##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended September 30, 2007

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 00-50347



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JEFFERSON BANCSHARES, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Tennessee                                                      |  | 45-0508261                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



|                                         |  |           
|---------------------------------------- |  | ----------
|120 Evans Avenue, Morristown, Tennessee  |  | 37814     
|(Address of principal executive offices) |  | (Zip code)

(423) 586-8421

(Registrants telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)



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

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

Large
accelerated filer ̈Accelerated filer  x    Non-accelerated filer ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x

Indicate the number of shares outstanding of each of the issuers classes of common stock as of the latest practicable date:

At November 9, 2007, the registrant had 6,382,693 shares of common stock, $0.01 par value per share, outstanding.



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##### Table of Contents

INDEX



|                              |  |                                                                                                                       |  |   
|----------------------------- |  | --------------------------------------------------------------------------------------------------------------------- |  | --
|                              |  | Page                                                                                                                 
|PART I. FINANCIAL INFORMATION
|                              |  |                                                                                                                      
|Item 1.                       |  | Financial Statements                                                                                                  |  |   
|                              |  |                                                                                                                      
|                              |  | Consolidated Statements of Condition - Unaudited Three months ended September 30, 2007 and year ended June 30, 2007   |  | 3 
|                              |  |                                                                                                                      
|                              |  | Consolidated Statements of Earnings - Unaudited Three months ended September 30, 2007 and 2006                        |  | 4 
|                              |  |                                                                                                                      
|                              |  | Consolidated Statements of Changes in Stockholders Equity  Unaudited Three months ended September 30, 2007 and 2006 |  | 5 
|                              |  |                                                                                                                      
|                              |  | Consolidated Statements of Cash Flows - Unaudited Three months ended September 30, 2007 and 2006                      |  | 6 
|                              |  |                                                                                                                      
|                              |  | Notes to Consolidated Financial Statements - Unaudited                                                                |  | 7 
|                              |  |                                                                                                                      
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                 |  | 11
|                              |  |                                                                                                                      
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                            |  | 25
|                              |  |                                                                                                                      
|Item 4.                       |  | Controls and Procedures                                                                                               |  | 25
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                                      
|                              |  |                                                                                                                      
|Item 1.                       |  | Legal Proceedings                                                                                                     |  | 26
|Item 1A.                      |  | Risk Factors                                                                                                          |  | 26
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                           |  | 26
|Item 3.                       |  | Defaults Upon Senior Securities                                                                                       |  | 27
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                                   |  | 27
|Item 5.                       |  | Other Information                                                                                                     |  | 27
|Item 6.                       |  | Exhibits                                                                                                              |  | 27
|                              | 
|SIGNATURES                    |  |                                                                                                                      



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Condition

(Dollars in thousands)



|                                                                                                                                                                                             |  |                   |         |   |              |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ------------ | - | ------- | -
|                                                                                                                                                                                             |  | September 30,2007 |         |   | June 30,2007 |  
|                                                                                                                                                                                             |  | (Unaudited)       |         |   |              |  
|Assets                                                                                                                                                                                       |  |                   |         |   |              |   |         |  
|Cash and cash equivalents                                                                                                                                                                    |  | $                 | 2,660   |   |              | $ | 1,955   |  
|Interest-earning deposits                                                                                                                                                                    |  |                   | 6,596   |   |              |   | 4,802   |  
|Fed funds sold                                                                                                                                                                               |  |                   | 883     |   |              |   | 977     |  
|Investment securities classified as available-for-sale, net                                                                                                                                  |  |                   | 25,503  |   |              |   | 27,278  |  
|Federal Home Loan Bank stock                                                                                                                                                                 |  |                   | 1,796   |   |              |   | 1,796   |  
|Bank owned life insurance                                                                                                                                                                    |  |                   | 5,757   |   |              |   | 5,702   |  
|Loans receivable, net of allowance for loan losses of $1,955 at September 30, 2007 and $1,955 at June 30, 2007                                                                               |  |                   | 272,353 |   |              |   | 274,881 |  
|Loans held-for-sale                                                                                                                                                                          |  |                   | 558     |   |              |   | 2,468   |  
|Premises and equipment, net                                                                                                                                                                  |  |                   | 15,462  |   |              |   | 15,572  |  
|Foreclosed real estate, net                                                                                                                                                                  |  |                   | 100     |   |              |   | 275     |  
|Accrued interest receivable:                                                                                                                                                                 |  |                   |         |   |              |   |         |  
|Investments                                                                                                                                                                                  |  |                   | 244     |   |              |   | 299     |  
|Loans receivable                                                                                                                                                                             |  |                   | 1,398   |   |              |   | 1,414   |  
|Deferred tax asset                                                                                                                                                                           |  |                   | 1,510   |   |              |   | 1,606   |  
|Other assets                                                                                                                                                                                 |  |                   | 637     |   |              |   | 678     |  
|                                                                                                                                                                                             |  |                   |         |   |              |   |         |  
|Total assets                                                                                                                                                                                 |  | $                 | 335,457 |   |              | $ | 339,703 |  
|                                                                                                                                                                                             |  |                   |         |   |              |   |         |  
|                                                                                                                                                                                             |  |                  
|Liabilities and Stockholders Equity                                                                                                                                                         |  |                   |         |   |              |   |         |  
|Deposits:                                                                                                                                                                                    |  |                   |         |   |              |   |         |  
|Noninterest-bearing                                                                                                                                                                          |  | $                 | 14,789  |   |              | $ | 12,561  |  
|Interest-bearing                                                                                                                                                                             |  |                   | 214,429 |   |              |   | 207,521 |  
|Federal Home Loan Bank advances                                                                                                                                                              |  |                   | 31,000  |   |              |   | 44,800  |  
|Other liabilities                                                                                                                                                                            |  |                   | 1,064   |   |              |   | 1,120   |  
|Accrued income taxes                                                                                                                                                                         |  |                   | 210     |   |              |   | 57      |  
|                                                                                                                                                                                             |  |                   |         |   |              |   |         |  
|Total liabilities                                                                                                                                                                            |  |                   | 261,492 |   |              |   | 266,059 |  
|                                                                                                                                                                                             |  |                   |         |   |              |   |         |  
|                                                                                                                                                                                             |  |                  
|Commitments and contingent liabilities                                                                                                                                                       |  |                   |        |   |              |   |        |  
|                                                                                                                                                                                             |  |                  
|Stockholders equity:                                                                                                                                                                        |  |                   |         |   |              |   |         |  
|Preferred stock, $.01 par value; 10,000,000 shares authorized; no shares issued or outstanding                                                                                               |  |                   |        |   |              |   |        |  
|Common stock, $.01 par value; 30,000,000 shares authorized; 8,446,375 shares issued and 6,394,955 shares outstanding at September 30,
2007 and 6,411,586 shares outstanding at June 30, 2007 |  |                   | 84      |   |              |   | 84      |  
|Additional paid-in capital                                                                                                                                                                   |  |                   | 72,820  |   |              |   | 72,738  |  
|Unearned ESOP shares                                                                                                                                                                         |  |                   | (4,861  | ) |              |   | (4,969  | )
|Unearned compensation                                                                                                                                                                        |  |                   | (2,046  | ) |              |   | (2,182  | )
|Accumulated other comprehensive income                                                                                                                                                       |  |                   | (105    | ) |              |   | (246    | )
|Retained earnings                                                                                                                                                                            |  |                   | 35,132  |   |              |   | 35,082  |  
|Treasury stock, at cost; 2,051,420 shares at September 30, 2007 and 2,034,789 shares at June 30, 2007                                                                                        |  |                   | (27,059 | ) |              |   | (26,863 | )
|                                                                                                                                                                                             |  |                   |         |   |              |   |         |  
|Total stockholders equity                                                                                                                                                                   |  |                   | 73,965  |   |              |   | 73,644  |  
|                                                                                                                                                                                             |  |                   |         |   |              |   |         |  
|Total liabilities and stockholders equity                                                                                                                                                   |  | $                 | 335,457 |   |              | $ | 339,703 |  
|                                                                                                                                                                                             |  |                   |         |   |              |   |         |  

See accompanying notes to financial statements.



3



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##### Table of Contents

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Earnings (Unaudited)

(Dollars in Thousands, Except Net Earnings Per Share)



|                                                    |  |                                 |       |      |   |      
|--------------------------------------------------- |  | ------------------------------- | ----- | ---- | - | -----
|                                                    |  | Three Months EndedSeptember 30,
|                                                    |  | 2007                            |       | 2006
|Interest income:                                    |  |                                 |       |      |   |      
|Interest on loans receivable                        |  | $                               | 5,047 |      | $ | 4,734
|Interest on investment securities                   |  |                                 | 273   |      |   | 313  
|Other interest                                      |  |                                 | 91    |      |   | 87   
|                                                    |  |                                 |       |      |   |      
|Total interest income                               |  |                                 | 5,411 |      |   | 5,134
|                                                    |  |                                 |       |      |   |      
|Interest expense:                                   |  |                                 |       |      |   |      
|Deposits                                            |  |                                 | 2,069 |      |   | 1,735
|Advances from FHLB                                  |  |                                 | 441   |      |   | 650  
|                                                    |  |                                 |       |      |   |      
|Total interest expense                              |  |                                 | 2,510 |      |   | 2,385
|                                                    |  |                                 |       |      |   |      
|                                                    |  |                                
|Net interest income                                 |  |                                 | 2,901 |      |   | 2,749
|Provision for loan losses                           |  |                                 | 68    |      |   |     
|                                                    |  |                                 |       |      |   |      
|Net interest income after provision for loan losses |  |                                 | 2,833 |      |   | 2,749
|                                                    |  |                                 |       |      |   |      
|Noninterest income:                                 |  |                                 |       |      |   |      
|Dividends from investments                          |  |                                 | 8     |      |   | 30   
|Mortgage origination fee income                     |  |                                 | 125   |      |   | 150  
|Service charges and fees                            |  |                                 | 154   |      |   | 123  
|Gain on sale of investment securities, net          |  |                                 |      |      |   | 1    
|Gain on sale of foreclosed real estate, net         |  |                                 | 46    |      |   | 13   
|BOLI increase in cash value                         |  |                                 | 55    |      |   | 52   
|Other                                               |  |                                 | 24    |      |   | 18   
|                                                    |  |                                 |       |      |   |      
|Total noninterest income                            |  |                                 | 412   |      |   | 387  
|                                                    |  |                                 |       |      |   |      
|Noninterest expense:                                |  |                                 |       |      |   |      
|Compensation and benefits                           |  |                                 | 1,444 |      |   | 1,543
|Occupancy expense                                   |  |                                 | 171   |      |   | 157  
|Equipment and data processing expense               |  |                                 | 359   |      |   | 344  
|DIF premiums                                        |  |                                 | 6     |      |   | 6    
|Advertising                                         |  |                                 | 95    |      |   | 169  
|Other                                               |  |                                 | 494   |      |   | 447  
|                                                    |  |                                 |       |      |   |      
|Total noninterest expense                           |  |                                 | 2,569 |      |   | 2,666
|                                                    |  |                                 |       |      |   |      
|Earnings before income taxes                        |  |                                 | 676   |      |   | 470  
|                                                    |  |                                 |       |      |   |      
|Income taxes:                                       |  |                                 |       |      |   |      
|Current                                             |  |                                 | 234   |      |   | 168  
|Deferred                                            |  |                                 | 8     |      |   | 12   
|                                                    |  |                                 |       |      |   |      
|Total income taxes                                  |  |                                 | 242   |      |   | 180  
|                                                    |  |                                 |       |      |   |      
|Net earnings                                        |  | $                               | 434   |      | $ | 290  
|                                                    |  |                                 |       |      |   |      
|Net earnings per share, basic                       |  | $                               | 0.07  |      | $ | 0.05 
|                                                    |  |                                 |       |      |   |      
|Net earnings per share, diluted                     |  | $                               | 0.07  |      | $ | 0.05 
|                                                    |  |                                 |       |      |   |      

See accompanying notes to financial statements.



4



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##### Table of Contents

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders Equity

Three Months Ended September 30, 2007 and 2006 (Unaudited)

(Dollars in Thousands)



|                                                                                           |  |             |    |                          |   |                               |  |   |                      |   |  |                                     |        |   |                  |   |      |               |  |   |                          |   |  |   |         |   |  |   |        |  
|------------------------------------------------------------------------------------------ |  | ----------- | -- | ------------------------ | - | ----------------------------- |  | - | -------------------- | - |  | ----------------------------------- | ------ | - | ---------------- | - | ---- | ------------- |  | - | ------------------------ | - |  | - | ------- | - |  | - | ------ | -
|                                                                                           |  | CommonStock |    | AdditionalPaid-inCapital |   | UnallocatedCommonStock inESOP |  |   | UnearnedCompensation |   |  | AccumulatedOtherComprehensiveIncome |        |   | RetainedEarnings |   |      | TreasuryStock |  |   | TotalStockholdersEquity |  
|Balance at June 30, 2007                                                                   |  | $           | 84 |                          | $ | 72,738                        |  | $ | (4,969               | ) |  | $                                   | (2,182 | ) |                  | $ | (246 | )             |  | $ | 35,082                   |   |  | $ | (26,863 | ) |  | $ | 73,644 |  
|                                                                                           |  |             |    |                          |   |                               |  |   |                      |   |  |                                     |        |   |                  |   |      |               |  |   |                          |   |  |   |         |   |  |   |        |  
|Comprehensive income:                                                                      |  |             |    |                          |   |                               |  |   |                      |   |  |                                     |        |   |                  |   |      |               |  |   |                          |   |  |   |         |   |  |   |        |  
|Net earnings                                                                               |  |             |   |                          |   |                              |  |   |                     |   |  |                                     |       |   |                  |   |     |               |  |   | 434                      |   |  |   |        |   |  |   | 434    |  
|Change in net unrealized gain (loss) on securities available for sale, net of taxes of $88 |  |             |   |                          |   |                              |  |   |                     |   |  |                                     |       |   |                  |   | 141  |               |  |   |                         |   |  |   |        |   |  |   | 141    |  
|                                                                                           |  |             |    |                          |   |                               |  |   |                      |   |  |                                     |        |   |                  |   |      |               |  |   |                          |   |  |   |         |   |  |   |        |  
|Total comprehensive income                                                                 |  |             |   |                          |   |                              |  |   |                     |   |  |                                     |       |   |                  |   |     |               |  |   |                         |   |  |   |        |   |  |   | 575    |  
|Dividends                                                                                  |  |             |   |                          |   |                              |  |   |                     |   |  |                                     |       |   |                  |   |     |               |  |   | (384                     | ) |  |   |        |   |  |   | (384   | )
|Shares committed to be released by the ESOP                                                |  |             |   |                          |   | 16                            |  |   | 108                  |   |  |                                     |       |   |                  |   |     |               |  |   |                         |   |  |   |        |   |  |   | 124    |  
|Stock options expensed                                                                     |  |             |   |                          |   | 66                            |  |   |                     |   |  |                                     |       |   |                  |   |     |               |  |   |                         |   |  |   |        |   |  |   | 66     |  
|Earned portion of stock grants                                                             |  |             |   |                          |   |                              |  |   |                     |   |  |                                     | 136    |   |                  |   |     |               |  |   |                         |   |  |   |        |   |  |   | 136    |  
|Purchase of common stock (16,631 shares)                                                   |  |             |   |                          |   |                              |  |   |                     |   |  |                                     |       |   |                  |   |     |               |  |   |                         |   |  |   | (196    | ) |  |   | (196   | )
|                                                                                           |  |             |    |                          |   |                               |  |   |                      |   |  |                                     |        |   |                  |   |      |               |  |   |                          |   |  |   |         |   |  |   |        |  
|Balance at September 30, 2007                                                              |  | $           | 84 |                          | $ | 72,820                        |  | $ | (4,861               | ) |  | $                                   | (2,046 | ) |                  | $ | (105 | )             |  | $ | 35,132                   |   |  | $ | (27,059 | ) |  | $ | 73,965 |  
|                                                                                           |  |             |    |                          |   |                               |  |   |                      |   |  |                                     |        |   |                  |   |      |               |  |   |                          |   |  |   |         |   |  |   |        |  



|                                                                                            |  |             |    |                          |   |                               |  |   |                      |   |  |                                     |        |   |                  |   |      |               |  |   |                          |   |  |   |         |   |  |   |        |  
|------------------------------------------------------------------------------------------- |  | ----------- | -- | ------------------------ | - | ----------------------------- |  | - | -------------------- | - |  | ----------------------------------- | ------ | - | ---------------- | - | ---- | ------------- |  | - | ------------------------ | - |  | - | ------- | - |  | - | ------ | -
|                                                                                            |  | CommonStock |    | AdditionalPaid-inCapital |   | UnallocatedCommonStock inESOP |  |   | UnearnedCompensation |   |  | AccumulatedOtherComprehensiveIncome |        |   | RetainedEarnings |   |      | TreasuryStock |  |   | TotalStockholdersEquity |  
|Balance at June 30, 2006                                                                    |  | $           | 84 |                          | $ | 72,171                        |  | $ | (5,401               | ) |  | $                                   | (2,733 | ) |                  | $ | (609 | )             |  | $ | 34,780                   |   |  | $ | (23,749 | ) |  | $ | 74,543 |  
|                                                                                            |  |             |    |                          |   |                               |  |   |                      |   |  |                                     |        |   |                  |   |      |               |  |   |                          |   |  |   |         |   |  |   |        |  
|Comprehensive income:                                                                       |  |             |    |                          |   |                               |  |   |                      |   |  |                                     |        |   |                  |   |      |               |  |   |                          |   |  |   |         |   |  |   |        |  
|Net earnings                                                                                |  |             |   |                          |   |                              |  |   |                     |   |  |                                     |       |   |                  |   |     |               |  |   | 290                      |   |  |   |        |   |  |   | 290    |  
|Change in net unrealized gain (loss) on securities available for sale, net of taxes of $164 |  |             |   |                          |   |                              |  |   |                     |   |  |                                     |       |   |                  |   | 265  |               |  |   |                         |   |  |   |        |   |  |   | 265    |  
|                                                                                            |  |             |    |                          |   |                               |  |   |                      |   |  |                                     |        |   |                  |   |      |               |  |   |                          |   |  |   |         |   |  |   |        |  
|Total comprehensive income                                                                  |  |             |   |                          |   |                              |  |   |                     |   |  |                                     |       |   |                  |   |     |               |  |   |                         |   |  |   |        |   |  |   | 555    |  
|Dividends                                                                                   |  |             |   |                          |   |                              |  |   |                     |   |  |                                     |       |   |                  |   |     |               |  |   | (396                     | ) |  |   |        |   |  |   | (396   | )
|Shares committed to be released by the employee stock ownership plan                        |  |             |   |                          |   | 34                            |  |   | 108                  |   |  |                                     |       |   |                  |   |     |               |  |   |                         |   |  |   |        |   |  |   | 142    |  
|Stock options expensed                                                                      |  |             |   |                          |   | 66                            |  |   |                     |   |  |                                     |       |   |                  |   |     |               |  |   |                         |   |  |   |        |   |  |   | 66     |  
|Earned portion of stock grants                                                              |  |             |   |                          |   |                              |  |   |                     |   |  |                                     | 139    |   |                  |   |     |               |  |   |                         |   |  |   |        |   |  |   | 139    |  
|Exercise of options                                                                         |  |             |   |                          |   | 26                            |  |   |                     |   |  |                                     |       |   |                  |   |     |               |  |   |                         |   |  |   |        |   |  |   | 26     |  
|Purchase of common stock (47,351 shares)                                                    |  |             |   |                          |   |                              |  |   |                     |   |  |                                     |       |   |                  |   |     |               |  |   |                         |   |  |   | (633    | ) |  |   | (633   | )
|                                                                                            |  |             |    |                          |   |                               |  |   |                      |   |  |                                     |        |   |                  |   |      |               |  |   |                          |   |  |   |         |   |  |   |        |  
|Balance at September 30, 2006                                                               |  | $           | 84 |                          | $ | 72,297                        |  | $ | (5,293               | ) |  | $                                   | (2,594 | ) |                  | $ | (344 | )             |  | $ | 34,674                   |   |  | $ | (24,382 | ) |  | $ | 74,442 |  
|                                                                                            |  |             |    |                          |   |                               |  |   |                      |   |  |                                     |        |   |                  |   |      |               |  |   |                          |   |  |   |         |   |  |   |        |  

See accompanying notes to financial statements.



5



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##### Table of Contents

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)



|                                                                                               |  |                                 |         |   |      |   |         |  
|---------------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                               |  | Three Months EndedSeptember 30, |        
|                                                                                               |  | 2007                            |         |   | 2006 |  
|Cash flows from operating activities:                                                          |  |                                 |         |   |      |   |         |  
|Net earnings                                                                                   |  | $                               | 434     |   |      | $ | 290     |  
|Adjustments to reconcile net earnings to net cash provided by (used for) operating activities: |  |                                 |         |   |      |   |         |  
|Allocated ESOP shares                                                                          |  |                                 | 124     |   |      |   | 142     |  
|Depreciation and amortization expense                                                          |  |                                 | 164     |   |      |   | 127     |  
|Amortization of premiums (discounts), net on investment securities                             |  |                                 | 4       |   |      |   | 3       |  
|Provision for loan losses                                                                      |  |                                 | 68      |   |      |   |        |  
|(Gain) on sale of investment securities and mortgage-backed securities, net                    |  |                                 |        |   |      |   | (1      | )
|FHLB stock dividends                                                                           |  |                                 |        |   |      |   | (25     | )
|Amortization of deferred loan fees, net                                                        |  |                                 | (58     | ) |      |   | (23     | )
|(Gain) on sale of foreclosed real estate, net                                                  |  |                                 | (46     | ) |      |   | (13     | )
|Deferred tax benefit                                                                           |  |                                 | 8       |   |      |   | 12      |  
|Originations of mortgage loans held for sale                                                   |  |                                 | (8,586  | ) |      |   | (19,659 | )
|Proceeds from sale of mortgage loans                                                           |  |                                 | 10,496  |   |      |   | 18,925  |  
|Increase in cash value of life insurance                                                       |  |                                 | (55     | ) |      |   | (52     | )
|Earned portion of MRP                                                                          |  |                                 | 136     |   |      |   | 139     |  
|Stock options expensed                                                                         |  |                                 | 66      |   |      |   | 66      |  
|Decrease (increase) in:                                                                        |  |                                 |         |   |      |   |         |  
|Accrued interest receivable                                                                    |  |                                 | 71      |   |      |   | 6       |  
|Other assets                                                                                   |  |                                 | 41      |   |      |   | 3,837   |  
|Increase (decrease) in other liabilities and accrued income taxes                              |  |                                 | 98      |   |      |   | (259    | )
|                                                                                               |  |                                 |         |   |      |   |         |  
|Net cash provided by (used for) operating activities                                           |  |                                 | 2,965   |   |      |   | 3,515   |  
|                                                                                               |  |                                 |         |   |      |   |         |  
|                                                                                               |  |                                
|Cash flows used for investing activities:                                                      |  |                                 |         |   |      |   |         |  
|Loan originations, net of principal collections                                                |  |                                 | 2,543   |   |      |   | (10,860 | )
|Investment securities classified as available for sale:                                        |  |                                 |         |   |      |   |         |  
|Purchased                                                                                      |  |                                 |        |   |      |   |        |  
|Proceeds from sale                                                                             |  |                                 |        |   |      |   |        |  
|Proceeds from maturities, calls and prepayments                                                |  |                                 | 2,000   |   |      |   | 1,000   |  
|Return of principal on mortgage-backed securities                                              |  |                                 |        |   |      |   |        |  
|Purchase of premises and equipment                                                             |  |                                 | (54     | ) |      |   | (469    | )
|Proceeds from sale of (additions to) foreclosed real estate, net                               |  |                                 | 196     |   |      |   |        |  
|                                                                                               |  |                                 |         |   |      |   |         |  
|Net cash provided by (used for) investing activities                                           |  |                                 | 4,685   |   |      |   | (10,329 | )
|                                                                                               |  |                                 |         |   |      |   |         |  
|                                                                                               |  |                                
|Cash flows from financing activities:                                                          |  |                                 |         |   |      |   |         |  
|Net increase (decrease) in deposits                                                            |  |                                 | 9,136   |   |      |   | 9,287   |  
|Proceeds from advances from FHLB                                                               |  |                                 | 6,500   |   |      |   | 25,400  |  
|Repayment of FHLB advances                                                                     |  |                                 | (20,300 | ) |      |   | (29,900 | )
|Purchase of treasury stock                                                                     |  |                                 | (196    | ) |      |   | (633    | )
|Dividends paid                                                                                 |  |                                 | (385    | ) |      |   | (562    | )
|Proceeds from exercise of stock options                                                        |  |                                 |        |   |      |   | 26      |  
|                                                                                               |  |                                 |         |   |      |   |         |  
|Net cash provided by (used for) financing activities                                           |  |                                 | (5,245  | ) |      |   | 3,618   |  
|                                                                                               |  |                                 |         |   |      |   |         |  
|Net increase (decrease) in cash, cash equivalents and interest-earning deposits                |  |                                 | 2,405   |   |      |   | (3,196  | )
|Cash, cash equivalents and interest-earning deposits at beginning of period                    |  |                                 | 7,734   |   |      |   | 11,956  |  
|                                                                                               |  |                                 |         |   |      |   |         |  
|Cash, cash equivalents and interest-earning deposits at end of period                          |  | $                               | 10,139  |   |      | $ | 8,760   |  
|                                                                                               |  |                                 |         |   |      |   |         |  
|                                                                                               |  |                                
|Supplemental disclosures of cash flow information:                                             |  |                                 |         |   |      |   |         |  
|Cash paid during period for:                                                                   |  |                                 |         |   |      |   |         |  
|Interest on deposits                                                                           |  | $                               | 2,069   |   |      | $ | 1,735   |  
|Interest on FHLB advances                                                                      |  |                                 | 441     |   |      |   | 650     |  
|Income taxes                                                                                   |  |                                 | 85      |   |      |   | 75      |  
|Real estate acquired in settlement of loans                                                    |  |                                 |        |   |      |   |        |  

See accompanying notes to financial statements.



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Notes To Consolidated Financial Statements



|(1) | Basis of Presentation
|--- | ---------------------

The accompanying
unaudited consolidated financial statements include the accounts of Jefferson Bancshares, Inc. (the Company or Jefferson Bancshares) and its wholly-owned subsidiary, Jefferson Federal Bank (the Bank or
Jefferson Federal). The unaudited financial statements of the Company were prepared with generally accepted accounting principles and with instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete
presentation of financial condition, results of operations and cash flows. In the opinion of management, the accompanying unaudited financial statements contain all adjustments, which are normal and recurring in nature, necessary for a fair
presentation of the interim financial statements. The results of operations for the period ended September 30, 2007 are not necessarily indicative of the results which may be expected for the entire fiscal year. These unaudited consolidated
financial statements should be read in conjunction with the Companys Annual Report on Form 10-K for the year ended June 30, 2007. All dollar amounts, other than per-share amounts, are in thousands unless otherwise noted.



|(2) | Principles of Consolidation
|--- | ---------------------------

The
consolidated financial statements include the accounts of Jefferson Bancshares, Inc. and its wholly-owned subsidiary, Jefferson Federal Bank. All significant intercompany balances and transactions have been eliminated in consolidation.



|(3) | Use of Estimates
|--- | ----------------

In preparing the
consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the statement of condition dates and revenues and expenses for the periods shown. Actual
results could differ from the estimates and assumptions used in the consolidated financial statements. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan
losses, the valuation of foreclosed real estate and deferred tax assets.



|(4) | Limitation on Capital Distributions
|--- | -----------------------------------

Office
of Thrift Supervision regulations impose limitations upon all capital distributions by a savings institution, including cash dividends, payments to repurchase its shares and payments to shareholders of another institution in a cash-out merger. Under
the regulations, an application to and the prior approval of the Office of Thrift Supervision is required prior to any capital distribution if the institution does not meet the criteria for expedited treatment of applications under
Office of Thrift Supervision regulations (i.e., generally, examination ratings in the top two categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the
preceding two years, the institution would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with, or condition imposed by, the Office of Thrift Supervision. If an
application is not required, the institution must still provide prior notice to the Office of Thrift Supervision of the capital distribution if, like Jefferson Federal, it is a subsidiary



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of a holding company. In addition, the Office of Thrift Supervision could prohibit a proposed capital distribution by any institution, which would otherwise
be permitted by the regulation, if the Office of Thrift Supervision determined that such distribution would constitute an unsafe or unsound practice. In the event Jefferson Federals capital falls below its regulatory requirements or the Office
of Thrift Supervision notifies it that it is in need of more than normal supervision, Jefferson Federals ability to make capital distributions could be restricted. Jefferson Federal also may not make a capital distribution if the distribution
would reduce its regulatory capital below the amount needed for the liquidation account established in connection with its conversion from the mutual holding company form of organization.



|(5) | Earnings Per Common Share
|--- | -------------------------

Earnings per
common share and earnings per common share-assuming dilution have been computed on the basis of dividing net earnings by the weighted-average number of shares of common stock outstanding, exclusive of unallocated ESOP shares. Diluted earnings per
common share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate to outstanding stock options and are determined
using the treasury stock method. For the period ended September 30, 2007, stock options to purchase 401,778 shares were not included in the computation of diluted net income per share as their effect would have been anti-dilutive. The following
table illustrates the number of weighted-average shares of common stock used in each corresponding earnings per common share calculation:



|                                                                                                                                            |  |                                                                            |  |          
|------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------- |  | ---------
|                                                                                                                                            |  | Weighted-Average SharesOutstanding for the
Three Months EndedSeptember 30,
|                                                                                                                                            |  | 2007                                                                       |  | 2006     
|Weighted average number of common shares used in computing basic earnings per common share                                                  |  | 5,879,990                                                                  |  | 6,041,551
|Effect of dilutive stock options                                                                                                            |  |                                                                           |  | 7,915    
|                                                                                                                                            |  |                                                                            |  |          
|Weighted average number of common shares and dilutive potential common shares used in computing earnings per common share assuming dilution |  | 5,879,990                                                                  |  | 6,049,466
|                                                                                                                                            |  |                                                                            |  |          



|(6) | Statements of Cash Flows
|--- | ------------------------

Dividends declared
but not paid have been recorded in other liabilities; however, their non-effect on cash and operations dictates their exclusion from the cash flows until actually paid.



|(7) | Accounting by Creditors for Impairment of a Loan
|--- | ------------------------------------------------

Impairment of loans is recognized in conformity with the Financial Accounting Standards Board (FASB) Statement No. 118. There was no impairment of loans or allowance for



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loan losses related to impaired loans at September 30, 2007. Other nonaccrual loans at September 30, 2007 were approximately $1.3 million. For the
three months ended September 30, 2007, gross income which would have been recognized had nonaccrual loans been current in accordance with their original terms amounted to approximately $29,000. No interest was collected during the three months
ended September 30, 2007 on nonaccrual loans.

The following table summarizes the activity in the allowance for loan losses for the
three months ended September 30, 2007:



|                              |  |                                                 |   |  |   |       |  
|----------------------------- |  | ----------------------------------------------- | - |  | - | ----- | -
|                              |  | Allowance for Loan Losses(Dollars in thousands) |  
|Balance at June 30, 2007      |  |                                                 |   |  | $ | 1,955 |  
|Provision for loan losses     |  |                                                 |   |  |   | 68    |  
|Charge-offs                   |  | (78                                             | ) |  |   |       |  
|Recoveries                    |  | 10                                              |   |  |   |       |  
|                              |  |                                                 |   |  |   |       |  
|Net (charge-offs)/recoveries  |  |                                                 |   |  |   | (68   | )
|                              |  |                                                 |   |  |   |       |  
|Balance at September 30, 2007 |  |                                                 |   |  | $ | 1,955 |  
|                              |  |                                                 |   |  |   |       |  



|(8) | Financial Instruments With Off-Balance Sheet Risk
|--- | -------------------------------------------------

Jefferson Bancshares is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments generally include commitments to originate
mortgage loans. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Companys maximum exposure to credit loss in the event of nonperformance by
the borrower is represented by the contractual amount and related accrued interest receivable of those instruments. The Company minimizes this risk by evaluating each borrowers creditworthiness on a case-by-case basis. Collateral held by the
Company consists of a first or second mortgage on the borrowers property. The amount of collateral obtained is based upon an appraisal of the property.

At September 30, 2007, we had approximately $13.3 million in loan commitments, consisting of commitments to originate real estate loans. In addition to commitments to originate loans, we had $22.9 million of
loans-in-process, $6.2 million in unused standby letters of credit and approximately $10.9 million in unused lines of credit.



|(9) | Dividend Declaration
|--- | --------------------

On August 30,
2007, the Board of Directors of the Company approved a quarterly dividend of $0.06 per share to stockholders of record as of September 30, 2007 and payable on October 12, 2007.



|(10) | Stock Incentive Plans
|---- | ---------------------

The Companys
2004 Stock Incentive Plan authorizes the granting of 698,750 options and 279,500 restricted stock awards to employees and non-employee directors. As of



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September 30, 2007, there were 401,778 options and 201,911 restricted stock awards granted under this plan which will vest pro-rata over a five-year
period. The 2004 Plan has an expiration date of January 30, 2014.

The table below summarizes the status of the Companys stock
option plans as of September 30, 2007.



|                                          |  |                                      |  |                                |      
|----------------------------------------- |  | ------------------------------------ |  | ------------------------------ | -----
|                                          |  | Three Months EndedSeptember 30, 2007
|                                          |  | Shares                               |  | Weighted-averageexercise price
|Outstanding at beginning of period        |  | 401,778                              |  | $                              | 13.69
|Granted during the three-month period     |  |                                     |  |                                |     
|Options exercised                         |  |                                     |  |                                |     
|Outstanding at September 30, 2007         |  | 401,778                              |  | $                              | 13.69
|                                          |  |                                     
|Options exercisable at September 30, 2007 |  | 241,083                              |  | $                              | 13.69

The following information applies to options outstanding at September 30, 2007:



|                                                |  |   |        
|----------------------------------------------- |  | - | -------
|Number outstanding                              |  |   | 401,778
|Range of exercise prices                        |  | $ | 13.69  
|Weighted-average exercise price                 |  | $ | 13.69  
|Weighted-average remaining contractual life     |  |   | 6.33   
|Number of options remaining for future issuance |  |   | 296,972

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 123R, Share Based Payment (SFAS 123R), an amendment of FASB Statement No. 123 (SFAS 123), Accounting for Stock-Based Compensation. SFAS 123R eliminates the
ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25 (APB 25) and requires a public entity to measure the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. This statement is effective for public entities that do not file as small business issuers as of the beginning of the first interim or annual reporting period that begins after
June 15, 2005.

Effective July 1, 2005, the Company adopted SFAS 123R using the modified prospective application transition
method. This requires the Company to expense the unvested portion of options granted in 2004, which reduces net earnings by approximately $217,000 in fiscal year 2008 and $109,000 during the remaining service period. SFAS 123R provides for the use
of alternative models to determine compensation cost related to stock option grants. The estimated fair value of stock options at grant date has been determined using the Black-Scholes option-pricing model based on market data as of January 29,
2004. The expected dividend yield of 1.17% and expected volatility of 7.01% were used to model the value. The risk free rate of return equaled 4.22%, which was based on the yield of a U.S. Treasury note with a term of ten years. The estimated time
remaining before the expiration of the options equaled ten years.



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|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

Managements discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of Jefferson Bancshares. The
information contained in this section should be read in conjunction with the financial statements and accompanying notes. For further information, refer to the financial statements and footnotes included in the Companys Annual Report on Form
10-K for the year ended June 30, 2007.

General

Jefferson Bancshares, Inc. (also referred to as the Company or Jefferson Bancshares) is the holding company for Jefferson Federal Bank (the Bank or Jefferson Federal).

The Company has no significant assets, other than all of the outstanding shares of the Bank, and no significant liabilities. Management of the Company and the Bank are
substantially similar and the Company neither owns nor leases any property, but instead uses the premises, equipment and furniture of the Bank. Accordingly, the information set forth in this report, including the consolidated financial statements
and related financial data, relates primarily to the Bank.

Jefferson Federal is a community oriented financial institution offering traditional financial
services to its local communities. The Bank is engaged primarily in the business of attracting deposits from the general public and using such funds to originate loans secured by first mortgages on owner-occupied, one-to four- family residential
properties, as well as originate commercial real estate and multi-family mortgage loans, construction loans, consumer loans, commercial non-real estate loans and make other investments permitted by applicable laws and regulations.

The Banks savings accounts are insured up to the applicable legal limits by the Federal Deposit Insurance Corporation (FDIC) through the Deposit
Insurance Fund. Jefferson Federal Bank is a member of the Federal Home Loan Bank (FHLB) System.

Private Securities Litigation Reform Act
Safe Harbor Statement

This Quarterly Report may contain forward-looking statements within the meaning of the federal securities laws. These
statements are not historical facts; but rather, are statements based on Jefferson Bancshares current expectations regarding its business strategies and their intended results and its future performance. Forward-looking statements are preceded
by terms such as expects, believes, anticipates, intends and similar expressions.



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Managements ability to predict results or the effect of future plans or strategies is inherently uncertain. These
factors include, but are not limited to, general economic conditions, changes in the interest rate environment, legislative or regulatory changes that may adversely affect our business, changes in accounting policies and practices, changes in
competition and demand for financial services, adverse changes in the securities markets and changes in the quality or composition of the Companys loan or investment portfolios. Additional factors that may affect our results are discussed in
our Annual Report on Form 10-K for the year ended June 30, 2007 under Item 1A. Risk Factors. These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements.
Jefferson Bancshares assumes no obligation to update any forward-looking statements.

Results of Operations for the Three months Ended
September 30, 2007 and 2006

Net Income

Net income was $434,000, or $0.07 per diluted share, for the three months ended September 30, 2007, an increase of 49.7% over net income of $290,000, or $0.05 per diluted share, for the three months ended September 30, 2006. The
increase in net income for the three-month period ended September 30, 2007 was the result of an increase in net interest income and noninterest income combined with a decrease in noninterest expense.



|                                      |  |                                              |      |   |      |   |      |  
|------------------------------------- |  | -------------------------------------------- | ---- | - | ---- | - | ---- | -
|                                      |  | Three Months EndedSeptember 30,              |     
|                                      |  | 2007                                         |      |   | 2006 |  
|                                      |  | (Dollars in thousands,except per share data) |     
|Net earnings                          |  | $                                            | 434  |   |      | $ | 290  |  
|Net earnings per share, basic         |  | $                                            | 0.07 |   |      | $ | 0.05 |  
|Net earnings per share, diluted       |  | $                                            | 0.07 |   |      | $ | 0.05 |  
|Return on average assets (annualized) |  |                                              | 0.52 | % |      |   | 0.35 | %
|Return on average equity (annualized) |  |                                              | 2.35 | % |      |   | 1.55 | %

Net Interest Income

Net interest income before loan loss provision increased $152,000, or 5.5%, to $2.9 million for the three months ended September 30, 2007 from the corresponding period in 2006. The interest rate spread and net
interest margin for the three months ended September 30, 2007 were 2.91% and 3.72%, respectively, compared to 2.84% and 3.62% for the same period in 2006.

The following table summarizes changes in interest income and expense for the three-month periods ended September 30, 2007 and 2006:



|                          |  |                                 |       |      |   |          |  |   |          |   |  |       |   
|------------------------- |  | ------------------------------- | ----- | ---- | - | -------- |  | - | -------- | - |  | ----- | --
|                          |  | Three Months EndedSeptember 30, |       |      |   |          |  |  
|                          |  | 2007                            |       | 2006 |   | $ Change |  |   | % Change |  
|                          |  | (Dollars in thousands)          |       |      |   |          |  |  
|Interest income:          |  |                                 |       |      |   |          |  |   |          |   |  |       |   
|Loans                     |  | $                               | 5,047 |      | $ | 4,734    |  | $ | 313      |   |  | 6.6   | % 
|Investment securities     |  |                                 | 273   |      |   | 313      |  |   | (40      | ) |  | (12.8 | )%
|Interest-earning deposits |  |                                 | 62    |      |   | 62       |  |   |         |   |  | 0.0   | % 
|FHLB stock                |  |                                 | 29    |      |   | 25       |  |   | 4        |   |  | 16.0  | % 
|                          |  |                                 |       |      |   |          |  |   |          |   |  |       |   
|Total interest income     |  |                                 | 5,411 |      |   | 5,134    |  |   | 277      |   |  | 5.4   | % 
|Interest expense:         |  |                                 |       |      |   |          |  |   |          |   |  |       |   
|Deposits                  |  |                                 | 2,069 |      |   | 1,735    |  |   | 334      |   |  | 19.3  | % 
|Borrowings                |  |                                 | 441   |      |   | 650      |  |   | (209     | ) |  | (32.2 | )%
|                          |  |                                 |       |      |   |          |  |   |          |   |  |       |   
|Total interest expense    |  |                                 | 2,510 |      |   | 2,385    |  |   | 125      |   |  | 5.2   | % 
|                          |  |                                 |       |      |   |          |  |   |          |   |  |       |   
|Net interest income       |  | $                               | 2,901 |      | $ | 2,749    |  | $ | 152      |   |  | 5.5   | % 
|                          |  |                                 |       |      |   |          |  |   |          |   |  |       |   



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##### Table of Contents

The following table summarizes average balances and average yields and costs:



|                          |  |                                  |         |            |      |   |                |   |            |  |      |  
|------------------------- |  | -------------------------------- | ------- | ---------- | ---- | - | -------------- | - | ---------- |  | ---- | -
|                          |  | Three Months Ended September 30, |        
|                          |  | 2007                             |         |            | 2006 |  
|                          |  | AverageBalance                   |         | Yield/Cost |      |   | AverageBalance |   | Yield/Cost | 
|                          |  | (Dollars in thousands)           |        
|Loans                     |  | $                                | 275,138 |            | 7.28 | % |                | $ | 261,635    |  | 7.18 | %
|Investment securities     |  |                                  | 26,323  |            | 4.15 | % |                |   | 31,655     |  | 3.96 | %
|Interest-earning deposits |  |                                  | 6,317   |            | 3.89 | % |                |   | 6,208      |  | 3.96 | %
|FHLB stock                |  |                                  | 1,796   |            | 6.41 | % |                |   | 1,755      |  | 5.65 | %
|Deposits                  |  |                                  | 212,589 |            | 3.86 | % |                |   | 191,556    |  | 3.59 | %
|Borrowings                |  |                                  | 35,118  |            | 4.98 | % |                |   | 49,683     |  | 5.19 | %

The following table sets forth the effects of changing rates and volumes on our net interest income. The rate
column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the
sum of the prior columns. For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume.



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|                                                                  |  |                                    |      |   |      |   |     |     |  |   |      |  
|----------------------------------------------------------------- |  | ---------------------------------- | ---- | - | ---- | - | --- | --- |  | - | ---- | -
|                                                                  |  | Three Months 2007 Compared to 2006 |     
|                                                                  |  | Increase(Decrease) DueTo           |      |   |      |  
|                                                                  |  | Volume                             |      |   | Rate |   |     | Net | 
|                                                                  |  | (In thousands)                     |     
|Interest income:                                                  |  |                                    |      |   |      |   |     |     |  |   |      |  
|Loans receivable                                                  |  | $                                  | 245  |   |      | $ | 68  |     |  | $ | 313  |  
|Investment securities                                             |  |                                    | (52  | ) |      |   | 13  |     |  |   | (39  | )
|Municipals                                                        |  |                                    | (1   | ) |      |   |    |     |  |   | (1   | )
|Daily interest-earning deposits and other interest-earning assets |  |                                    | 2    |   |      |   | 2   |     |  |   | 4    |  
|                                                                  |  |                                    |      |   |      |   |     |     |  |   |      |  
|Total interest-earning assets                                     |  |                                    | 194  |   |      |   | 83  |     |  |   | 277  |  
|                                                                  |  |                                    |      |   |      |   |     |     |  |   |      |  
|Interest expense:                                                 |  |                                    |      |   |      |   |     |     |  |   |      |  
|Deposits                                                          |  |                                    | 196  |   |      |   | 138 |     |  |   | 334  |  
|Borrowings                                                        |  |                                    | (190 | ) |      |   | (19 | )   |  |   | (209 | )
|                                                                  |  |                                    |      |   |      |   |     |     |  |   |      |  
|Total interest-bearing liabilities                                |  |                                    | 6    |   |      |   | 119 |     |  |   | 125  |  
|                                                                  |  |                                    |      |   |      |   |     |     |  |   |      |  
|Net change in interest income                                     |  | $                                  | 188  |   |      | $ | (36 | )   |  | $ | 152  |  
|                                                                  |  |                                    |      |   |      |   |     |     |  |   |      |  

Total interest income increased $277,000, or 5.4%, to $5.4 million for the three months ended September 30,
2007 as a result of an increase in the volume of interest-earning assets and a higher average yield. The average balance of interest-earning assets increased $8.3 million, to $309.6 million for the three months ended September 30, 2007 compared
to the same period in 2006 due to growth in the loan portfolio. The average yield on interest-earning assets increased 17 basis points to 6.93% primarily as the result of higher yields in the loan and investment portfolio.

Interest on loans increased $313,000, or 6.6%, to $5.0 million for the three months ended September 30, 2007. The average balance of loans increased $13.5 million,
or 5.2%, to $275.1 million for the three months ended September 30, 2007 primarily due to growth in the commercial loan portfolio. The average yield on loans increased 10 basis points, to 7.28%, for the three months ended September 30,
2007 compared to the corresponding period in 2006.

Interest on investment securities decreased $40,000, or 12.8%, to $273,000 for the three months ended
September 30, 2007. The average balance of investment securities decreased $5.3 million, to $26.3 million at September 30, 2007 as a result of sales, calls and maturities of securities. The average yield on investments increased 19 basis
points to 4.15% for the three months ended September 30, 2007 compared to the same period in 2006.

Total interest expense increased $125,000, or
5.2%, to $2.5 million for the three-month period ended September 30, 2007 primarily due to growth in interest-bearing deposits combined with higher average rates paid on deposits, partially offset by a lower volume and lower rate paid on FHLB
borrowings. The average rate paid on interest-bearing liabilities increased 10 basis points to 4.02%, while the average volume of interest-bearing liabilities increased $6.5 million, to $247.7 million for the three months ended September 30,
2007, compared to the same period in 2006.



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Interest expense on deposits increased $334,000, or 19.3%, to $2.1 million for the three-month period ended
September 30, 2007. The average balance of interest-bearing deposits increased $21.0 million, or 11.0%, to $212.6 million due to a higher volume of money market accounts and time deposits. The increase in the average balance of deposits was
primarily the result of marketing efforts, attractive promotional rates and an additional branch office that opened during the three months ended September 30, 2007. The average rate paid on deposits increased 27 basis points to 3.86% for the
three months ended September 30, 2007 as a result of higher rates paid on money market accounts and time deposits.

Interest expense on FHLB advances
decreased $209,000, or 32.2%, to $441,000 for the three months ended September 30, 2007 compared to the same period in 2006. The average balance of FHLB advances declined $14.6 million to $35.1 million and the average rate paid decreased 21
basis points to 4.98%. The increase in deposits has reduced our reliance on FHLB borrowings during the three months ended September 30, 2007.

Provision for Loan Losses

We review the level of the loan loss allowance on a monthly basis and establish the provision for loan
losses based on the volume and types of lending, delinquency levels, loss experience, the amount of classified loans, economic conditions and other factors related to the collectibility of the loan portfolio. The provision for loan losses totaled
$68,000 for the three months ended September 30, 2007 primarily as a result of growth in the loan portfolio, compared to no provision for the comparable period in 2006. Net charge-offs for the three month period ended September 30, 2007
amounted to $68,000 compared to $28,000 for the comparable period in 2006. Nonperforming loans totaled $1.3 million at September 30, 2007 compared to $205,000 at September 30, 2006 primarily due to a commercial relationship involving two
loans totaling $1.2 million that was moved to nonaccrual status during the three months ended September 30, 2007.

Noninterest Income

Noninterest income increased $25,000, or 6.5%, to $412,000 for the three months ended September 30, 2007 compared to $387,000 for the corresponding
period in 2006. Service charges and fee income increased $31,000, or 25.2%, to $154,000 as a result of an increase in deposit accounts. Gain on sale of foreclosed property was $46,000 for the three months ended September 30, 2007 compared to
$13,000 for same period in 2006. Mortgage origination fee income decreased $25,000, or 16.7%, to $125,000 for the three months ended September 30, 2007 due to a lower volume of loan originations.

The following table summarizes the dollar amounts for each category of noninterest income, and the dollar and percent changes for the three months ended
September 30, 2007 compared to the same period in 2006.



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|                                                  |  |                                  |     |      |   |          |  |   |          |   |  |        |   
|------------------------------------------------- |  | -------------------------------- | --- | ---- | - | -------- |  | - | -------- | - |  | ------ | --
|                                                  |  | Three Months Ended September 30, |     |      |   |          |  |  
|                                                  |  | 2007                             |     | 2006 |   | $ Change |  |   | % Change |  
|                                                  |  | (Dollars in thousands)           |     |      |   |          |  |  
|Noninterest income:                               |  |                                  |     |      |   |          |  |   |          |   |  |        |   
|Dividends from investments                        |  | $                                | 8   |      | $ | 30       |  | $ | (22      | ) |  | (73.3  | )%
|Mortgage origination fee income                   |  |                                  | 125 |      |   | 150      |  |   | (25      | ) |  | (16.7  | )%
|Service charges and fees                          |  |                                  | 154 |      |   | 123      |  |   | 31       |   |  | 25.2   | % 
|Gain (loss) on sale of investment securities, net |  |                                  |    |      |   | 1        |  |   | (1       | ) |  | (100.0 | )%
|Gain on sale of foreclosed real estate, net       |  |                                  | 46  |      |   | 13       |  |   | 33       |   |  | 253.8  | % 
|BOLI increase in cash value                       |  |                                  | 55  |      |   | 52       |  |   | 3        |   |  | 5.8    | % 
|Other                                             |  |                                  | 24  |      |   | 18       |  |   | 6        |   |  | 33.3   | % 
|                                                  |  |                                  |     |      |   |          |  |   |          |   |  |        |   
|Total noninterest income                          |  | $                                | 412 |      | $ | 387      |  | $ | 25       |   |  | 6.5    | % 
|                                                  |  |                                  |     |      |   |          |  |   |          |   |  |        |   

Noninterest Expense

Noninterest expense decreased $97,000, or 3.6%, to $2.6 million for the three-month period ended September 30, 2007, primarily due to a decrease in compensation and benefits expense and advertising expense.
Compensation and benefits expense decreased $99,000, or 6.4%, to $1.4 million for the three months ended September 30, 2007. There were 87 full-time employees at September 30, 2007 compared to 95 full-time employees at September 30,
2006. Advertising expense decreased $74,000, or 43.8%, to $95,000 for the three months ended September 30, 2007.

The following table summarizes the
dollar amounts for each category of noninterest expense, and the dollar and percent changes for the three months ended September 30, 2007 compared to the same period in 2006.



|                                      |  |                                  |       |      |   |          |  |   |          |   |  |       |   
|------------------------------------- |  | -------------------------------- | ----- | ---- | - | -------- |  | - | -------- | - |  | ----- | --
|                                      |  | Three Months Ended September 30, |       |      |   |          |  |  
|                                      |  | 2007                             |       | 2006 |   | $ Change |  |   | % Change |  
|                                      |  | (Dollars in thousands)           |       |      |   |          |  |  
|Compensation and benefits             |  | $                                | 1,444 |      | $ | 1,543    |  | $ | (99      | ) |  | (6.4  | )%
|Occupancy expense                     |  |                                  | 171   |      |   | 157      |  |   | 14       |   |  | 8.9   | % 
|Equipment and data processing expense |  |                                  | 359   |      |   | 344      |  |   | 15       |   |  | 4.4   | % 
|Deposit insurance premiums            |  |                                  | 6     |      |   | 6        |  |   |         |   |  | 0.0   | % 
|Advertising                           |  |                                  | 95    |      |   | 169      |  |   | (74      | ) |  | (43.8 | )%
|Other                                 |  |                                  | 494   |      |   | 447      |  |   | 47       |   |  | 10.5  | % 
|                                      |  |                                  |       |      |   |          |  |   |          |   |  |       |   
|Total noninterest expense             |  | $                                | 2,569 |      | $ | 2,666    |  | $ | (97      | ) |  | (3.6  | )%
|                                      |  |                                  |       |      |   |          |  |   |          |   |  |       |   

Income Taxes

Income tax expense for the three months ended September 30, 2007 was $242,000 compared to $180,000 for the same period in 2006 due to a higher level of taxable income.



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##### Table of Contents

Financial Condition

Overview

At September 30, 2007, total assets were $335.5 million, a decrease of $4.2 million compared to $339.7 million at
June 30, 2007. The decrease in assets was due primarily to a decrease in loans and loans held-for-sale. Total liabilities were $261.5 million, a decrease of $4.6 million compared to $266.1 at June 30, 2007. The decrease in liabilities was
due primarily to a decrease in FHLB advances, partially offset by an increase in deposits.

Cash, Cash Equivalents and Interest-Earning Deposits

Cash, cash equivalents, and interest-earning deposits were $10.1 million at September 30, 2007 compared to $7.7 million at June 30, 2007.
We manage the level of cash, cash equivalents and interest-earning deposits to meet loan demand and daily liquidity needs.

Investments

Our investment portfolio consists primarily of federal agency securities with maturities of seven years or less, and municipal securities.
Investment securities decreased $1.8 million, or 6.5%, to $25.5 million due primarily to calls and maturities of investment securities during the three-month period. Investment securities classified as available-for-sale are carried at fair market
value and reflect an unrealized loss of $171,000, or $105,000 net of taxes.

The following table sets forth the carrying values of our investment
securities portfolio at the dates indicated. All of our investment securities are classified as available-for-sale.



|                                    |  |                        |        |   |                 |   |                  |  |   |           |   |  |   |       
|----------------------------------- |  | ---------------------- | ------ | - | --------------- | - | ---------------- |  | - | --------- | - |  | - | ------
|At September 30, 2007               |  |                        |        |   |                 |   |                  |  |   |          
|                                    |  | AmortizedCost          |        |   | UnrealizedGains |   | UnrealizedLosses |  |   | FairValue
|                                    |  | (Dollars in thousands)
|Securities available-for-sale       |  |                        |        |   |                 |   |                  |  |   |           |   |  |   |       
|Debt securities:                    |  |                        |        |   |                 |   |                  |  |   |           |   |  |   |       
|Federal agency                      |  | $                      | 21,340 |   |                 | $ | 4                |  | $ | (100      | ) |  | $ | 21,244
|Municipals                          |  |                        | 4,334  |   |                 |   | 1                |  |   | (76       | ) |  |   | 4,259 
|                                    |  |                        |        |   |                 |   |                  |  |   |           |   |  |   |       
|Total securities available-for-sale |  | $                      | 25,674 |   |                 | $ | 5                |  | $ | (176      | ) |  | $ | 25,503
|                                    |  |                        |        |   |                 |   |                  |  |   |           |   |  |   |       
|Weighted-average rate               |  |                        | 4.15   | % |                 |   |                  |  |   |           |   |  |   |       
|                                    |  |                        |        |   |                 |   |                  |  |   |           |   |  |   |       
|                                    |  |                        |        |  
|At June 30, 2007                    |  |                        |        |   |                 |   |                  |  |   |          
|                                    |  | AmortizedCost          |        |   | UnrealizedGains |   | UnrealizedLosses |  |   | FairValue
|                                    |  | (Dollars in thousands)
|Securities available-for-sale       |  |                        |        |   |                 |   |                  |  |   |           |   |  |   |       
|Debt securities:                    |  |                        |        |   |                 |   |                  |  |   |           |   |  |   |       
|Federal agency                      |  | $                      | 23,339 |   |                 | $ |                 |  | $ | (278      | ) |  | $ | 23,061
|Municipals                          |  |                        | 4,338  |   |                 |   | 1                |  |   | (122      | ) |  |   | 4,217 
|                                    |  |                        |        |   |                 |   |                  |  |   |           |   |  |   |       
|Total securities available-for-sale |  | $                      | 27,677 |   |                 | $ | 1                |  | $ | (400      | ) |  | $ | 27,278
|                                    |  |                        |        |   |                 |   |                  |  |   |           |   |  |   |       
|Weighted-average rate               |  |                        | 3.96   | % |                 |   |                  |  |   |           |   |  |   |       
|                                    |  |                        |        |   |                 |   |                  |  |   |           |   |  |   |       



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##### Table of Contents

Loans

Net
loans decreased $2.5 million to $272.4 million at September 30, 2007 primarily due to the payout of several commercial loan participations and a softening in loan demand. Our primary lending activity is the origination of loans secured by real
estate. Real estate loans totaled $222.0 million, or 80.8% of total loans, at September 30, 2007 compared to $225.5 million, or 81.4% of total loans, at June 30, 2007. Commercial business loans increased $1.8 million, or 4.4%, to $43.5
million at September 30, 2007, while consumer loans decreased $855,000, or 8.5%, to $9.2 million. The decline in consumer loans was largely attributable to a decrease in indirect automobile loans.



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##### Table of Contents

Loans receivable, net, are summarized as follows:



|                               |  |                        |         |   |                     |       |   |        |   |         |                     |  |       |          |  |   |          |   |  |       |   
|------------------------------ |  | ---------------------- | ------- | - | ------------------- | ----- | - | ------ | - | ------- | ------------------- |  | ----- | -------- |  | - | -------- | - |  | ----- | --
|                               |  | At September 30, 2007  |         |   | At June 30, 2007    |       |   |        |   |         |                     | 
|                               |  | Amount                 |         |   | Percentof Portfolio |       |   | Amount |   |         | Percentof Portfolio |  |       | $ Change |  |   | % Change |  
|                               |  | (Dollars in thousands) |         |   |                     |       |   |        |  
|Real estate loans:             |  |                        |         |   |                     |       |   |        |   |         |                     |  |       |          |  |   |          |   |  |       |   
|Residential one-to four-family |  | $                      | 70,012  |   |                     | 25.5  | % |        | $ | 69,693  |                     |  | 25.1  | %        |  | $ | 319      |   |  | 0.5   | % 
|Home equity line of credit     |  |                        | 5,818   |   |                     | 2.1   | % |        |   | 5,470   |                     |  | 2.0   | %        |  |   | 348      |   |  | 6.4   | % 
|Commercial                     |  |                        | 86,647  |   |                     | 31.5  | % |        |   | 86,929  |                     |  | 31.4  | %        |  |   | (282     | ) |  | (0.3  | )%
|Multi-family                   |  |                        | 7,948   |   |                     | 2.9   | % |        |   | 8,182   |                     |  | 3.0   | %        |  |   | (234     | ) |  | (2.9  | )%
|Construction                   |  |                        | 15,261  |   |                     | 5.6   | % |        |   | 21,634  |                     |  | 7.8   | %        |  |   | (6,373   | ) |  | (29.5 | )%
|Land                           |  |                        | 36,291  |   |                     | 13.2  | % |        |   | 33,604  |                     |  | 12.1  | %        |  |   | 2,687    |   |  | 8.0   | % 
|                               |  |                        |         |   |                     |       |   |        |   |         |                     |  |       |          |  |   |          |   |  |       |   
|Total real estate loans        |  |                        | 221,977 |   |                     | 80.8  | % |        |   | 225,512 |                     |  | 81.4  | %        |  |   | (3,535   | ) |  | (1.6  | )%
|                               |  |                        |         |   |                     |       |   |        |   |         |                     |  |       |          |  |   |          |   |  |       |   
|Commercial business loans      |  |                        | 43,511  |   |                     | 15.8  | % |        |   | 41,667  |                     |  | 15.0  | %        |  |   | 1,844    |   |  | 4.4   | % 
|                               |  |                        |         |   |                     |       |   |        |   |         |                     |  |       |          |  |   |          |   |  |       |   
|Consumer loans:                |  |                        |         |   |                     |       |   |        |   |         |                     |  |       |          |  |   |          |   |  |       |   
|Automobile loans               |  |                        | 5,675   |   |                     | 2.1   | % |        |   | 6,423   |                     |  | 2.3   | %        |  |   | (748     | ) |  | (11.6 | )%
|Mobile home loans              |  |                        | 75      |   |                     | 0.0   | % |        |   | 82      |                     |  | 0.0   | %        |  |   | (7       | ) |  | (8.5  | )%
|Loans secured by deposits      |  |                        | 1,053   |   |                     | 0.4   | % |        |   | 978     |                     |  | 0.4   | %        |  |   | 75       |   |  | 7.7   | % 
|Other consumer loans           |  |                        | 2,365   |   |                     | 0.9   | % |        |   | 2,540   |                     |  | 0.9   | %        |  |   | (175     | ) |  | (6.9  | )%
|                               |  |                        |         |   |                     |       |   |        |   |         |                     |  |       |          |  |   |          |   |  |       |   
|Total consumer loans           |  |                        | 9,168   |   |                     | 3.3   | % |        |   | 10,023  |                     |  | 3.6   | %        |  |   | (855     | ) |  | (8.5  | )%
|                               |  |                        |         |   |                     |       |   |        |   |         |                     |  |       |          |  |   |          |   |  |       |   
|Total gross loans              |  |                        | 274,656 |   |                     | 100.0 | % |        |   | 277,202 |                     |  | 100.0 | %        |  |   | (2,546   | ) |  | (0.9  | )%
|                               |  |                        |         |   |                     |       |   |        |   |         |                     |  |       |          |  |   |          |   |  |       |   
|Less:                          |  |                        |         |   |                     |       |   |        |   |         |                     |  |       |          |  |   |          |   |  |       |   
|Deferred loan fees, net        |  |                        | (348    | ) |                     |       |   |        |   | (366    | )                   |  |       |          |  |   | 18       |   |  | (4.9  | )%
|Allowance for losses           |  |                        | (1,955  | ) |                     |       |   |        |   | (1,955  | )                   |  |       |          |  |   |         |   |  | 0.0   | % 
|                               |  |                        |         |   |                     |       |   |        |   |         |                     |  |       |          |  |   |          |   |  |       |   
|Loans receivable, net          |  | $                      | 272,353 |   |                     |       |   |        | $ | 274,881 |                     |  |       |          |  | $ | (2,528   | ) |  | (0.9  | )%
|                               |  |                        |         |   |                     |       |   |        |   |         |                     |  |       |          |  |   |          |   |  |       |   

Loan Loss Allowance

The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the need to establish reserves against losses on loans on a monthly basis. When additional
reserves are necessary, a provision for loan losses is charged to earnings.

In connection with assessing the allowance, we have established a systematic
methodology for determining the adequacy of the allowance for loan losses. The methodology utilizes a loan grading system which segments loans with similar risk characteristics. Management performs a monthly assessment of the allowance for loan
losses based on the nature and volume of the loan



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##### Table of Contents

portfolio, the amount of impaired and classified loans and historical loan loss experience. In addition, management considers other qualitative factors,
including delinquency trends, economic conditions and loan considerations.

The Office of Thrift Supervision, as an integral part of its examination
process, periodically reviews our allowance for loan losses. The Office of Thrift Supervision may require us to make additional provisions for loan losses based on judgments different from ours.

The allowance for loan losses remained steady at $2.0 million at September 30, 2007. Our allowance for loan losses represented 0.71% of total loans and 156.27% of
nonperforming loans at September 30, 2007 compared to 0.71% of total loans and 778.88% of nonperforming loans at June 30, 2007.



|                                                                           |  |                                 |       |   |      |   |       |  
|-------------------------------------------------------------------------- |  | ------------------------------- | ----- | - | ---- | - | ----- | -
|                                                                           |  | Three Months EndedSeptember 30, |      
|                                                                           |  | 2007                            |       |   | 2006 |  
|                                                                           |  | (Dollars in thousands)          |      
|Balance at beginning of period                                             |  | $                               | 1,955 |   |      | $ | 2,172 |  
|Provision for loan losses                                                  |  |                                 | 68    |   |      |   |      |  
|Recoveries                                                                 |  |                                 | 10    |   |      |   | 25    |  
|Charge-offs                                                                |  |                                 | (78   | ) |      |   | (53   | )
|                                                                           |  |                                 |       |   |      |   |       |  
|Net charge-offs                                                            |  |                                 | (68   | ) |      |   | (28   | )
|                                                                           |  |                                 |       |   |      |   |       |  
|Allowance at end of period                                                 |  | $                               | 1,955 |   |      | $ | 2,144 |  
|                                                                           |  |                                 |       |   |      |   |       |  
|Net charge-offs to average outstanding loans during the period, annualized |  |                                 | 0.10  | % |      |   | 0.04  | %

Nonperforming Assets

We consider repossessed assets and nonaccrual loans to be nonperforming assets. Loans are reviewed on a monthly basis and are generally placed on nonaccrual status when the loan becomes more than 90 days delinquent.
Nonperforming loans totaled $1.3 million at September 30, 2007 compared to $251,000 at June 30, 2007 primarily due to a large commercial relationship that was moved to nonaccrual status during the three months ended September 30,
2007. Foreclosed real estate amounted to $100,000 at September 30, 2007 compared to $275,000 at June 30, 2007. Foreclosed real estate is initially recorded at the lower of the amount of the loan or the fair value, less estimated selling
costs. Any writedown to fair value is charged to the allowance for loan losses. Any subsequent writedown of foreclosed real estate is charged against earnings.



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##### Table of Contents

|                                                       |  |                        |        |   |              |   |        |  
|------------------------------------------------------ |  | ---------------------- | ------ | - | ------------ | - | ------ | -
|                                                       |  | September 30,2007      |        |   | June 30,2007 |  
|                                                       |  | (Dollars in thousands) |       
|Nonaccruing loans:                                     |  |                        |        |   |              |   |        |  
|Real estate                                            |  | $                      | 1,245  |   |              | $ | 251    |  
|Commercial business                                    |  |                        |       |   |              |   |       |  
|Consumer                                               |  |                        | 6      |   |              |   |       |  
|                                                       |  |                        |        |   |              |   |        |  
|Total nonaccrual loans                                 |  |                        | 1,251  |   |              |   | 251    |  
|                                                       |  |                       
|Real estate owned                                      |  |                        | 100    |   |              |   | 275    |  
|Other repossessed assets                               |  |                        |       |   |              |   |       |  
|                                                       |  |                        |        |   |              |   |        |  
|Total nonperforming assets                             |  | $                      | 1,351  |   |              | $ | 526    |  
|                                                       |  |                        |        |   |              |   |        |  
|Total nonperforming assets to total assets             |  |                        | 0.40   | % |              |   | 0.15   | %
|Total nonperforming loans to total loans               |  |                        | 0.46   | % |              |   | 0.09   | %
|Allowance for loan losses to total nonperforming loans |  |                        | 156.27 | % |              |   | 778.88 | %

Bank Owned Life Insurance

We hold bank owned life insurance (BOLI) to help offset the cost of employee benefit plans. BOLI provides earnings from accumulated cash value growth and provides tax advantages inherent in a life
insurance contract. The cash surrender value of the BOLI at September 30, 2007 was $5.8 million.

Deposits

Total deposits increased $9.1 million, or 4.2%, to $229.2 million at September 30, 2007 primarily as a result of marketing efforts, attractive promotional rates and
the opening of our second branch in Knoxville, Tennessee during the quarter ended September 30, 2007. The increase in deposits has reduced our reliance on FHLB advances during the three months ended September 30, 2007. Certificates of
deposit increased $5.0 million, or 3.6%, to $145.3 million and money market accounts increased $2.3 million, or 5.6%, to $43.6 million primarily due to promotional rates and customer preference for higher-yielding accounts. Noninterest-bearing
checking accounts increased $2.2 million, or 17.7%, to $14.8 million as a result of our emphasis on increasing the number of business checking accounts.



|                             |  |                        |         |              |   |          |  |   |          |   |  |      |   
|---------------------------- |  | ---------------------- | ------- | ------------ | - | -------- |  | - | -------- | - |  | ---- | --
|                             |  | September 30,2007      |         | June 30,2007 |   | $ Change |  |   | % Change |  
|                             |  | (Dollars in thousands) |         |              |   |          |  |  
|Noninterest-bearing accounts |  | $                      | 14,789  |              | $ | 12,561   |  | $ | 2,228    |   |  | 17.7 | % 
|NOW accounts                 |  |                        | 16,614  |              |   | 16,230   |  |   | 384      |   |  | 2.4  | % 
|Savings accounts             |  |                        | 8,903   |              |   | 9,690    |  |   | (787     | ) |  | (8.1 | )%
|Money market accounts        |  |                        | 43,632  |              |   | 41,312   |  |   | 2,320    |   |  | 5.6  | % 
|Certificates of deposit      |  |                        | 145,280 |              |   | 140,289  |  |   | 4,991    |   |  | 3.6  | % 
|                             |  |                        |         |              |   |          |  |   |          |   |  |      |   
|                             |  | $                      | 229,218 |              | $ | 220,082  |  | $ | 9,136    |   |  | 4.2  | % 
|                             |  |                        |         |              |   |          |  |   |          |   |  |      |   

Advances

FHLB advances decreased $13.8 million to $31.0 million at September 30, 2007 as lower costing deposits were used to fund loan growth and more expensive FHLB advances were repaid. Additional FHLB advances may be utilized in the future
to manage daily liquidity needs and to support loan growth.



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Stockholders Equity

Stockholders equity totaled $74.0 million at September 30, 2007 compared to $73.6 million at June 30, 2007. Retained earnings increased $50,000 due to net income of $434,000 partially offset by cash
dividends totaling $384,000. Unrealized gains and losses, net of taxes, in the available-for-sale investment portfolio are reflected as an adjustment to stockholders equity. At September 30, 2007, the adjustment to stockholders
equity was a net unrealized loss of $105,000 compared to a net unrealized loss of $246,000 at June 30, 2007. Stock repurchases for the three months ended September 30, 2007 totaled 16,631 shares at an average cost of $11.73 per share. On
February 24, 2006, the Company announced its third stock repurchase program in which up to 690,261 shares of the Companys outstanding common stock, may be repurchased. At September 30, 2007, 315,945 shares remained eligible for
repurchase under the current stock repurchase program.

Liquidity and Capital Resources

Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan
repayments, maturities and sales of investment securities and borrowings from the FHLB of Cincinnati. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are
greatly influenced by general interest rates, economic conditions and competition.

We regularly adjust our investments in liquid assets based on our
assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning
deposits and short- and intermediate-term U.S. Government agency obligations.

Our most liquid assets are cash and cash equivalents and interest-earning
assets. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At September 30, 2007, cash and cash equivalents totaled $2.7 million and interest-earning deposits totaled
$7.5 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $25.5 million at September 30, 2007. In addition, at September 30, 2007, our advances agreement with the FHLB provided us
with the ability to borrow a total of approximately $54.0 million from the FHLB of Cincinnati. In the three-month period ended September 30, 2007, FHLB advances decreased $13.8 million to $31.0 million.

We anticipate that we will have sufficient funds available to meet current loan commitments. At September 30, 2007, we had approximately $13.3 million in loan
commitments outstanding. In addition to commitments to originate loans, we had $22.9 million in loans-in-process primarily to fund undisbursed proceeds of construction loans, $6.2 million in unused standby letters of credit and approximately $10.9
million in unused lines of credit. We had $128.1 million in



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certificates of deposit due within one year and $83.9 million in other deposits without specific maturities at September 30, 2007. We believe, based on
past experience, that a significant portion of those deposits will remain with us. Deposit flows are affected by the overall level of interest rates and products offered by us and our local competitors and other factors. We generally manage the
pricing of our deposits to be competitive and to increase core deposits. Occasionally, we offer promotional rates on certain deposit products in order to attract deposits. We experienced a net increase in total deposits of $9.1 million during the
three-month period ended September 30, 2007.

Off-Balance Sheet Arrangements

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our financial statements. These transactions
involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers requests for funding and take the form of loan commitments, unused lines of credit, amounts due
mortgagors on construction loans, amounts due on commercial loans and commercial letters of credit.

For the three months ended September 30, 2007, we
engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.



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Capital Compliance

The following table presents our capital position relative to our regulatory capital requirements at September 30, 2007 and June 30, 2007:



|                          |  |                        |        |       |                              |   |        |                                                               |        |  |       |  |     |        |  |   |        |       |   |  |      |  
|------------------------- |  | ---------------------- | ------ | ----- | ---------------------------- | - | ------ | ------------------------------------------------------------- | ------ |  | ----- |  | --- | ------ |  | - | ------ | ----- | - |  | ---- | -
|                          |  | Actual                 |        |       | For CapitalAdequacy Purposes |   |        | To Be WellCapitalized UnderPrompt CorrectiveAction Provisions |       
|                          |  | Amount                 |        | Ratio |                              |   | Amount |                                                               |        |  | Ratio |  |     | Amount |  |   |        | Ratio |  
|                          |  | (Dollars in thousands) |       
|At September 30, 2007     |  |                        |        |       |                              |   |        |                                                               |        |  |       |  |     |        |  |   |        |       |   |  |      |  
|                          |  |                        |        |       |                              |   |        |                                                              
|Total Capital             |  |                        |        |       |                              |   |        |                                                               |        |  |       |  |     |        |  |   |        |       |   |  |      |  
|(To Risk Weighted Assets) |  | $                      | 67,931 |       | 26.1                         | % |        | $                                                             | 20,826 |  | >     |  | 8.0 | %      |  | $ | 26,033 |       | > |  | 10.0 | %
|                          |  |                        |        |       |                              |   |        |                                                               |        |  |       |  |     |        |  |   |        |       |   |  |      |  
|Core Capital              |  |                        |        |       |                              |   |        |                                                               |        |  |       |  |     |        |  |   |        |       |   |  |      |  
|(To Tangible Assets)      |  |                        | 66,013 |       | 19.8                         | % |        |                                                               | 13,323 |  | >     |  | 4.0 | %      |  |   | 16,653 |       | > |  | 5.0  | %
|                          |  |                        |        |       |                              |   |        |                                                               |        |  |       |  |     |        |  |   |        |       |   |  |      |  
|Tangible Capital          |  |                        |        |       |                              |   |        |                                                               |        |  |       |  |     |        |  |   |        |       |   |  |      |  
|(To Tangible Assets)      |  |                        | 66,013 |       | 19.8                         | % |        |                                                               | 4,996  |  | >     |  | 1.5 | %      |  |   | N/A    |       |   |  |      |  
|                          |  |                        |        |       |                              |   |        |                                                               |        |  |       |  |     |        |  |   |        |       |   |  |      |  
|Tier 1 Capital            |  |                        |        |       |                              |   |        |                                                               |        |  |       |  |     |        |  |   |        |       |   |  |      |  
|(To Risk Weighted Assets) |  |                        | 66,013 |       | 25.4                         | % |        |                                                               | N/A    |  |       |  |     |        |  |   | 15,620 |       | > |  | 6.0  | %
|                          |  |                        |        |       |                              |   |        |                                                               |        |  |       |  |     |        |  |   |        |       |   |  |      |  
|                          |  |                        |        |       |                              |   |        |                                                              
|At June 30, 2007          |  |                        |        |       |                              |   |        |                                                               |        |  |       |  |     |        |  |   |        |       |   |  |      |  
|                          |  |                        |        |       |                              |   |        |                                                              
|Total Capital             |  |                        |        |       |                              |   |        |                                                               |        |  |       |  |     |        |  |   |        |       |   |  |      |  
|(To Risk Weighted Assets) |  | $                      | 67,123 |       | 25.5                         | % |        | $                                                             | 21,099 |  | >     |  | 8.0 | %      |  | $ | 26,374 |       | > |  | 10.0 | %
|                          |  |                        |        |       |                              |   |        |                                                               |        |  |       |  |     |        |  |   |        |       |   |  |      |  
|Core Capital              |  |                        |        |       |                              |   |        |                                                               |        |  |       |  |     |        |  |   |        |       |   |  |      |  
|(To Tangible Assets)      |  |                        | 65,205 |       | 19.3                         | % |        |                                                               | 13,496 |  | >     |  | 4.0 | %      |  |   | 16,870 |       | > |  | 5.0  | %
|                          |  |                        |        |       |                              |   |        |                                                               |        |  |       |  |     |        |  |   |        |       |   |  |      |  
|Tangible Capital          |  |                        |        |       |                              |   |        |                                                               |        |  |       |  |     |        |  |   |        |       |   |  |      |  
|(To Tangible Assets)      |  |                        | 65,205 |       | 19.3                         | % |        |                                                               | 5,061  |  | >     |  | 1.5 | %      |  |   | N/A    |       |   |  |      |  
|                          |  |                        |        |       |                              |   |        |                                                               |        |  |       |  |     |        |  |   |        |       |   |  |      |  
|Tier 1 Capital            |  |                        |        |       |                              |   |        |                                                               |        |  |       |  |     |        |  |   |        |       |   |  |      |  
|(To Risk Weighted Assets) |  |                        | 65,205 |       | 24.7                         | % |        |                                                               | N/A    |  |       |  |     |        |  |   | 15,824 |       | > |  | 6.0  | %
|                          |  |                        |        |       |                              |   |        |                                                               |        |  |       |  |     |        |  |   |        |       |   |  |      |  



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|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

For a
discussion of the Companys asset and liability management policies, as well as the potential impact of interest rate changes upon the market value of the Companys portfolio equity, see Item 7A in the Companys Annual Report on
Form 10-K for the year ended June 30, 2007. Management, as part of its regular practices, performs periodic reviews of the impact of interest rate changes upon net interest income and the market value of the Companys portfolio equity.
Based on, among other factors, such reviews, management believes that there have been no material changes in the market risk of the Companys asset and liability position since June 30, 2007.



|Item 4. | Controls and Procedures
|------- | -----------------------

The Companys management, including
the Companys principal executive officer and principal financial officer, have evaluated the effectiveness of the Companys disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the
Securities Exchange Act of 1934, as amended (the Exchange Act). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the
Companys disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange
Commission (the SEC) (1) is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and (2) is accumulated and communicated to the Companys management, including
its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Companys internal control over financial reporting
occurred during the quarter ended September 30, 2007 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.



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##### Table of Contents

PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

Jefferson Bancshares is not a party to any
pending legal proceedings. Periodically, there have been various claims and lawsuits involving Jefferson Federal, such as claims to enforce liens, condemnation proceedings on properties in which Jefferson Federal holds security interests, claims
involving the making and servicing of real property loans and other issues incident to Jefferson Federals business. Jefferson Federal is not a party to any pending legal proceedings that it believes would have a material adverse effect on the
financial condition or operations of the Company.



|Item 1A. | Risk Factors
|-------- | ------------

There have been no material changes to the risk
factors previously disclosed in the Companys Annual Report on Form 10-K for the year ended June 30, 2007.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------



|                                             |  |                                               |  |                                        |       |                                                                                              |        |                                                                                                                         |         |    
|-------------------------------------------- |  | --------------------------------------------- |  | -------------------------------------- | ----- | -------------------------------------------------------------------------------------------- | ------ | ----------------------------------------------------------------------------------------------------------------------- | ------- | ---
|Period                                       |  | (a) Total Numberof Shares (or units)Purchased |  | (b)AveragePrice Paidper Share(or Unit) |       | ( c ) Total Number ofShares (or Units)Purchased asPart of PubliclyAnnounced Plansor Programs |        | ( d )Maximum Number(or ApproximateDollar
Value) of Shares (orUnits) That MayYet Be PurchasedUnder the Plans or Programs |        
|Month #1                                     |  |                                               |  |                                        |       |                                                                                              |        |                                                                                                                         |         |    
|July 1, 2007 through July 31, 2007           |  | 12,463                                        |  | $                                      | 11.76 |                                                                                              | 12,463 |                                                                                                                         | 320,113 | (1)
|                                             |  |                                               |  |                                       
|Month #2                                     |  |                                               |  |                                        |       |                                                                                              |        |                                                                                                                         |         |    
|August 1, 2007 through August 31, 2007       |  | 4,168                                         |  | $                                      | 11.64 |                                                                                              | 4,168  |                                                                                                                         | 315,945 | (1)
|                                             |  |                                               |  |                                       
|Month #3                                     |  |                                               |  |                                        |       |                                                                                              |        |                                                                                                                         |         |    
|September 1, 2007 through September 30, 2007 |  |                                              |  |                                        |      |                                                                                              |       |                                                                                                                         | 315,945 | (1)
|                                             |  |                                               |  |                                       
|Total                                        |  | 16,631                                        |  | $                                      | 11.73 |                                                                                              | 16,631 |                                                                                                                         | 315,945 |    

---

|(1) | On February 24, 2006, the Company announced a Stock Repurchase Program under which the Company may repurchase an additional 690,261 shares of the Companys common stock,
from time to time, subject to market conditions. The repurchase program will continue until completed or terminated by the Board of Directors.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

None.



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

None.



|Item 5. | Other Information
|------- | -----------------

None.



|Item 6. | Exhibits
|------- | --------



| | 3.2 | Amended and restated Bylaws of Jefferson Bancshares, Inc. (incorporated by reference to Exhibit 3.2 to the current report on Form 8-K filed by the Company with the Securities and
Exchange Commission on October 25, 2007)
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 10.1 | Employment Agreement by and among Jefferson Federal Bank and Charles G. Robinette, dated July 16, 2007 (incorporated by reference to Exhibit 10.3 to the Annual Report on Form 10-K
filed by the Company with the Securities and Exchange Commission on September 13, 2007)
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 31.1 | Rule 13a-14(a)/15d-14(a) certification of the principal executive officer
| | ---- | -------------------------------------------------------------------------



| | 31.2 | Rule 13a-14(a)/15d-14(a) certification of the principal financial officer
| | ---- | -------------------------------------------------------------------------



| | 32.1 | Section 1350 certification
| | ---- | --------------------------



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SIGNATURES

Pursuant to the requirements 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.



|                 |  |                                                 
|---------------- |  | ------------------------------------------------
|                 |  | JEFFERSON BANCSHARES, INC.                      
|                 | 
|November 8, 2007 |  | /s/ Anderson L. Smith                           
|                 |  | Anderson L. Smith                               
|                 |  | President and Chief Executive Officer           
|                 | 
|November 8, 2007 |  | /s/ Jane P. Hutton                              
|                 |  | Jane P. Hutton                                  
|                 |  | Chief Financial Officer, Treasurer and Secretary