##### 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 June 30, 2006

Commission file number 0-30753



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FIRST FEDERAL BANCSHARES, INC.

(Exact name of registrant as specified in its
charter)



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|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                       |  | 37-1397683                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)

109 East Depot Street, Colchester, Illinois 62326

(Address of principal executive offices) (Zip Code)

(309) 776-3225

(Registrants telephone number, including area code)



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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 ̈Non-accelerated filer  x

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.

As of August 1, 2006, the Registrant had outstanding 1,242,213 shares of common stock.



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##### Table of Contents

FIRST FEDERAL BANCSHARES, INC.

Form 10-Q Quarterly Report

Index



|                               |  |                                                                                       |  |     
|------------------------------ |  | ------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                       |  | Page
|PART I -
Financial Information |  |                                                                                      
|                               |  |                                                                                      
|Item 1                         |  | Financial Statements                                                                  |  | 1   
|Item 2                         |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 8   
|Item 3                         |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 12  
|Item 4                         |  | Controls and Procedures                                                               |  | 13  
|                               | 
|PART II -
Other Information    |  |                                                                                      
|                               |  |                                                                                      
|Item 1                         |  | Legal Proceedings                                                                     |  | 15  
|Item 1A                        |  | Risk Factors                                                                          |  | 15  
|Item 2                         |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 15  
|Item 3                         |  | Defaults Upon Senior Securities                                                       |  | 15  
|Item 4                         |  | Submission of Matters to a Vote of Securities Holders                                 |  | 16  
|Item 5                         |  | Other Information                                                                     |  | 16  
|Item 6                         |  | Exhibits                                                                              |  | 17  
|                               | 
|SIGNATURES                     |  | 18                                                                                   



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##### Table of Contents

PART I  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

First Federal Bancshares, Inc.

Consolidated Statements of Financial Condition

(in thousands of
dollars, except share data)

(unaudited)



|                                                                                         |  |              |         |   |                  |   |         |  
|---------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                                                                                         |  | June 30,2006 |         |   | December 31,2005 |  
|ASSETS                                                                                   |  |              |         |   |                  |   |         |  
|Cash and cash equivalents                                                                |  | $            | 15,379  |   |                  | $ | 12,798  |  
|Time deposits in other financial institutions                                            |  |              | 196     |   |                  |   | 196     |  
|Securities available-for-sale, at fair value                                             |  |              | 132,626 |   |                  |   | 137,023 |  
|Loans receivable, net                                                                    |  |              | 186,033 |   |                  |   | 178,551 |  
|Real estate owned, net                                                                   |  |              | 257     |   |                  |   | 233     |  
|Federal Home Loan Bank stock, at cost                                                    |  |              | 1,796   |   |                  |   | 1,682   |  
|Premises and equipment, net                                                              |  |              | 3,200   |   |                  |   | 3,300   |  
|Goodwill                                                                                 |  |              | 1,340   |   |                  |   | 1,340   |  
|Core deposits and other intangibles                                                      |  |              | 188     |   |                  |   | 209     |  
|Accrued interest receivable                                                              |  |              | 1,615   |   |                  |   | 1,606   |  
|Other assets                                                                             |  |              | 3,132   |   |                  |   | 2,364   |  
|                                                                                         |  |              |         |   |                  |   |         |  
|TOTAL ASSETS                                                                             |  | $            | 345,762 |   |                  | $ | 339,302 |  
|                                                                                         |  |              |         |   |                  |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                     |  |              |         |   |                  |   |         |  
|LIABILITIES                                                                              |  |              |         |   |                  |   |         |  
|Deposits                                                                                 |  | $            | 302,160 |   |                  | $ | 291,228 |  
|Advances from borrowers for taxes and insurance                                          |  |              | 416     |   |                  |   | 217     |  
|Federal Home Loan Bank advances                                                          |  |              | 14,646  |   |                  |   | 18,188  |  
|Subordinated debentures                                                                  |  |              | 7,217   |   |                  |   | 7,217   |  
|Accrued interest payable                                                                 |  |              | 825     |   |                  |   | 754     |  
|Other liabilities                                                                        |  |              | 316     |   |                  |   | 383     |  
|                                                                                         |  |              |         |   |                  |   |         |  
|Total liabilities                                                                        |  |              | 325,580 |   |                  |   | 317,987 |  
|                                                                                         |  |             
|SHAREHOLDERS EQUITY                                                                     |  |              |         |   |                  |   |         |  
|Preferred stock, $.01 par value, 1,000,000 shares authorized; none issued or outstanding |  |              |        |   |                  |   |        |  
|Common stock, $.01 par value, 4,000,000 shares authorized; 2,242,500 shares issued       |  |              | 22      |   |                  |   | 22      |  
|Additional paid-in capital                                                               |  |              | 23,254  |   |                  |   | 23,166  |  
|Unearned ESOP shares                                                                     |  |              | (762    | ) |                  |   | (852    | )
|Unearned stock awards                                                                    |  |              |        |   |                  |   | (203    | )
|Treasury stock (June 30-1,000,287 shares, December 31-1,000,236 shares)                  |  |              | (30,016 | ) |                  |   | (30,015 | )
|Retained earnings                                                                        |  |              | 31,680  |   |                  |   | 31,751  |  
|Accumulated other comprehensive loss                                                     |  |              | (3,996  | ) |                  |   | (2,554  | )
|                                                                                         |  |              |         |   |                  |   |         |  
|Total shareholders equity                                                               |  |              | 20,182  |   |                  |   | 21,315  |  
|                                                                                         |  |              |         |   |                  |   |         |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                               |  | $            | 345,762 |   |                  | $ | 339,302 |  
|                                                                                         |  |              |         |   |                  |   |         |  

See notes to consolidated financial statements.



1



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##### Table of Contents

First Federal Bancshares, Inc.

Consolidated Statements of Income

(in thousands of dollars, except share data)

(unaudited)



|                                                    |  |                            |           |                           |      |   |           |  |   |           |   |  |   |          
|--------------------------------------------------- |  | -------------------------- | --------- | ------------------------- | ---- | - | --------- |  | - | --------- | - |  | - | ---------
|                                                    |  | Three Months EndedJune 30, |           | Six Months Ended June 30,
|                                                    |  | 2006                       |           |                           | 2005 |   | 2006      |  |   | 2005     
|Interest income                                     |  |                            |           |                           |      |   |           |  |   |           |   |  |   |          
|Loans                                               |  | $                          | 2,909     |                           |      | $ | 2,310     |  | $ | 5,683     |   |  |   | 4,424    
|Securities                                          |  |                            | 1,439     |                           |      |   | 1,461     |  |   | 2,867     |   |  |   | 2,952    
|Other interest income                               |  |                            | 167       |                           |      |   | 41        |  |   | 262       |   |  |   | 116      
|                                                    |  |                            |           |                           |      |   |           |  |   |           |   |  |   |          
|Total interest income                               |  |                            | 4,515     |                           |      |   | 3,812     |  |   | 8,812     |   |  |   | 7,492    
|                                                    |  |                            |           |                          
|Interest expense                                    |  |                            |           |                           |      |   |           |  |   |           |   |  |   |          
|Deposits                                            |  |                            | 2,459     |                           |      |   | 1,738     |  |   | 4,663     |   |  |   | 3,328    
|Federal Home Loan Bank advances                     |  |                            | 199       |                           |      |   | 77        |  |   | 399       |   |  |   | 133      
|Subordinated debentures                             |  |                            | 106       |                           |      |   | 105       |  |   | 211       |   |  |   | 210      
|                                                    |  |                            |           |                           |      |   |           |  |   |           |   |  |   |          
|Total interest expense                              |  |                            | 2,764     |                           |      |   | 1,920     |  |   | 5,273     |   |  |   | 3,671    
|                                                    |  |                            |           |                           |      |   |           |  |   |           |   |  |   |          
|Net interest income                                 |  |                            | 1,751     |                           |      |   | 1,892     |  |   | 3,539     |   |  |   | 3,821    
|                                                    |  |                            |           |                          
|Provision for loan losses                           |  |                            | 15        |                           |      |   | 115       |  |   | 66        |   |  |   | 115      
|                                                    |  |                            |           |                           |      |   |           |  |   |           |   |  |   |          
|Net interest income after provision for loan losses |  |                            | 1,736     |                           |      |   | 1,777     |  |   | 3,473     |   |  |   | 3,706    
|                                                    |  |                            |           |                          
|Noninterest income                                  |  |                            |           |                           |      |   |           |  |   |           |   |  |   |          
|Service charges on deposit accounts                 |  |                            | 119       |                           |      |   | 108       |  |   | 212       |   |  |   | 197      
|Loan origination and servicing fees                 |  |                            | 77        |                           |      |   | 71        |  |   | 135       |   |  |   | 128      
|Other fee income                                    |  |                            | 91        |                           |      |   | 64        |  |   | 184       |   |  |   | 119      
|Net gain (loss) on sale of securities               |  |                            | (9        | )                         |      |   | 225       |  |   | 11        |   |  |   | 229      
|Recovery of impairment loss                         |  |                            |          |                           |      |   |          |  |   | 8         |   |  |   |         
|Other income                                        |  |                            | 12        |                           |      |   | 8         |  |   | 21        |   |  |   | 31       
|                                                    |  |                            |           |                           |      |   |           |  |   |           |   |  |   |          
|Total noninterest income                            |  |                            | 290       |                           |      |   | 476       |  |   | 571       |   |  |   | 704      
|                                                    |  |                            |           |                          
|Noninterest expense                                 |  |                            |           |                           |      |   |           |  |   |           |   |  |   |          
|Compensation and benefits                           |  |                            | 1,201     |                           |      |   | 1,134     |  |   | 2,297     |   |  |   | 2,175    
|Occupancy and equipment                             |  |                            | 147       |                           |      |   | 139       |  |   | 303       |   |  |   | 279      
|Data processing                                     |  |                            | 185       |                           |      |   | 171       |  |   | 370       |   |  |   | 321      
|Federal insurance premiums                          |  |                            | 30        |                           |      |   | 30        |  |   | 61        |   |  |   | 59       
|Advertising                                         |  |                            | 48        |                           |      |   | 39        |  |   | 80        |   |  |   | 80       
|Professional fees                                   |  |                            | 90        |                           |      |   | 81        |  |   | 175       |   |  |   | 156      
|Other noninterest expense                           |  |                            | 210       |                           |      |   | 215       |  |   | 426       |   |  |   | 447      
|                                                    |  |                            |           |                           |      |   |           |  |   |           |   |  |   |          
|Total noninterest expense                           |  |                            | 1,911     |                           |      |   | 1,809     |  |   | 3,712     |   |  |   | 3,517    
|                                                    |  |                            |           |                           |      |   |           |  |   |           |   |  |   |          
|Income before income taxes                          |  |                            | 115       |                           |      |   | 444       |  |   | 332       |   |  |   | 893      
|                                                    |  |                            |           |                          
|Provision for income taxes                          |  |                            | 53        |                           |      |   | 155       |  |   | 125       |   |  |   | 319      
|                                                    |  |                            |           |                           |      |   |           |  |   |           |   |  |   |          
|Net income                                          |  | $                          | 62        |                           |      | $ | 289       |  |   | 207       |   |  |   | 574      
|                                                    |  |                            |           |                           |      |   |           |  |   |           |   |  |   |          
|Earnings per share                                  |  |                            |           |                           |      |   |           |  |   |           |   |  |   |          
|Basic                                               |  | $                          | .05       |                           |      | $ | .26       |  | $ | .18       |   |  | $ | .50      
|Diluted                                             |  | $                          | .05       |                           |      | $ | .24       |  | $ | .18       |   |  | $ | .47      
|                                                    |  |                            |           |                          
|Weighted average shares - basic                     |  |                            | 1,155,606 |                           |      |   | 1,130,626 |  |   | 1,151,144 |   |  |   | 1,158,295
|                                                    |  |                            |           |                          
|Comprehensive income (loss)                         |  | $                          | (963      | )                         |      | $ | 1,005     |  |   | (1,235    | ) |  |   | 117      
|                                                    |  |                            |           |                           |      |   |           |  |   |           |   |  |   |          

See notes to consolidated financial statements.



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##### Table of Contents

First Federal Bancshares, Inc.

Consolidated Statements of Shareholders Equity

Six months ended June 30, 2006 and 2005

(in thousands of dollars, except share data)

(unaudited)



|                                                                                          |  |             |    |                          |   |        |                    |  |   |                     |   |  |               |      |   |                  |   |         |                                             |  |   |                           |   |  |   |        |   |  |   |        |  
|----------------------------------------------------------------------------------------- |  | ----------- | -- | ------------------------ | - | ------ | ------------------ |  | - | ------------------- | - |  | ------------- | ---- | - | ---------------- | - | ------- | ------------------------------------------- |  | - | ------------------------- | - |  | - | ------ | - |  | - | ------ | -
|                                                                                          |  | CommonStock |    | AdditionalPaid-inCapital |   |        | UnearnedESOPShares |  |   | UnearnedStockAwards |   |  | TreasuryStock |      |   | RetainedEarnings |   |         | AccumulatedOtherCompre-hensiveIncome (loss) |  |   | TotalShare-holdersEquity |  
|Balance at December 31, 2004                                                              |  | $           | 22 |                          | $ | 22,954 |                    |  | $ | (1,032              | ) |  | $             | (474 | ) |                  | $ | (28,185 | )                                           |  | $ | 31,393                    |   |  | $ | (554   | ) |  | $ | 24,124 |  
|Purchase of 75,050 shares of treasury stock                                               |  |             |   |                          |   |       |                    |  |   |                    |   |  |               |     |   |                  |   | (1,859  | )                                           |  |   |                          |   |  |   |       |   |  |   | (1,859 | )
|ESOP shares earned                                                                        |  |             |   |                          |   | 117    |                    |  |   | 90                  |   |  |               |     |   |                  |   |        |                                             |  |   |                          |   |  |   |       |   |  |   | 207    |  
|Options exercised (2,175 shares)                                                          |  |             |   |                          |   | (28    | )                  |  |   |                    |   |  |               |     |   |                  |   | 66      |                                             |  |   |                          |   |  |   |       |   |  |   | 38     |  
|Stock awards earned                                                                       |  |             |   |                          |   |       |                    |  |   |                    |   |  |               | 135  |   |                  |   |        |                                             |  |   |                          |   |  |   |       |   |  |   | 135    |  
|Dividends declared ($.24 per share)                                                       |  |             |   |                          |   |       |                    |  |   |                    |   |  |               |     |   |                  |   |        |                                             |  |   | (283                      | ) |  |   |       |   |  |   | (283   | )
|Comprehensive income                                                                      |  |             |    |                          |   |        |                    |  |   |                     |   |  |               |      |   |                  |   |         |                                             |  |   |                           |   |  |   |        |   |  |   |        |  
|Net income                                                                                |  |             |   |                          |   |       |                    |  |   |                    |   |  |               |     |   |                  |   |        |                                             |  |   | 574                       |   |  |   |       |   |  |   | 574    |  
|Unrealized loss on securities available-for-sale, net of reclassification and tax effects |  |             |   |                          |   |       |                    |  |   |                    |   |  |               |     |   |                  |   |        |                                             |  |   |                          |   |  |   | (457   | ) |  |   | (457   | )
|                                                                                          |  |             |    |                          |   |        |                    |  |   |                     |   |  |               |      |   |                  |   |         |                                             |  |   |                           |   |  |   |        |   |  |   |        |  
|Total comprehensive loss                                                                  |  |             |    |                          |   |        |                    |  |   |                     |   |  |               |      |   |                  |   |         |                                             |  |   |                           |   |  |   |        |   |  |   | 117    |  
|                                                                                          |  |             |    |                          |   |        |                    |  |   |                     |   |  |               |      |   |                  |   |         |                                             |  |   |                           |   |  |   |        |   |  |   |        |  
|Balance at June 30, 2005                                                                  |  | $           | 22 |                          | $ | 23,043 |                    |  | $ | (942                | ) |  | $             | (339 | ) |                  | $ | (29,978 | )                                           |  | $ | 31,684                    |   |  | $ | (1,011 | ) |  | $ | 22,479 |  
|                                                                                          |  |             |    |                          |   |        |                    |  |   |                     |   |  |               |      |   |                  |   |         |                                             |  |   |                           |   |  |   |        |   |  |   |        |  
|Balance at December 31, 2005                                                              |  | $           | 22 |                          | $ | 23,166 |                    |  | $ | (852                | ) |  | $             | (203 | ) |                  | $ | (30,015 | )                                           |  | $ | 31,751                    |   |  | $ | (2,554 | ) |  | $ | 21,315 |  
|Transferred to additional paid-in capital                                                 |  |             |   |                          |   | (203   | )                  |  |   |                    |   |  |               | 203  |   |                  |   |        |                                             |  |   |                          |   |  |   |       |   |  |   |       |  
|Purchase of 51 shares of treasury stock                                                   |  |             |   |                          |   |       |                    |  |   |                    |   |  |               |     |   |                  |   | (1      | )                                           |  |   |                          |   |  |   |       |   |  |   | (1     | )
|ESOP shares earned                                                                        |  |             |   |                          |   | 78     |                    |  |   | 90                  |   |  |               |     |   |                  |   |        |                                             |  |   |                          |   |  |   |       |   |  |   | 168    |  
|Stock option expense                                                                      |  |             |   |                          |   | 78     |                    |  |   |                    |   |  |               |     |   |                  |   |        |                                             |  |   |                          |   |  |   |       |   |  |   | 78     |  
|Stock awards earned                                                                       |  |             |   |                          |   | 135    |                    |  |   |                    |   |  |               |     |   |                  |   |        |                                             |  |   |                          |   |  |   |       |   |  |   | 135    |  
|Dividends declared ($.24 per share)                                                       |  |             |   |                          |   |       |                    |  |   |                    |   |  |               |     |   |                  |   |        |                                             |  |   | (278                      | ) |  |   |       |   |  |   | (278   | )
|Comprehensive income                                                                      |  |             |    |                          |   |        |                    |  |   |                     |   |  |               |      |   |                  |   |         |                                             |  |   |                           |   |  |   |        |   |  |   |        |  
|Net income                                                                                |  |             |   |                          |   |       |                    |  |   |                    |   |  |               |     |   |                  |   |        |                                             |  |   | 207                       |   |  |   |       |   |  |   | 207    |  
|Unrealized loss on securities available-for-sale, net of reclassification and tax effects |  |             |   |                          |   |       |                    |  |   |                    |   |  |               |     |   |                  |   |        |                                             |  |   |                          |   |  |   | (1,442 | ) |  |   | (1,442 | )
|                                                                                          |  |             |    |                          |   |        |                    |  |   |                     |   |  |               |      |   |                  |   |         |                                             |  |   |                           |   |  |   |        |   |  |   |        |  
|Total comprehensive loss                                                                  |  |             |    |                          |   |        |                    |  |   |                     |   |  |               |      |   |                  |   |         |                                             |  |   |                           |   |  |   |        |   |  |   | (1,235 | )
|                                                                                          |  |             |    |                          |   |        |                    |  |   |                     |   |  |               |      |   |                  |   |         |                                             |  |   |                           |   |  |   |        |   |  |   |        |  
|Balance at June 30, 2006                                                                  |  | $           | 22 |                          | $ | 23,254 |                    |  | $ | (762                | ) |  | $             |     |   |                  | $ | (30,016 | )                                           |  | $ | 31,680                    |   |  | $ | (3,996 | ) |  | $ | 20,182 |  
|                                                                                          |  |             |    |                          |   |        |                    |  |   |                     |   |  |               |      |   |                  |   |         |                                             |  |   |                           |   |  |   |        |   |  |   |        |  

See notes to consolidated financial statements.



3



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##### Table of Contents

First Federal Bancshares, Inc.

Consolidated Statements of Cash Flows

(in thousands of dollars)

(unaudited)



|                                                                                 |  |                          |        |   |      |   |         |  
|-------------------------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------- | -
|                                                                                 |  | Six Months EndedJune 30, |       
|                                                                                 |  | 2006                     |        |   | 2005 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                             |  |                          |        |   |      |   |         |  
|Net income                                                                       |  | $                        | 207    |   |      | $ | 574     |  
|Adjustments to reconcile net income to net cash provided by operating activities |  |                          |        |   |      |   |         |  
|Depreciation                                                                     |  |                          | 133    |   |      |   | 128     |  
|Net gain on sale of real estate owned                                            |  |                          | (6     | ) |      |   | (3      | )
|Net amortization of premiums and discounts                                       |  |                          | 12     |   |      |   | 75      |  
|ESOP compensation expense                                                        |  |                          | 168    |   |      |   | 207     |  
|Stock award compensation expense                                                 |  |                          | 135    |   |      |   | 135     |  
|Stock option expense                                                             |  |                          | 78     |   |      |   |        |  
|Amortization of intangible assets                                                |  |                          | 21     |   |      |   | 20      |  
|Provision for loan losses                                                        |  |                          | 66     |   |      |   | 115     |  
|Deferred income taxes                                                            |  |                          | 66     |   |      |   | 91      |  
|Federal Home Loan Bank stock dividends                                           |  |                          |       |   |      |   | (42     | )
|Dividend reinvestments                                                           |  |                          | (22    | ) |      |   | (598    | )
|Net gain on sale of securities                                                   |  |                          | (11    | ) |      |   | (229    | )
|Net changes in                                                                   |  |                          |        |   |      |   |         |  
|Accrued interest receivable and other assets                                     |  |                          | 91     |   |      |   | (203    | )
|Deferred loan fees                                                               |  |                          | (30    | ) |      |   | (20     | )
|Accrued interest payable and other liabilities                                   |  |                          | 4      |   |      |   | 433     |  
|                                                                                 |  |                          |        |   |      |   |         |  
|Net cash from operating activities                                               |  |                          | 912    |   |      |   | 683     |  
|                                                                                 |  |                         
|CASH FLOWS FROM INVESTING ACTIVITIES                                             |  |                          |        |   |      |   |         |  
|Purchase of securities available-for-sale                                        |  |                          | (8,081 | ) |      |   | (2,460  | )
|Principal paydowns on mortgage-backed securities                                 |  |                          | 6,308  |   |      |   | 7,523   |  
|Purchase of Federal Home Loan Bank stock                                         |  |                          | (114   | ) |      |   | (42     | )
|Sale of Federal Home Loan Mortgage Corporation stock                             |  |                          |       |   |      |   | 239     |  
|Proceeds from sales of securities available-for-sale                             |  |                          | 3,797  |   |      |   | 2,338   |  
|Proceeds from maturities of securities available-for-sale                        |  |                          | 38     |   |      |   |        |  
|Purchase of loans                                                                |  |                          | (9,958 | ) |      |   | (22,920 | )
|Sale of loans                                                                    |  |                          | 1,597  |   |      |   | 802     |  
|Net decrease (increase) in loans receivable                                      |  |                          | 753    |   |      |   | (5,343  | )
|Proceeds from sale of real estate owned                                          |  |                          | 72     |   |      |   | 169     |  
|Purchase of premises and equipment                                               |  |                          | (33    | ) |      |   | (52     | )
|                                                                                 |  |                          |        |   |      |   |         |  
|Net cash from investing activities                                               |  |                          | (5,621 | ) |      |   | (19,746 | )
|                                                                                 |  |                         
|CASH FLOWS FROM FINANCING ACTIVITIES                                             |  |                          |        |   |      |   |         |  
|Net increase in deposits                                                         |  |                          | 10,932 |   |      |   | 10,000  |  
|Net change in advances from borrowers for taxes and insurance                    |  |                          | 199    |   |      |   | 166     |  
|Advances from the Federal Home Loan Bank                                         |  |                          | 5,000  |   |      |   | 8,000   |  
|Repayment of Federal Home Loan Bank advances                                     |  |                          | (8,542 | ) |      |   |        |  
|Purchase of treasury stock                                                       |  |                          | (1     | ) |      |   | (1,859  | )
|Dividends paid                                                                   |  |                          | (298   | ) |      |   | (303    | )
|Exercise of options                                                              |  |                          |       |   |      |   | 38      |  
|                                                                                 |  |                          |        |   |      |   |         |  
|Net cash from financing activities                                               |  |                          | 7,290  |   |      |   | 16,042  |  
|                                                                                 |  |                          |        |   |      |   |         |  
|Net change in cash and cash equivalents                                          |  |                          | 2,581  |   |      |   | (3,021  | )
|                                                                                 |  |                         
|Cash and cash equivalents                                                        |  |                          |        |   |      |   |         |  
|Beginning of period                                                              |  |                          | 12,798 |   |      |   | 14,387  |  
|                                                                                 |  |                          |        |   |      |   |         |  
|End of period                                                                    |  | $                        | 15,379 |   |      | $ | 11,366  |  
|                                                                                 |  |                          |        |   |      |   |         |  
|Supplemental disclosures of cash flow information                                |  |                          |        |   |      |   |         |  
|Cash paid during the period for                                                  |  |                          |        |   |      |   |         |  
|Interest                                                                         |  | $                        | 5,202  |   |      | $ | 3,611   |  
|Taxes, net of refunds                                                            |  |                          | (66    | ) |      |   | 278     |  
|Transfers to real estate owned                                                   |  |                          | 90     |   |      |   | 708     |  

See notes to consolidated financial statements.



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FIRST FEDERAL BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2006

(table amounts in thousands of dollars, except share data)

Note 1 - Basis of Presentation

The accompanying interim consolidated financial statements have been prepared pursuant to the rules
and regulations for reporting on Form 10-Q. Accordingly, certain disclosures required by U.S. generally accepted accounting principles are not included herein. These interim consolidated statements should be read in conjunction with First Federal
Bancshares, Inc.s (First Federal Bancshares or the Company) Annual Report on Form 10-K for the year ended December 31, 2005. The December 31, 2005 consolidated balance sheet presented herein has been derived
from the audited consolidated financial statements included in the Companys Annual Report on Form 10-K for the year ended December 31, 2005, but does not include all disclosures required by U.S. generally accepted accounting principles.

Interim statements are subject to possible adjustment in connection with the annual audit of the Company for the year ending December 31, 2006. In
the opinion of management of the Company, the accompanying unaudited interim consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the consolidated financial
position and consolidated results of operations for the periods presented. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reported period. Actual results could differ
from these estimates.

Note 2  Earnings Per Share

Basic earnings per share for the three and six months ended June 30, 2006 and 2005 were computed by dividing net income by the weighted average number of shares outstanding. Diluted earnings per share for the
three and six months ended June 30, 2006 and 2005 were computed by dividing net income by the weighted average number of shares outstanding, adjusted for the dilutive effect of the outstanding stock options and stock awards. Computations for
basic and diluted earnings per share are provided below.



|                                           |  |                                       |       |                                  |   |       |  |      |       |  |   |      
|------------------------------------------ |  | ------------------------------------- | ----- | -------------------------------- | - | ----- |  | ---- | ----- |  | - | -----
|                                           |  | For the three months Ended June 30,   |       | For the six monthsEnded June 30,
|                                           |  | 2006                                  |       | 2005                             |   | 2006  |  | 2005
|                                           |  | (in thousands, except per share data)
|Basic                                      |  |                                       |       |                                  |   |       |  |      |       |  |   |      
|Net income                                 |  | $                                     | 62    |                                  | $ | 289   |  | $    | 207   |  | $ | 574  
|                                           |  |                                       |       |                                  |   |       |  |      |       |  |   |      
|Weighted average common shares outstanding |  |                                       | 1,156 |                                  |   | 1,131 |  |      | 1,151 |  |   | 1,158
|                                           |  |                                       |       |                                  |   |       |  |      |       |  |   |      
|Basic earnings per common share            |  | $                                     | .05   |                                  | $ | .26   |  | $    | .18   |  | $ | .50  
|                                           |  |                                       |       |                                  |   |       |  |      |       |  |   |      
|Diluted                                    |  |                                       |       |                                  |   |       |  |      |       |  |   |      
|Net income                                 |  | $                                     | 62    |                                  | $ | 289   |  | $    | 207   |  | $ | 574  
|                                           |  |                                       |       |                                  |   |       |  |      |       |  |   |      
|Weighted average common shares outstanding |  |                                       | 1,156 |                                  |   | 1,131 |  |      | 1,151 |  |   | 1,158
|Dilutive effect of stock options           |  |                                       | 30    |                                  |   | 53    |  |      | 20    |  |   | 61   
|Dilutive effect of stock awards            |  |                                       | 1     |                                  |   | 4     |  |      | 1     |  |   | 6    
|                                           |  |                                       |       |                                  |   |       |  |      |       |  |   |      
|Diluted average common shares              |  |                                       | 1,187 |                                  |   | 1,188 |  |      | 1,172 |  |   | 1,225
|                                           |  |                                       |       |                                  |   |       |  |      |       |  |   |      
|Diluted earnings per common share          |  | $                                     | .05   |                                  | $ | .24   |  | $    | .18   |  | $ | .47  
|                                           |  |                                       |       |                                  |   |       |  |      |       |  |   |      



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Note 3  Stock-Based Compensation

The Company has a stock compensation plan under which it may issue stock options and restricted stock.

Under the 2001 Stock-Based Incentive Plan (the Plan), the Companys Compensation Committee granted 224,250 shares of its Common Stock for Incentive and
Non-Statutory stock options. All grants were made pursuant to the Plan prior to 2005. It is the Companys intent that shares issued under the Plan would come from treasury shares.

Under the Plan, certain key employees have been granted options to purchase shares of the Companys Common Stock at fair value at the date of the grant. All stock options have an exercise price that is at least
equal to the fair market value of the Companys stock on the date the options were granted. Options granted vest evenly over a five-year period and must be exercised within ten years from the date of grant.

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123R, Share Based Payment. The
Company elected to utilize the modified prospective transition method, therefore, prior period results were not restated. Prior to the adoption of SFAS 123R, stock-based compensation expense related to stock options was not recognized in the results
of operations if the exercise price was at least equal to the market value of the common stock on the grant date, in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees.

SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation
expense over the service period (generally the vesting period) in the consolidated financial statements based on their fair values. For options with graded vesting, we value the stock option grants and recognize compensation expense as if each
vesting portion of the award was a single award. Under the modified prospective method, unvested awards, awards that were granted, modified, or settled on or after January 1, 2006 are measured and accounted for in accordance with SFAS 123R. The
impact of forfeitures that may occur prior to vesting is also estimated and considered in the amount recognized.

The
following table summarizes stock option activity:



|                                   |  |                               |  |                                |       |               |         |   |                                |   |      
|---------------------------------- |  | ----------------------------- |  | ------------------------------ | ----- | ------------- | ------- | - | ------------------------------ | - | -----
|                                   |  | Six Months EndedJune 30, 2006 |  | Six Months EndedJune 30, 2005 
|                                   |  | OptionsShares                 |  | WeightedAveragePrice Per Share |       | OptionsShares |         |   | WeightedAveragePrice Per Share
|Outstanding at beginning of period |  | 209,016                       |  | $                              | 15.19 |               | 211,491 |   |                                | $ | 15.18
|Granted                            |  |                              |  |                                |      |               |        |   |                                |   |     
|Exercised                          |  |                              |  |                                |      |               | (2,175  | ) |                                |   | 14.27
|Forfeited                          |  |                              |  |                                |      |               |        |   |                                |   |     
|                                   |  |                               |  |                                |       |               |         |   |                                |   |      
|Outstanding at end of period       |  | 209,016                       |  |                                | 15.19 |               | 209,316 |   |                                |   | 15.19
|                                   |  |                               |  |                                |       |               |         |   |                                |   |      



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The following table details stock options exercisable:



|                                                |  |                        |         |                  |   |        
|----------------------------------------------- |  | ---------------------- | ------- | ---------------- | - | -------
|                                                |  | June 30,2006           |         | December 31,2005
|                                                |  | (dollars in thousands)
|Stock options vested and currently exercisable: |  |                        |         |                  |   |        
|Number                                          |  |                        | 155,349 |                  |   | 155,349
|Weighted average exercise price                 |  | $                      | 14.53   |                  | $ | 14.53  
|Weighted average remaining life (in years)      |  |                        | 5.6     |                  |   | 6.1    

The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes based stock
option valuation model. This model requires the input of subjective assumptions that will usually have a significant impact on the fair value estimate. Expected volatilities are based on historical volatility of the Companys stock, and
other factors. Expected dividends are based on dividend trends and the market price of the Companys stock price at grant. The Company uses historical data to estimate option exercises and employee terminations within the valuation
model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. There were no grants during the three or six months ended June 30, 2006 and 2005.
Management has estimated a forfeiture rate of 7%. Estimated forfeitures will be reassessed in subsequent periods and may change based on new facts and circumstances.

The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the market price of our common stock as of the reporting date. The intrinsic value of stock options that
were exercisable at June 30, 2006 was $454,000, while the intrinsic value of outstanding stock options was $472,000 at June 30, 2006. The Company recorded $37,000 in stock compensation expense during the three-month period and $78,000 for
the six-month period ended June 30, 2006. There were no options granted or modified during the three or six-month periods ended June 30, 2006 and 2005.

Prior to 2006, the Company applied APB Opinion 25 and related Interpretations in accounting for its stock option plan. Accordingly, no compensation cost was recognized at the date of grant. Had compensation cost been determined based on the
fair value at the grant dates for awards under the plan consistent with the method of SFAS No. 123, Accounting for Stock-Based Compensation, the Companys net income and earnings per share for the three and six months ended
June 30, 2005 would have been reduced to the pro forma amounts in the table below. For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the options vesting period.

As a result of adopting SFAS 123R on January 1, 2006, the Companys diluted earnings per share was $.04 lower for the six months ended June 30, 2006, than
if the Company had continued to account for stock-based compensation under APB opinion No. 25 for stock option grants. As a result of the adoption of SFAS 123R, the Companys net income was $62,000 and $207,000, respectively, for the three
and six-month periods ended June 30, 2006, compared to $84,000 and $255,000 for the same respective periods had SFAS 123R not been adopted.



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The following table illustrates the effect on net income and earnings per share if expense was measured using the fair
value recognition provisions of SFAS 123R as of June 30, 2005.



|                                                                                                                 |  |                                               |      |                                |   |     
|---------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------- | ---- | ------------------------------ | - | ----
|                                                                                                                 |  | Three Months Ended June 30, 2005              |      | Six Months Ended June 30, 2005
|                                                                                                                 |  | (dollars in thousands, except per share data)
|Net income, as reported                                                                                          |  | $                                             | 289  |                                | $ | 574 
|Deduct: Stock based compensation expense determined under the fair value based method, net of related tax effect |  |                                               | 25   |                                |   | 51  
|                                                                                                                 |  |                                               |      |                                |   |     
|Pro forma net income                                                                                             |  | $                                             | 264  |                                | $ | 523 
|                                                                                                                 |  |                                               |      |                                |   |     
|Earnings per share, as reported:                                                                                 |  |                                               |      |                                |   |     
|Basic                                                                                                            |  | $                                             | 0.26 |                                | $ | 0.50
|Diluted                                                                                                          |  |                                               | 0.24 |                                |   | 0.47
|                                                                                                                 |  |                                              
|Pro forma earnings per share:                                                                                    |  |                                               |      |                                |   |     
|Basic                                                                                                            |  | $                                             | 0.23 |                                | $ | 0.45
|Diluted                                                                                                          |  |                                               | 0.22 |                                | $ | 0.43

SFAS 123R requires the recognition of stock-based compensation for the number of awards that are ultimately
expected to vest. Unrecognized stock option compensation expense related to unvested awards for the remainder of 2006 and beyond is estimated as follows:



|                          |  |                |    
|------------------------- |  | -------------- | ---
|Year                      |  | (in thousands)
|July 2006  December 2006 |  | $              | 68 
|2007                      |  |                | 19 
|2008                      |  |                | 19 
|2009                      |  |                | 17 
|                          |  |                |    
|Total                     |  | $              | 123
|                          |  |                |    

Pursuant to its 2001 Stock-Based Incentive Plan, the Company awarded 89,700 shares of restricted stock during
2001. These shares vest over a five-year period. The unamortized cost of shares not yet earned (vested) is reported as a reduction of shareholders equity. Compensation expense for restricted stock awards totaled $68,000 for the three-month
period and $135,000 for the six-month period ended June 30, 2006. There were no shares granted or forfeited in the three or six-month periods ended June 30, 2006.

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This report contains certain
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). The Company intends such
forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, as amended, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words such as believe, expect,
intend, anticipate, estimate, project, or similar expressions. The Companys ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which
could have a material adverse affect on the operations and future prospects of the Company and its wholly-owned subsidiary include, but are not limited to, changes in: interest rates; general economic conditions; legislative/regulatory provisions;



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monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve
Board; the quality or composition of the loan or investment portfolios; demand for loan products; deposit flows; competition; demand for financial services in the Companys market area; and accounting principles, policies, and guidelines. These
risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Additional factors that may affect our results are discussed in the Companys Annual Report on
Form 10-K (the Form 10-K) and this Quarterly Report on Form 10-Q under Item 1A. Risk Factors.

The following discussion compares
the consolidated financial condition of First Federal Bancshares and its wholly owned subsidiary, First Federal Bank, at June 30, 2006 to its consolidated financial condition at December 31, 2005, and the consolidated results of its
operations for the three-month and six-month periods ended June 30, 2006 to the same periods in 2005. This discussion should be read in conjunction with the interim consolidated financial statements and footnotes included herein.

FINANCIAL CONDITION

Total assets were $345.8 million at
June 30, 2006 and $339.3 million at December 31, 2005. During the six months ended June 30, 2006, cash and cash equivalents increased $2.6 million to $15.4 million. Loans receivable increased $7.5 million to $186.0 million primarily
as a result of participation loans purchased totaling $10.0 million offset by loans sold totaling $1.6 million. Securities available-for-sale decreased $4.4 million to $132.6 million primarily as a result of a $2.4 million decrease in the fair value
of the portfolio, principal paydowns on mortgage-backed securities of $6.3 million, and the sale of securities available-for-sale of $3.8 million partially offset by purchases of securities available-for-sale of $8.1 million.

We have historically reviewed investment securities with significant declines in fair value for potential other-than-temporary impairment pursuant to the guidance set
forth in Statement of Financial Accounting Standards 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS 115 and SAB No. 59). We have developed a methodology for conducting periodic
impairment testing on marketable equity securities with dividends that adjust periodically based on market interest rate indices, such as the Shay Funds that we own. There are no other-than-temporary impairment issues.

The allowance for loan losses was $950,000 at June 30, 2006 and $971,000 at December 31, 2005. There were no impaired loans at either date. The allowance for
loan losses represented .51% of total loans at June 30, 2006 and .54% at December 31, 2005, and 92.95% of non-performing loans at June 30, 2006 compared to 86.70% of non-performing loans at December 31, 2005. Non-performing
assets totaled $1.3 million and $1.4 million at June 30, 2006 and December 31, 2005, respectively. The ratio of non-performing assets to total assets at June 30, 2006 was .38% compared to .40% at December 31, 2005.

Total liabilities at June 30, 2006 were $325.6 million compared to $318.0 million at December 31, 2005, an increase of $7.6 million. The increase in total
liabilities primarily reflects an increase in customer deposits of $10.9 million partially offset by a $3.5 million decrease in Federal Home Loan Bank advances.

Shareholders equity at June 30, 2006 was $20.2 million compared to $21.3 million at December 31, 2005, a decrease of $1.1 million. The decrease in equity primarily reflects a decrease in the fair value of securities
available-for-sale, net of tax, of $1.4 million, partially offset by net income of $207,000. Other items affecting equity include ESOP and stock awards earned, dividends paid, and stock option expense associated with the adoption of FAS 123R.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2006 AND JUNE 30, 2005

Net income decreased $227,000 to $62,000 for the quarter ended June 30, 2006 compared to the same period in 2005. The biggest factors in the decrease in net income were a decrease in net interest income due to a
narrower interest rate spread, a decrease in noninterest income due to the absence of significant gains on the sale of securities in the current period and an increase in noninterest expense, partially offset by a decrease in the provision for loan
losses.



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Net interest income was $1.8 million for the quarter ended June 30, 2006 compared to $1.9 million for the same prior
year period. The ratio of average interest-earning assets to average interest-bearing liabilities increased to 107.19% from 105.92% for the three-month periods, respectively. The net interest spread and the net interest margin decreased to 1.80% and
2.03%, respectively, for the quarter ended June 30, 2006 from 2.26% and 2.40%, respectively, for the same period in 2005. The decrease in the spread and margin was due to an increase in the rate of interest-bearing liabilities partially offset
by an increase in the volume of interest-earning assets. The increase in the cost of funds exceeded the increase in the yield on interest-earning assets as interest-bearing liabilities repriced upward more quickly than interest-earning assets in
reaction to the increasing short-term interest rate environment and flat yield curve. The average yield on interest-earning assets increased 39 basis points to 5.23% for the quarter ended June 30, 2006 from 4.84% for the same quarter in 2005,
while the average cost of interest-bearing liabilities increased 85 basis points to 3.43% for the quarter ended June 30, 2006 from 2.58% for the same period in 2005.

The provision for loan losses was $15,000 for the quarter ended June 30, 2006 compared to $115,000 for the same period in 2005. The change was a result of a $465,000 decrease in commercial mortgage loans on
watch status in the quarter ended June 30, 2006 compared to a $249,000 increase in the quarter ended June 30, 2005. Management considered the allowance for loan losses to be adequate during both periods.

On a quarterly basis, management of the Company meets to review the allowance for loan losses. Management classifies loans in compliance with regulatory classifications.
Classified loans are individually reviewed to arrive at specific reserves for those loans. Once the specific portion of the allowance is calculated, management calculates a historical portion for each loan category based on loan loss history, peer
data, current economic conditions and trends in the portfolio, including delinquencies and impairments, as well as changes in the composition of the loan portfolio. Although management believes that the allowance for loan losses reflected probable
incurred losses on existing loans at June 30, 2006, there can be no assurance that such losses will not exceed estimated amounts. Future adjustments to the allowance may be necessary due to economic, operating, regulatory and other conditions
that may be beyond the Companys control. The allowance for loan losses as of June 30, 2006 was maintained at a level that represents managements best estimate of probable incurred losses inherent in the loan portfolio.

Noninterest income was $290,000 for the three-month period ended June 30, 2006 compared to $476,000 for the same period in 2005. A decrease in net gain on sale
of securities of $234,000 was partially offset by increases of $27,000 in other fee income, $11,000 in service charges on deposit accounts, and small increases in loan origination and servicing fees and other income.

During July 2006, the Company sold its holdings in a mutual fund. The sale resulted in net proceeds of $9.1 million, net of a $231,000 loss. The loss on the sale of the
mutual fund was mostly offset by a gain of $212,000 on the sale of 3,900 shares of FHLMC stock. The Company intends to use the proceeds from the sale to fund approximately $8.0 million of commercial real estate loans, which will increase the average
yield on interest-earning assets and will further managements strategic plan to increase loans as a percentage of assets.

Noninterest expense was
$1.9 million for the quarter ended June 30, 2006 compared to $1.8 million for the same prior year period. Compensation and benefits expense increased $67,000 due to increases in retirement fund costs, stock option expense, and compensation
costs, partially offset by decreases in ESOP expense and health insurance premiums. Data processing expense increased $14,000 compared to the same quarter in 2005 due to the expiration of discounts resulting from a change in data processors during
2003. In addition, increases in occupancy and equipment, advertising, and professional fees were partially offset by a decrease in other noninterest expense.



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The Companys income tax expense decreased $102,000 to $53,000 for the quarter ended June 30, 2006 compared to
$155,000 during the same period in 2005 primarily as a result of decreased income. Income tax expense was approximately 46% and 35% of pretax income for the quarter ended June 2006 and 2005, respectively. The increase in the effective tax rate is
primarily for permanent differences in stock option expense under SFAS No. 123R in 2006.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED
JUNE 30, 2006 AND JUNE 30, 2005

Net income decreased $367,000 to $207,000 for the six months ended June 30, 2006 compared to the same period in 2005.
The biggest factors in the decrease in net income were a decrease in net interest income due to a narrower interest rate spread, a decrease in noninterest income due to the absence of significant gains on the sale of securities in the current period
and an increase in noninterest expense, partially offset by a decrease in the provision for loan losses.

Net interest income was $3.5 million for the
six-month period ended June 30, 2006 compared to $3.8 million for the same prior year period. The ratio of average interest-earning assets to average interest-bearing liabilities increased to 107.22% from 106.01% for the six-month periods,
respectively. The net interest spread and the net interest margin decreased to 1.85% and 2.07%, respectively, for the six months ended June 30, 2006 from 2.30% and 2.45%, respectively, for the same period in 2005. The decrease in the spread and
margin was primarily due to an increase in the rate paid on interest-bearing liabilities partially offset by an increase in the volume of interest-earning assets. The increase in the cost of funds exceeded the increase in the yield on
interest-earning assets as interest-bearing liabilities repriced upward more quickly than interest-earning assets in reaction to the increasing short-term interest rate environment and flat yield curve. The average yield on interest-earning assets
increased 38 basis points to 5.17% for the six months ended June 30, 2006 from 4.79% for the same quarter in 2005, while the average cost of interest-bearing liabilities increased 82 basis points to 3.31% for the six months ended June 30,
2006 from 2.49% for the same period in 2005.

The provision for loan losses was $66,000 for the six-month period ended June 30, 2006 compared to
$115,000 for the same period in 2005. The change was a result of a $508,000 decrease in commercial mortgage loans on watch status in the six months ended June 30, 2006 compared to a $66,000 increase in the same prior year period.
Management considered the allowance for loan losses to be adequate during both periods.

Noninterest income was $571,000 for the six months ended
June 30, 2006 compared to $704,000 for the same period in 2005. Decreases in net gain on sale of securities of $218,000 and other income of $10,000 were partially offset by increases of $65,000 in other fee income, $15,000 in service charges on
deposit accounts, $8,000 in recovery of impairment loss, and $7,000 in loan origination and servicing fees.

Noninterest expense was $3.7 million for the
six months ended June 30, 2006 compared to $3.5 million for the same prior year period. Compensation and benefits expense increased $122,000 due to increases in retirement fund costs, stock option expense, and compensation costs, partially
offset by decreases in health insurance premiums and ESOP expense. Data processing expense increased $49,000 compared to the same period in 2005 due to the expiration of discounts resulting from a change in data processors during 2003. In addition,
increases in occupancy and equipment and professional fees were partially offset by a decrease in other noninterest expense.

The Companys income tax
expense decreased $194,000 to $125,000 for the six-month period ended June 30, 2006 compared to $319,000 during the same period in 2005 primarily as a result of decreased income. Income tax expense was approximately 38% and 36% of pretax income
for the six months ended June 2006 and 2005, respectively.



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LIQUIDITY

The Company must maintain an adequate level of liquidity to ensure the availability of sufficient funds to fund loan originations and deposit withdrawals, to satisfy other financial commitments, and to take advantage
of investment opportunities. The Company invests excess funds in overnight deposits and other short-term interest-bearing assets to provide liquidity to meet these needs. At June 30, 2006, cash and cash equivalents totaled $15.4 million. At
June 30, 2006, the Company had commitments to fund loans of $1.3 million. At the same time, certificates of deposit which are scheduled to mature in one year or less totaled $142.5 million. Management believes, based on past experience, that a
significant portion of those deposits will remain with the Company. Based on the foregoing, in addition to the Companys high level of core deposits and capital, the Company considers its liquidity and capital resources sufficient to meet its
outstanding short-term and long-term needs. First Federal Bank has the ability to borrow funds at the Federal Home Loan Bank (FHLB). In the past, borrowed funds have been term advances and open lines of credit. At June 30, 2006 the Bank had
$13.5 million in FHLB advances with an average weighted rate of 4.23% and tiered maturities from February 2007 through February 2016. In addition, advances totaling $1.1 million with an average weighted rate of 5.14% are scheduled for payments to
amortize over a ten-year period, maturing in August and December 2015. Collateral used for these purposes are mortgage-backed securities issued by government sponsored agencies, namely, GNMA and FNMA, with a total value of $35.6 million, or 26.8% of
total available-for-sale securities, and therefore does not significantly impact the Companys liquidity. There were no open lines of credit at June 30, 2006.

CAPITAL RESOURCES

The Bank is subject to capital-to-asset requirements in accordance with bank regulations. The following
table summarizes the Banks regulatory capital requirements versus actual capital as of June 30, 2006:



|                                             |  |        |        |   |                 |   |        |        |        |  |      |        |  |   |        |  |      |  
|-------------------------------------------- |  | ------ | ------ | - | --------------- | - | ------ | ------ | ------ |  | ---- | ------ |  | - | ------ |  | ---- | -
|                                             |  | ACTUAL |        |   | MINIMUMREQUIRED |   |        | EXCESS |       
|                                             |  | AMOUNT |        | % |                 |   | AMOUNT |        | %      |  |      | AMOUNT |  | % |       
|Core capital (to adjusted total assets)      |  | $      | 25,263 |   | 7.31            | % |        | $      | 13,819 |  | 4.00 | %      |  | $ | 11,444 |  | 3.31 | %
|Tangible capital (to adjusted total assets)  |  |        | 25,263 |   | 7.31            |   |        |        | 5,182  |  | 1.50 |        |  |   | 20,081 |  | 5.81 |  
|Risk-based capital (to risk-weighted assets) |  |        | 25,594 |   | 15.26           |   |        |        | 13,419 |  | 8.00 |        |  |   | 12,175 |  | 7.26 |  

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Qualitative Aspects of Market Risk.The
Companys most significant form of market risk is interest rate risk. The principal objectives of the Companys interest rate risk management are to evaluate the interest rate risk inherent in certain balance sheet accounts, determine the
level of risk appropriate given the Companys business strategy, operating environment, capital and liquidity requirements and performance objectives, and manage the risk consistent with the Board of Directors approved guidelines. The
Company has an Asset/Liability Committee, responsible for reviewing its asset/liability policies and interest rate risk position, which meets monthly and reports trends and interest rate risk position to the Board of Directors quarterly. The extent
of the movement of interest rates is an uncertainty that could have a negative impact on the earnings of the Company.

The Company has used the following
strategies to manage interest rate risk: (1) emphasizing the origination and purchase of adjustable-rate and balloon loans and not originating long-term, fixed-rate loans for retention in its loan portfolio; (2) emphasizing shorter term
consumer loans; (3) introducing floating-rate commercial business loans tied to the prime rate; (4) maintaining a high quality securities portfolio that



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provides adequate liquidity and flexibility to take advantage of opportunities that may arise from fluctuations in market
interest rates, the overall maturity of which is monitored in relation to the repricing of its loan portfolio; and (5) using Federal Home Loan Bank advances to better structure maturities of its interest rate sensitive liabilities. The Company
currently does not participate in hedging programs, interest rate swaps or other activities involving the use of off-balance sheet derivative financial instruments.

Quantitative Aspects of Market Risk.The Company primarily utilizes an interest sensitivity analysis prepared by the Office of Thrift Supervision to review the level of interest rate risk of the Bank.
This analysis measures interest rate risk by computing changes in the net portfolio value of the Banks cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. Net
portfolio value represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market
risk sensitive instruments in the event of a sudden and sustained 100 to 300 basis point increase or decrease in market interest rates with no effect given to any steps that management might take to counter the effect of that interest rate movement.
The following table, which is based on information provided to the Bank by the Office of Thrift Supervision, presents the change in the Banks net portfolio value at June 30, 2006, the latest date for which information is available, that
would occur upon an immediate change in interest rates based on Office of Thrift Supervision assumptions, but without giving effect to any steps that management might take to counteract that change. All model outputs associated with the 300 bp
scenarios are not applicable because of the abnormally low prevailing interest rate environment.



|                                                      |                     |                        |          |           |         |          |                    |     |    |                                      |       |   |  |      |    
|----------------------------------------------------- | ------------------- | ---------------------- | -------- | --------- | ------- | -------- | ------------------ | --- | -- | ------------------------------------ | ----- | - |  | ---- | ---
|Change in Interest Rates in Basis Points (Rate Shock) |                     |                        |          |           |         |          |                    |     |    | NPV as % ofPortfolio Value of Assets |      
|                                                      | Net Portfolio Value |                        |          | NPV Ratio |         |          | Basis Point Change |    
|                                                      | Amount              |                        | $ Change |           |         | % Change |                    |     |   
|                                                      |                     | (Dollars in thousands) |          |           |         |          |                    |     |   
|300                                                   |                     | $                      | 17,110   |           | (14,210 | )        |                    | (45 | )% |                                      | 5.22  | % |  | (380 | )bp
|200                                                   |                     |                        | 22,266   |           | (9,054  | )        |                    | (29 | )  |                                      | 6.66  |   |  | (236 | )bp
|100                                                   |                     |                        | 26,936   |           | (4,384  | )        |                    | (14 | )  |                                      | 7.90  |   |  | (112 | )bp
|Static                                                |                     |                        | 31,320   |           |        |          |                    |    |    |                                      | 9.02  |   |  |     |    
|(100)                                                 |                     |                        | 35,051   |           | 3,731   |          |                    | 12  |    |                                      | 9.93  |   |  | 91   | bp 
|(200)                                                 |                     |                        | 37,269   |           | 5,949   |          |                    | 19  |    |                                      | 10.44 |   |  | 142  | bp 

The Office of Thrift Supervision uses certain assumptions in assessing the interest rate risk of savings
associations. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates, and the market values of certain assets under differing interest rate scenarios, among others.

As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although
certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance
of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable rate mortgage loans, have features, which restrict changes in interest rates on a
short-term basis and over the life of the asset. Further, if interest rates change, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating the table.

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 Exchange Act. Based upon their evaluation, the



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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.



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##### Table of Contents

PART II  OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

Periodically, there have been various claims and lawsuits involving the Company,
such as claims to enforce liens, condemnation proceedings on properties in which the Company holds security interest, claims involving the making and servicing of real property loans and other issues incident to the Companys business. In the
opinion of management, after consultation with the Companys legal counsel, no significant loss is expected from any such pending claims or lawsuits. The Company is not a party to any material pending legal proceedings.

ITEM 1A. RISK FACTORS.

In addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2005, which could materially affect our business, financial condition or future results. The risks
described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial
condition and/or operating results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

The following table provides certain
information with regard to shares repurchased by the Company in the second quarter of 2006.



|                                     |  |                                                |     |  |                                           |       |                                                                                               |   |                                                                                                                             |  
|------------------------------------ |  | ---------------------------------------------- | --- |  | ----------------------------------------- | ----- | --------------------------------------------------------------------------------------------- | - | --------------------------------------------------------------------------------------------------------------------------- | -
|Period                               |  | (a) Total Number of Shares (or Units)Purchased |     |  | (b)Average Price Paid per Share (or
Unit) |       | (c) Total Number ofShares (or Units) Purchased as Part of Publicly AnnouncedPlans or Programs |   | (d) Maximum Number (or Appropriate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
|April 1, 2006 through April 30, 2006 |  |                                               |     |  |                                           |      |                                                                                               |  |                                                                                                                             | 
|                                     |  |                                                |     | 
|May 1, 2006 through May 31, 2006     |  |                                               |     |  |                                           |      |                                                                                               |  |                                                                                                                             | 
|                                     |  |                                                |     | 
|June 1, 2006 through June 30, 2006   |  | 51                                             | (1) |  | $                                         | 20.00 |                                                                                               |  |                                                                                                                             | 

---

|(1) | Purchased through unsolicited private transactions.
|--- | ---------------------------------------------------

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None



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##### Table of Contents

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.

On May 23, 2006, the Company held its
annual meeting of stockholders for the purpose of the election of three directors to three-year terms and the ratification of Crowe Chizek and Company LLC as the Companys independent auditors. The number of votes cast at the meeting as to each
matter to be acted upon was as follows:



|                      |  |                      |  |                          
|--------------------- |  | -------------------- |  | -------------------------
|Election of Directors |  | Number of Votes For: |  | Number of Votes Withheld:
|B. Bradford Billings  |  | 787,722              |  | 87,038                   
|                      |  |                      |  |                          
|Gerald L. Prunty      |  | 787,260              |  | 87,500                   
|                      |  |                      |  |                          
|James J. Stebor       |  | 791,560              |  | 83,200                   
|                      |  |                      |  |                          

The Directors whose terms continued and the years their terms expire are as follows:
Dr. Stephan L. Roth (2007), Richard D. Stephens (2007), Franklin M. Hartzell (2008), Murrel Hollis (2008), Mark K. Bross (2008).



|                                                                                  |  |                     |  |                        |  |                         
|--------------------------------------------------------------------------------- |  | ------------------- |  | ---------------------- |  | ------------------------
|                                                                                  |  | Number of Votes For |  | Number ofVotes Against |  | Number ofVotes Abstained
|Ratification of Crowe Chizek and Company LLC as the Companys Independent Auditor |  | 824,294             |  | 48,880                 |  | 1,586                   

There were no broker non-votes.

ITEM 5. OTHER INFORMATION.

None



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ITEM 6. EXHIBITS



| | 3.1 | Certificate of Incorporation of First Federal Bancshares, Inc. (1)
| | --- | ------------------------------------------------------------------



| | 3.2 | Bylaws of First Federal Bancshares, Inc. (2)
| | --- | --------------------------------------------



| | 4.0 | Specimen Stock Certificate of First Federal Bancshares, Inc. (1)
| | --- | ----------------------------------------------------------------



| | 10.1 | *Employment Agreement between First Federal Bancshares, Inc. and James J. Stebor (3)
| | ---- | ------------------------------------------------------------------------------------



| | 10.2 | *Employment Agreement between First Federal Bank and James J. Stebor (3)
| | ---- | ------------------------------------------------------------------------



| | 10.3 | *First Federal Bank Supplemental Executive Retirement Plan (3)
| | ---- | --------------------------------------------------------------



| | 10.4 | *First Federal Bank Employee Severance Compensation Plan (3)
| | ---- | ------------------------------------------------------------



| | 10.5 | *First Federal Bancshares, Inc. 2001 Stock-Based Incentive Plan (4)
| | ---- | -------------------------------------------------------------------



| | 10.6 | *PFSB Bancorp, Inc. 2000 Stock-Based Incentive Plan (5)
| | ---- | -------------------------------------------------------



| | 10.7 | *Form of NSO Award Agreement (6)
| | ---- | --------------------------------



| | 10.8 | *Change in Control Agreement with Mark Tyrpin (7)
| | ---- | -------------------------------------------------



| | 31.1 | Rule 13a  14(a)/15d  14(a) Certification of the Chief Executive Officer.
| | ---- | --------------------------------------------------------------------------



| | 31.2 | Rule 13a  14(a)/15d  14(a) Certification of the Chief Financial Officer.
| | ---- | --------------------------------------------------------------------------



| | 32.1 | Section 1350 Certification of the Chief Executive Officer.
| | ---- | ----------------------------------------------------------



| | 32.2 | Section 1350 Certification of the Chief Financial Officer.
| | ---- | ----------------------------------------------------------

---

|* | Management contract or compensatory plan, contract or arrangement.
|- | ------------------------------------------------------------------

|(1) | Incorporated herein by reference from the Exhibits to Form SB-2, Registration Statement and amendments thereto, initially filed on May 5, 2000, Registration No. 333-36368.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated herein by reference from the Exhibits to the Annual Report on Form 10-KSB, filed on March 28, 2002.
|--- | ----------------------------------------------------------------------------------------------------------------

|(3) | Incorporated herein by reference from the Exhibits to the Quarterly Report on Form 10-QSB filed on November 14, 2000.
|--- | ---------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated herein by reference from the Exhibits to the Quarterly Report on Form 10-QSB filed on August 13, 2001.
|--- | -------------------------------------------------------------------------------------------------------------------

|(5) | Incorporated by reference to PFSB Bancorp, Inc.s Registration Statement on Form S-8 (SEC No. 333-35020) filed on April 18, 2000.
|--- | ---------------------------------------------------------------------------------------------------------------------------------

|(6) | Incorporated by reference from the Exhibits to the Annual Report on Form 10-K filed on March 31, 2005.
|--- | ------------------------------------------------------------------------------------------------------

|(7) | Incorporated by reference from the Exhibits to the Annual Report on Form 10-K filed on March 30, 2006.
|--- | ------------------------------------------------------------------------------------------------------



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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.



|                      |  |                                      
|--------------------- |  | -------------------------------------
|                      |  | FIRST FEDERAL BANCSHARES, INC.       
|                      | 
|Date: August 14, 2006 |  | /s/ James J. Stebor                  
|                      |  | James J. Stebor                      
|                      |  | President and Chief Executive Officer
|                      | 
|Date: August 14, 2006 |  | /s/ Cathy D. Pendell                 
|                      |  | Cathy D. Pendell                     
|                      |  | Treasurer                            



18