**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 December 31, 2005**




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 January 30, 2006**Common
                Stock, $0.01 par value
            2,645,000





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









**ROYAL
      FINANCIAL, INC. AND SUBSIDIARY**




**FORM
      10-QSB**




**For
      the quarterly period ended December 31, 2005**




**TABLE
      OF CONTENTS**




**Page****PART
                I - FINANCIAL INFORMATION**Item
                1. Financial StatementsConsolidated
                Statements of Financial Condition as of December 31, 2005 and
                June 30, 2005
            1Consolidated
                Statements of Income (Loss) and Comprehensive Income (Loss) for the
                three
                months and six months ended December 31, 2005 and
                2004
            2Consolidated
                Statements of Stockholders’ Equity for the six months ended
                December 31, 2005 and 2004
            3Consolidated
                Statements of Cash Flows for the six months ended December 31, 2005
                and 2004
            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
            13Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            13Item
                3. Defaults Upon Senior Securities
            13Item
                4. Submission of Matters to a Vote of Security Holders
            13Item
                5. Other Information
            14Item
                6. Exhibits
            14**SIGNATURES**
            15**EXHIBIT INDEX**




i





**PART
      I. - FINANCIAL INFORMATION**




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




**ROYAL
      FINANCIAL, INC. AND SUBSIDIARY**


CONSOLIDATED
      STATEMENTS OF FINANCIAL CONDITION


December 31,
      2005 and June 30, 2005




**December 31,
                2005**
            
            **June 30,**
              **2005**(Unaudited)**ASSETS**Cash
                and due from financial institutions
            
            $
            3,431,482
            
            $
            5,434,381Federal
                funds sold
            
            
            405,769
            
            
            11,587,315Total
                cash and cash equivalents
            
            
            3,837,251
            
            
            17,021,696Securities
                available for sale
            
            
            28,613,089
            
            
            33,241,548Loans
                receivable, net of allowance for loan losses of $346,020 at
                December 31, 2005 and $286,020 at June 30, 2005
            
            
            68,518,366
            
            
            52,325,571Federal
                Home Loan Bank stock, at cost
            
            
            377,514
            
            
            369,500Cash
                surrender value of life insurance
            
            
            5,146,158
            
            
            5,038,027Premises
                and equipment, net
            
            
            4,508,090
            
            
            4,616,417Accrued
                interest receivable
            
            
            360,461
            
            
            306,961Other
                assets
            
            
            378,032
            
            
            301,041Total
                assets
            
            $
            111,738,961
            
            $
            113,220,761**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**LiabilitiesDeposits
            
            $
            76,446,459
            
            $
            78,107,014Advances
                from borrowers for taxes and insurance
            
            
            433,618
            
            
            377,037Accrued
                interest payable and other liabilities
            
            
            351,202
            
            
            197,419Common
                stock in ESOP subject to contingent repurchase obligation
            
            
            300,049
            
            
            272,964Total
                liabilities
            
            
            77,531,328
            
            
            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 December 31, 2005 and June 30,
                2005
            
            
            26,450
            
            
            26,450Additional
                paid-in capital
            
            
            24,813,391
            
            
            24,764,553Retained
                earnings
            
            
            12,245,182
            
            
            12,268,336Accumulated
                other comprehensive loss, net of tax
            
            
            (304,322
            )
            
            (113,322
            )Unearned
                ESOP shares
            
            
            (2,273,019
            )
            
            (2,406,726
            )Reclassification
                of ESOP shares
            
            
            (304,322
            )
            
            (272,964
            )Total
                stockholders’ equity
            
            
            34,207,633
            
            
            34,266,327Total
                liabilities and stockholders’ equity
            
            $
            111,738,961
            
            $
            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 six months ended December 31, 2005 and 2004


(Unaudited)




**Three
                Months Ended**
              **December
                31,**
            
            **Six
                Months Ended**
              **December
                31,****2005**
            
            **2004**
            
            **2005**
            
            **2004**Interest
                incomeLoans
            
            $
            1,059,133
            
            $
            582,264
            
            $
            1,982,703
            
            $
            1,102,113SecuritiesTaxable
            
            
            284,491
            
            
            298,780
            
            
            575,659
            
            
            597,001Tax-exempt
            
            
            —
            
            
            3,600
            
            
            —
            
            
            7,993Federal
                funds sold
            
            
            40,219
            
            
            100,437
            
            
            143,407
            
            
            144,075Total
                interest income
            
            
            1,383,843
            
            
            985,081
            
            
            2,701,769
            
            
            1,851,182Interest
                expenseDeposits
            
            
            327,179
            
            
            311,955
            
            
            632,199
            
            
            599,660Advances
                from Federal Home Loan Bank
            
            
            —
            
            
            24,431
            
            
            —
            
            
            48,862Total
                interest expense
            
            
            327,179
            
            
            336,386
            
            
            632,199
            
            
            648,522**Net
                interest income**
            
            
            1,056,664
            
            
            648,695
            
            
            2,069,570
            
            
            1,202,660Provision
                for loan losses
            
            
            30,000
            
            
            —
            
            
            60,000
            
            
            —**Net
                interest income after provision for loan losses**
            
            
            1,026,664
            
            
            648,695
            
            
            2,009,570
            
            
            1,202,660Noninterest
                incomeService
                charges on deposit accounts
            
            
            61,429
            
            
            45,682
            
            
            118,413
            
            
            97,262Gain
                (loss) on sale of securities, net
            
            
            (18,579
            )
            
            —
            
            
            (1,634
            )
            
            175,532Gain
                on sale of loans
            
            
            —
            
            
            20,928
            
            
            —
            
            
            41,130Earnings
                on cash surrender value of life insurance
            
            
            53,621
            
            
            —
            
            
            108,131
            
            
            —Other
                income
            
            
            19,805
            
            
            20,396
            
            
            38,357
            
            
            35,884Total
                noninterest income
            
            
            116,276
            
            
            87,006
            
            
            263,267
            
            
            349,808Noninterest
                expenseSalaries
                and employee benefits
            
            
            572,085
            
            
            352,924
            
            
            1,101,722
            
            
            742,323Occupancy
                and equipment
            
            
            264,866
            
            
            181,301
            
            
            472,482
            
            
            345,178Data
                processing
            
            
            107,214
            
            
            79,549
            
            
            209,671
            
            
            203,576Professional
                services
            
            
            97,054
            
            
            29,587
            
            
            268,374
            
            
            65,437Director
                fees
            
            
            34,200
            
            
            30,600
            
            
            66,000
            
            
            61,200Supplies
            
            
            13,307
            
            
            21,437
            
            
            33,009
            
            
            47,425Advertising
            
            
            10,258
            
            
            19,660
            
            
            22,846
            
            
            64,372Insurance
                premiums
            
            
            17,248
            
            
            15,900
            
            
            38,888
            
            
            35,170Other
            
            
            81,984
            
            
            46,615
            
            
            131,525
            
            
            86,469Total
                noninterest expense
            
            
            1,198,216
            
            
            777,573
            
            
            2,344,517
            
            
            1,651,150**Loss
                before income tax expense**
            
            
            (55,276
            )
            
            (41,872
            )
            
            (71,680
            )
            
            (98,682
            )Income
                tax benefit
            
            
            (41,926
            )
            $
            (13,000
            )
            
            (48,526
            )
            $
            (31,000
            )Net
                income (loss)
            
            $
            (13,350
            )
            $
            (28,872
            )
            $
            (23,154
            )
            $
            (67,682
            )Basic
                and diluted earnings (loss) per share*
            
            $
            (0.01
            )
            
            N/A
            
            $
            (0.01
            )
            
            N/AComprehensive
                income (loss)
            
            
            (86,175
            )
            $
            (63,853
            )
            
            (214,154
            )
            $
            100,188


____________


*
            N/A
                - Not Applicable, see Note 2.




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




2




**ROYAL
        FINANCIAL, INC. AND SUBSIDIARY**
 CONSOLIDATED
        STATEMENT OF STOCKHOLDERS’ EQUITY
 Six
        months ended December 31, 2005
 (Unaudited)


**2005**
              
              **Common
                  Stock**
              
              **Additional
                  Paid-In Capital**
              
              **Retained
                  Earnings**
              
              **Accumulated
                  Other Compre-hensive Income (Loss)**
              
              **Unearned
                  ESOP Shares**
              
              **Amount
                  Reclassi-fied on ESOP Shares**
              
              **Total**Balance
                  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)
              
              
              —
              
              
              —
              
              
              (23,154
              )
              
              —
              
              
              —
              
              
              —
              
              
              (23,154
              )Change
                  in fair value of securitiesavailable-for-sale, net
              
              
              —
              
              
              —
              
              
              —
              
              
              (191,000
              )
              
              —
              
              
              —
              
              
              (191,000
              )Total
                  comprehensive (loss)
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (214,154
              )Reclassification
                  due to change in fair value of common stock in ESOP subject to
                  contingent
                  repurchase obligation
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (27,085
              )
              
              (27,085
              )RRP
                  shares earned
              
              
              —
              
              
              37,229
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              37,229ESOP
                  shares earned
              
              
              —
              
              
              11,609
              
              
              —
              
              
              —
              
              
              133,707
              
              
              —
              
              
              145,316Balance
                  at December 31, 2005
              
              $
              26,450
              
              $
              24,813,391
              
              $
              12,245,182
              
              $
              (304,322
              )
              $
              (2,273,019
              )
              $
              (300,049
              )
              $
              34,207,633
 *See
        accompanying notes to these unaudited consolidated financial
        statements.*




3




**ROYAL
      FINANCIAL, INC. AND SUBSIDIARY**


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


Six
      months ended December 31, 2005 and 2004


(Unaudited)


**2005**
            
            **2004****Cash
                flows from operating activities**Net
                income (loss)
            
            $
            (23,154
            )
            $
            (67,682
            )Adjustments
                to reconcile net income (loss) to net cash from operating
                activities:Depreciation
            
            
            139,938
            
            
            138,208Provision
                for loan losses
            
            
            60,000
            
            
            —(Gain)
                loss on sale of securities available for sale
            
            
            1,634
            
            
            (175,532
            )Federal
                Home Loan Bank stock dividend
            
            
            (8,014
            )
            
            (10,400
            )Gain
                on sale of loans sold
            
            
            —
            
            
            (41,130
            )Earnings
                on bank-owned life insurance
            
            
            (108,131
            )
            
            —ESOP
                expense
            
            
            145,316
            
            
            —RRP
                shares earned
            
            
            37,229
            
            
            —Change
                in accrued interest receivable and other assets
            
            
            (130,491
            )
            
            (326,339
            )Change
                in other accrued interest payable and liabilities
            
            
            153,783
            
            
            3,646Net
                cash from operating activities
            
            
            268,110
            
            
            (479,229
            )**Cash
                flows from investing activities**Proceeds
                from sales, maturities, calls, and paydowns of available for sale
                securities
            
            
            6,435,825
            
            
            14,047,984Purchases
                of securities available for sale
            
            
            (2,000,000
            )
            
            (3,979,275
            )Change
                in loans receivable
            
            
            (12,401,795
            )
            
            (3,444,065
            )Purchase
                of loan participations
            
            
            (3,851,000
            )
            
            (2,766,945
            )Purchase
                of premises and equipment
            
            
            (31,611
            )
            
            (535,771
            )Net
                cash from investing activities
            
            
            (11,848,581
            )
            
            3,321,928**Cash
                flows from financing activities**Net
                increase (decrease) in deposits
            
            
            (1,660,555
            )
            
            42,733,385Change
                in advances from borrowers for taxes and insurance
            
            
            56,581
            
            
            34,519Net
                cash from financing activities
            
            
            (1,603,974
            )
            
            42,767,904Net
                change in cash and cash equivalents
            
            
            (13,184,445
            )
            
            45,610,603Cash
                and cash equivalentsBeginning
                of the year
            
            
            17,021,696
            
            
            7,942,567End
                of period
            
            $
            3,837,251
            
            $
            53,553,170





*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, the Bank,
      as of and for the three- and six- month periods ended December 31, 2005 and
      the accounts of the Bank as of and for the three and six months ended
      December 31, 2004. 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 income taxes to be critical accounting
      estimates.




5




At
      December 31, 2005, 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 six-month
      periods ended December 31, 2005. Weighted average common shares outstanding
      excludes unallocated ESOP shares.




**Three
                  Months Ended**
                **December 31,
                  2005**
              
              **Six
                  Months Ended**
                **December
                  31,**
                **2005**Basic
                  and diluted loss per shareNet
                  loss as reported
              
              $
              (13,350
              )
              $
              (23,154
              )Weighted
                  average common shares outstanding
              
              
              2,461,613
              
              
              2,458,968Basic
                  and diluted loss per share
              
              $
              (.01
              )
              $
              (.01
              )





**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 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




6




($13.90
      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
      will vest equally (20% per year) over the next five years. Compensation expense
      related to vesting of the stock awards will approximate $136,000 per year (net
      of tax). 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 $118,000 per year (net of tax), 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 12/31/05**
            
            **Six
                Months Ended 12/31/05**Net
                income (loss) as reported
            
            $
            (13,350
            )
            $
            (23,154
            )Deduct:
                Stock-based compensation expense determined under fair value based
                method
            
            
            19,593
            
            
            19,593Pro
                forma net income (loss)
            
            
            (32,943
            )
            
            (42,747
            )Basic
                earnings per share as reported
            
            
            (.01
            )
            
            (.01
            )Pro
                forma basic earnings per share
            
            
            (.01
            )
            
            (.02
            )Diluted
                earnings per share as reported
            
            
            (.01
            )
            
            (.01
            )Pro
                forma diluted earnings per share
            
            
            (.01
            )
            
            (.02
            )





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




**2005**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
              $4.81




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 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.




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




The
      Company’s total assets decreased $1.5 million, or 1.3%, to $111.7 million at
      December 31, 2005, from $113.2 million at June 30, 2005.




Cash
      and
      cash equivalents decreased $13.2 million to $3.8 million at December 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 $4.6 million, or 13.9%, to $28.6 million at
      December 31, 2005 from $33.2 million at June 30, 2005. The decrease is
      the result of the sale and maturities of $6.4 million of securities. The
      proceeds from the sale and maturity of securities were used to purchase
      additional securities in an effort to restructure the portfolio to minimize
      interest rate risk exposure, as well as to fund new loan growth.




Loans
      increased $16.2 million, or 30.9%, to $68.5 million at December 31, 2005,
      from $52.3 million at June 30, 2005. The increase in loans was the result
      of the continued emphasis by management on increasing the commercial and
      commercial real estate loan portfolios.




Total
      deposits decreased $1.7 million, or 2.1%, to $76.4 million at December 31,
      2005 from $78.1 million at June 30, 2005.




Total
      stockholders’ equity decreased $59,000 at December 31, 2005 from
      June 30, 2005. The decrease was primarily the result of a net loss of
      $23,000, an increase in unrealized losses on securities available for sale,
      net
      of taxes, of $191,000, offset by an increase in ESOP shares earned of $145,000
      and $37,000 of RRP shares earned.




***Comparison
      of Results of Operation for the Three Months and Six Months Ended
      December 31, 2005 and 2004***




*General* .
      Net
      loss for the three months ended December 31, 2005 was $13,000, a decrease
      in net loss of $16,000 from the same period in 2004. For the six months ended
      December 31, 2005, the net loss




8




was
      $23,000, a decrease in net loss of $45,000 from the same period last year.
      The
      net loss 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 $408,000 to $1.1 million for the three months
      ended
      December 31, 2005, from $649,000 for the same period in 2004. Net interest
      income increased by $867,000 to $2.1 million for the six months ended
      December 31, 2005, from the same period in 2004. The net interest rate
      spread was 3.92% and 3.83% for the three and six months ended December 31,
      2005, as compared to 2.78% and 2.66% for the same period in 2004. The net
      interest margin increased to 4.28% and 4.17% for the three- and six-month
      periods ended December 31, 2005, from 2.70% and 2.64% for the same periods
      in 2004, 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 $399,000 to $1.4 million for the three months ended
      December 31, 2005 from $985,000 for the three months ended
      December 31, 2004. Total interest income increased $851,000 to $2.7 million
      for the six months ended December 31, 2005 from $1.9 million for the same
      period in 2004. For the three and six months ended December 31, 2005,
      average interest-earning assets increased to $98.7 million and $99.2 million
      from $95.0 million and $90.7 million for the same period in 2004. The increase
      was primarily the result of loan growth. The yield on interest-earning assets
      increased to 5.61% and 5.45% for the three- and six-month periods ended
      December 31, 2005 from 4.12% and 4.07% for the comparable periods in 2004
      reflecting the increase in interest rates.




*Interest
      Expense* .
      Total
      interest expense decreased $9,000 and $16,000 to $327,000 and $632,000 for
      the
      three and six months ended December 31, 2005 from $336,000 and $649,000 for
      the same periods in 2004. The average cost of deposits decreased from 1.84%
      and
      1.73% for the three and six months ended December 31, 2004 to 1.68% and
      1.62% for the same periods 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 types of loans and the 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 of $30,000 and $60,000 were
      made for the three and six months ended December 31, 2005. 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 0.50% at
      December 31, 2005, from 0.57% at December 31, 2004. The Bank had no
      nonperforming loans at December 31, 2005 compared to $136,000 at
      December 31, 2004.




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




9




based
      on
      their judgment of information available to them at the time of their
      examination. The allowance for loan losses as of December 31, 2005 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 $29,000 to $116,000 for the three month period
      ended December 31, 2005 from the same period in 2004. Noninterest income
      decreased $87,000 to $263,000 for the six month period ended December 31,
      2005, compared to the same period in 2004. The increase in the three month
      period was primarily the result of increased service fee income and earnings
      on
      the cash surrender value of life insurance offset by losses on the sales of
      securities available for sale. The decrease in noninterest income for the six
      month period ended December 31, 2005, was primarily the result of $2,000 in
      losses on sales of securities compared to $176,000 of gains on sales of
      securities in the comparable period in 2004.




*Noninterest
      Expense* .
      Noninterest expense increased $421,000 and $693,000 to $1.2 million and $2.3
      million for the three and six months ended December 31, 2005 from $778,000
      and $1.7 million for the three and six months ended December 31, 2004. The
      increases were primarily the result of an increase in salaries and employee
      benefits, and occupancy-related expenses and professional services.




Salaries
      and employee benefits increased $219,000 and $359,000 for the three and six
      months ended December 31, 2005 compared to the same periods in 2004,
      primarily resulting from the hiring of new loan and accounting personnel, a
      new
      operations officer, and staffing for the Lansing branch opened in 2004. The
      company incurred compensation expense of $71,000 and $145,000 for ESOP shares
      earned over the three and six months ended December 31, 2005. Beginning in
      the second quarter, the Company began incurring compensation expense related
      to
      participants vesting in awards under the Management Recognition and Retention
      Plan (“RRP”) granted in October 2005. Expense related to this plan was $37,000
      for the quarter.




Occupancy
      and equipment expense increased $84,000 and $127,000 for the three and six
      months ended December 31, 2005 compared to the same periods in 2004, due to
      depreciation on the new bank building and furniture and equipment used in the
      new building and the branch office in Lansing.




The
      increase in professional services is a result of the Company’s additional
      reporting requirements as a public company and the preparation necessary for
      its
      first annual meeting as a public company.




*Provision
      for Income Taxes* .
      The
      income tax benefit increased $29,000 for the three months ended
      December 31, 2005 from the comparable period in 2004. For the six months
      ended December 31, 2005, the tax benefit was $49,000 as compared to the tax
      benefit of $31,000 recorded for the comparable six month period in 2004. The
      increase in the tax benefit for the three- and six-month periods ended
      December 31, 2005 was primarily the result of earnings on the cash
      surrender value of life insurance, which are not subject to federal income
      tax.




***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




10




us
      to
      meet lending requirements. We utilize FHLB advances as needed. At
      December 31, 2005 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 $268,000 and ($479,000) for December 31,
      2005 and 2004, 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 maturing securities and paydowns on mortgage-backed securities. Net cash
      from investing activities was ($11.8) million and $3.3 million for
      December 31, 2005, and 2004, respectively. Net cash from financing
      activities consisted primarily of the activity in deposit accounts and FHLB
      borrowings. The net cash from financing activities was ($1.6) million at
      December 31, 2005 and $42.8 million at December 31, 2004.




From
      June 30, 2005 through December 31, 2005, the Company received proceeds
      of $6.4 million from sales, maturities, calls and paydowns of available for
      sale
      securities. These proceeds were primarily reinvested in loans.




At
      December 31, 2005, the Company had outstanding commitments to originate
      $12.2 million in loans, unfunded lines of credit and participation loans of
      $2.5
      million and $10.0 million, respectively, and letters of credit outstanding
      of
      $147,000. In addition, as of December 31, 2005, the total amount of
      certificates of deposit that were scheduled to mature in the next 12 months
      equaled $25.3 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 December 31, 2005, 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 December 31, 2005, the Bank exceeded
      each of its capital requirements with ratios of 20.18%, 30.03% and 30.49%,
      respectively.




***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




11




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, respectively, 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, 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
      concluded that the Company’s disclosure controls and procedures are effective,
      in all material respects, in timely alerting him to 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.




12





**PART II. -
      OTHER INFORMATION**




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




The
      Company is not 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** **.**




None




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




None




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




At
      the
      Company’s Annual Meeting of Stockholders held on October 26, 2005, the
      following matters were submitted to and approved by a vote of
      stockholders:




(1)
            The
                election of two Class I directors for a three-year term ending at the
                Annual Meeting of Stockholders to be held in
                2008:




Directors
            Votes
                For
            Votes
                WithheldPeter C.
                Rolewicz
            2,117,605
            353,416Roldolfo
                Serna
            2,261,747
            209,334





The
      following directors continue to serve after the Annual Meeting:




Continuing
                Director
            Term
                ExpiresAlan
                W. Bird
            2006Barbara
                K. Minster
            2006Donald
                A. Moll
            2007John
                T. Dempsey
            2007Peter
                C. Rolewicz
            2008Roldolfo
                Serna
            2008




(2)
                  Adoption
                      of the Royal Financial, Inc. 2005 Stock Option
                      Plan.
  Total
                      votes for
                  1,686,558Total
                      votes against
                  256,510Total
                      votes abstaining
                  38,793Broker
                      Non-votes
                  489,220
  13


(3)
            Adoption
                of the Royal Financial, Inc. 2005 Management Recognition and Retention
                Plan.




Total
                votes for
            1,644,229Total
                votes against
            313,254Total
                votes abstaining
            24,378Broker
                Non-votes
            489,220





(4)
            Ratification
                of the appointment of Crowe Chizek and Company LLC as the Company’s
                independent accountants for the fiscal year ending June 30,
                2006.




Total
                votes for
            2,278,391Total
                votes against
            20,668Total
                votes abstaining
            172,022





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




Due
      to a
      recent serious illness, Neil Brodzinski, the Company’s Chief Financial Officer,
      has taken a leave of absence. At this time, the length of Mr. Brodzinski’s
      leave of absence is not known. Effective February 13, 2006, Leonard
      Szwajkowski joined the Company as Senior Vice President - Finance.
      Mr. Szwajkowski will assume a majority of Mr. Brodzinski’s duties in
      his absence.  Mr.
      Szwajkowski has over 20 years experience in the banking industry, including
      previously serving as Senior Vice President, Chief Financial Officer and a
      director of East Side Bank and Trust Company in Chicago.




**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.


Date: 
              February 14, 2006
            **ROYAL
              FINANCIAL, INC.**By:
            /s/ Donald
              A. MollDonald
                A. MollPresident
              and
              Chief Executive Officer




15




**EXHIBIT INDEX**




31.1
            Certification
                of Chief Executive Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.32.1
            Certification
                of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.