**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, 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 January 30, 2007**Common
                Stock, $0.01 par value
            2,574,882





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









**ROYAL
      FINANCIAL, INC.**




**FORM
      10-QSB**




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




**TABLE
      OF CONTENTS**




**Page****PART
                I - FINANCIAL INFORMATION**Item
                1. Financial StatementsConsolidated
                Statements of Financial Condition
                as of December 31, 2006 and June 30, 2006
            1Consolidated
                Statements of Income (Loss) and
                Comprehensive Income (Loss) for the three months and six months ended
                December 31, 2006 and 2005
            2Consolidated
                Statements of Stockholders’
                Equity for the six months ended December 31, 2006 and
                2005
            3Consolidated
                Statements of Cash Flows for the six months
                ended December 31, 2006 and 2005
            6Notes
                to Unaudited Financial Statements
            7Item
                2. Management’s Discussion and Analysis of
                Financial Condition and Results of Operations
            11Item
                3. Controls and Procedures
            15**PART II
                - OTHER
                INFORMATION**Item
                1. Legal Proceedings
            17Item
                2. Unregistered Sales of Equity Securities and Use
                of Proceeds
            17Item
                3. Defaults Upon Senior
                Securities
            17Item
                4. Submission of Matters to a Vote of Security
                Holders
            17Item
                5. Other Information
            17Item
                6. Exhibits
            17**SIGNATURES**
            18**EXHIBIT INDEX**




i
 *Table
          of Contents*





**PART
      I. - FINANCIAL INFORMATION**




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




**ROYAL
      FINANCIAL, INC. AND SUBSIDIARY**


CONSOLIDATED
          STATEMENTS OF FINANCIAL
          CONDITION


December
      31, 2006 and June 30, 2006




**December
                31, 2006**
            
            **June 30,
                2006**(Unaudited)**ASSETS**Cash
                and due from financial institutions
            
            $
            3,640,896
            
            $
            3,454,828Federal
                funds sold
            
            
            27,083,139
            
            
            893,392Total
                cash and cash equivalents
            
            
            30,724,035
            
            
            4,348,220Securities
                available for sale
            
            
            17,324,828
            
            
            21,517,841Loans
                receivable, net of allowance for loan losses of $460,000 at
                December 31, 2006 and $400,000 at June 30, 2006
            
            
            70,201,890
            
            
            77,325,934Federal
                Home Loan Bank stock, at cost
            
            
            322,992
            
            
            345,913Cash
                surrender value of life insurance
            
            
            4,645,782
            
            
            4,553,721Premises
                and equipment, net
            
            
            5,491,581
            
            
            5,402,419Accrued
                interest receivable
            
            
            465,928
            
            
            446,591Other
                assets
            
            
            619,932
            
            
            337,975Total
                assets
            
            $
            129,796,968
            
            $
            114,278,614**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**LiabilitiesDeposits
            
            $
            95,548,390
            
            $
            78,897,747Federal
                funds purchased
            
            
            —
            
            
            1,225,404Advances
                from borrowers for taxes and insurance
            
            
            436,620
            
            
            479,706Accrued
                interest payable and other liabilities
            
            
            599,749
            
            
            302,502Common
                stock in ESOP subject to contingent repurchase obligation
            
            
            698,280
            
            
            617,872Total
                liabilities
            
            
            97,283,039
            
            
            81,523,231Stockholders’
                equityPreferred
                stock, $.01 par value per share, authorized 1,000,000 shares; no
                shares
                are outstanding
            
            
            —
            
            
            —Common
                stock, $.01 par value per share, authorized 5,000,000 shares 2,645,000
                shares issued at December 31, 2006 and June 30,
                2006
            
            
            26,450
            
            
            26,450Additional
                paid-in capital
            
            
            24,016,116
            
            
            24,739,005Retained
                earnings
            
            
            12,432,272
            
            
            12,822,013Treasury
                stock, 69,900 shares and 52,900 shares, at cost
            
            
            (1,062,461
            )
            
            (783,611
            )Accumulated
                other comprehensive loss, net of tax
            
            
            (192,589
            )
            
            (393,231
            )Unearned
                RRP shares
            
            
            —
            
            
            (897,072
            )Unearned
                ESOP shares
            
            
            (2,007,579
            )
            
            (2,140,299
            )Reclassification
                of ESOP shares
            
            
            (698,280
            )
            
            (617,872
            )Total
                stockholders’ equity
            
            
            32,513,929
            
            
            32,755,383Total
                liabilities and stockholders’ equity
            
            $
            129,796,968
            
            $
            114,278,614





See
      accompanying notes to these unaudited consolidated financial
      statements.




1
 *Table
          of Contents*




**ROYAL
      FINANCIAL, INC. AND SUBSIDIARY**


CONSOLIDATED
        STATEMENTS OF INCOME (LOSS)
 AND
        COMPREHENSIVE INCOME (LOSS)


Three
      months and six months ended December 31, 2006 and 2005


(Unaudited)




**Three
                Months Ended**
              **December
                31,**
            
            **Six
                Months Ended**
              **December
                31,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Interest
                incomeLoans
            
            $
            1,376,353
            
            $
            1,045,547
            
            $
            2,738,537
            
            $
            1,945,428SecuritiesTaxable
            
            
            186,693
            
            
            284,491
            
            
            381,422
            
            
            575,659Federal
                funds sold and other
            
            
            326,360
            
            
            40,219
            
            
            463,233
            
            
            143,407Total
                interest income
            
            
            1,889,406
            
            
            1,370,257
            
            
            3,583,192
            
            
            2,664,494Interest
                expenseDeposits
            
            
            751,616
            
            
            327,179
            
            
            1,317,818
            
            
            632,199Federal
                funds purchased
            
            
            —
            
            
            —
            
            
            2,151
            
            
            —Total
                interest expense
            
            
            751,616
            
            
            327,179
            
            
            1,319,969
            
            
            632,199**Net
                interest income**
            
            
            1,137,790
            
            
            1,043,078
            
            
            2,263,223
            
            
            2,032,295Provision
                for loan losses
            
            
            30,000
            
            
            30,000
            
            
            60,000
            
            
            60,000**Net
                interest income after provision for loan losses**
            
            
            1,107,790
            
            
            1,013,078
            
            
            2,203,223
            
            
            1,972,295Noninterest
                incomeService
                charges on deposit accounts
            
            
            66,475
            
            
            61,429
            
            
            132,797
            
            
            118,413Loss
                on sale of securities, net
            
            
            —
            
            
            (18,579
            )
            
            —
            
            
            (1,634
            )Mortgage
                banking fees
            
            
            16,283
            
            
            13,586
            
            
            58,541
            
            
            37,275Earnings
                on cash surrender value of life insurance
            
            
            48,610
            
            
            53,621
            
            
            92,060
            
            
            108,131Other
                income
            
            
            8,095
            
            
            19,805
            
            
            37,921
            
            
            38,357Total
                noninterest income
            
            
            139,463
            
            
            129,862
            
            
            321,319
            
            
            300,542Noninterest
                expenseSalaries
                and employee benefits
            
            
            705,107
            
            
            572,085
            
            
            1,426,038
            
            
            1,101,722Occupancy
                and equipment
            
            
            281,150
            
            
            264,866
            
            
            599,217
            
            
            472,482Data
                processing
            
            
            91,491
            
            
            107,214
            
            
            166,551
            
            
            209,671Professional
                services
            
            
            196,027
            
            
            97,054
            
            
            356,847
            
            
            268,374Director
                fees
            
            
            34,200
            
            
            34,200
            
            
            68,400
            
            
            66,000Supplies
            
            
            26,974
            
            
            13,307
            
            
            68,301
            
            
            33,009Advertising
            
            
            84,188
            
            
            10,258
            
            
            153,520
            
            
            22,846Insurance
                premiums
            
            
            17,406
            
            
            17,248
            
            
            35,231
            
            
            38,888Other
            
            
            151,812
            
            
            81,984
            
            
            273,178
            
            
            131,525Total
                noninterest expense
            
            
            1,588,355
            
            
            1,198,216
            
            
            3,147,283
            
            
            2,344,517**Loss
                before income tax expense**
            
            
            (341,102
            )
            
            (55,276
            )
            
            (622,741
            )
            
            (71,680
            )Income
                tax benefit
            
            
            (127,000
            )
            
            (41,926
            )
            
            (233,000
            )
            
            (48,526
            )Net
                income (loss)
            
            $
            (214,102
            )
            $
            (13,350
            )
            $
            (389,741
            )
            $
            (23,154
            )Basic
                and diluted earnings (loss) per share
            
            $
            (0.09
            )
            $
            (0.01
            )
            $
            (0.17
            )
            $
            (0.01
            )Comprehensive
                income (loss)
            
            $
            (188,919
            )
            $
            (114,601
            )
            $
            (189,099
            )
            $
            (242,580
            )





See
      accompanying notes to these unaudited consolidated financial
      statements.




2
 *Table
          of Contents*




**ROYAL
      FINANCIAL, INC. AND SUBSIDIARY**


CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS’
EQUITY
 Six
          months ended December 31, 2006, and 2005
 (Unaudited)


**2005**
                
                **Common
                    Stock**
                
                **Additional
                    Paid-In Capital**
                
                **Retained
                    Earning**
                
                **Accumu-lated
                    Other Compre-hensive Income (Loss)**
                
                **Unearned
                    ESOP Shares**
                
                **Amount
                    Reclassi-fied on ESOP Shares**
                
                **Treasury
                    Stock**
                
                **Unearned
                    RRP 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
                    loss
                
                
                —
                
                
                —
                
                
                (23,154
                )
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (23,154
                )Change
                    in fair value of securities available-for-sale, net
                
                
                —
                
                
                —
                
                
                —
                
                
                (191,000
                )
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (191,000
                )Total
                  compre-
                  hensive
                  income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (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
 *Table
          of Contents*




**ROYAL
      FINANCIAL, INC. AND SUBSIDIARY**


CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY Six
          months ended December 31, 2006, and 2005
 (Unaudited)


**2006**
                  
                  **Common
                      Stock**
                  
                  **Additional
                      Paid-In Capital**
                  
                  **Retained
                      Earning**
                  
                  **Accumu-lated
                      Other Compre-hensive Income (Loss)**
                  
                  **Unearned
                      ESOP Shares**
                  
                  **Amount
                      Reclassi-fied on ESOP Shares**
                  
                  **Treasury
                      Stock**
                  
                  **Unearned
                      RRP Shares**
                  
                  **Total**Balance
                      at July 1, 2006
                  
                  $
                  26,450
                  
                  $
                  24,739,005
                  
                  $
                  12,822,013
                  
                  $
                  (393,231
                  )
                  $
                  (2,140,299
                  )
                  $
                  (617,872
                  )
                  $
                  (783,611
                  )
                  $
                  (897,072
                  )
                  $
                  32,755,383Comprehensive
                      income (loss)Net
                      loss
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (389,741
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (389,741
                  )Change
                      in fair value of securities available-for-sale, net
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  200,642
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  200,642Total
                    compre-
                    hensive
                    loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (189,099
                  )Reclassification
                      due to release and change in fair value of common stock in
                      ESOP subject to
                      contingent repurchase obligation of ESOP shares
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (80,408
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  (80,408
                  )Release
                      of
                    10,500 of
                    unearned
                    ESOP shares
                  
                  
                  —
                  
                  
                  30,030
                  
                  
                  —
                  
                  
                  —
                  
                  
                  132,720
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  162,750


(Continued)




4
 *Table
          of Contents*




**ROYAL
        FINANCIAL, INC. AND SUBSIDIARY**
 CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY


Six
          months ended December 31, 2006, and 2005
 (Unaudited)




**2006**
                  
                  **Common
                      Stock**
                  
                  **Additional
                      Paid-In Capital**
                  
                  **Retained
                      Earning**
                  
                  **Accumu-lated
                      Other Compre-hensive Income (Loss)**
                  
                  **Unearned
                      ESOP Shares**
                  
                  **Amount
                      Reclassi-fied on ESOP Shares**
                  
                  **Treasury
                      Stock**
                  
                  **Unearned
                      RRP Shares**
                  
                  **Total**Reclassification
                      of RRPS in conjunction with adoption of SFAS 123(R)
                  
                  $
                  —
                  
                  $
                  (897,072
                  )
                  $
                  —
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  897,072
                  
                  $
                  —Issuance
                      of 5,000 shares to RRP plan
                  
                  
                  —
                  
                  
                  (74,250
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  74,250
                  
                  
                  —
                  
                  
                  —Tax
                      benefit on RRP shares vested
                  
                  
                  —
                  
                  
                  7,482
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  7,482Purchase
                      of
                    22,000treasury
                    shares at cost
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (353,100
                  )
                  
                  —
                  
                  
                  (353,100
                  )Stock-based
                    compensation
                  
                  
                  —
                  
                  
                  210,921
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  210,921Balance
                      at December 31, 2006
                  
                  $
                  26,450
                  
                  $
                  24,016,116
                  
                  $
                  12,432,272
                  
                  $
                  (192,589
                  )
                  $
                  (2,007,579
                  )
                  $
                  (698,280
                  )
                  $
                  (1,062,461
                  )
                  $
                  —
                  
                  $
                  32,513,929


See
      accompanying notes to these unaudited consolidated financial
      statements.




5
 *Table
          of Contents*




**ROYAL
      FINANCIAL, INC. AND SUBSIDIARY**


CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 Six
        months ended December 31, 2006 and 2005


(Unaudited)







**2006**
            
            **2005****Cash
                flows from operating activities**Net
                Income (loss)
            
            $
            (389,741
            )
            $
            (23,154
            )Adjustments
                to reconcile net income (loss) to net cash from operating
                activities:Depreciation
            
            
            199,153
            
            
            139,938Provision
                for loan losses
            
            
            60,000
            
            
            60,000Loss
                on sale of securities available for sale
            
            
            —
            
            
            1,634Federal
                Home Loan Bank stock dividend
            
            
            —
            
            
            (8,014
            )Earnings
                on bank-owned life insurance
            
            
            (92,060
            )
            
            (108,131
            )ESOP
                expense
            
            
            162,750
            
            
            145,316Stock-based
                compensation
            
            
            210,921
            
            
            37,229Change
                in accrued interest receivable and other assets
            
            
            (404,655
            )
            
            (130,491
            )Change
                in other accrued interest payable and liabilities
            
            
            297,247
            
            
            153,783Net
                cash from operating activities
            
            
            43,615
            
            
            268,110**Cash
                flows from investing activities**Proceeds
                from sales, maturities, calls, and paydowns of available for sale
                securities
            
            
            6,500,144
            
            
            6,435,825Purchases
                of securities available for sale
            
            
            (2,003,129
            )
            
            (2,000,000
            )Change
                in loans receivable
            
            
            7,945,144
            
            
            (12,401,795
            )Purchase
                of loan participations
            
            
            (881,100
            )
            
            (3,851,000
            )Redemption
                of Federal Home Loan Bank stock
            
            
            22,921
            
            
            —Purchase
                of premises and equipment
            
            
            (288,315
            )
            
            (31,611
            )Net
                cash from investing activities
            
            
            11,295,665
            
            
            (11,848,581
            )**Cash
                flows from financing activities**Net
                increase (decrease) in deposits
            
            
            16,650,643
            
            
            (1,660,555
            )Net
                decrease in federal funds purchased
            
            
            (1,225,404
            )
            
            —Change
                in advances from borrowers for taxes and insurance
            
            
            (43,086
            )
            
            56,581Purchase
                of treasury stock
            
            
            (353,100
            )
            
            —Tax
                benefit on RRP shares
            
            
            7,482
            
            
            —Net
                cash from financing activities
            
            
            15,036,535
            
            
            (1,603,974
            )Net
                change in cash and cash equivalents
            
            
            26,375,815
            
            
            (13,184,445
            )Cash
                and cash equivalentsBeginning
                of the year
            
            
            4,348,220
            
            
            17,021,696End
                of period
            
            $
            30,724,035
            
            $
            3,837,251





See
      accompanying notes to these unaudited consolidated financial
      statements.









6
 *Table
          of Contents*


**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.




**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, 2006 and 2005.
      Significant intercompany accounts and transactions have been eliminated in
      consolidation.




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, 2006
      and 2005. 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, 2007. 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 and Significant Accounting Policies**




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 valuation allowance on deferred tax assets to
      be
      critical accounting estimates.




Beginning
      July 1, 2006, the effective date of the Company’s adoption of Statement on
      Financial Accounting Standard No. 123R, the Company was required to record
      compensation expense related to the nonvested portion of stock options
      outstanding. The impact on current quarter earnings and estimated effect on
      future earnings are discussed in Note 5.




7
 *Table
          of Contents*




**Note
      4 - Earnings (Loss) 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, 2006 and 2005. Weighted average common shares
      outstanding excludes unallocated ESOP shares.




**Three
                Months Ended December 31, 2006**
            
            **Three
                Months Ended December 31, 2005**
            
            **Six
                Months Ended December 31, 2006**
            
            **Six
                Months Ended December 31, 2005**Basic
                and diluted loss per shareNet
                loss as reported
            
            $
            (214,102
            )
            $
            (13,350
            )
            $
            (389,741
            )
            $
            (23,154
            )Weighted
                average common shares outstanding
            
            
            2,359,148
            
            
            2,461,613
            
            
            2,357,948
            
            
            2,458,968Basic
                and diluted loss per share
            
            $
            (0.09
            )
            $
            (0.01
            )
            $
            (0.17
            )
            $
            (0.01
            )





The
      effect of stock option and stock awards was not included in the calculation
      of
      diluted loss per share because to do so would have been anti-dilutive for all
      shares given the Company’s losses for the periods.





**Note
      5 - Stock-Based Compensation**




In
      October 2005, the Company’s stockholders approved the Royal Financial, Inc. 2005
      Stock Option Plan (“SOP”) and the Royal Financial, Inc. 2005 Management
      Recognition and Retention Plan (“RRP”). The SOP provides for issue of up to
      264,500 options to directors, officers, and key employees. The options become
      exercisable in equal installments over a five-year period from the date of
      grant. The options expire ten years from the date of grant. As of December
      31,
      2006, there are 56,125 shares available for future grants under the Plan. Option
      activity under the Plan is as follows:


**Number
                    of shares**
                
                **Weighted
                    Average Exercise Price**
                
                **Weighted
                    Average Contractual Life**
                
                **Aggregate
                    Intrinsic Value**Outstanding
                    at July 1, 2006
                
                
                198,375
                
                $
                13.94Granted
                
                
                10,000
                
                
                14.60Exercised
                
                
                —
                
                
                —Forfeited
                
                
                —
                
                
                —Outstanding
                    at December 31, 2006
                
                
                208,375
                
                $
                13.97
                
                
                8.88
                
                $
                527,189Exercisable
                    at December 31, 2006(1)
                
                
                47,610
                
                $
                13.90
                
                
                8.82
                
                $
                123,786


(1)  The
      vesting of the exercisable options was accelerated due to the death of the
      Company's former chief financial officer.




8
 *Table
          of Contents*




No
      options were granted during the quarter ended December 31, 2006.




The
      fair
      value of each option grant is estimated on the date of grant using the
      Black-Scholes option pricing model using the following assumptions:




**2006**Risk-free
                      interest rate
                  5.10%Expected
                      option life
                  7
                      yearsExpected
                      stock price volatility
                  20.00%Dividend
                      yield
                  0.00%




A
      summary
      of the status of the Company’s nonvested shares as of December 31, 2006 and
      changes during the six months ended December 31, 2006, is presented
      below:


**Number
                    of Shares**
                
                **Grant
                    Date Fair Value**Unvested
                    at July 1, 2006
                
                
                185,150
                
                $
                4.83Granted
                
                
                10,000
                
                
                5.33Exercised
                
                
                —
                
                
                —Vested
                
                
                (34,385
                )
                
                4.81Forfeited
                
                
                —
                
                
                —Unvested
                    at December 31, 2006
                
                
                160,765
                
                $
                4.85


As
      of
      December 31, 2006, there was $735,000 of total unrecognized compensation cost
      related to nonvested share-based compensation arrangements granted under the
      SOP. That cost is expected to be recognized over a weighted-average period
      of
      approximately 3.88 years. Options for 34,385 shares of common stock vested
      during the three months ended December 31, 2006 .




The
        Company adopted FAS123(R) on July 1, 2006, which has resulted in compensation
        expense of $50,000 and $100,000 for the three and six months ended December
        31,
        2006. The Company elected the modified prospective method, under which prior
        periods are not revised for comparative purposes.
  Forfeitures
        for options granted prior to 2006 were
        recognized as they occurred. Beginning July 1, 2006, the Company is
        estimating the impact of future forfeitures consistent with the provisions
        of
        FAS 123(R).


Prior
      to
      July 1, 2006, the Company accounted for stock-based awards to employees using
      the intrinsic value method in accordance with Accounting Principles Board
      (“APB”) Opinion No. 25, *Accounting
      for Stock Issued to Employees* .
      No
      compensation expense was recognized in the financial statements for stock option
      arrangements, as the Company’s stock option plan provides for the issuance of
      options at a price of no less than the fair market value at the date of the
      grant.




Statement
      of Financial Accounting Standards (“Statement”) No. 123, *Accounting
      for Stock-Based Compensation* ,
      requires the disclosure of pro forma net income and earnings per share had
      the
      Company adopted the fair value method at the grant date of all stock options.
      Under Statement 123, the fair value of stock-based awards is calculated through
      the use of option pricing models, even though such models were developed to
      estimate the fair value of freely tradable, fully transferable options without
      vesting restrictions, which differ significantly from the Company's stock option
      awards. These models also require subjective assumptions, which affect the
      calculated values.




In
      December 2004, the FASB issued Statement 123 (revised 2004), *Share-Based
      Payment* .
      This
      Statement requires that compensation costs related to share-based payment
      transactions be recognized in the financial statements. Measurement of the
      cost
      of employee service is based on the grant-date fair value of the equity or
      liability instruments issued. That cost is recognized over the period during
      which an employee is required to provide service in exchange for the award.




9
 *Table
          of Contents*




The
      weighted average grant-date fair value of options granted for the three and
      six
      months ended December 31, 2005 was $4.81.  The following table illustrates
      the effect on net loss and loss per share if expense was measured using the
      fair
      value recognition provisions of FASB Statement No. 123, *Accounting
      for Stock-Based Compensation* ,
      for the
      three and six month periods ended December 31, 2005.


**Three
                    Months Ended**
                
                **Six
                    Months Ended**Net
                    loss as reported
                
                $
                (13,350
                )
                $
                (23,154
                )Deduct:
                    stock-based compensation expense determined under fair value-based
                    method
                
                
                29,686
                
                
                29,686Pro
                    forma loss income
                
                $
                (43,036
                )
                $
                (52,840
                )Basic
                    and diluted loss per share as reported
                
                
                (0.01
                )
                
                (0.01
                )Pro
                    forma basic and diluted loss per share
                
                
                (0.02
                )
                
                (0.02
                )




A
      Recognition and Retention Plan ("RRP") provides for issue of shares to
      directors, officers, and employees. Compensation expense is recognized over
      the
      vesting period of the shares based on the market value of the Company's common
      stock at the issue date. Pursuant to the RRP, the Company can award up to
      105,800 shares of restricted stock. These shares vest over a five-year period.
      Prior to July 1, 2006, the unamortized cost of shares not yet earned (vested)
      was reported as a reduction of shareholders' equity. Upon adoption of FAS
      123(R), the unamortized cost of shares not yet earned was reclassified to
      additional paid-in capital. During the quarter ended December 31, 2006, no
      shares were granted. As of December 31, 2006, 21,450 shares could still be
      granted under the plan. Compensation expense for outstanding restricted stock
      awards totaled approximately $56,000 and $111,000 for the three and six months
      ended December 31, 2006. Compensation expense of $37,000 was recorded for the
      three and six months ended December 31, 2005.




10
 *Table
          of Contents*




**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, 2006 and June 30,
      200*** ***6***




The
      Company’s total assets increased $15.5 million, or 13.6%, to $129.8 million at
      December 31, 2006, from $114.3 million at June 30, 2006.




Cash
      and
      cash equivalents increased $26.4 million to $30.7 million at December 31,
      2006 from $4.3 million at June 30, 2006, as a result of an increase in
      federal funds sold. The Company is using this short-term investment to maintain
      its liquidity position given the current interest rate environment.




Securities
      available for sale decreased $4.2 million, or 19.5%, to $17.3 million at
      December 31, 2006 from $21.5 million at June 30, 2006. The decrease is
      the result of $6.5 million in securities maturing or being repaid during the
      period ended December 31, 2006. The decrease was offset by $2.0 million in
      purchases of securities available for sale.




Loans
      decreased $7.1 million, or 9.2%, to $70.2 million at December 31, 2006,
      from $77.3 million at June 30, 2006. The decrease in loans was the result
      of continued loan prepayments during the period and a softening in loan
      demand.




Total
      deposits increased $16.7 million, or 21.1%, to $95.5 million at December 31,
      2006 from $78.9 million at June 30, 2006 as a result of the opening of two
      new branches in August 2006 and a special certificate of deposit promotion
      offering above-market deposit rates on certain CD balances.




Total
      stockholders’ equity was $32.5 million at December 31, 2006 compared to $32.8
      million at June 30, 2006, a decrease of $241,000.




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




*General* .
      Net
      loss for the three months ended December 31, 2006 was $214,000, an increase
      in net loss of $201,000, from the same period in 2005. For the six months ended
      December 31, 2006 the net loss was $390,000, an increase in net loss of
      $367,000, from the same period last year. The net loss was primarily the result
      of an increase in interest expense and increased overhead costs, primarily
      in
      the area of salaries and employee benefits, occupancy and equipment, and
      advertising in connection with the opening of two new branch locations in August
      2006.




*Net
      Interest Income* .
      Net
      interest income increased by $95,000 to $1.1 million for the three months ended
      December 31, 2006, from $1.0 million for the same period in 2005. Net
      interest income increased by $231,000 to $2.3 million for the six months ended
      December 31, 2006, from the same period in 2005. The net interest rate
      spread was 3.31% and 3.58% for the three and six months ended December 31,
      2006, as compared to 3.92% and 3.83% for the same period in 2005. The net
      interest margin decreased to 3.87% and 4.01% for the three and six month periods
      ended December 31, 2006, from 4.23% and 4.10% for the same periods in 2005.
      As
      the Company is more liability sensitive, its liabilities reprice faster than
      its
      assets in a rising rate environment, as was the case in the last two quarters,
      and as a result, the Company’s interest rate spread and net interest margin
      narrowed.




11
 *Table
          of Contents*




*Interest
      Income* .
      Total
      interest income increased $519,000 to $1.9 million for the three months ended
      December 31, 2006 from $1.4 million for the three months ended
      December 31, 2005. Total interest income increased $919,000 to $3.6 million
      for the six months ended December 31, 2006 from $2.7 million for the same
      period in 2005. For the three and six months ended December 31, 2006,
      average interest-earning assets increased to $117.5 million and $113.0 million,
      respectively, from $98.7 million and $99.2 million, respectively, for
      the same periods in 2005. The increase was primarily the result of increased
      Federal funds sold and loans. The yields on interest-earning assets increased
      to
      6.43% and 6.34% for the three and six months ended December 31, 2006,
      respectively, from 5.55% and 5.37%, respectively, for the comparable
      periods in 2005, reflecting the increase in interest rates.




*Interest
      Expense* .
      Total
      interest expense increased $424,000 and $688,000 to $752,000 and $1.3 million,
      respectively, for the three and six months ended December 31, 2006 from
      $327,000 and $632,000 for the same period in 2005. The average cost of deposits
      increased from 1.68% and 1.62% for the three and six months ended December
      31,
      2005, respectively, to 3.12% and 2.75% for the same periods in 2006.




*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, 2006, respectively. The
      provisions were primarily the result of changes to the economic condition
      component of the historical loss allocation. The allowance for loan losses
      as a
      percentage of gross loans outstanding increased to .65% at December 31,
      2006, from .50% at December 31, 2005. The Bank had no nonperforming loans
      at December 31, 2005 and 2006.




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
      December 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 $10,000 to $139,000 for the three month period
      ended December 31, 2006 from the same period in 2005. The increase in the three
      month period was the result of a $5,000 increase in service changes, offset
      by
      decreases of $5,000 in earnings on the cash surrender value on life insurance
      policies and other income of $12,000. In addition, a loss on the sale of
      securities of $19,000 was recorded in the three month period ended December
      31,
      2005, with no comparable losses being incurred in the same period in 2006.
      Noninterest income was $321,000 and $301,000 for the six month periods ended
      December 31, 2006 and 2005, respectively.




12
 *Table
          of Contents*




*Noninterest
      Expense* .
      Noninterest expense increased $390,000 and $802,000 to $1.6 million and $3.1
      million for the three and six months ended December 31, 2006,
      respectively, from $1.2 million and $2.3 million for the three and six
      months ended December 31, 2005, respectively. The increases were primarily
      the result of increases in salaries and employee benefits, occupancy-related
      expenses and professional services.




Salaries
      and employee benefits increased $133,000 and $324,000 for the three and six
      months ended December 31, 2006, respectively, compared to the same
      periods in 2005, primarily resulting from an increase due to stock-based
      compensation expense for the quarter and six month period ended December 31,
      2006 of $88,000 and $191,000, respectively. The remaining increases were the
      result of increased personnel expenses from the two newly opened branches in
      Frankfort, Illinois and Schererville, Indiana.




Occupancy
      and equipment expense increased $16,000 and $127,000 for the three and six
      months ended December 31, 2006, respectively, compared to the same
      periods in 2005, due to increased rent and depreciation expense for the two
      new
      branch locations.




Professional
      fees increased $99,000 and $88,000, advertising expense increased $74,000 and
      $131,000, and other expenses increased $70,000 and $142,000 for the three and
      six month periods ended December 31, 2006, respectively, compared to the
      same periods in 2005, due to costs of the newly opened bank
      branches.




*Provision
      for Income Taxes* .
      The
      income tax benefit increased $85,000 for the three months ended
      December 31, 2006 from the comparable period in 2005. For the six months
      ended December 31, 2006, the tax benefit was $233,000 as compared to the
      tax benefit of $49,000 recorded for the comparable six month period in 2005.
      The
      fluctuations between periods was primarily due to the increase in taxable net
      loss. A valuation allowance has not been established for the deferred tax asset
      related to federal net operating loss carryforwards as the Company believes
      it
      is more likely than not that they will be realized.




***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, FHLB advances and Federal funds sold, 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 December 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 were $44,000 and $268,000 for December 31,
      2006 and 2005, respectively. Net cash from investing activities consisted
      primarily of repayments on loans and mortgage-backed securities, and proceeds
      from maturing securities and paydowns on mortgage-backed securities, offset
      by
      purchases of securities, premises and equipment, and participation loans. Net
      cash from investing activities were $11.3 million and ($11.8) million for
      December 31, 2006, and 2005, respectively. Net cash from financing
      activities consisted primarily of the activity in deposit accounts, federal
      funds purchased, and treasury stock purchases. The net cash from financing
      activities was $15.0 million and ($1.6) million at December 31, 2006 and 2005,
      respectively.




13
 *Table
          of Contents*




From
      June 30, 2006 through December 31, 2006, 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 loan participations
      and
      federal funds sold.




At
      December 31, 2006, the Company had outstanding commitments to originate
      $1.1 million in loans, unfunded lines of credit and participation loans of
      $5.8
      million and $4.1 million, respectively, and letters of credit outstanding of
      $147,000. In addition, as of December 31, 2006, the total amount of certificates
      of deposit that were scheduled to mature in the next 12 months equaled
      $48.5 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,
      2006, the Bank had $6.5 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, 2006, the Bank exceeded
      each of its capital requirements with ratios of 18.26%, 30.57% and 31.16%,
      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 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.




14
 *Table
          of Contents*




*Valuation
      Allowance on Deferred Tax Assets* .
      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.




***Recent
      Accounting Pronouncements***




In
      July
      2006, FASB issued Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes* (“FIN
      48”). FIN 48 is effective for fiscal years beginning after December 15, 2006.
      FIN 48 applies to all income tax positions subject to FASB Statement No. 109, *Accounting
      for Income Taxes* (“SFAS
      109), including tax positions considered to be routine and those with a high
      degree of uncertainty. The Company is evaluating the potential impact of this
      guidance on future periods.




In
      September 2006, the Securities and Exchange Commission (SEC) released Staff
      Accounting Bulletin No. 108, *Considering
      the Effects of Prior Year Misstatements When Quantifying Misstatements in
      Current Year Financial Statements* (SAB
      108), which is effective for fiscal years ending on or after November 15, 2006.
      SAB 108 provides guidance on how the effects of prior-year uncorrected financial
      statement misstatements should be considered in quantifying a current year
      misstatement. SAB 108 requires public companies to quantify misstatements using
      both an income statement (rollover) and balance sheet (iron curtain) approach
      and evaluate whether either approach results in a misstatement that, when all
      relevant quantitative and qualitative factors are considered, is material.
      If
      prior year errors that had been previously considered immaterial now are
      considered material based on either approach, no restatement is required so
      long
      as management properly applied its previous approach and all relevant facts
      and
      circumstances were considered. Adjustments considered immaterial in prior years
      under the method previously used, but now considered material under the dual
      approach required by SAB 108, are to be recorded upon initial adoption of SAB
      108. The amount so recorded is shown as a cumulative effect adjustment is
      recorded in opening retained earnings as of July 1, 2006. The Company is
      evaluating the potential impact of this guidance of future periods.




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




The
      Company maintains disclosure controls and procedures that are designed to ensure
      that information required to be disclosed in the Company’s reports that it files
      or submits under the Securities Exchange Act of 1934 is recorded, processed,
      summarized and reported within the time periods specified in the Securities
      and
      Exchange Commission’s rules and forms, and that such information is accumulated
      and communicated to the Company’s management, including its Chief Executive
      Officer and Chief Financial Officer, as appropriate to allow timely decisions
      regarding required disclosure. As of the end of the period covered by this
      report, the Company carried out an evaluation, with the participation of
      management, including its Chief Executive Officer and Chief Financial Officer,
      of the effectiveness of the design and operation of its disclosure controls
      and
      procedures pursuant to the 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 our disclosure controls and procedures were not effective
      as of December 31, 2006, because of the material weakness disclosed below.





In
      connection with its audit of the Company’s consolidated financial statements for
      the year ended June 30, 2006, Crowe Chizek and Company LLC (“Crowe Chizek”), the
      Company’s independent




15
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registered
      public accounting firm, advised the Board of Directors, the Audit Committee
      and
      management of certain significant internal control deficiencies that they
      considered to be, in the aggregate, a material weakness. A material weakness
      is
      a significant deficiency, or combination of significant deficiencies, that
      results in more than a remote likelihood that a material misstatement of the
      annual or interim financial statements will not be prevented or detected.





In
      particular, in connection with the audit for the year ended June 30, 2006,
      Crowe
      Chizek identified several adjustments and corrections that had to be
      incorporated into the consolidated financial statements as a result of Crowe
      Chizek’s audit. These adjustments encompassed various areas, including deferred
      loan costs, income taxes, professional fees, and the employee stock ownership
      plan. According to Crowe Chizek, these adjustments and corrections indicated
      that management’s internal review process over financial reporting was not
      appropriately designed and implemented. Specifically, Crowe Chizek advised
      the
      Board of Directors, the Audit Committee and management that: (a) a formal
      procedure was not in place to ensure that entries were recorded in accordance
      with United States generally accepted accounting principles and that the posting
      of these entries was appropriately reviewed; and (b) when there were departures
      from United States generally accepted accounting principles, a formal procedure
      was not in place to ensure that an analysis of the potential differences was
      completed, conclusions as to materiality documented and remediation steps
      determined on a quarterly and annual basis.





In
      order
      to remediate this material weakness identified by Crowe Chizek and to improve
      the effectiveness of the Company’s disclosure controls, management is in the
      process of designing, implementing and continuing to enhance disclosure controls
      to correct the material weakness set forth above. Management will continue
      to
      monitor, evaluate and test the operating effectiveness of these controls.




Except
        as
        noted above, there were no changes in our internal control over financial
        reporting identified in connection with our evaluation of it that occurred
        during the three months ended December 31, 2006 that materially affected,
        or are
        reasonably likely to materially affect, our internal control over financial
        reporting.




16
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**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****.**


**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/**
                  **Programs
                    (1)**10/01/06-10/31/06
                
                
                —
                
                
                —
                
                
                —
                
                
                125,63811/01/06-11/30/06
                
                
                10,000
                
                $
                16.05
                
                
                10,000
                
                
                115,63812/01/06-12/31/06
                
                
                12,000
                
                
                16.05
                
                
                22,000
                
                
                103,638Total
                
                
                22,000
                
                $
                16.05
                
                
                22,000
                
                
                103,638




(1)
            In
                September 2006, the Company's Board of Directors approved the repurchase
                of up to 5% of the Company's then currently outstanding shares of
                common
                stock, or 125,638 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****.**




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 II directors for a three-year term ending at
                  the Annual Meeting of Stockholders to be held in
                  2009:
  Directors
              Votes
                  For
              Votes
                  WithheldAlan
                  W. Bird
              2,051,657
              1,814Barbara
                  K. Minster
              2,048,172
              5,299
 
 The
        following directors continue to serve after the Annual Meeting:
  Continuing
                  Director
              Term
                  ExpiresDonald
                  A. Moll
              2007John
                  T. Dempsey
              2007Peter
                  C. Rolewicz
              2008Roldolfo
                  Serna
              2008
 Alan
                  W. Bird
              2009Barbara
                  K. Minster
              2009
  (2)
              Ratification
                  of the appointment of Crowe Chizek and Company LLC as the Company’s
                  independent accountants for the fiscal year ending June 30,
                  2007.
  Total
                  votes for
              2,053,421Total
                  votes against
              0Total
                  votes abstaining
              50


**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.




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**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:
                    February 14, 2007
                  By:
                  /s/Donald
                    A. Moll
 Donald
                    A. MollPresident
                    and Chief Executive Officer
 Date:
                          February 14, 2007
                      By:
                      /s/Leonard
                        Szwajkowski
  Leonard
                        SzwajkowskiSenior
                        Vice President, Chief Financial Officer and
                        Treasurer
 18
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**EXHIBIT INDEX**




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.