ****
             (c) Management Recognition Plan                                               *
             (d) Employment Agreement with Joseph L. LaMonica                              ****
             (e) Employment Agreement with Patrick D. McTernan                             ****
             (f) Employment Agreement with Jeffrey J. Carfora                              *****
             (g) Employment Agreement with Barbara A. Flannery                             ****
11           Statement re: computation of per share earnings                               11
12           Statements re: computation of ratios                                          12
13           Annual Report to security holders                                             Not required
16           Letter re: change in certifying accountant                                    Not required
18           Letter re: change in accounting principles                                    None
21           Subsidiaries of the registrant                                                21
22           Published report regarding matters submitted to vote of security holders      None
23           Consents of independent auditors and counsel                                  23
24           Power of Attorney                                                             Not required
99           Additional Exhibits                                                           Not applicable

</TABLE>



        * Filed as exhibits to the Company's  Registration Statement on Form S-1
          under  the  Securities  Act of 1933,  filed  with the  Securities  and
          Exchange Commission on March 25, 1994 (Registration No. 33-76854). All
          of such previously filed documents are hereby  incorporated  herein by
          reference in accordance with Item 601 of Regulation S-K.

       ** 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, 1999 (File No.  0-24040).  Such previously
          filed document is hereby  incorporated by reference in accordance with
          Item 601 of Regulation S-K.

      *** 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,  and 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.   The  First   Amendment  to  the
          Stockholders Protection Rights Agreement is filed as an exhibit to the
          Form 8-A/A and the Second  Amendment  to the  Stockholders  Protection
          Rights  Agreement  is filed as an exhibit to the Form  8-A/A-2.  These
          documents are hereby incorporated by reference in accordance with Item
          601 of Regulation S-K.

     **** Filed as  exhibits  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).  All of such
          previously  filed  documents are hereby  incorporated  by reference in
          accordance with Item 601 of Regulation S-K.

    ***** 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 14, 2002 (File No.  0-24040).  Such  previously
          filed document is hereby  incorporated by reference in accordance with
          Item 601 of Regulation S-K.


(b) Reports on Form 8-K:

There were no reports filed on Form 8-K for the three month period ended June
30, 2002.

                                       72
<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 23, 2002                   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 23, 2002                     Date: September 23, 2002


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


Date: September 23, 2002                     Date: September 23, 2002


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


Date: September 23, 2002                     Date: September 23, 2002


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


Date: September 23, 2002                     Date: September 23, 2002


                                       73

<PAGE>


                                  CERTIFICATION


I, Joseph L. LaMonica, certify that:

1.   I have  reviewed  this  annual  report  on Form 10-K of  PennFed  Financial
     Services, Inc.;

2.   Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report; and

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report.


Date: September 23, 2002                   /s/ Joseph L. LaMonica
                                           -------------------------------------
                                           Joseph L. LaMonica
                                           President and Chief Executive Officer


                                       74

<PAGE>


                                  CERTIFICATION

I, Claire M. Chadwick, certify that:

1.   I have  reviewed  this  annual  report  on Form 10-K of  PennFed  Financial
     Services, Inc.;

2.   Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report; and

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report.


Date: September 23, 2002                        /s/ Claire M. Chadwick
                                                --------------------------------
                                                Claire M. Chadwick
                                                Executive Vice President, Chief
                                                Financial Officer and Controller


                                       75

<PAGE>


     CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the
undersigned hereby certifies in his capacity as an officer of PennFed Financial
Services, Inc. (the "Company") that the Annual Report of the Company on Form
10-K for the year ended June 30, 2002 fully complies with the requirements of
Section 13(a) of the Securities Exchange Act of 1934 and that the information
contained in such report fairly presents, in all material respects, the
financial condition and results of operations of the Company as of the dates and
for the periods presented in the financial statements included in such report.


                                     By:  /s/ Joseph L. LaMonica
                                          --------------------------------------
                                          Joseph L. LaMonica
                                          President and Chief
                                          Executive Officer

                                          Date: September 23, 2002


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

                                          Date: September 23, 2002






                                       76