UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2008

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number: 0-51296

COMMUNITY FINANCIAL SHARES, INC.

(Exact name of registrant as specified in its charter)

Delaware	36-4387843
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
357 Roosevelt Road Glen Ellyn, Illinois	60137
(Address of principal executive offices)	(Zip Code)

(630) 545-0900

(Registrant’s telephone number, including area code)

None

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

Large Accelerated Filer  ¨	Accelerated Filer  ¨
Non-Accelerated Filer  ¨ (Do not check if a smaller reporting company)	Smaller Reporting Company  x

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at August 12, 2008
Common Stock, no par value per share	1,245,267 shares

Form 10-Q Quarterly Report

Table of Contents

PART I
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	21
Item 4.	Controls and Procedures	21
PART II
Item 1.	Legal Proceedings	22
Item 1A.	Risk Factors	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3.	Defaults Upon Senior Securities	22
Item 4.	Submission of Matters to a Vote of Security Holders	23
Item 5.	Other Information	23
Item 6.	Exhibits	23
	Signatures

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

COMMUNITY FINANCIAL SHARES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

	June 30, 2008			December 31, 2007
	(Unaudited)
ASSETS
Cash and due from banks	$	4,956		$	7,789
Cash and cash equivalents		4,956			7,789
Securities available-for-sale		30,996			33,163
Loans, less allowance for loan losses of $2,805 and $1,970 at June 30, 2008 and December 31, 2007, respectively		223,457			227,736
Loans held for sale		752			600
Federal Home Loan Bank stock		5,398			5,398
Premises and equipment, net		16,997			16,515
Cash value of life insurance		5,356			5,247
Interest receivable and other assets		1,924			1,863
Total assets	$	289,836		$	298,311
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits	$	245,795		$	249,032
Federal Home Loan Bank advances		17,000			17,500
Subordinated debentures		3,609			3,609
Federal funds purchased and other borrowings		4,400			7,500
Interest payable and other liabilities		1,304			2,165
Total liabilities		272,108			279,806
Commitments and contingent liabilities
Shareholders' equity
Common stock—no par value, 5,000,000 shares authorized; 1,245,267 and 1,250,880 issued and outstanding at June 30, 2008 and December 31, 2007, respectively		—			—
Paid-in capital		4,861			4,999
Retained earnings		13,235			13,630
Accumulated other comprehensive loss		(368	)		(124	)
Total shareholders' equity		17,728			18,505
Total liabilities and shareholders' equity	$	289,836		$	298,311

See Notes to Condensed Consolidated Financial Statements

3

COMMUNITY FINANCIAL SHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three and Six Months Ended June 30, 2008 and 2007

(In thousands, except share and per share data)

(Unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
	2008			2007		2008			2007
Interest income
Loans	$	3,473		$	3,730	$	7,216		$	7,408
Securities:
Taxable		212			326		474			580
Exempt from federal income tax		129			160		262			319
Federal funds sold		13			20		17			29
Federal Home Loan Bank dividends and other		—			91		—			171
Total interest income		3,827			4,327		7,969			8,507
Interest expense
Deposits		1,459			1,710		3,256			3,333
Federal funds purchased		10			11		41			13
Federal Home Loan Bank advances and other borrowed funds		218			132		450			264
Subordinated debentures		40			83		98			163
Total interest expense		1,727			1,936		3,845			3,773
Net interest income		2,100			2,391		4,124			4,734
Provision for loan losses		800			—		830			—
Net interest income after provision for loan losses		1,300			2,391		3,294			4,734
Non-interest income
Service charges on deposit accounts		171			142		316			278
Gain on sale of loans		144			100		315			207
Gain on sale of securities		—			—		79			37
Life insurance death benefit		—			—		—			478
Other non-interest income		139			153		271			302
Total non-interest income		454			395		981			1,302
Non-interest expense
Salaries and employee benefits		1,291			1,200		2,622			2,442
Net occupancy and equipment expense		319			257		674			516
Data processing expense		208			175		412			335
Advertising and promotions		98			100		168			200
Professional fees		97			91		185			181
Other operating expenses		390			436		834			778
Total non interest expense		2,403			2,259		4,895			4,452
Income (loss) before income taxes		(649	)		527		(620	)		1,584
Provision (benefit) for income taxes		(322	)		122		(374	)		285
Net income (loss)	$	(327	)	$	405	$	(246	)	$	1,299
Earnings (loss) per share
Basic	$	(0.26	)	$	0.29	$	(0.20	)	$	0.94
Diluted	$	(0.26	)	$	0.29	$	(0.20	)	$	0.94
Average shares outstanding basic		1,244,918			1,375,278		1,246,792			1,375,263
Average shares outstanding diluted		1,248,439			1,379,670		1,251,570			1,379,914
Dividends per share	$	0.06		$	0.06	$	0.12		$	0.12

See Notes to Condensed Consolidated Financial Statements

4

COMMUNITY FINANCIAL SHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Six Months Ended June 30, 2008 and 2007

(In thousands, except share data)

(Unaudited)

	Number of Common Shares		Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders' Equity
Balance at January 1, 2008	1,250,880		$	4,999		$	13,630		$	(124	)	$	18,505
Net income (loss)	—			—			(246	)		—			(246	)
Change in unrealized net loss on securities available-for-sale, net of reclassifications and tax effects	—			—			—			(244	)		(244	)
Total comprehensive loss													(490	)
Cash dividends ($0.12 per share)	—			—			(149	)		—			(149	)
Stock option expense	—			11			—			—			11
Tax benefit of stock options exercised	—			1			—			—			1
Stock repurchased	(6,333	)		(165	)		—			—			(165	)
Stock options exercised	720			15			—			—			15
Balance at June 30, 2008	1,245,267		$	4,861		$	13,235		$	(368	)	$	17,728
Balance at January 1, 2007	1,375,228		$	8,231		$	12,361		$	9		$	20,601
Net income	—			—			1,299			—			1,299
Change in unrealized net gain on securities available-for-sale, net of reclassifications and tax effects	—			—			—			(389	)		(389	)
Total comprehensive income													910
Cash dividends ($0.12 per share)	—			—			(166	)		—			(166	)
Stock option expense	—			10			—			—			10
Stock options exercised	50			1			—			—			1
Balance at June 30, 2007	1,375,278		$	8,242		$	13,494		$	(380	)	$	21,356

See Notes to Condensed Consolidated Financial Statements

5

COMMUNITY FINANCIAL SHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended June 30, 2008 and 2007

(In thousands)

(Unaudited)

	Six Months Ended June 30,
	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	(246	)	$	1,299
Adjustments to reconcile net income to net cash from operating activities
Amortization on securities, net		8			32
Depreciation		337			264
Provision for loan losses		830			—
Gain on sale of securities		(79	)		(37	)
Gain on sale of loans		(315	)		(207	)
Originations of loans for sale		(15,655	)		(10,641	)
Proceeds from sales of loans		15,970			10,848
Compensation cost of stock options		11			10
Change in cash value of life insurance		(109	)		(160	)
Change in interest receivable and other assets		93			191
Change in interest payable and other liabilities		(861	)		(405	)
Net cash from (used in) operating activities		(16	)		1,194
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available-for-sale		(9,187	)		(12,707	)
Maturities and calls of securities available-for-sale		8,909			2,287
Proceeds from sales of securities available-for-sale		2,118			2,419
Net change in loans		3,298			(192	)
Proceeds of life insurance death benefit		—			478
Property and equipment expenditures, net		(819	)		(1,079	)
Net cash from (used in) investing activities		4,319			(8,794	)
CASH FLOWS FROM FINANCING ACTIVITIES
Change in:
Non-interest bearing and interest bearing demand deposit and savings		12,574			5,880
Certificates and other time deposits		(15,812	)		(9,831	)
Short term borrowings		(5,100	)		4,100
Proceeds of borrowings		8,500			8,609
Repayments of borrowings		(7,000	)		(3,609	)
Purchase of stock		(165	)		—
Exercise of stock options		15			1
Tax benefit of stock options exercised		1			—
Dividends paid		(149	)		(166	)
Net cash from (used in) financing activities		(7,136	)		4,984
Change in cash and cash equivalents		(2,833	)		(2,616	)
Cash and cash equivalents at beginning of period		7,789			10,629
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	4,956		$	8,013

See Notes to Condensed Consolidated Financial Statements

6

COMMUNITY FINANCIAL SHARES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Table dollars in thousands)

June 30, 2008 and 2007

NOTE 1 – BASIS OF PRESENTATION

The accounting policies followed in the preparation of the interim condensed consolidated financial statements are consistent with those used in the preparation of annual consolidated financial statements. The interim condensed consolidated financial statements reflect all normal and recurring adjustments, which are necessary, in the opinion of management of Community Financial Shares, Inc. (the “Company”), for a fair statement of results for the interim periods presented. Results for the three and six months ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ended December 31, 2008.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for the interim financial period and with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2007, which was filed with the U.S. Securities and Exchange Commission on March 28, 2008. The condensed consolidated balance sheet of the Company as of December 31, 2007 has been derived from the audited consolidated balance sheet as of that date.

NOTE 2 – EARNINGS (LOSS) PER SHARE

The number of shares used to compute basic and diluted earnings (loss) per share were as follows:

	Three Months Ended June 30,					Six Months Ended June 30,
	2008			2007		2008			2007
Net income (loss) (in thousands)	$	(327	)	$	405	$	(246	)	$	1,299
Weighted Average Shares outstanding		1,244,918			1,375,278		1,246,792			1,375,263
Effect of dilutive securities:
Stock options		3,521			4,392		4,778			4,651
Shares used to compute diluted earnings per share		1,248,439			1,379,670		1,251,570			1,379,914
Earnings (loss) per share:
Basic	$	(0.26	)	$	0.29	$	(0.20	)	$	0.94
Diluted		(0.26	)		0.29		(0.20	)		0.94

There were 1,280 and 50 anti-dilutive shares for the three and six months ended June 30, 2008, respectively included in the above table.

7

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Table dollars in thousands)

June 30, 2008 and 2007

NOTE 3 – CAPITAL RATIOS

At the dates indicated, the Bank’s capital ratios were:

	June 30, 2008				December 31, 2007
	Amount		Ratio		Amount		Ratio
Total capital (to risk-weighted assets)	$	25,862	10.7	%	$	23,141	9.4	%
Tier I capital (to risk-weighted assets)		23,057	9.5	%		21,171	8.6	%
Tier I capital (to average assets)		23,057	7.8	%		21,171	7.2	%

At June 30, 2008, Community Bank-Wheaton/Glen Ellyn (the “Bank”), the Company’s wholly owned subsidiary, was categorized by its regulators as well capitalized in accordance with all regulatory capital requirements. In addition, at December 31, 2007, the Bank was categorized as well capitalized in accordance with the regulatory criteria for Tier 1 capital requirements. However, the Bank was slightly below the well capitalized risk based capital requirement of 10% at December 31, 2007.

NOTE 4 – DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES

Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“FAS 157”). FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value measurements. FAS 157 has been applied prospectively as of the beginning of the year.

FAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1 – Quoted prices in active markets for identical assets or liabilities

Level 2 – Observable inputs other than Level 1 prices, such quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy.

8

Available-for-sale Securities

If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include certain collateralized mortgage and debt obligations and certain municipal securities. The following table is as of June 30, 2008:

			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale Securities	$	30,996,000	$	—	$	30,996,000	$	—

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

The following discussion and analysis is intended as a review of significant factors affecting the financial condition and results of operations of the Company for the periods indicated. The discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes. In addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed elsewhere in this report.

Safe Harbor Statement

This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.

The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries include, but are not limited to, the following:

• The strength of the United States economy in general and the strength of the local economies in which the Company conducts its operations which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of the Company’s assets.

• The economic impact of past and any future terrorist attacks, acts of war or threats thereof and the response of the United States to any such threats and attacks.

9

• The effects of, and changes in, federal, state and local laws, regulations and policies affecting banking, securities, insurance and monetary and financial matters.

• The effects of changes in interest rates (including the effects of changes in the rate of prepayments of the Company’s assets) and the policies of the Board of Governors of the Federal Reserve System.

• The ability of the Company to compete with other financial institutions as effectively as the Company currently intends due to increases in competitive pressures in the financial services sector.

• The inability of the Company to obtain new customers and to retain existing customers.

• The timely development and acceptance of products and services, including products and services offered through alternative delivery channels such as the Internet.

• Technological changes implemented by the Company and by other parties, including third party vendors, which may be more difficult or more expensive than anticipated or which may have unforeseen consequences to the Company and its customers.

• The ability of the Company to develop and maintain secure and reliable electronic systems.

• The ability of the Company to retain key executives and employees and the difficulty that the Company may experience in replacing key executives and employees in an effective manner.

• Consumer spending and saving habits which may change in a manner that affects the Company’s business adversely.

• Business combinations and the integration of acquired businesses which may be more difficult or expensive than expected.

• The costs, effects and outcomes of existing or future litigation.

• Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the Financial Accounting Standards Board.

• The ability of the Company to manage the risks associated with the foregoing as well as anticipated.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Additional information concerning the Company and its business, including other factors that could materially affect the Company’s financial results, is included in the Company’s filings with the Securities and Exchange Commission.

Overview

Community Financial Shares, Inc. (the “Company”) is the holding company for Community Bank- Wheaton/Glen Ellyn (the “Bank”). The Company is headquartered in Glen Ellyn, Illinois and operates four offices in its market. One location is in Glen Ellyn and three are located in Wheaton. The Company completed construction and opened its fourth location November 21, 2007. The new facility will help to solidify the Company’s market presence in Wheaton as well as provide access to the Carol Stream and Winfield markets.

The Company’s principal business is conducted by the Bank and consists of offering a full range of community-based financial services, including commercial and retail banking services. The profitability of the Company’s operations depends primarily on its net interest income, provision for loan losses, other income, and other expenses. Net interest income is the difference between the income

10

the Company receives on its loan and securities portfolios and its cost of funds, which consists of interest paid on deposits and borrowings. The provision for loan losses reflects the cost of credit risk in the Company’s loan portfolio. Other income consists of service charges on deposit accounts, gains on loan sales, securities gains (losses), and other income. Other expenses include salaries and employee benefits, as well as occupancy and equipment expenses and other noninterest expenses.

Net interest income is dependent on the amounts and yields of interest-earning assets as compared to the amounts of and rates on interest-bearing liabilities. Net interest income is sensitive to changes in market rates of interest and the Company’s asset/liability management procedures in coping with such changes. The provision for loan losses is dependent upon management’s assessment of the collectibility of the loan portfolio under current economic conditions.

Comparison of Financial Condition at June 30, 2008 and December 31, 2007

Total assets at June 30, 2008 were $289.8 million, which represented a decrease of $8.5 million, or 2.8%, compared to $298.3 million at December 31, 2007. The change in total assets was primarily due to decreases in cash and cash equivalents, investment securities and loans receivable. Cash and cash equivalents decreased by $2.8 million, or 36.4%, to $5.0 million at June 30, 2008. The decrease in cash and cash equivalents is partially due to the repayment of $5.6 million of borrowings during the first six months of 2008. Investment securities decreased by $2.2 million, or 6.5%, to $31.0 million at June 30, 2008. This decrease is partially due to $6.1 million of securities being called in the first six months of 2008. Loans receivable decreased by $4.3 million, or 1.9%, to $223.5 million at June 30, 2008. Net of loans sold, loans receivable increased $2.4 million. This net growth in loans during the first six months ended June 30, 2008 is primarily due to continued strong relationships within the business community maintained by our loan staff. The decrease in total loans was partially offset by an increase in premises and equipment, net which increased $482,000, or 2.9%, to $17.0 million at June 30, 2008 as compared to $16.5 million at December 31, 2007, which is primarily due to final costs associated with the completion of the Bank’s fourth full service facility.

Total liabilities at June 30, 2008 were $272.1 million, which represented a decrease of $7.7 million, or 2.8%, compared to $279.8 million at December 31, 2007. Deposits decreased $3.2 million, or 1.3%, to $245.8 million at June 30, 2008 as compared to $249.0 million at December 31, 2007. Deposits decreased partially due to the continued strong competition for certificates of deposit. However, the bank’s commercial loan staff continues to place an emphasis on obtaining deposit relationships with our current commercial loan clients. Federal Home Loan Bank (“FHLB”) advances and other borrowed money decreased $3.6 million, or 14.4%, to $21.4 million at June 30, 2008 from $25.0 million at December 31, 2007. However, the opening of the facility in north Wheaton has provided a new source of deposits which has decreased our reliance on FHLB advances to fund loan growth. Deposits from this facility since its opening in November 2007 totaled $13.0 million at June 30, 2008, which is $3.9 million higher than March 31, 2008.

Shareholders’ equity decreased by $777,000, or 4.2%, to $17.7 million at June 30, 2008 as compared to $18.5 million at December 31, 2007. The decrease in shareholders’ equity was primarily the result of stock repurchases of 6,333 shares totaling $165,000, dividends paid of $149,000, a decrease of $244,000 in the Company’s accumulated other comprehensive loss relating to the change in fair value of its available-for-sale investment portfolio during the first six months of 2008 and the Company’s net loss for the six months ended June 30, 2008.

Comparison of Operating Results for the Three Months Ended June 30, 2008 and 2007

General. The Company’s net income (loss) decreased $731,000 to ($327,000) for the three months ended June 30, 2008, from $405,000 for the three months ended June 30, 2007. This represents a 189.7% decrease in diluted earnings per share to ($0.26) per share for the three months ended June 30, 2008 from $0.29 per share for the three months ended June 30, 2007. The decrease in net income is partially the result of the combined effect of i) an $800,000 provision for loan losses; ii) a $291,000 decrease in net interest income primarily due to a decrease in the yield on interest earning assets; iii) a $144,000 increase in noninterest expense; and iv) a $59,000 increase in noninterest income.

11

Net interest income. The following table summarizes interest and dividend income and interest expense for the three months ended June 30, 2008 and 2007.

	Three Months Ended June 30,
	2008		2007		$ Change			% Change
	(Dollars in thousands)
Interest and dividend income:
Interest and fees on loans	$	3,473	$	3,730	$	(257	)	(6.89	)%
Securities:
Taxable		212		326		(114	)	(34.97	)
Exempt from federal tax		129		160		(31	)	(19.38	)
Federal funds sold		13		20		(7	)	(35.00	)
Federal Home Loan Bank dividends and other		—		91		(91	)	(100.00	)
Total interest and dividend income		3,827		4,327		(500	)	(11.56	)
Interest expense:
Deposits		1,459		1,710		(251	)	(14.68	)
Federal funds purchased		10		11		(1	)	(9.09	)
Federal Home Loan Bank advances and other borrowings		195		132		63		47.73
Subordinated debentures		63		83		(20	)	(24.10	)
Total interest expense		1,727		1,936		(209	)	(10.80	)
Net interest income	$	2,100	$	2,391	$	(291	)	(12.17	)

The following table summarizes average balances and annualized average yield or cost for the three months ended June 30, 2008 and 2007.

	Three Months Ended June 30,
	2008					2007
	Average Balance		Interest	Average Yield/ Cost		Average Balance		Interest	Average Yield/ Cost
	(Dollars in thousands)
Interest-earning assets:
Federal funds sold	$	—	—	—	%	$	1,463	20	5.34	%
Taxable securities		15,954	212	5.32			25,593	326	5.11
Tax-exempt securities		12,238	129	4.23			14,824	160	4.34
Loan receivables, net		230,342	3,473	6.05			196,905	3,730	7.60
Interest-bearing deposits		2,403	13	2.25			3,812	53	5.57
FHLB stock		5,398	—	0.00			5,398	38	2.84
Total interest-earning assets		266,335	3,827	5.76			247,995	4,327	7.00
Interest-bearing liabilities:
NOW accounts		46,559	119	1.02			35,708	53	0.59
Regular savings		26,887	17	0.25			27,833	52	0.75
Money market accounts		39,940	233	2.34			43,032	344	3.21
Certificates of deposit		107,431	1,090	4.07			100,901	1,272	5.06
FHLB advances and other		19,000	218	4.60			10,610	122	4.61
Federal funds purchased		1,642	10	2.42			604	10	6.93
Subordinated debentures		3,609	40	4.48			3,847	83	8.66
Total interest-bearing deposits	$	245,068	1,727	2.83		$	222,535	1,936	3.49
Net interest income			2,100					2,391
Net interest spread				2.93	%				3.51	%
Net interest income to average interest-earning assets				3.16	%				3.87	%

12

Interest Income. Interest income decreased $500,000, or 11.6%, to $3.8 million for the three months ended June 30, 2008, compared to $4.3 million in the same period in 2007. This decrease resulted primarily from a decrease in average yield. The largest component was a decrease of $257,000 in interest income on loans for the three months ended June 30, 2008 compared to the comparable prior year period.

Loan interest income decreased $257,000, or 6.9%, to $3.5 million for the three months ended June 30, 2008, compared to $3.7 million for the comparable prior year period. This decrease resulted from a decrease in the average yield of 155 basis points to 6.05% for the three months ended June 30, 2008 from 7.60% for the comparable prior year period. This decrease was partially offset by in increase in the average balance of $33.4 million to $230.3 million for the three months ended June 30, 2008 from $196.9 million for the comparable prior year period. There was a 225 basis point decrease in the federal funds interest rate since January 2008. The effect of such decreases has a negative impact due to approximately one half of the bank’s portfolio being comprised of adjustable rate loans. In addition, interest on taxable securities decreased $114,000 for the three months ended June 30, 2008 compared to the comparable prior year period. This decrease is primarily due to a decrease in average balance of $9.6 million to $16.0 million for the three months ended June 30, 2008 from $25.6 million for the three months ended June 30, 2007 partially due to securities called in the three months ended June 30, 2008. This decrease was partially offset by an increase in average yield on taxable securities of 21 basis points to 5.32% for the three months ended June 30, 2008 from 5.11% for the comparable prior year period.

Interest Expense. Interest expense decreased by $209,000, or 10.8%, to $1.7 million for the three months ended June 30, 2008, from $1.9 million for the three months ended June 30, 2007. This decrease resulted from a decrease in the average rate paid on interest bearing liabilities of 66 basis points to 2.83% for the three months ended June 30, 2008 from 3.49% for the comparable prior year period. This decrease was partially offset by an increase in the average balance of interest bearing liabilities of $22.6 million to $245.1 million for the three months ended June 30, 2008 from $222.5 million for the three months ended June 30, 2007. Interest expense resulting from FHLB advances and other borrowings increased $86,000 during the three months ended June 30, 2008. The average balance on these borrowings increased $8.4 million to $19.0 million for the three months ended June 30, 2008 from $10.6 million for the comparable prior year period. Partially offsetting this increase was a decrease in average cost of one basis point to 4.60% for the three months ended June 30, 2008 from 4.61% for the comparable period in 2007.

Net Interest Income before Provision for Loan Losses. Net interest income before provision for loan losses decreased $291,000, or 12.2%, to $2.1 million for the three months ended June 30, 2008 from $2.4 million for the comparable period in 2007. The Company’s net interest margin expressed as a percentage of average earning assets fell to 3.16% for the three months ended June 30, 2008 as compared to 3.87% for the three months ended June 30, 2007, however, the margin increased 15 basis points from the linked quarter. The yield on average earning assets decreased to 5.76% for the three months ended June 30, 2008 from 7.00% for the comparable period ended June 30, 2007, a 124 basis point decrease. This decrease in the yield on earning assets was primarily due to a decrease in loan yield, which resulted from the 225 basis point decrease in the federal funds interest rate since January 2008. The yield on average loans decreased to 6.05% for the three months ended June 30, 2008 from 7.60% for the three months ended June 30, 2007. In addition, there was a 66 basis point decrease in the cost of interest-bearing liabilities to 2.83% for the three months ended June 30, 2008 as compared to 3.49% a year earlier.

Provision for Loan Losses. The Bank’s provision for loan losses increased to $800,000 for the three months ended June 30, 2008 from $0 for the comparable period in 2007. The increase in the provision was the result of management’s quarterly analysis of the allowance for loan loss. At June 30, 2008, December 31, 2007 and June 30, 2007, non-performing loans totaled $3.1 million, $697,000 and $152,000, respectively. At June 30, 2008, the ratio of the allowance for loan losses to non-performing loans was 89.2% compared to 282.7% at December 31, 2007 and 995.7% at June 30, 2007, respectively. The ratio of the allowance to total loans was 1.24%, 0.86% and 0.77%, at June 30, 2008, December 31, 2007 and June 30, 2007, respectively. The increase in nonperforming loans was primarily the result of the addition of a $2.0 million condominium construction loan located in the western suburbs of Chicago, Illinois. This credit represents approximately 65% of total nonperforming loans at June 30, 2008 and is being closely monitored by senior management.

13

The amounts of the provision and allowance for loan losses are influenced by a number of factors, including current economic conditions, actual loss experience, industry trends and other factors, including real estate values in the Company’s market area and management’s assessment of current collection risks within the loan portfolio. Should the local economic climate begin to deteriorate, borrowers may experience difficulty, and the level of non-performing loans, charge- offs, and delinquencies could rise and require increases in the provision. The allowance for loan losses represents management’s estimate of probable incurred losses based on information available as of the date of the financial statements. The allowance for loan losses is based on management’s evaluation of the collectibility of the loan portfolio, including past loan loss experience, known and inherent risks in the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, and economic conditions. Management has concluded that the allowance for loan losses is adequate at June 30, 2008. However, there can be no assurance that the allowance for loan losses will be adequate to cover all losses. The FDIC examines the Bank periodically and, accordingly, as part of this examination the allowance is reviewed utilizing specific guidelines. Based upon their review, the regulators may from time to time require reserves in addition to those previously provided.

	Three Months Ended June 30,
	2008		2007		$ Change			% Change
	(Dollars in thousands)
Non-interest income:
Service charges on deposit accounts	$	171	$	142	$	29		20.42	%
Gain on sale of loans		144		100		44		44.00
Other non-interest income		139		153		(14	)	(9.15	)
Total non-interest income	$	454	$	395	$	59		14.94

Noninterest Income. Noninterest income totaled $454,000 and $395,000 for the three months ended June 30, 2008 and 2007, respectively. Gain on sale of loans increased $44,000 to $144,000 for the three months ended June 30, 2008 from $100,000 for the comparable prior year period and are down from $172,000 in the linked quarter. The mortgage department continues to operate in a difficult interest rate environment and overall real estate market. In addition, service charges on deposit accounts increased $29,000 to $171,000 for the three months ended June 30, 2008 from $142,000 for the comparable prior year period and are up from $145,000 in the linked quarter. This increase is partially due to an increase in the number of deposit accounts.

	Three Months Ended June 30,
	2008		2007		$ Change			% Change
	(Dollars in thousands)
Non-interest expenses:
Salaries and employee benefits	$	1,291	$	1,200	$	91		7.58	%
Net occupancy and equipment expense		319		257		62		24.12
Data processing expense		208		175		33		18.86
Advertising and promotions		98		100		(2	)	(2.00	)
Professional fees		97		91		6		6.59
Other operating expenses		390		436		(46	)	(10.55	)
Total non-interest expenses	$	2,403	$	2,259	$	144		6.37

Noninterest Expense. Noninterest expense increased by $144,000, to $2.4 million for the three months ended June 30, 2008 from $2.3 million for the comparable prior year period and is down from $2.5 million in the linked quarter. Salaries and employee benefits increased by $91,000, or 7.6%, to $1.3 million for the three months ended June 30, 2008 compared to $1.2 million for the three months ended June 30, 2007. This increase is primarily due to a combination of annual salary increases and the addition of staff. The additional staff expenses are partially due to the opening of our fourth full service facility, which opened November 21, 2007. Other operating expenses, including occupancy, data processing, and marketing and advertising expenses, increased by a net $93,000, or 17.5%, to $625,000 for the three months ended June 30, 2008 from $532,000 for the prior year period. Of this increase, $33,000 is related to data processing, $62,000 is related to occupancy expenses, which is due to higher depreciation expenses related to the new facility and higher real estate taxes. These increases were partially offset by lower advertising and promotion expenses, which decreased $2,000 from the prior year period. Management continues to emphasize the importance of expense management and control in order to continue to provide expanded banking services to a growing market base.

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Income Tax Expense. Income tax (benefit)/expense totaled ($322,000) and $122,000 for the three months ended June 30, 2008 and 2007, respectively. The decrease in income tax expense is primarily the result of a decrease in income before income taxes of $1.2 million to a loss of ($649,000) for the three months ended June 30, 2008 compared to $527,000 for the comparable prior year period.

Comparison of Operating Results for the Six Months Ended June 30, 2008 and 2007

General. The Company’s net income (loss) decreased $1.5 million to ($246,000) for the six months ended June 30, 2008, from $1.3 million for the six months ended June 30, 2007. This represents a 121.3% decrease in diluted earnings (loss) per share to ($0.20) per share for the six months ended June 30, 2008 from $0.94 per share for the six months ended June 30, 2007. The decrease in net income is partially the result of the combined effect of i) an $830,000 increase in provision for loan losses; ii) a $72,000 increase in interest expense, due to an increase in average balance of interest bearing liabilities; iii) a $610,000 decrease in net interest income primarily due to a decrease in net interest margin and a decrease in the yield on interest earning assets; and iv) the absence of a $478,000 life insurance benefit that was present in the prior year period.

Net interest income. The following table summarizes interest and dividend income and interest expense for the six months ended June 30, 2008 and 2007.

	Six Months Ended June 30,
	2008		2007		$ Change			% Change
	(Dollars in thousands)
Interest and dividend income:
Interest and fees on loans	$	7,216	$	7,408	$	(192	)	(2.59	)%
Securities:
Taxable		474		580		(106	)	(18.28	)
Exempt from federal tax		262		319		(57	)	(17.87	)
Federal funds sold		17		29		(12	)	(41.38	)
Federal Home Loan Bank dividends and other		—		171		(171	)	(100.00	)
Total interest and dividend income		7,969		8,507		(538	)	(6.32	)
Interest expense:
Deposits		3,256		3,333		(77	)	(2.31	)
Federal funds purchased		41		13		28		215.38
Federal Home Loan Bank advances and other borrowings		450		264		186		70.45
Subordinated debentures		98		163		(65	)	(39.88	)
Total interest expense		3,845		3,773		72		1.91
Net interest income	$	4,124	$	4,734	$	(610	)	(12.89	)

15

The following table summarizes average balances and annualized average yield or cost for the six months ended June 30, 2008 and 2007.

	Six Months Ended June 30,
	2008					2007
	Average Balance		Interest	Average Yield/ Cost		Average Balance		Interest	Average Yield/ Cost
	(Dollars in thousands)
Interest-earning assets:
Federal funds sold	$	—	—	—	%	$	1,125	29	5.22	%
Taxable securities		17,920	474	5.31			23,355	580	5.01
Tax-exempt securities		12,230	262	4.29			14,638	319	4.39
Loan receivables, net		231,540	7,216	6.25			198,662	7,408	7.52
Interest-bearing deposits		1,362	17	2.54			3,970	88	4.48
FHLB stock		5,398	—	0.00			5,398	83	3.10
Total interest-earning assets		268,450	7,969	5.95			247,148	8,507	6.94
Interest-bearing liabilities:
NOW accounts		43,943	221	1.01			35,932	101	0.57
Regular savings		26,023	42	0.33			27,093	104	0.77
Money market accounts		40,310	495	2.46			39,934	548	2.77
Certificates of deposit		112,418	2,498	4.46			104,048	2,580	5.00
FHLB advances and other		18,942	450	4.77			10,555	264	5.05
Federal funds purchased		2,589	41	3.16			381	13	6.63
Subordinated debentures		3,609	98	5.42			3,729	163	8.79
Total interest-bearing deposits	$	247,834	3,845	3.11		$	221,672	3,773	3.43
Net interest income			4,124					4,734
Net interest spread				2.84	%				3.51	%
Net interest income to average interest-earning assets				3.08	%				3.86	%

Interest Income. Interest income decreased $538,000, or 6.3%, to $8.0 million for the six months ended June 30, 2008, compared to $8.5 million in the same period in 2007. This decrease resulted primarily from a decrease in average yield. The largest component was a decrease of $192,000 in interest income on loans for the six months ended June 30, 2008 compared to the comparable prior year period. In addition, FHLB dividends decreased $83,000 for the six months ended June 30, 2008 compared to the comparable prior year period. This resulted from a decision by the FHLB of Chicago to not declare a dividend for the six months ended June 30, 2008.

Loan interest income decreased $192,000, or 2.6%, to $7.2 million for the six months ended June 30, 2008, compared to $7.4 million for the comparable prior year period. This decrease resulted from a decrease in the average yield of 127 basis points to 6.25% for the six months ended June 30, 2008 from 7.52% for the comparable prior year period. This decrease was partially offset by in increase in the average balance of $32.8 million to $231.5 million for the six months ended June 30, 2008 from $198.7 million for the comparable prior year period. The decrease in yield is primarily due to a 225 basis point decrease in the federal funds interest rate since January 2008, and the effect such decreases have had on the Bank’s loan portfolio, approximately one half of which is comprised of adjustable rate loans. In addition, interest on taxable securities decreased $106,000 for the six months ended June 30, 2008 compared to the comparable prior year period. This decrease is primarily due to a decrease in average balance of $5.4 million to $17.9 million for the six months ended June 30, 2008 from $23.4 million for the six months ended June 30, 2007. This decrease was partially offset by an increase in average yield on taxable securities of 30 basis points to 5.31% for the six months ended June 30, 2008 from 5.01% for the comparable prior year period.

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Interest Expense. Interest expense increased slightly by $72,000, or 1.9%, to $3.8 million for the six months ended June 30, 2008, from $3.7 million for the six months ended June 30, 2007. This increase resulted from an increase in the average balance of interest bearing liabilities of $26.1 million, or 11.8%, to $247.8 million for the six months ended June 30, 2008 from $221.7 million for the comparable prior year period. This increase was partially offset by a decrease in the average rate paid on interest bearing liabilities of 32 basis points to 3.11% for the six months ended June 30, 2008 from 3.43% for the comparable prior year period. Interest expense resulting from FHLB advances and other borrowings increased $186,000 during the six months ended June 30, 2008. The average balance on these borrowings increased $8.3 million to $18.9 million for the six months ended June 30, 2008 from $10.6 million for the comparable prior year period. Partially offsetting this increase was a decrease in average cost of 28 basis points to 4.77% for the six months ended June 30, 2008 from 5.05% for the comparable period in 2007.

Net Interest Income before Provision for Loan Losses. Net interest income before provision for loan losses decreased $610,000, or 12.9%, to $4.1 million for the six months ended June 30, 2008 from $4.7 million for the comparable period in 2007. The Company’s net interest margin expressed as a percentage of average earning assets fell to 3.08% for the six months ended June 30, 2008 as compared to 3.86% for the six months ended June 30, 2007. The yield on average earning assets decreased to 5.95% for the six months ended June 30, 2008 from 6.94% for the comparable period ended June 30, 2007, a 99 basis point decrease. This decrease in the yield on earning assets was primarily due to a decrease in loan yield, which resulted from the 225 basis point decrease in the federal funds interest rate since January 2008. The yield on average loans decreased to 6.25% for the six months ended June 30, 2008 from 7.52% for the six months ended June 30, 2007. In addition, there was a 32 basis point decrease in the cost of interest-bearing liabilities to 3.11% for the six months ended June 30, 2008 as compared to 3.43% a year earlier.

Provision for Loan Losses. The Bank’s provision for loan losses increased to $830,000 for the six months ended June 30, 2008 from $0 for the comparable period in 2007. The increase in the provision was the result of management’s quarterly analysis of the allowance for loan loss. At June 30, 2008, December 31, 2007 and June 30, 2007, non-performing loans totaled $3.1 million, $697,000 and $152,000, respectively. At June 30, 2008, the ratio of the allowance for loan losses to non-performing loans was 89.2% compared to 282.7% at December 31, 2007 and 995.7% at June 30, 2007, respectively. The ratio of the allowance to total loans was 1.24%, 0.86% and 0.77%, at June 30, 2008, December 31, 2007 and June 30, 2007, respectively. The increase in nonperforming loans was primarily the result of the addition of a $2.0 million condominium construction loan located in the western suburbs of Chicago, Illinois. This credit represents approximately 65% of total nonperforming loans at June 30, 2008 and is being closely monitored by senior management.

	Six Months Ended June 30,
	2008		2007		$ Change			% Change
	(Dollars in thousands)
Non-interest income:
Service charges on deposit accounts	$	316	$	278	$	38		13.67	%
Gain on sale of loans		315		207		108		52.17
Gain on sale of securities		79		37		42		113.51
Life insurance benefit		—		478		(478	)	(100.00	)
Other non-interest income		271		302		(31	)	(10.26	)
Total non-interest income	$	981	$	1,302	$	(321	)	(24.65	)

Noninterest Income. Noninterest income totaled $981,000 and $1.3 million for the six months ended June 30, 2008 and 2007, respectively. Life insurance death benefits decreased $478,000 to $0 for the six months ended June 30, 2008 from the prior year period which included a benefit related to BOLI. Gain on sale of loans increased $108,000 to $315,000 for the six months ended June 30, 2008 from $207,000 for the comparable prior year period. This increase is due to a greater emphasis placed on this area. Gain on sale of securities increased $42,000 to $79,000 for the six months ended June 30, 2008 from $37,000 for the comparable prior year period. In addition, service charges on deposit accounts increased $38,000 to $316,000 for the six months ended June 30, 2008 from $278,000 for the comparable prior year period. This increase is partially due to an increase in the number of deposit accounts.

17

	Six Months Ended June 30,
	2008		2007		$ Change			% Change
	(Dollars in thousands)
Non-interest expenses:
Salaries and employee benefits	$	2,622	$	2,442	$	180		7.37	%
Net occupancy and equipment expense		674		516		158		30.62
Data processing expense		412		335		77		22.99
Advertising and promotions		168		200		(32	)	(16.00	)
Professional fees		185		181		4		2.21
Other operating expenses		834		778		56		7.20
Total non-interest expenses	$	4,895	$	4,452	$	443		9.95

Noninterest Expense. Noninterest expense increased by $443,000, to $4.9 million for the six months ended June 30, 2008 from $4.5 million for the comparable prior year period. Salaries and employee benefits increased by $180,000, or 7.4%, to $2.6 million for the six months ended June 30, 2008 compared to $2.4 million for the six months ended June 30, 2007. This increase is primarily due to a combination of annual salary increases and the addition of staff. The additional staff expenses are partially due to the opening of our fourth full service facility, which opened November 21, 2007. Other operating expenses, including occupancy, data processing, and marketing and advertising expenses, increased by a combined $203,000, or 19.3%, to $1.3 million for the six months ended June 30, 2008 from $1.1 million for the prior year period. Of this increase, $77,000 is related to data processing, $158,000 is related to occupancy expenses, which is due to higher depreciation expenses related to the new facility and higher real estate taxes. These increases were partially offset by lower advertising and promotion expenses, which decreased $32,000 from the prior year period. Management continues to emphasize the importance of expense management and control in order to continue to provide expanded banking services to a growing market base.

Income Tax Expense. Income tax (benefit)/expense totaled ($374,000) and $285,000 for the six months ended June 30, 2008 and 2007, respectively. The decrease in income tax expense is primarily the result of a decrease in income (loss) before income taxes of $2.2 million to ($620,000) for the six months ended June 30, 2008 compared to $1.6 million for the comparable prior year period.

Critical Accounting Policies

The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The Company’s significant accounting policies are described in detail in the notes to the consolidated financial statements included in the Company’s Form 10-K for the year ended December 31, 2007. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The financial position and results of operations can be affected by these estimates and assumptions and are integral to the understanding of reported results. Critical accounting policies are those policies that management believes are the most important to the portrayal of the Company’s financial condition and results, and they require management to make estimates that are difficult, subjective, or complex.

Allowance for Credit Losses. The allowance for credit losses provides coverage for probable losses inherent in the Company’s loan portfolio. Management evaluates the adequacy of the allowance for credit losses each quarter based on changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, regulatory guidance and economic factors. This evaluation is inherently subjective, as it requires the use of significant management estimates. Many factors can affect management’s estimates of specific and expected losses, including volatility of default probabilities, rating migrations, loss severity and economic and political conditions. The allowance is increased through provisions charged to operating earnings and reduced by net charge-offs.

The Company determines the amount of the allowance based on relative risk characteristics of the loan portfolio. The allowance recorded for commercial loans is based on reviews of individual credit relationships and an analysis of the migration of commercial

18

loans and actual loss experience. The allowance recorded for homogeneous consumer loans is based on an analysis of loan mix, risk characteristics of the portfolio, fraud loss and bankruptcy experiences, and historical losses, adjusted for current trends, for each homogeneous category or group of loans. The allowance for credit losses relating to impaired loans is based on the loan’s observable market price, the collateral for certain collateral-dependent loans, or the discounted cash flows using the loan’s effective interest rate.

Regardless of the extent of the Company’s analysis of customer performance, portfolio trends or risk management processes, certain inherent but undetected losses are probable within the loan portfolio. This is due to several factors including inherent delays in obtaining information regarding a customer’s financial condition or changes in their unique business conditions, the judgmental nature of individual loan evaluations, collateral assessments and the interpretation of economic trends. Volatility of economic or customer-specific conditions affecting the identification and estimation of losses for larger non-homogeneous credits and the sensitivity of assumptions utilized to establish allowances for homogenous groups of loans are among other factors. The Company estimates a range of inherent losses related to the existence of these exposures. The estimates are based upon the Company’s evaluation of imprecision risk associated with the commercial and consumer allowance levels and the estimated impact of the current economic environment.

Accounting Matters

In December 2007, the FASB issued SFAS 141 (revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R established principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. SFAS 141R also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for business combinations where the acquisition date is on or after fiscal years beginning after December 15, 2008. Earlier adoption is not allowed. The Company does not believe that the adoption of SFAS 141R will have a significant impact on its financial condition or results of operations.

In December 2007, the FASB issues SFAS 160, Non-controlling Interests in Consolidated Financial Statements – an amendment of ARB No. 51. (“SFAS 160”) SFAS 160 establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements and requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of SFAS 160 shall be applied prospectively. The effective date of SFAS 160 is the same as that for SFAS 141R. The Company does not expect the adoption of SFAS 160 to have a material impact on its financial condition or results of operation.

Financial Accounting Standards Board Statement No. 161 (“SFAS 161”), “Disclosures About Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133,” was issued in March 2008 and amends and expands the disclosure requirements of SFAS 133 to provide greater transparency about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedge items are accounted for under SFAS 133 and its related interpretations, and (iii) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. To meet those objectives, SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 is effective for the Corporation on January 1, 2009 and is not expected to have a significant impact on the Corporation’s financial statements.

Liquidity and Capital Resources

The Company’s primary sources of funds are deposits, FHLB advances, and proceeds from principal and interest payments on loans and securities. While maturities, and scheduled amortization of loans and securities, and calls of securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions, and competition. The Company generally manages the pricing of its deposits to be competitive and to increase core deposit relationships.

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Liquidity management is both a daily and long-term responsibility of management. The Company adjusts its investments in liquid assets based upon management’s assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and securities, and (iv) the objectives of its asset/liability management program. Excess liquid assets are invested generally in interest-earning overnight deposits and short- and intermediate-term U.S. government and agency obligations.

The Company’s most liquid assets are cash and short-term investments. The levels of these assets are dependent on the Company’s operating, financing, lending, and investing activities during any given year. The Company has other sources of liquidity if a need for additional funds arises, including securities maturing within one year and the repayment of loans. The Company may also utilize the sale of securities available-for-sale, federal funds lines of credit from correspondent banks, and borrowings from the Federal Home Loan Bank of Chicago and M&I Marshall & Ilsley Bank.

Contractual Obligations

The following table discloses contractual obligations of the Company as of June 30, 2008:

(Dollars in Thousands)	2008		2009		2010		2011		2012		2013 and after		Total
Federal Home Loan Bank advances	$	6,500	$	6,000	$	4,500		—		—		—	$	17,000
Line of credit Subordinated debentures		2,000 —		—   —		—   —		—   —		—   —		—   3,609		2,000 3,609
Data Processing (1), (2)		261		541		561		581		601		—		2,545
Total	$	8,761	$	6,541	$	5,061	$	581	$	601	$	3,609	$	25,154

(1) Estimated contract amount based on transaction volume. Actual expense was $461,000 and $444,000 in 2007 and 2006 respectively.

(2) Contract expires September 30, 2012.

Off-Balance Sheet Arrangements

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with U.S. generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, letters of credit and lines of credit. For information about our loan commitments and unused lines of credit, see Note 15 of the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2007, as filed with the SEC. We currently have no plans to engage in hedging activities in the future. For the year ended December 31, 2007 and for the six months ended June 30, 2008, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

Impact of Inflation and Changing Prices

The financial statements and related data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on the operations of the Company is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates, generally, have a more significant impact on a financial institution’s performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

For a discussion of the potential impact of interest rate changes upon the market value of the Company’s portfolio equity, see Item 7A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. Management, as part of its regular practices, performs periodic reviews of the impact of interest rate changes upon net interest income and the market value of the Company’s portfolio equity. Based on, among other factors, such reviews, management believes that there have been no material changes in the market risk of the Company’s asset and liability position since December 31, 2007.

ITEM 4: CONTROLS AND PROCEDURES

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Company’s internal control over financial reporting occurred during the quarter ended June 30, 2008 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II

ITEM 1. LEGAL PROCEEDINGS

There are no material pending legal proceedings to which the Company or its subsidiaries are a party other than ordinary routine litigation incidental to their respective businesses.

ITEM 1A. RISK FACTORS

There are no material changes to the risk factors disclosed in the Company’s Form 10-K for the year ended December 31, 2007.

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

The following table sets forth information regarding the Company’s repurchases of its common stock during the three months ended June 30, 2008.

Period	Total Number of Shares Purchased	Average Price Paid Per Share	Total Number Of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
April 1, 2008 through April 30, 2008 (1)
May 1, 2008 through May 31, 2008
June 1, 2008 through June 30, 2008

(1) On February 25, 2008, the Company announced that its Board of Directors had approved a stock repurchase program authorizing the Company to purchase up to 15,000 shares of the Company’s common stock.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

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

The Company’s annual meeting of shareholders was held on May 28, 2008. The following proposals were voted on by the stockholders.

PROPOSAL	FOR	WITHHELD
1) Election of Directors – nominees for a one year term:
William F. Behrmann	1,023,296	19,356
Penny A. Belke	1,020,608	22,044
H. David Clayton	1,024,124	18,528
Raymond A. Dieter	1,013,056	29,596
Donald H. Fischer	1,019,592	23,060
Robert F. Haeger	1,022,864	19,788
Scott W. Hamer	1,023,924	18,728
Mary Beth Moran	1,020,608	22,044
Joseph S. Morrissey	1,022,864	19,788
John M. Mulherin	1,018,216	24,436

2) Approval of appointment of BKD LLP as the Company’s Independent Registered Public Accounting Firm for the Year ending December 31, 2008.	FOR	AGAINST	ABSTAIN
	982,316	48,348	11,988

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)
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.
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

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

COMMUNITY FINANCIAL SHARES, INC.

(Registrant)

/s/ Scott W. Hamer

Scott W. Hamer

Dated: August 14, 2008

President and Chief Executive Officer

(Principal Executive Officer)

/s/ Eric J. Wedeen

Eric J. Wedeen

Dated: August 14, 2008

Chief Financial Officer

(Principal Financial Officer)