**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**




**FORM
      10-QSB**




(mark
      one)




**ý** **QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
      SECURITIES**


**EXCHANGE
      ACT OF 1934**


**For
      the quarterly period ended March 31, 2006**




or




** ̈** **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
      ACT**




For
      the
      transition period from _______to_______




Commission
      File Number 000-51123




**ROYAL
      FINANCIAL, INC.**


(Exact
      name of small business issuer specified in its charter)







**Delaware**
              (State
                or other jurisdiction of incorporation or organization)
            **20-1636029**
              (I.R.S.
                Employer Identification Number)**9226
                S. Commercial Avenue**
              **Chicago,
                Illinois 60617**
              (Address
                of principal executive offices)





**(773) 768-4800**


(Issuer’s
      telephone number)




**Not
      Applicable**


(Former
      name, former address and former fiscal year,


if
      changes since last report)




Check
      whether the issuer (1) filed all reports required to be filed by
      Section 13 or 15(d) of the Exchange Act during the past 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 ý No  ̈




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




State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date:


**Class**
            **Outstanding
                as of March 31, 2006**Common
                Stock, $0.01 par value
            2,537,450





Transitional
      Small Business Disclosure Format (check one): Yes  ̈ No ý









**ROYAL
      FINANCIAL, INC. AND SUBSIDIARY**




**FORM
      10-QSB**




**For
      the quarterly period ended March 31, 2006**




**TABLE
      OF CONTENTS**




**Page****PART
                I - FINANCIAL INFORMATION**Item
                1. Financial StatementsConsolidated
                Statements of Financial Condition as of March 31, 2006 and June 30,
                2005
            1Consolidated
                Statements of Income (Loss) and Comprehensive Income (Loss) for the
                three
                months and nine months ended March 31, 2006 and 2005
            2Consolidated
                Statements of Stockholders’ Equity for the nine months ended
                March 31, 2006 and 2005
            3Consolidated
                Statements of Cash Flows for the nine months ended March 31, 2006
                and
                2005
            4Item
                2. Management’s Discussion and Analysis of Financial Condition and Results
                of Operations
            8Item
                3. Controls and Procedures
            12**PART II
                - OTHER INFORMATION**Item
                1. Legal Proceedings
            14Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            14Item
                3. Defaults Upon Senior Securities
            14Item
                4. Submission of Matters to a Vote of Security Holders
            14Item
                5. Other Information
            14Item
                6. Exhibits
            14**SIGNATURES**
            15**EXHIBIT INDEX**









**PART
      I. - FINANCIAL INFORMATION**




**Item
      1.**  **Financial
      Statements** **.**




**ROYAL
      FINANCIAL, INC. AND SUBSIDIARY**


CONSOLIDATED
        STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
 March
        31,
        2006 and June 30, 2005




**March 31,
                2006**
            
            **June 30,
                2005****ASSETS**Cash
                and due from financial institutions
            
            $
            3,319,118
            
            $
            5,434,381Federal
                funds sold
            
            
            2,257,805
            
            
            11,587,315Total
                cash and cash equivalents
            
            
            5,576,923
            
            
            17,021,696Securities
                available for sale
            
            
            23,551,535
            
            
            33,241,548Loans
                receivable, net of allowance for loan losses of $376,020 at March 31,
                2006 and $286,020 at June 30, 2005
            
            
            73,738,968
            
            
            52,325,571Federal
                Home Loan Bank stock, at cost
            
            
            377,514
            
            
            369,500Cash
                surrender value of life insurance
            
            
            5,200,724
            
            
            5,038,027Premises
                and equipment, net
            
            
            4,561,411
            
            
            4,616,417Accrued
                interest receivable
            
            
            365,801
            
            
            306,961Other
                assets
            
            
            388,574
            
            
            301,041Total
                assets
            
            $
            113,761,450
            
            $
            113,220,761**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**LiabilitiesDeposits
            
            $
            77,633,746
            
            $
            78,107,014Advances
                from borrowers for taxes and insurance
            
            
            284,853
            
            
            377,037Federal
                funds purchased
            
            
            2,500,000
            
            
            —Accrued
                interest payable and other liabilities
            
            
            288,632
            
            
            197,419Common
                stock in ESOP subject to contingent repurchase obligation
            
            
            314,226
            
            
            272,964Total
                liabilities
            
            
            81,021,457
            
            
            78,954,434Stockholders’
                equityPreferred
                stock, $.01 par value per share, authorized 1,000,000 shares; no
                issues
                are outstanding
            
            
            —
            
            
            —Common
                stock, $.01 par value per share, authorized 5,000,000 shares 2,645,000
                shares issued at March 31, 2006 and June 30, 2005
            
            
            26,450
            
            
            26,450Additional
                paid-in capital
            
            
            24,728,983
            
            
            24,764,553Retained
                earnings
            
            
            12,185,496
            
            
            12,268,336Treasury
                stock, 28,200 and 0 shares, at cost
            
            
            (418,770
            )
            
            -Accumulated
                other comprehensive loss, net of tax
            
            
            (312,032
            )
            
            (113,322
            )Unearned
                RRP shares
            
            
            (949,249
            )
            
            —Unearned
                ESOP shares
            
            
            (2,206,659
            )
            
            (2,406,726
            )Reclassification
                of ESOP shares
            
            
            (314,226
            )
            
            (272,964
            )Total
                stockholders’ equity
            
            
            32,739,993
            
            
            34,266,327Total
                liabilities and stockholders’ equity
            
            $
            113,761,450
            
            $
            113,220,761





*See
      accompanying notes to these unaudited consolidated financial
      statements.*




1





**ROYAL
      FINANCIAL, INC. AND SUBSIDIARY**


CONSOLIDATED
        STATEMENTS OF INCOME (LOSS)
 AND
        COMPREHENSIVE INCOME (LOSS)
 Three
        months and nine months ended March 31, 2006 and 2005
 (Unaudited)


**Three
                Months Ended**
              **March
                31,**
            
            **Nine
                Months Ended**
              **March
                31,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Interest
                incomeLoans
            
            $
            1,194,149
            
            $
            711,969
            
            $
            3,139,577
            
            $
            1,814,082SecuritiesTaxable
            
            
            226,865
            
            
            349,254
            
            
            802,524
            
            
            946,255Tax-exempt
            
            
            —
            
            
            —
            
            
            —
            
            
            7,993Federal
                funds sold and other
            
            
            31,360
            
            
            129,093
            
            
            174,767
            
            
            273,168Total
                interest income
            
            
            1,452,374
            
            
            1,190,316
            
            
            4,116,868
            
            
            3,041,498Interest
                expenseDeposits
            
            
            339,153
            
            
            314,279
            
            
            971,352
            
            
            913,939Advances
                from Federal Home Loan Bank
            
            
            —
            
            
            7,170
            
            
            —
            
            
            56,032Federal
                funds purchased
            
            
            264
            
            
            —
            
            
            264
            
            
            —Total
                interest expense
            
            
            339,417
            
            
            321,449
            
            
            971,616
            
            
            969,971**Net
                interest income**
            
            
            1,112,957
            
            
            868,867
            
            
            3,145,252
            
            
            2,071,527Provision
                for loan losses
            
            
            30,000
            
            
            20,000
            
            
            90,000
            
            
            20,000**Net
                interest income after provision for loan losses**
            
            
            1,082,957
            
            
            848,867
            
            
            3,055,252
            
            
            2,051,527Noninterest
                incomeService
                charges on deposit accounts
            
            
            55,697
            
            
            46,098
            
            
            174,110
            
            
            143,360Gain
                (loss) on sale of securities, net
            
            
            (43,823
            )
            
            —
            
            
            (45,457
            )
            
            175,532Gain
                on sale of loans
            
            
            —
            
            
            11,069
            
            
            —
            
            
            52,199Earnings
                on cash surrender value of life insurance
            
            
            54,566
            
            
            —
            
            
            162,697
            
            
            —Other
                income
            
            
            55,910
            
            
            19,528
            
            
            131,542
            
            
            55,412Total
                noninterest income
            
            
            122,350
            
            
            76,695
            
            
            422,892
            
            
            426,503Noninterest
                expenseSalaries
                and employee benefits
            
            
            695,442
            
            
            527,255
            
            
            1,797,164
            
            
            1,269,578Occupancy
                and equipment
            
            
            254,469
            
            
            199,644
            
            
            726,951
            
            
            544,822Data
                processing
            
            
            103,127
            
            
            110,380
            
            
            312,798
            
            
            313,956Professional
                services
            
            
            94,155
            
            
            82,003
            
            
            362,529
            
            
            147,440Director
                fees
            
            
            34,200
            
            
            30,600
            
            
            100,200
            
            
            91,800Supplies
            
            
            22,117
            
            
            21,127
            
            
            55,126
            
            
            68,552Advertising
            
            
            5,629
            
            
            14,278
            
            
            28,475
            
            
            78,650Insurance
                premiums
            
            
            20,055
            
            
            28,954
            
            
            58,943
            
            
            64,124Charitable
                foundation donation
            
            
            —
            
            
            600,000
            
            
            —
            
            
            600,000Other
            
            
            90,523
            
            
            126,241
            
            
            222,048
            
            
            212,710Total
                noninterest expense
            
            
            1,319,717
            
            
            1,740,482
            
            
            3,664,234
            
            
            3,391,632**Loss
                before income tax expense**
            
            
            (114,410
            )
            
            (814,920
            )
            
            (186,090
            )
            
            (913,602
            )


Income
                    tax expense (benefit)
                
                $
                (54,724
                )
                $
                (279,000
                )
                $
                (103,250
                )
                $
                (310,000
                )


Net
                income (loss)
            
            $
            (59,686
            )
            $
            (535,920
            )
            $
            (82,840
            )
            $
            (603,602
            )Basic
                and diluted earnings (loss) per share
            
            $
            (.02
            )
            $
            (0.20
            )
            $
            (.03
            )
            $
            (0.20
            )Comprehensive
                income (loss)
            
            
            (67,396
            )
            
            (790,355
            )
            
            (281,550
            )
            
            (690,167
            )




*See
      accompanying notes to these unaudited consolidated financial
      statements.*




2




**ROYAL
        FINANCIAL, INC. AND SUBSIDIARY**
 CONSOLIDATED
          STATEMENT OF STOCKHOLDERS’ EQUITY
 Nine
        months ended March 31, 2006 and 2005
 (Unaudited)
  **2005**
                
                **Common
                    Stock**
                
                **Additional
                    Paid-In Capital**
                
                **Retained
                    Earnings**
                
                **Treasury**
                  **Stock**
                
                **Accumulated
                    Other Compre-hensive Income (Loss)**
                
                **Unearned
                    RRP Shares**
                
                **Unearned
                    ESOP Shares**
                
                **Amount
                    Reclassified on ESOP Shares**
                
                **Total**Balance
                    at July 1, 2004
                
                $
                —
                
                $
                —
                
                $
                12,912,324
                
                $
                —
                
                $
                (213,511
                )
                $
                —
                
                $
                —
                
                $
                —
                
                $
                12,698,813Comprehensive
                    income (loss)Net
                    income (loss)
                
                
                —
                
                
                —
                
                
                (603,602
                )
                
                —
                
                
                —
                
                
                
                
                
                —
                
                
                —
                
                
                (603,602
                )Change
                    in fair value of securities available-for-sale, net
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (86,565
                )
                
                
                
                
                —
                
                
                —
                
                
                (86,565
                )Total
                    comprehensive (loss)
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                
                
                
                —
                
                
                —
                
                
                (690,167
                )Issuance
                    of common stock, net of offering costs
                
                
                25,950
                
                
                24,274,315
                
                
                —
                
                
                —
                
                
                —
                
                
                
                
                
                —
                
                
                —
                
                
                24,300,265Purchase
                    of 211,000 shares for ESOP
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                
                
                
                (2,667,150
                )
                
                —
                
                
                (2,667,150
                )ESOP
                    shares earned
                
                
                —
                
                
                
                
                
                —
                
                
                —
                
                
                —
                
                
                
                
                
                106,513
                
                
                —
                
                
                106,513Donation
                    of 50,000 shares to Royal Charitable Foundation
                
                
                500
                
                
                499,500
                
                
                —
                
                
                —
                
                
                —
                
                
                
                
                
                —
                
                
                —
                
                
                500,000Balance
                    at March 31, 2005
                
                $
                26,450
                
                $
                24,773,815
                
                $
                12,308,722
                
                $
                —
                
                $
                (300,076
                )
                $
                —
                
                $
                (2,560,637
                )
                $
                —
                
                $
                34,248,2742006Balance
                    at July 1, 2005
                
                $
                26,450
                
                $
                24,764,553
                
                $
                12,268,336
                
                $
                —
                
                $
                (113,322
                )
                $
                —
                
                $
                (2,406,726
                )
                $
                (272,964
                )
                $
                34,266,327Comprehensive
                    income (loss)Net
                    income (loss)
                
                
                —
                
                
                —
                
                
                (82,840
                )
                
                
                
                
                —
                
                
                
                
                
                —
                
                
                —
                
                
                (82,840
                )Change
                    in fair value of securities available-for-sale, net
                
                
                —
                
                
                —
                
                
                —
                
                
                
                
                
                (198,710
                )
                
                
                
                
                —
                
                
                —
                
                
                (198,710
                )Total
                    comprehensive (loss)
                
                
                —
                
                
                —
                
                
                —
                
                
                
                
                
                —
                
                
                
                
                
                —
                
                
                —
                
                
                (281,550
                )Reclassification
                    due to change in fair value of common stock in ESOP subject to
                    contingent
                    repurchase obligation
                
                
                —
                
                
                —
                
                
                —
                
                
                
                
                
                —
                
                
                
                
                
                —
                
                
                (41,262
                )
                
                (41,262
                )Purchase
                    of 107,550 at cost
                
                
                —
                
                
                —
                
                
                —
                
                
                (1,582,768
                )
                
                —
                
                
                
                
                
                —
                
                
                —
                
                
                (1,582,768
                )Allocation
                    of 79,350 shares to the RRP plan
                
                
                
                
                
                (57,912
                )
                
                
                
                
                1,163,998
                
                
                
                
                
                (1,106,086
                )
                
                
                
                
                
                
                
                —RRP
                    shares earned
                
                
                —
                
                
                
                
                
                —
                
                
                
                
                
                —
                
                
                156,837
                
                
                —
                
                
                —
                
                
                156,837ESOP
                    shares earned
                
                
                —
                
                
                22,342
                
                
                —
                
                
                
                
                
                —
                
                
                
                
                
                200,067
                
                
                —
                
                
                222,409Balance
                    at March 31, 2006
                
                $
                26,450
                
                $
                24,728,983
                
                $
                12,185,496
                
                $
                (418,770
                )
                $
                (312,032
                )
                $
                (949,249
                )
                $
                (2,206,659
                )
                $
                (314,226
                )
                $
                32,739,993
  *See
        accompanying notes to these unaudited consolidated financial
        statements.*




3




**ROYAL
      FINANCIAL, INC. AND SUBSIDIARY**


CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 Nine
        months ended March 31, 2006 and 2005
 (Unaudited)





**2006**
            
            **2005****Cash
                flows from operating activities**Net
                income (loss)
            
            $
            (82,840
            )
            $
            (603,602
            )Adjustments
                to reconcile net income (loss) to net cash from operating
                activities:Depreciation
            
            
            210,129
            
            
            131,952Provision
                for loan losses
            
            
            90,000
            
            
            20,000Charitable
                foundation donation
            
            
            —
            
            
            500,000(Gain)
                loss on sale of securities available for sale
            
            
            45,457
            
            
            (175,532
            )Federal
                Home Loan Bank stock dividend
            
            
            (8,014
            )
            
            (10,400
            )Gain
                on sale of loans sold
            
            
            —
            
            
            (52,199
            )Earnings
                on bank-owned life insurance
            
            
            (162,697
            )
            
            —ESOP
                expense
            
            
            222,409
            
            
            106,513RRP
                shares earned
            
            
            156,837
            
            
            —Change
                in accrued interest receivable and other assets
            
            
            (146,373
            )
            
            (57,661
            )Change
                in other accrued interest payable and liabilities
            
            
            193,578
            
            
            (113,008
            )Net
                cash from operating activities
            
            
            518,486
            
            
            (253,937
            )**Cash
                flows from investing activities**Proceeds
                from sales, maturities, calls, and paydowns of available for sale
                securities
            
            
            11,343,481
            
            
            16,812,003Purchases
                of securities available for sale
            
            
            (2,000,000
            )
            
            (7,487,766
            )Change
                in loans receivable
            
            
            (14,652,397
            )
            
            (9,187,452
            )Purchase
                of loan participations
            
            
            (6,851,000
            )
            
            (4,244,720
            )Purchase
                of premises and equipment
            
            
            (155,123
            )
            
            (468,253
            )Net
                cash from investing activities
            
            
            (12,315,039
            )
            
            (4,576,188
            )**Cash
                flows from financing activities**Net
                increase (decrease) in deposits
            
            
            (473,268
            )
            
            4,888,731Federal
                funds purchased
            
            
            2,500,000
            
            
            —Repayment
                of Federal Home Loan Bank advance
            
            
            —
            
            
            (2,000,000
            )Change
                in advances from borrowers for taxes and insurance
            
            
            (92,184
            )
            
            (56,373
            )Proceeds
                from stock offering, net of offering cost
            
            
            —
            
            
            24,300,265Purchase
                of Treasury stock
            
            
            (1,582,768
            )
            
            —Purchase
                of ESOP shares
            
            
            —
            
            
            (2,667,150
            )Net
                cash from financing activities
            
            
            351,780
            
            
            24,465,473Net
                change in cash and cash equivalents
            
            
            (11,444,773
            )
            
            19,635,348Cash
                and cash equivalentsBeginning
                of the year
            
            
            17,021,696
            
            
            7,942,567End
                of period
            
            $
            5,576,923
            
            $
            27,577,915





*See
      accompanying notes to these unaudited consolidated financial
      statements.*




4




**ROYAL
      FINANCIAL, INC. AND SUBSIDIARY**


**NOTES
        TO UNAUDITED FINANCIAL STATEMENTS**




**Note
      1 — Nature of Business**




Royal
      Financial, Inc. was incorporated under the laws of Delaware on
      September 15, 2004, for the purpose of serving as the holding company of
      Royal Savings Bank (the “Bank”) as part of the Bank’s conversion from a mutual
      to stock form of organization. As described in Note 2 below, the conversion
      was
      completed on January 20, 2005.




**Note
      2 — Basis of Presentation**




The
      accompanying unaudited consolidated financial statements include the accounts
      of
      Royal Financial, Inc. (the “Company”) and its wholly owned subsidiary, Royal
      Savings Bank, as of and for the three- and nine- month periods ended
      March 31, 2006 and 2005. Significant intercompany accounts and transactions
      have been eliminated in consolidation.




On
      August 18, 2004, the Board of Directors of the Bank unanimously adopted a
      plan of conversion providing for the conversion of the Bank from an
      Illinois-chartered mutual savings bank to an Illinois-chartered stock savings
      bank and the purchase of all of the common stock of the Bank by the Company.
      The
      members of the Bank approved the plan at a meeting held on December 21,
      2004, and the conversion was completed on January 20, 2005 when the Company
      issued 2,595,000 shares of common stock to the public, resulting in $25,950,000
      of gross proceeds. Costs to complete the stock offering were deducted from
      the
      gross proceeds of the offering. The Bank issued all of its outstanding capital
      stock to the Company in exchange for one half of the net proceeds of the
      offering, which amounted to $12.1 million. The Company contributed 50,000 shares
      of common stock to the Royal Charitable Foundation in February,
      2005.




The
      accompanying unaudited interim consolidated financial statements have been
      prepared pursuant to the rules and regulations for reporting on Form 10-QSB.
      Accordingly, certain disclosures required by U.S. generally accepted accounting
      principles (GAAP) are not included herein. These interim financial statements
      should be read in conjunction with the audited financial statements and
      accompanying notes of the Company for the fiscal years ended June 30, 2005
      and 2004. The results of the Company’s operations for any interim period are not
      necessarily indicative of the results of the Company’s operations for any other
      interim period or for a full fiscal year.




Interim
      statements are subject to possible adjustment in connection with the annual
      audit of the Company’s financial statements for the fiscal year ending
      June 30, 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.




**Note
      3 — Use of Estimates**




The
      preparation of the consolidated financial statements in conformity with GAAP
      requires management to make estimates and assumptions that affect amounts
      reported in the consolidated financial statements. Changes in these estimates
      and assumptions are considered reasonably possible and may have a material
      impact on the consolidated financial statements and thus actual results could
      differ from the amounts reported and disclosed herein. The Company considers
      the
      allowance for loan losses and the carrying value of deferred tax asset accounts
      to be critical accounting estimates.




5




At
      March 31, 2006, there were no material changes in the Company’s significant
      accounting policies or critical accounting estimates from those disclosed in
      the
      audited financial statements and accompanying notes of the Company for the
      fiscal years ended June 30, 2005 and 2004.




**Note
      4 — Earnings Per Share**




The
      following table presents a reconciliation of the components used to compute
      basic and diluted earnings (loss) per share for the three-month and nine month
      periods ended March 31, 2006. Weighted average common shares outstanding
      excludes unallocated ESOP shares.




**Three
                Months Ended**
              **March 31,
                2006**
            
            **Nine
                Months Ended**
              **March
                31, 2006**Basic
                and diluted loss per shareNet
                loss as reported
            
            $
            59,686
            
            $
            82,840Weighted
                average common shares outstanding
            
            
            2,389,703
            
            
            2,435,879Basic
                loss per share
            
            $
            (.02
            )
            $
            (.03
            )Weighted
                average common shares outstanding, including common stock
                equivalents
            
            
            2,648,913
            
            
            2,579,885Diluted
                loss per share
            
            $
            (.02
            )
            $
            (.03
            )





Earnings
      per share for the period ending March 31, 2005 is calculated beginning with
      January 20, 2005, the date of conversion. Net loss for the period from
      conversion through March 31, 2005 was $499,720. Weighted average shares
      outstanding for the period from conversion through March 31, 2005 are 2,537,113,
      resulting in a basic and diluted loss per share of $0.20.




Diluted
      earnings per common share included the dilutive effects of additional potential
      common shares
      issuable under stock options and stock awards.





**Note
      5 — Employee Stock Ownership Plan**




On
      January 20, 2005, the Company adopted an employee stock ownership plan
      (“ESOP”) for the benefit of substantially all employees. The ESOP borrowed $2.7
      million from the Company and used those funds to acquire 211,600 shares of
      the
      Company’s stock at an average price of $12.62 per share.




Shares
      purchased by the ESOP are allocated to ESOP participants based on principal
      and
      interest repayments made by the ESOP on the loan from the Company. The loan
      is
      secured by shares purchased with the loan proceeds and will be repaid by the
      ESOP with funds from the Company’s discretionary contributions to the ESOP and
      earnings on ESOP assets.




The
      $2.7
      million loan from the Company to the ESOP requires annual principal payments
      of
      approximately $267,000, plus interest at 7.25%.




As
      shares
      are released from collateral, the Company will report compensation expense
      equal
      to the current market price of the shares and the shares will become outstanding
      for earnings-per-share (“EPS”) computations.




Upon
      termination of their employment, participants in the ESOP who elect to receive
      their benefit distributions in the form of Company common stock may require
      the
      Company to purchase the common stock distributed at fair value. This contingent
      repurchase obligation is reflected in the Company’s financial statements as
“Common stock in ESOP subject to contingent repurchase obligation” and reduces
      stockholders’ equity by an amount that represents the market value of all the
      Company’s common stock held by the ESOP and allocated to participants, without
      regard to whether it is likely that the shares would




6




be
      distributed or that the recipients of the shares
      would be likely to exercise their right to require the Company to purchase
      the
      shares.




**Note
      6 — Stock Option Plan and Recognition and Retention Plan**




On
      August 2, 2005, subject to stockholder approval, the Company’s Board of
      Directors approved the grant of stock options and restricted stock awards to
      each of the Company’s directors and certain of its executive officers under the
      Royal Financial, Inc. 2005 Stock Option Plan (“SOP”) and the Royal Financial,
      Inc. 2005 Management Recognition and Retention Plan (“RRP”). The SOP and RRP
      were approved by the Company’s stockholders on October 26, 2005 at the
      Company’s 2005 Annual Meeting, and upon approval, 185,150 stock options and
      74,060 stock awards were granted at fair market value ($13.90 per share). A
      subsequent grant of 13,225 stock options and 5,290 stock awards were issued
      to
      one officer of the Company on February 21, 2006 at fair market value
      ($14.49 per share).  A
      total
      of 264,500 and 105,800 shares of Company common stock have been reserved for
      issuance under the SOP and the RRP, respectively. The plans have a term of
      ten
      years. Both the stock options and restricted stock awards vest equally (20%
      per
      year) over five years. Compensation expense related to vesting of the stock
      awards will approximate $207,000 per year. The Company will also be required
      to
      record compensation expense related to the nonvested portion of the stock
      options outstanding beginning July 1, 2006, the effective date of the
      Company’s adoption of Statement on Financial Account Standard No. 123R.
      Compensation expense related to vesting of stock options will approximate
      $179,000 per year based on current options outstanding.




*Stock
      Compensation:* Employee
      compensation expense under stock options is reported using the intrinsic value
      method. No stock-based compensation cost is reflected in net income, as all
      options granted had an exercise price equal to or greater than the market price
      of the underlying common stock at date of grant. The following table illustrates
      the effect on net income and earnings per share if expense was measured using
      the fair value recognition provisions of FASB Statement No. 123, *Accounting
      for Stock-Based Compensation* .




**Three
                Months Ended 3/31/06**
            
            **Nine
                Months Ended 3/31/06**Net
                income (loss) as reported
            
            $
            (59,686
            )
            $
            (82,840
            )Deduct:
                Stock-based compensation expense determined under fair value based
                method
            
            
            99,106
            
            
            133,639Pro
                forma net income (loss)
            
            
            (158,792
            )
            
            (216,479
            )Basic
                earnings per share as reported
            
            
            (.02
            )
            
            (.03
            )Pro
                forma basic earnings per share
            
            
            (.07
            )
            
            (.09
            )Diluted
                earnings per share as reported
            
            
            (.02
            )
            
            (.03
            )Pro
                forma diluted earnings per share
            
            
            (.07
            )
            
            (.09
            )





As
      of
      March 31, 2005 there were no stock options outstanding.




The
      fair
      value of options granted and pro forma effect are computed using option pricing
      models, using the following weighted-average assumptions as of the grant
      dates.




**2006**Risk-free
                  interest rate
              4.52%Expected
                  option life
              7
                  yearsExpected
                  stock price volatility
              20%Dividend
                  yield
              —Weighted
                  average fair value of options granted during year
              $4.83


7


**Item
      2.**  **Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations** **.**




***Forward-Looking
      Information***




This
      report includes forward-looking statements, including statements regarding
      our
      strategy, effectiveness of investment programs, evaluations of future interest
      rate trends and liquidity, expectations as to growth in assets, deposits and
      results of operations, future operations, market position, financial position,
      and prospects, plans and objectives of management. These forward-looking
      statements, which are based on certain assumptions and describe our future
      plans, strategies and expectations, can generally be identified by use of the
      words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or
      similar expressions. Our ability to predict results or the actual effect of
      future plans or strategies is inherently uncertain and actual results may differ
      materially from those predicted in such forward-looking statements. Factors
      that
      could have a material adverse effect on the operations and future prospects
      of
      the Company and the Bank include, but are not limited to, changes in: interest
      rates; the economic health of the local real estate market; general economic
      conditions; legislative/regulatory provisions; 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 and securities portfolios;
      demand for loan products; deposit flows; competition; demand for financial
      services in the Bank'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.




***Comparison
      of Financial Condition at March 31, 2006 and June 30,
      2005***




The
      Company’s total assets increased $541,000, or 0.5%, to $113.8 million at
      March 31, 2006, from $113.2 million at June 30, 2005.




Cash
      and
      cash equivalents decreased $11.4 million to $5.6 million at March 31, 2005
      from $17.0 million at June 30, 2005, as a result of an increase in loans
      during the period.




Securities
      available for sale decreased $9.7 million, or 29.2%, to $23.6 million at
      March 31, 2006 from $33.2 million at June 30, 2005. The decrease is
      the result of the sale and maturities of $11.3 million of securities. The
      proceeds from the sale and maturity of securities were used to fund new loan
      growth and to purchase $2 million of additional securities to reposition the
      portfolio for purposes of interest rate risk planning.




Loans
      increased $21.4 million, or 40.9%, to $73.7 million at March 31, 2006, from
      $52.3 million at June 30, 2005. The increase in loans was the result of
      management’s continued emphasis on growing the commercial and commercial real
      estate loan portfolios.




Total
      deposits decreased $473,000, or 0.6%, to $77.6 million at March 31, 2006, from
      $78.1 million at June 30, 2005. The Company purchased $2.5 million in
      federal funds for short-term liquidity purposes.




Total
      stockholders’ equity decreased $1.5 million at March 31, 2006 from
      June 30, 2005. The decrease was primarily the result of the purchase of
      107,550 shares of common stock at a cost of $1.6 million. Approximately $1.1
      million of the re-purchased stock was allocated to the Company’s RRP plan and is
      reflected as a contra-equity account (“unearned RRP’s”) until the shares become
      vested by the participants. The decrease in stockholders' equity was also the
      result of a $82,840 net loss and a change in the fair value of securities
      available for sale. The decrease in stockholders’ equity is partially offset by
      the pro rata vesting of shares by participants in the ESOP and RRP
      plans.




8





***Comparison
      of Results of Operation for the Three Months and Nine Months Ended
      March 31, 2006 and 200*** ***5***




*General* .
      Net
      loss for the three months ended March 31, 2006 was $60,000, a decrease in
      net loss of $476,000 from the same period in 2005. For the nine months ended
      March 31, 2006, the net loss was $83,000, a decrease in net loss of
      $521,000 from the same period last year. The decrease in net loss for the
      quarter and nine months ended March 31, 2006 is primarily the result of a
      $600,000 charitable contribution made in fiscal year 2005. The net loss in
      2006
      resulted from increased overhead costs, primarily in the area of salaries and
      employee benefits, occupancy and equipment, and professional services. The
      increase in noninterest expense is a result of the Company’s continued
      preparations for implementing its growth strategy.




*Net
      Interest Income* .
      Net
      interest income increased by $244,000 to $1.1 million for the three months
      ended
      March 31, 2006, from $869,000 for the same period in 2005. Net interest
      income increased by $1.1 million to $3.1 million for the nine months ended
      March 31, 2006, from the same period in 2005. The net interest rate spread
      was 4.02% and 3.78% for the three and nine months ended March 31, 2006,
      respecitvley, as compared to 2.79% and 2.69% for the same period in 2005.
      The net interest margin increased to 4.51% and 4.23% for the three and nine
      month periods ended March 31, 2006, from 3.02% and 2.80% for the same
      periods in 2005, reflecting the migration of interest-earning assets to higher
      yielding loans. Management believes that the continued migration of
      interest-earning assets to higher yielding loans will generate the net interest
      income needed to cover increases in noninterest expenses, leading to future
      profitability.




*Interest
      Income* .
      Total
      interest income increased $262,000 to $1.5 million for the three months ended
      March 31, 2006 from $1.2 million for the three months ended March 31,
      2005. Total interest income increased $1.2 million to $4.2 million for the
      nine
      months ended March 31, 2006 from $3.0 million for the same period in 2005.
      For the three and nine months ended March 31, 2006, average
      interest-earning assets were $98.8 million and $99.1 million, respectively,
      compared to $112.9 million and $98.4 million for the same periods in 2005.
      The
      yield on interest-earning assets increased to 5.88% and 5.54% for the three
      and
      nine month periods ended March 31, 2006 from 4.16% and 4.09% for the
      comparable periods in 2005, as a result of an increase in loans and market
      interest rates earned on such loans.




*Interest
      Expense* .
      Total
      interest expense increased $18,000 and $2,000 to $339,000 and $972,000,
      respectively,  for the three and nine months ended March 31, 2006 from
      $321,000 and $970,000 for the same periods in 2005. The average cost of funds
      increased
      from 1.35%
      and
      1.37% for the three and nine months ended March 31, 2005 to 1.75%
      and 1.66% for the same periods in 2006. Interest expense was lowered by $7,000
      and $56,000 for the quarter and nine month ended as a result of the prepayment
      of FHLB advances in 2005.




*Provision
      for Loan Losses* .
      Provisions for loan losses are charged to operations at a level required to
      reflect probable incurred credit losses in the loan portfolio. In evaluating
      the
      level of the allowance for loan losses, management considers historical loss
      experience, the composition and amount of loans in the loan portfolio, adverse
      situations that may affect the borrower’s ability to repay, estimated value of
      any underlying collateral, peer group information, and prevailing economic
      conditions. Large groups of smaller balance homogenous loans, such as
      residential real estate, small commercial real estate, and home equity and
      consumer loans, are evaluated in the aggregate using historical loss factors
      and
      peer group data adjusted for current economic conditions. Large balance and/or
      more complex loans, such as multi-family and commercial real estate loans,
      are
      evaluated individually for impairment.




This
      evaluation is inherently subjective, as it requires estimates that are
      susceptible to significant revision, as more information becomes available
      or as
      projected events change. Provision for loan losses




9




of
      $30,000 and $90,000 were made for the three and nine months ended March 31,
      2006. The provisions were the result of continued growth of the loan portfolio.
      The allowance for loan losses as a percentage of gross loans outstanding
      decreased to 0.51% at March 31, 2006, from 0.53% at March 31, 2005.
      The Bank had no nonperforming loans at March 31, 2006 or March 31,
      2005.




Management
      assesses the allowance for loan losses quarterly. While management uses
      available information to recognize losses on loans, future loan loss provisions
      may be necessary based on changes in economic conditions. In addition,
      regulatory agencies, as an integral part of their examination process,
      periodically review the allowance for loan losses and may require us to
      recognize additional provisions based on their judgment of information available
      to them at the time of their examination. The allowance for loan losses as
      of
      March 31, 2006 was maintained at a level that represented management’s best
      estimate of losses in the loan portfolio to the extent they were both probable
      and reasonably estimable.




*Noninterest
        Income*. Noninterest income increased $46,000 to $122,000 for the three
        month period ended March 31, 2006 from the same period in 2005. Noninterest
        income decreased $4,000 to $423,000 for the nine month period ended
        March 31, 2006, compared to the same period in 2005. The increase in the
        three month period was primarily the result of earnings on the cash surrender
        value of bank-owned life insurance and increased service fee income, offset
        by
        losses on the sales of securities available for sale. The decrease in
        noninterest income for the nine month period ended March 31, 2006, was
        primarily the result of $45,000 in losses on sales of securities compared
        to
        $176,000 of gains on sales of securities for the comparable period in 2005.
        The
        Company is the beneficiary of bank-owned life insurance policies on its former
        chief financial officer, Neil Brodzenski, who passed away in
        March 2006. Approximately $578,000, plus interest, of the proceeds
        from the $1.3 million death benefit of the policies will be recognized as
        noninterest income upon approval of the insurance claim.


*Noninterest
      Expense* .
      Noninterest expense decreased $421,000 and $273,000 to $1.3 million and $3.7
      million for the three and nine months ended March 31, 2006 from $1.7
      million and $3.4 million for the three and nine months ended March 31,
      2005. The decrease was primarily the result of a $600,000 charitable foundation
      donation in the third quarter of 2005. If the donation is excluded from the
      2005
      period, non interest expense for 2006 would have increased $179,000 and $873,000
      for the quarter and nine month periods ended March 31, 2006 compared to the
      prior year periods, primarily as a result of an increase in salaries and
      employee benefits, occupancy and equipment expenses, and professional
      services.




Salaries
      and employee benefits increased $168,000 and $528,000 for the three and nine
      months ended March 31, 2006, respectively, compared to the same periods in
      2005, primarily resulting from the hiring of new loan and accounting personnel,
      a new operations officer and a new chief financial officer. The Company incurred
      compensation expense of $74,000 and $222,000 for ESOP shares earned over the
      three and nine months ended March 31, 2006. Beginning in the second quarter
      of 2006, the Company began incurring compensation expense related to
      participants vesting in awards granted under the Management Recognition and
      Retention Plan (“RRP”). Expense related to this plan was $120,000 and $157,000
      for the three and the nine months ended March 31, 2006. The death of the
      Company’s former chief financial officer resulted in the immediate vesting
      of his outstanding stock awards. The Company recognized $67,000 of compensation
      expense related to the vesting of these awards.




Occupancy
      and equipment expense increased $55,000 and $182,000 for the three and nine
      months ended March 31, 2006 compared to the same periods in 2005, due
      primarily to depreciation on the new bank building and furniture and equipment
      used in the new building and the branch office in Lansing.




Professional
      services for the quarter increased $12,000 and $215,000 for the three and nine
      months ended March 31, 2006 compared to the same periods in 2005. The increase
      in professional services is a result of the Company’s additional reporting
      requirements as a public company and the preparation necessary for




10




its
      first annual meeting as a public company earlier in
      2006. The Company also incurred costs related to the establishmnet of the
      ESOP plan in 2005.




*Provision
      for Income Taxes* .
      The
      income tax benefit decreased $224,000 for the three months ended March 31,
      2006 from the comparable period in 2005. For the nine months ended
      March 31, 2006, the tax benefit was $103,000 as compared to the tax benefit
      of $310,000 recorded for the comparable nine month period in 2005. A majority
      of
      the tax benefit in fiscal year 2005 was related to the charitable foundation
      donation, which is currently reflected as a deferred tax asset. The remaining
      changes in the income tax benefits are the result of the changes in taxable
      income for the applicable period.




***Liquidity
      and Capital Resources***




*Liquidity* .
      Liquidity management is measured and monitored on both a short- and long-term
      basis, allowing management to better understand and react to emerging balance
      sheet trends. After assessing actual and projected cash flow needs, management
      seeks to obtain funding at the most economical cost. Our primary sources of
      funds are deposits, principal and interest payments on loans, proceeds from
      maturities and calls of securities and FHLB advances, and funds provided from
      operations. While maturities and scheduled amortization of loans and securities
      are relatively predictable sources of funds, deposit flows and loan repayments
      are greatly influenced by general interest rates, economic conditions, and
      competition. We invest excess funds in short-term interest-earning assets,
      which
      enable us to meet lending requirements. We utilize FHLB advances as needed.
      At
      March 31, 2006 there were no FHLB advances outstanding.




The
      Company’s cash flows are comprised of three primary classifications: cash flows
      from operating activities, investing activities, and financing activities.
      Net
      cash from operating activities was $518,000 and $(254,000) for three months
      ended March 31, 2006 and 2005, respectively. Net cash from investing
      activities consisted primarily of disbursements for loan originations and
      participation interests and the purchase of securities, offset by principal
      collections on loans, proceeds from the maturity and sale of securities and
      paydowns on mortgage-backed securities. Net cash used in investing activities
      was $12.3 million and $4.6 million for three months ended March 31, 2006,
      and 2005, respectively. Net cash from financing activities in the current year
      consisted primarily of the activity in deposit accounts, federal funds
      purchased, and borrowings. The net cash from financing activities was $352,000
      at March 31, 2006 and $24.5 million at March 31, 2005.




From
      June 30, 2005 through March 31, 2006, the Company received proceeds of
      $11.3 million from sales, maturities, calls and paydowns of available for sale
      securities held in its portfolio. These proceeds were primarily reinvested
      in
      new loans.




At
      March 31, 2006, the Company had outstanding commitments to originate loans,
      unfunded lines of credit and participation loans of $15.9 million, and letters
      of credit outstanding of $294,000. In addition, as of March 31, 2006, the
      total amount of certificates of deposit that were scheduled to mature in the
      next 12 months equaled $26.7 million. The Company believes that it has adequate
      resources to fund all of its commitments and that it can adjust the rates paid
      on certificates of deposit to retain deposits in changing interest rate
      environments. If the Company requires funds beyond its internal funding
      capabilities, advances from the FHLB are available as an additional source
      of
      funds. As of March 31, 2006, the Bank had $14.2 million of available credit
      from the FHLB.




*Capital* .
      The
      Bank is required to maintain regulatory capital sufficient to meet Tier 1
      leverage, Tier 1 risk-based and total risk-based capital ratios of at least
      4.0%, 4.0% and 8.0%, respectively. At March 31, 2006, the Bank exceeded
      each of its capital requirements with ratios of 19.75%, 28.44% and 28.92%,
      respectively.




11





***Critical
      Accounting Policies and Estimates***




The
      accounting and reporting policies of the Company are in accordance with U.S.
      generally accepted accounting principles and conform to general practices within
      the banking industry. Accounting and reporting policies for the allowance for
      loan losses and income tax are deemed critical because they involve the use
      of
      estimates and require significant management judgments.




*Allowance
      for Loan Losses* .
      The
      allowance for loan losses is an amount that management believes will be adequate
      to absorb probable incurred losses in existing loans, taking into consideration
      such factors as past loss experience, changes in the nature and volume of the
      portfolio, overall portfolio quality, loan concentrations, specific problem
      loans, and current economic conditions that affect the borrower’s ability to
      pay. Determination of the allowance is inherently subjective due to the
      above-mentioned reasons. Loan losses are charged off against the allowance
      when
      management believes that the full collectability of the loan is unlikely.
      Recoveries of amounts previously charged off are credited to the allowance.
      Allowances established to provide for losses under commitments to extend credit,
      or recourse provisions under loan sales agreements or servicing agreements
      are
      classified with other liabilities.




A
      loan is
      considered impaired when it is probable that not all principal and interest
      amounts will be collected according to the loan contract. Residential mortgage,
      installment and other consumer loans are collectively evaluated for impairment.
      Individual commercial loans are evaluated for impairment. Impaired loans are
      recorded at the loan’s fair value by the establishment of a specific allowance
      where necessary. The fair value of collateral-dependent loans is determined
      by
      the fair value of the underlying collateral. The fair value of
      noncollateral-dependent loans is determined by discounting expected future
      interest and principal payments at the loan’s effective interest
      rate.




The
      Company maintains the allowance for loan losses at a level adequate to absorb
      management’s estimate of probable losses inherent in the loan portfolio.
      Management believes that it uses the best information available to determine
      the
      adequacy of the allowance for loan losses. However, future adjustments to the
      allowance may be necessary and the results of operations could be significantly
      and adversely affected if circumstances differ substantially from the
      assumptions used in making the determinations.




*Income
      Taxes* .
      Accounting for income taxes is a critical accounting policy due to the
      subjective nature of certain estimates that are involved in the calculation.
      The
      Company uses an asset/liability method of accounting for income taxes in which
      deferred tax assets and liabilities are established for temporary differences
      between the financial reporting basis and the tax basis of the Company’s assets
      and liabilities. The Company must assess the realization of the deferred tax
      asset quarterly, and to the extent that management believes that recovery is
      not
      likely, a valuation allowance is established. This assessment is impacted by
      various factors, including taxable income and the composition of the investment
      securities portfolio. Material changes to these items can cause an adjustment
      to
      the valuation allowance. An adjustment to increase or decrease the valuation
      allowance is charged or credited, if
      necessary,to income tax expense.




**Item
      3.**  **Controls
      and Procedures** **.**




As
      of the
      end of the period covered by this report, we carried out an evaluation, under
      the supervision, and with the participation of our management, including our
      Chief Executive Officer and Chief Financial Officer, of the effectiveness of
      the
      design and operation of our disclosure controls and procedures as contemplated
      by Exchange Act Rule 13a-15. Based upon, and as of the date of, that evaluation,
      the Chief Executive Officer and Chief Financial Officer concluded that the
      Company’s disclosure controls and procedures are effective, in all material
      respects, in timely alerting them to




12




material
      information relating to the Company (and its consolidated subsidiary) required
      to be included in the periodic reports the Company is required to file and
      submit to the SEC under the Exchange Act.




13





**PART II. -
      OTHER INFORMATION**




**Item
      1.**  **Legal
      Proceedings** **.**




Neither
      the Company nor
      the Bank is
      involved in any pending legal proceedings other than routine legal proceedings
      occurring in the ordinary course of business that, in the aggregate, are
      believed by management to be immaterial to the Company’s business, financial
      condition, results of operations and cash flows.




**Item
      2.**  **Unregistered
      Sales of Equity Securities and Use of Proceeds** **.**




**Period**
              
              **(a)**
                **Total
                  Number of Shares Purchased**
              
              **(b)**
                **Average
                  Price paid per Share**
              
              **(c)**
                **Total
                  Number of Shares Purchased as part of publicly announced Plans
                  or
                  Programs**
              
              **(d)**
                **Maximum
                  Number of Shares that may be purchased under the Plans/Program
                  (1)**0/01/06-01/31/06
              
              
              —
              
              
              —
              
              
              —
              
              
              132,25002/01/06-02/28/06
              
              
              15,250
              
              
              $14.45
              
              
              15,250
              
              
              117,00003/01/06-03/31/06
              
              
              92,300
              
              
              14.76
              
              
              92,300
              
              
              24,700Total
              
              
              107,550
              
              
              $14.72
              
              
              107,550
              
              
              24,700
 ____________
 (1) In
        January 2006, the Company received regulatory approval to repurchase up to
        5% of
        its outstanding shares of common stock, or 132,250 shares (the “Program”).
        Unless terminated earlier by the Company’s Board of Directors, the Program will
        expire when the Company has repurchased all shares authorized for repurchase
        thereunder.




**Item
      3.**  **Defaults
      Upon Senior Securities** ***.***




None




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




None





**Item
      5.**  **Other
      Information** **.**




None




**Item
      6.**  **Exhibits** **.**




(a)  The
      exhibits filed as part of this Form 10-QSB are listed in the Exhibit Index,
      which is incorporated herein by reference.




14





**SIGNATURES**




Pursuant
      to the requirements of the Securities Exchange Act of 1934, as amended, the
      Registrant has duly caused this report to be signed on its behalf by the
      undersigned, thereunto duly authorized.




**ROYAL
                FINANCIAL, INC.**Date: 
                May 15, 2006
              By:
              /s/
                Donald A. Moll
 Donald
                A. MollPresident
                and Chief Executive Officer
 Date: 
                    May 15, 2006
                  By:
                  /s/
                    Leonard Szwajkowski
  Leonard
                    SzwajkowskiSenior
                    Vice President and Chief Financial
                    Officer
 15
  **EXHIBIT INDEX**


10.1
                Executive
                    Employment Agreement dated as of February 21, 2006 by and among Royal
                    Financial, Inc., Royal Savings Bank and Leonard
                    Szwajkowski.31.1
                Certification
                    of Chief Executive Officer pursuant to Section 302 of the
                    Sarbanes-Oxley Act of 2002.31.2
                Certification
                    of Chief Financial Officer pursuant to Section 302 of the
                    Sarbanes-Oxley Act of 2002.32.1
                Certification
                    of Chief Executive Officer and Chief Financial Officer pursuant
                    to 18
                    U.S.C. Section 1350, as adopted pursuant to Section 906 of the
                    Sarbanes-Oxley Act of 2002.