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 March 31, 2007

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 00-50347

JEFFERSON BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Tennessee	45-0508261
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

120 Evans Avenue, Morristown, Tennessee	37814
(Address of principal executive offices)	(Zip code)

(423) 586-8421

(Registrant’s telephone number, including area code)

Not Applicable

(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 or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨

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:

At May 10, 2007, the registrant had 6,442,984 shares of common stock, $0.01 par value per share, outstanding.

INDEX

	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	Page
	Consolidated Statements of Condition - Unaudited Nine months ended March 31, 2007 and year ended June 30, 2006	3
	Consolidated Statements of Earnings - Unaudited Three and nine months ended March 31, 2007 and 2006	4
	Consolidated Statements of Changes in Stockholders’ Equity – Unaudited Nine months ended March 31, 2007 and 2006	5
	Consolidated Statements of Cash Flows - Unaudited Nine months ended March 31, 2007 and 2006	6
	Notes to Consolidated Financial Statements - Unaudited	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	27
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3.	Defaults Upon Senior Securities	29
Item 4.	Submission of Matters to a Vote of Security Holders	29
Item 5.	Other Information	29
Item 6.	Exhibits	29
SIGNATURES

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Condition

(Dollars in thousands)

	March 31, 2007			June 30, 2006
		(Unaudited	)
Assets
Cash and cash equivalents	$	2,779		$	3,146
Interest-earning deposits		5,704			8,810
Investment securities classified as available-for-sale, net		27,354			31,845
Federal Home Loan Bank stock		1,796			1,745
Bank owned life insurance		5,649			5,491
Loans receivable, net of allowance for loan losses of $2,048 at March 31, 2007 and $2,172 at June 30, 2006		266,677			254,127
Loans held-for-sale		1,041			1,645
Premises and equipment, net		14,391			11,926
Foreclosed real estate, net		130			74
Accrued interest receivable:
Investments		232			330
Loans receivable		1,363			1,342
Deferred tax asset		1,592			1,986
Other assets		1,078			4,670
Total assets	$	329,786		$	327,137
Liabilities and Stockholders’ Equity
Deposits:
Noninterest-bearing	$	13,599		$	10,806
Interest-bearing		205,333			188,037
Federal Home Loan Bank advances		36,300			52,400
Other liabilities		897			1,295
Accrued income taxes		—			56
Total liabilities		256,129			252,594
Commitments and contingent liabilities		—			—
Stockholders’ equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized; no shares issued or outstanding		—			—
Common stock, $.01 par value; 30,000,000 shares authorized; 8,446,375 shares issued and 6,454,813 shares outstanding at March 31, 2007 and 6,613,557 shares outstanding at June 30, 2006		84			84
Additional paid-in capital		72,660			72,171
Unearned ESOP shares		(5,077	)		(5,401	)
Unearned compensation		(2,318	)		(2,733	)
Accumulated other comprehensive income		(202	)		(609	)
Retained earnings		34,849			34,780
Treasury stock, at cost; 1,991,562 shares at March 31, 2007 and 1,793,091 shares at June 30, 2006		(26,339	)		(23,749	)
Total stockholders’ equity		73,657			74,543
Total liabilities and stockholders’ equity	$	329,786		$	327,137

See accompanying notes to financial statements.

3

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Earnings (Unaudited)

(Dollars in Thousands, Except Net Earnings Per Share)

	Three Months Ended March 31,					Nine Months Ended March 31,
	2007		2006			2007			2006
Interest income:
Interest on loans receivable	$	4,895	$	4,155		$	14,522		$	11,669
Interest on investment securities		262		373			855			1,272
Other interest		60		77			210			250
Total interest income		5,217		4,605			15,587			13,191
Interest expense:
Deposits		1,840		1,470			5,390			3,964
Advances from FHLB		541		396			1,804			833
Total interest expense		2,381		1,866			7,194			4,797
Net interest income		2,836		2,739			8,393			8,394
Provision for loan losses		—		—			30			—
Net interest income after provision for loan losses		2,836		2,739			8,363			8,394
Noninterest income:
Dividends from investments		8		12			55			29
Mortgage origination fee income		102		129			354			446
Service charges and fees		133		131			383			404
Loss on sale of investment securities, net		—		(46	)		(29	)		(90	)
Gain on sale of foreclosed real estate, net		1		8			35			168
BOLI increase in cash value		53		49			158			155
Other		27		30			65			70
Total noninterest income		324		313			1,021			1,182
Noninterest expense:
Compensation and benefits		1,485		1,483			4,526			4,063
Occupancy expense		139		108			441			305
Equipment and data processing expense		323		276			1,039			735
Advertising		46		28			280			173
Other		456		391			1,368			1,172
Total noninterest expense		2,449		2,286			7,654			6,448
Earnings before income taxes		711		766			1,730			3,128
Income taxes:
Current		181		218			495			926
Deferred		76		72			142			231
Total income taxes		257		290			637			1,157
Net earnings	$	454	$	476		$	1,093		$	1,971
Net earnings per share, basic	$	0.07	$	0.08		$	0.18		$	0.31
Net earnings per share, diluted	$	0.07	$	0.08		$	0.18		$	0.31

See accompanying notes to financial statements.

4

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders’ Equity

Nine Months Ended March 31, 2007 and 2006 (Unaudited)

(Dollars in Thousands)

	Common Stock		Additional Paid-in Capital			Unallocated Common Stock in ESOP			Unearned Compensation			Accumulated Other Comprehensive Income			Retained Earnings			Treasury Stock			Total Stockholders’ Equity
Balance at June 30, 2006	$	84	$	72,171		$	(5,401	)	$	(2,733	)	$	(609	)	$	34,780		$	(23,749	)	$	74,543
Comprehensive income:
Net earnings		—		—			—			—			—			1,093			—			1,093
Change in net unrealized gain (loss) on securities available for sale, net of taxes of $253		—		—			—			—			407			—			—			407
Total comprehensive income		—		—			—			—			—			—			—			1,500
Dividends		—		—			—			—			—			(1,173	)		—			(1,173	)
Dividends used for ESOP payment		—		—			—			—			—			149			—			149
Shares committed to be released by the ESOP		—		97			324			—			—			—			—			421
Stock options expensed		—		199			—			—			—			—			—			199
Earned portion of stock grants		—		—			—			415			—			—			—			415
MRP Vesting		—		(13	)		—			—			—			—			—			(13	)
Exercise of options		—		160			—			—			—			—			—			160
Tax benefit from exercise of nonqualifying stock options		—		46			—			—			—			—			—			46
Purchase of common stock (198,471 shares)		—		—			—			—			—			—			(2,590	)		(2,590	)
Balance at March 31, 2007	$	84	$	72,660		$	(5,077	)	$	(2,318	)	$	(202	)	$	34,849		$	(26,339	)	$	73,657
	Common Stock		Additional Paid-in Capital			Unallocated Common Stock in ESOP			Unearned Compensation			Accumulated Other Comprehensive Income			Retained Earnings			Treasury Stock			Total Stockholders’ Equity
Balance at June 30, 2005	$	84	$	71,694		$	(5,833	)	$	(3,232	)	$	(155	)	$	34,069		$	(14,599	)	$	82,028
Comprehensive income:
Net earnings		—		—			—			—			—			1,971			—			1,971
Change in net unrealized gain (loss) on securities available for sale, net of taxes of $(250)		—		—			—			—			(403	)		—			—			(403	)
Total comprehensive income		—		—			—			—			—			—			—			1,568
Dividends		—		—			—			—			—			(1,245	)		—			(1,245	)
Dividends used for ESOP payment		—		—			—			—			—			157			—			157
Shares committed to be released by the employee stock ownership plan		—		104			324			—			—			—			—			428
Stock options expensed		—		199			—			—			—			—			—			199
Tax benefit from exercise of nonqualifying stock options		—		—			—			—			—			—			—			—
Earned portion of stock grants		—		—			—			359			—			—			—			359
Exercise of options		—		49			—			—			—			—			—			49
Tax benefit from exercise of nonqualifying stock options		—		25			—			—			—			—			—			25
Purchase of common stock (605,899 shares)		—		—			—			—			—			—			(8,074	)		(8,074	)
Balance at March 31, 2006	$	84	$	72,071		$	(5,509	)	$	(2,873	)	$	(558	)	$	34,952		$	(22,673	)	$	75,494

See accompanying notes to financial statements.

5

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)

	Nine Months ended March 31,
	2007			2006
Cash flows from operating activities:
Net earnings	$	1,093		$	1,971
Adjustments to reconcile net earnings to net cash provided by (used for) operating activities:
Allocated ESOP shares		421			428
Depreciation and amortization expense		392			202
Amortization of premiums (discounts), net on investment securities		11			23
Provision for loan losses		30			—
Loss on sale of investment securities and mortgage-backed securities, net		29			106
(Gain) on sale of equity investments		—			(16	)
FHLB stock dividends		(52	)		(68	)
Amortization of deferred loan fees, net		(113	)		(95	)
(Gain) on sale of foreclosed real estate, net		(35	)		(168	)
Deferred tax benefit		142			231
Tax benefit from stock options and MRP		46			25
Originations of mortgage loans held for sale		(38,359	)		(41,998	)
Proceeds from sale of mortgage loans		38,963			44,030
Increase in cash value of life insurance		(158	)		(155	)
Earned portion of MRP		415			359
Stock options expensed		199			199
Decrease (increase) in:
Accrued interest receivable		77			(6	)
Other assets		3,592			41
Increase (decrease) in other liabilities and accrued income taxes		(283	)		8
Net cash provided by (used for) operating activities		6,410			5,117
Cash flows used for investing activities:
Loan originations, net of principal collections		(12,388	)		(31,579	)
Investment securities classified as available for sale:
Purchased		—			(1,246	)
Proceeds from sale		3,965			11,527
Proceeds from maturity		1,145			200
Return of principal on mortgage-backed securities		—			2,201
Purchase of premises and equipment		(2,857	)		(3,410	)
Proceeds from sale of (additions to) foreclosed real estate, net		41			345
Net cash provided by (used for) investing activities		(10,094	)		(21,962	)
Cash flows from financing activities:
Net increase (decrease) in deposits		20,089			2,173
Proceeds from advances from FHLB		63,500			40,000
Repayment of FHLB advances		(79,600	)		(18,000	)
Purchase of treasury stock		(2,590	)		(8,074	)
Dividends paid		(1,348	)		(1,572	)
Proceeds from exercise of stock options		160			50
Net cash provided by (used for) financing activities		211			14,577
Net increase (decrease) in cash, cash equivalents and interest-earning deposits		(3,473	)		(2,268	)
Cash, cash equivalents and interest-earning deposits at beginning of period		11,956			11,027
Cash, cash equivalents and interest-earning deposits at end of period	$	8,483		$	8,759
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest on deposits	$	5,390		$	3,964
Interest on FHLB advances		1,804			833
Income taxes		570			1,135
Real estate acquired in settlement of loans		90			454

See accompanying notes to financial statements.

6

Notes To Consolidated Financial Statements

(1) Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of Jefferson Bancshares, Inc. (the “Company” or “Jefferson Bancshares”) and its wholly-owned subsidiary, Jefferson Federal Bank (the “Bank” or “Jefferson Federal”). The unaudited financial statements of the Company were prepared with generally accepted accounting principles and with instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of financial condition, results of operations and cash flows. In the opinion of management, the accompanying unaudited financial statements contain all adjustments, which are normal and recurring in nature, necessary for a fair presentation of the interim financial statements. The results of operations for the period ended March 31, 2007 are not necessarily indicative of the results which may be expected for the entire fiscal year. These unaudited consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2006. All dollar amounts, other than per-share amounts, are in thousands unless otherwise noted.

(2) Principles of Consolidation

The consolidated financial statements include the accounts of Jefferson Bancshares, Inc. and its wholly-owned subsidiary, Jefferson Federal Bank. All significant intercompany balances and transactions have been eliminated in consolidation.

(3) Use of Estimates

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the statement of condition dates and revenues and expenses for the periods shown. Actual results could differ from the estimates and assumptions used in the consolidated financial statements. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of foreclosed real estate and deferred tax assets.

(4) Limitation on Capital Distributions

Office of Thrift Supervision regulations impose limitations upon all capital distributions by a savings institution, including cash dividends, payments to repurchase its shares and payments to shareholders of another institution in a cash-out merger. Under the regulations, an application to and the prior approval of the Office of Thrift Supervision is required prior to any capital distribution if the institution does not meet the criteria for “expedited treatment” of applications under Office of Thrift Supervision regulations (i.e., generally, examination ratings in the top two categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with, or condition imposed by, the Office of Thrift Supervision. If an application is not required, the institution must still provide

7

prior notice to the Office of Thrift Supervision of the capital distribution if, like Jefferson Federal, it is a subsidiary of a holding company. In addition, the Office of Thrift Supervision could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the Office of Thrift Supervision determined that such distribution would constitute an unsafe or unsound practice. In the event Jefferson Federal’s capital falls below its regulatory requirements or the Office of Thrift Supervision notifies it that it is in need of more than normal supervision, Jefferson Federal’s ability to make capital distributions could be restricted. Jefferson Federal also may not make a capital distribution if the distribution would reduce its regulatory capital below the amount needed for the liquidation account established in connection with its conversion from the mutual holding company form of organization.

(5) Earnings Per Common Share

Earnings per common share and earnings per common share-assuming dilution have been computed on the basis of dividing net earnings by the weighted-average number of shares of common stock outstanding, exclusive of unearned ESOP shares. Diluted earnings per common share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method. The following table illustrates the number of weighted-average shares of common stock used in each corresponding earnings per common share calculation:

	Weighted-Average Shares Outstanding for the Three Months Ended March 31,		Weighted-Average Shares Outstanding for the Nine Months Ended March 31,
	2007	2006	2007	2006
Weighted average number of common shares used in computing basic earnings per common share	5,958,765	6,227,668	5,997,108	6,422,164
Effect of dilutive stock options	—	20,436	—	18,193
Weighted average number of common shares and dilutive potential common shares used in computing earnings per common share assuming dilution	5,958,765	6,248,104	5,997,108	6,440,357

(6) Statements of Cash Flows

Dividends declared but not paid have been recorded in other liabilities; however, their non-effect on cash and operations dictates their exclusion from the cash flows until actually paid.

(7) Accounting by Creditors for Impairment of a Loan

Impairment of loans having a recorded investment of $99,000 at March 31, 2007 is recognized in conformity with the Financial Accounting Standards Board (“FASB”) Statement No. 118. The total allowance for loan losses related to these loans was $38,000 at March 31, 2007. Other nonaccrual loans at March 31, 2007 were

8

approximately $234,000. Interest income from non-accrual loans included in the Company’s interest income amounted to $5,000 for the nine months ended March 31, 2007.

The following table summarizes the activity in the allowance for loan losses for the nine months ended March 31, 2007:

	Allowance for Loan Losses
	(Dollars in thousands)
Balance at June 30, 2006			$	2,172
Provision for loan losses				30
Charge-offs	(229	)
Recoveries	75
Net (charge-offs)/recoveries				(154	)
Balance at March 31, 2007			$	2,048

(8) Financial Instruments With Off-Balance Sheet Risk

Jefferson Bancshares is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments generally include commitments to originate mortgage loans. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Company’s maximum exposure to credit loss in the event of nonperformance by the borrower is represented by the contractual amount and related accrued interest receivable of those instruments. The Company minimizes this risk by evaluating each borrower’s creditworthiness on a case-by-case basis. Collateral held by the Company consists of a first or second mortgage on the borrower’s property. The amount of collateral obtained is based upon an appraisal of the property.

At March 31, 2007, we had approximately $1.2 million in loan commitments, consisting of commitments to originate real estate loans. In addition to commitments to originate loans, we had $16.8 million of loans-in-process, $9.9 million in unused standby letters of credit and approximately $14.2 million in unused lines of credit.

(9) Dividend Declaration

On March 1, 2007, the Board of Directors of the Company approved a quarterly dividend of $0.06 per share to stockholders of record as of March 31, 2007 and payable on April 13, 2007.

(10) Stock Incentive Plans

Under the Bank’s 1995 Stock Option Plan and the 1995 Management Recognition and Development Plan (“MRP”), the Company issued a combined total of 179,176 shares to officers, employees and non-employee directors. Both plans vested pro-rata over a five-year period, with the Stock Option Plan having an expiration date of April 1, 2007. As

9

of March 31, 2007, there were no options outstanding and no remaining shares available for grant under the 1995 Stock Option Plan. During the three-month period ended March 31, 2007, 30,593 options were exercised.

The Company’s 2004 Stock Incentive Plan authorizes the granting of 698,750 options and 279,500 restricted stock awards to employees and non-employee directors. As of March 31, 2007, there were 401,778 options and 204,711 restricted stock awards granted under this plan which will vest pro-rata over a five-year period. The 2004 Plan has an expiration date of January 30, 2014.

The table below summarizes the status of the Company’s stock option plans as of March 31, 2007.

	Three Months Ended March 31, 2007
	Shares	Weighted- average exercise price
Outstanding at beginning of period	432,371	$	13.02
Granted during the three-month period	—		—
Options exercised	30,593	$	4.17
Outstanding at March 31, 2007	401,778	$	13.69
Options exercisable at March 31, 2007	241,083	$	13.69

The following information applies to options outstanding at March 31, 2007:

Number outstanding		401,778
Weighted-average exercise price	$	13.69
Weighted-average remaining contractual life		6.84
Number of options remaining for future issuance		296,972

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123R, “Share Based Payment” (“SFAS 123R”), an amendment of FASB Statement No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation.” SFAS 123R eliminates the ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25 (“APB 25”) and requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This statement is effective for public entities that do not file as small business issuers as of the beginning of the first interim or annual reporting period that begins after June 15, 2005.

Effective July 1, 2005, the Company adopted SFAS 123R using the modified prospective application transition method. This requires the Company to expense the unvested portion of options granted in 2004, which reduces net earnings by approximately $217,000 in fiscal year 2007 and $326,000 during the remaining service period. SFAS

10

123R provides for the use of alternative models to determine compensation cost related to stock option grants. The estimated fair value of stock options at grant date has been determined using the Black-Scholes option-pricing model based on market data as of January 29, 2004. The expected dividend yield of 1.17% and expected volatility of 7.01% were used to model the value. The risk free rate of return equaled 4.22%, which was based on the yield of a U.S. Treasury note with a term of ten years. The estimated time remaining before the expiration of the options equaled ten years.

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

Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of Jefferson Bancshares. The information contained in this section should be read in conjunction with the financial statements and accompanying notes. For further information, refer to the financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2006.

General

Jefferson Bancshares, Inc. (also referred to as the “Company” or “Jefferson Bancshares”) is the holding company for Jefferson Federal Bank (the “Bank” or “Jefferson Federal”).

The Company has no significant assets, other than all of the outstanding shares of the Bank, and no significant liabilities. Management of the Company and the Bank are substantially similar and the Company neither owns nor leases any property, but instead uses the premises, equipment and furniture of the Bank. Accordingly, the information set forth in this report, including the consolidated financial statements and related financial data, relates primarily to the Bank.

Jefferson Federal is a community oriented financial institution offering traditional financial services to its local communities. The Bank is engaged primarily in the business of attracting deposits from the general public and using such funds to originate loans secured by first mortgages on owner-occupied, one-to four- family residential properties, as well as originate commercial real estate and multi-family mortgage loans, construction loans, consumer loans, commercial non-real estate loans and make other investments permitted by applicable laws and regulations.

The Bank’s savings accounts are insured up to the applicable legal limits by the Federal Deposit Insurance Corporation (“FDIC”) through the Deposit Insurance Fund. Jefferson Federal Bank is a member of the Federal Home Loan Bank (“FHLB”) System.

11

Private Securities Litigation Reform Act Safe Harbor Statement

This Quarterly Report may contain forward-looking statements within the meaning of the federal securities laws. These statements are not historical facts; but rather, are statements based on Jefferson Bancshares’ current expectations regarding its business strategies and their intended results and its future performance. Forward-looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions.

Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain. These factors include, but are not limited to, general economic conditions, changes in the interest rate environment, legislative or regulatory changes that may adversely affect our business, changes in accounting policies and practices, changes in competition and demand for financial services, adverse changes in the securities markets and changes in the quality or composition of the Company’s loan or investment portfolios. Additional factors that may affect our results are discussed in our Annual Report on Form 10-K for the year ended June 30, 2006 under “Item 1A. Risk Factors.” These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. Jefferson Bancshares assumes no obligation to update any forward-looking statements.

Results of Operations for the Three and Nine Months Ended March 31, 2007 and 2006

Net Income

Net income was $454,000, or $0.07 per diluted share, for the three months ended March 31, 2007 compared to net income of $476,000, or $0.08 per diluted share, for the quarter ended March 31, 2006. For the nine months ended March 31, 2007, net income was $1.1 million, or $0.18 per diluted share, compared to $2.0 million, or $0.31 per diluted share, for the comparable period in 2006. The decline in net income for both the three- and nine-month periods ended March 31, 2007 was primarily the result of an increase in noninterest expense. The increase in noninterest expense continues to reflect our expansion initiatives in the Knoxville region during the past year.

	Three Months Ended March 31,						Nine Months Ended March 31,
	2007			2006			2007			2006
	(Dollars in thousands, except per share data)						(Dollars in thousands, except per share data)
Net earnings	$	454		$	476		$	1,093		$	1,971
Net earnings per share, basic	$	0.07		$	0.08		$	0.18		$	0.31
Net earnings per share, diluted	$	0.07		$	0.08		$	0.18		$	0.31
Return on average assets (annualized)		0.55	%		0.61	%		0.44	%		0.86	%
Return on average equity (annualized)		2.46	%		2.49	%		1.96	%		3.33	%

Net Interest Income

Net interest income before loan loss provision increased $97,000, or 3.5%, to $2.8 million for the three months ended March 31, 2007 from the corresponding period in 2006. The interest rate spread and net interest margin for the three months ended March 31, 2007 were 2.94% and 3.74%, respectively, compared to 3.04% and 3.80% for the same period in 2006. The average yield on interest-earning assets increased 50 basis points to 6.88% while the average volume of

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earning assets increased $14.8 million, to $303.4 million for the three months ended March 31, 2007 compared to the same period in 2006. The average rate paid on interest-bearing liabilities increased 59 basis points to 3.93%, while the average volume of interest-bearing liabilities increased $18.8 million, to $242.1 million for the three months ended March 31, 2007, compared to the same period in 2006.

The following table summarizes changes in interest income and expense for the three-month periods ended March 31, 2007 and 2006:

	Three Months Ended March 31,
	2007		2006		$ Change			% Change
	(Dollars in thousands)
Interest income:
Loans	$	4,895	$	4,155	$	740		17.8	%
Investment securities		262		373		(111	)	(29.8	%)
Interest-earning deposits		32		53		(21	)	(39.6	%)
FHLB stock		28		24		4		16.7	%
Total interest income		5,217		4,605		612		13.3	%
Interest expense:
Deposits		1,840		1,470		370		25.2	%
Borrowings		541		396		145		36.6	%
Total interest expense		2,381		1,866		515		27.6	%
Net interest income	$	2,836	$	2,739	$	97		3.5	%

For the nine months ended March 31, 2007, net interest income remained unchanged at $8.4 million from the comparable period in 2006. The interest rate spread and net interest margin for the nine months ended March 31, 2007 were 2.89% and 3.69%, respectively, compared to 3.24% and 3.96% for the same period in 2006. The average yield on interest-earning assets increased 64 basis points to 6.86% while the average volume of earning assets increased $20.4 million, to $303.1 million for the nine months ended March 31, 2007 compared to the same period in 2006. The average rate paid on interest-bearing liabilities increased 99 basis points to 3.96%, while the average volume of interest-bearing liabilities increased $27.2 million, to $242.0 million for the nine months ended March 31, 2007, compared to the same period in 2006.

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The following table summarizes changes in interest income and expense for the nine-month periods ended March 31, 2007 and 2006:

	Nine Months Ended March 31,
	2007		2006		$ Change			% Change
	(Dollars in thousands)
Interest income:
Loans	$	14,522	$	11,669	$	2,853		24.4	%
Investment securities		855		1,272		(417	)	(32.8	%)
Interest-earning deposits		130		182		(52	)	(28.6	%)
FHLB stock		80		68		12		17.6	%
Total interest income		15,587		13,191		2,396		18.2	%
Interest expense:
Deposits		5,390		3,964		1,426		36.0	%
Borrowings		1,804		833		971		116.6	%
Total interest expense		7,194		4,797		2,397		50.0	%
Net interest income	$	8,393	$	8,394	$	(1	)	(0.0	%)

The following table summarizes average balances and average yields and costs:

	Three Months Ended March 31,								Nine Months Ended March 31,
	2007				2006				2007				2006
	Average Balance		Yield/ Cost		Average Balance		Yield/ Cost		Average Balance		Yield/ Cost		Average Balance		Yield/ Cost
	(Dollars in thousands)								(Dollars in thousands)
Loans	$	269,981	7.25	%	$	239,795	6.93	%	$	267,082	7.25	%	$	226,793	6.86	%
Investment securities		27,272	3.84	%		40,047	3.73	%		29,321	3.89	%		46,008	3.69	%
Interest-earning deposits		4,364	2.93	%		7,111	2.98	%		4,939	3.51	%		8,264	2.94	%
FHLB stock		1,806	6.20	%		1,712	5.61	%		1,780	5.99	%		1,687	5.37	%
Deposits		199,961	3.68	%		185,588	3.17	%		196,113	3.66	%		186,122	2.84	%
Borrowings		42,133	5.14	%		37,666	4.21	%		45,907	5.24	%		28,667	3.87	%

The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume.

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	Three Months Ended March 31, 2007 Compared to 2006									Nine Months Ended March 31, 2007 Compared to 2006
	Increase (Decrease) Due To									Increase (Decrease) Due To
	Volume			Rate			Net			Volume			Rate			Net
	(In thousands)									(In thousands)
Interest income:
Loans receivable	$	541		$	199		$	740		$	2,162		$	691		$	2,853
Investment securities		(139	)		28			(111	)		(540	)		123			(417	)
Daily interest-earning deposits and other interest-earning assets		(19	)		2			(17	)		(106	)		66			(40	)
Total interest-earning assets		383			229			612			1,516			880			2,396
Interest expense:
Deposits		120			250			370			223			1,203			1,426
Borrowings		50			95			145			612			359			971
Total interest-bearing liabilities		170			345			515			835			1,562			2,397
Net change in interest income	$	213		$	(116	)	$	97		$	681		$	(682	)	$	(1	)

Total interest income increased $612,000, or 13.3%, to $5.2 million for the three months ended March 31, 2007, and increased $2.4 million, or 18.2%, to $15.6 million for the nine months ended March 31, 2007. The increase in interest income was the result of growth in the average balance of loans combined with an increase in interest rates.

Interest on loans increased $740,000, or 17.8%, to $4.9 million for the three months ended March 31, 2007 and increased $2.9 million, or 24.4%, to $14.5 million for the nine months ended March 31, 2007. The increase in interest on loans is the result of a higher average balance, primarily due to growth in the commercial loan portfolio, combined with a higher average yield. The average balance of loans increased $30.2 million, or 12.6%, to $270.0 million for the three months ended March 31, 2007 and increased $40.3 million, or 17.8%, to $267.1 million for the nine months ended March 31, 2007. The increase in the average yield on loans was primarily the result of increases in the prime lending rate. The average yield on loans increased 32 basis points, to 7.25%, for the three months ended March 31, 2007 and increased 39 basis points, to 7.25%, for the nine months ended March 31, 2007 compared to the corresponding periods in 2006.

Interest on investment securities decreased $111,000, or 29.8%, to $262,000 for the three months ended March 31, 2007 and decreased $417,000, or 32.8%, to $855,000, for the nine months ended March 31, 2007. The decrease for both periods was the result of a decrease in the average balance of investment securities more than offsetting an increase in the average yield. The average balance of investment securities decreased $12.8 million, to $27.3 million for the three months ended March 31, 2007 and decreased $16.7 million, to $29.3 million for the nine months ended March 31, 2007. Proceeds from the sale of investment securities were used to fund growth in the loan portfolio. The average yield on investments increased 11 basis points to 3.84% for the three months ended March 31, 2007 and increased 20 basis points to 3.89% for the nine months ended March 31, 2007 compared to the same periods in 2006.

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Total interest expense increased $515,000, or 27.6%, to $2.4 million for the three-month period ended March 31, 2007 and increased $2.4 million, or 50.0%, to $7.2 million for the nine-month period ended March 31, 2007. The increase for both periods was due to higher average balances of both deposits and FHLB advances combined with higher interest rates.

Interest expense on deposits increased $370,000, or 25.2%, to $1.8 million for the three-month period ended March 31, 2007 and increased $1.4 million, or 36.0%, to $5.4 million for the nine-month period ended March 31, 2007. The increase for both periods was due to an increase in the average balance of deposits combined with an increase in the rate paid on money market accounts and time deposits. The average rate paid on deposits increased 51 basis points to 3.68% for the three months ended March 31, 2007 and increased 82 basis points to 3.66% for the nine months ended March 31, 2007. The increase in the rate paid on deposits reflects an increase in short-term market interest rates. The increase in the average balance of deposits was primarily the result of marketing efforts, promotions and certificate of deposit specials.

Interest expense on FHLB advances amounted to $541,000 for the three months ended March 31, 2007 compared to $396,000 for the corresponding period in 2006. For the nine months ended March 31, 2007, interest expense on FHLB advances was $1.8 million compared to $833,000 for the same period in 2006. The increase for both periods was due to a higher average balance and higher interest rates. FHLB advances have been utilized as a funding source for supporting loan growth.

Provision for Loan Losses

We review the level of the loan loss allowance on a monthly basis and establish the provision for loan losses based on the volume and types of lending, delinquency levels, loss experience, the amount of classified loans, economic conditions and other factors related to the collectibility of the loan portfolio. Net charge-offs for the three and nine month periods ended March 31, 2007 amounted to $60,000 and $154,000, respectively, compared to $43,000 and $102,000 for the comparable periods in 2006. The provision for loan losses totaled $30,000 for the nine months ended March 31, 2007 as a result of growth in the loan portfolio, compared to no provision for the comparable period in 2006. Nonperforming loans totaled $333,000 at March 31, 2007 compared to $62,000 at March 31, 2006.

Noninterest Income

Noninterest income increased $11,000, or 3.5%, to $324,000 for the three months ended March 31, 2007 compared to $313,000 for the corresponding period in 2006. There was no loss on sale of investment securities recorded in the three-month period ended March 31, 2007 compared to a loss of $46,000 for the comparable period in 2006. Mortgage origination fee income decreased $27,000, or 20.9%, to $102,000 in the three months ended March 31, 2007 due to a lower volume of loan originations.

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The following table summarizes the dollar amounts for each category of noninterest income, and the dollar and percent changes for the three months ended March 31, 2007 compared to the same period in 2006.

	Three Months Ended March 31,					$ Change			% Change
	2007		2006
	(Dollars in thousands)
Noninterest income:
Dividends from investments	$	8	$	12		$	(4	)	(33.3	%)
Mortgage origination fee income		102		129			(27	)	(20.9	%)
Service charges and fees		133		131			2		1.5	%
Loss on sale of investment securities, net		—		(46	)		46		(100.0	%)
Gain on sale of foreclosed real estate, net		1		8			(7	)	(87.5	%)
BOLI increase in cash value		53		49			4		8.2	%
Other		27		30			(3	)	(10.0	%)
Total noninterest income	$	324	$	313		$	11		3.5	%

Noninterest income decreased $161,000, or 13.6%, to $1.0 million for the nine months ended March 31, 2007 compared to $1.2 for the corresponding period in 2006. Loss on sale of investment securities totaled $29,000 for the nine-month period ended March 31, 2007 compared to $90,000 for the corresponding period in 2006. Gain on sale of foreclosed property was $35,000 for the nine months ended March 31, 2007 compared to $168,000 for the same period in 2006. Mortgage origination fee income decreased $92,000, or 20.6%, to $354,000 in the nine months ended March 31, 2007 due to a lower volume of loan originations.

The following table summarizes the dollar amounts for each category of noninterest income, and the dollar and percent changes for the nine months ended March 31, 2007 compared to the same period in 2006.

	Nine Months Ended March 31,						$ Change			% Change
	2007			2006
	(Dollars in thousands)
Noninterest income:
Dividends from investments	$	55		$	29		$	26		89.7	%
Mortgage origination fee income		354			446			(92	)	(20.6	%)
Service charges and fees		383			404			(21	)	(5.2	%)
Loss on sale of investment securities, net		(29	)		(90	)		61		(67.8	%)
Gain on sale of foreclosed real estate, net		35			168			(133	)	(79.2	%)
BOLI increase in cash value		158			155			3		1.9	%
Other		65			70			(5	)	(7.1	%)
Total noninterest income	$	1,021		$	1,182		$	(161	)	(13.6	%)

Noninterest Expense

Noninterest expense increased $163,000, or 7.1%, to $2.4 million for the three-month period ended March 31, 2007, primarily due to an increase in occupancy expense and equipment and data processing expense. Occupancy expense increased $31,000, or 28.7%, to $139,000 and equipment and data processing expense increased $47,000, or 17.0%, to $323,000. The increases in occupancy expense and equipment and data processing expense were related to the operations of two additional full-service offices in Hamblen and Knox Counties.

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The following table summarizes the dollar amounts for each category of noninterest expense, and the dollar and percent changes for the three months ended March 31, 2007 compared to the same period in 2006.

	Three Months Ended March 31,				$ Change		% Change
	2007		2006
	(Dollars in thousands)
Compensation and benefits	$	1,485	$	1,483	$	2	0.1	%
Occupancy expense		139		108		31	28.7	%
Equipment and data processing expense		323		276		47	17.0	%
Advertising		46		28		18	64.3	%
Other		456		391		65	16.6	%
Total noninterest expense	$	2,449	$	2,286	$	163	7.1	%

Noninterest expense increased $1.2 million, or 18.7%, to $7.7 million for the nine-month period ended March 31, 2007, primarily due to an increase in compensation and benefits expense. Compensation and benefits expense increased $463,000, or 11.4%, to $4.5 million for the nine-month period ended March 31, 2007 primarily due to staff additions. Advertising expense amounted to $280,000 for the nine months ended March 31, 2007 compared to $173,000 for the corresponding period in 2006 as a result of marketing efforts and promotions. Occupancy expense increased $136,000, or 44.6%, to $441,000 and equipment and data processing expense increased $304,000, or 41.4%, to $1.0 million as a result of our recent expansion activities.

The following table summarizes the dollar amounts for each category of noninterest expense, and the dollar and percent changes for the nine months ended March 31, 2007 compared to the same period in 2006.

	Nine Months Ended March 31,				$ Change		% Change
	2007		2006
	(Dollars in thousands)
Compensation and benefits	$	4,526	$	4,063	$	463	11.4	%
Occupancy expense		441		305		136	44.6	%
Equipment and data processing expense		1,039		735		304	41.4	%
Advertising		280		173		107	61.8	%
Other		1,368		1,172		196	16.7	%
Total noninterest expense	$	7,654	$	6,448	$	1,206	18.7	%

Income Taxes

Income tax expense for the three months ended March 31, 2007 was $257,000 compared to $290,000 for the same period in 2006 due to a lower level of taxable income. For the nine months ended March 31, 2007, income tax expense decreased $520,000, or 44.9%, to $637,000 due to lower taxable income.

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Financial Condition

Assets

At March 31, 2007, total assets were $329.8 million, an increase of $2.6 million, or 1.0%, compared to $327.1 million at June 30, 2006. The increase in assets was attributable to a $12.6 million increase in loans, funded primarily by a $20.1 million increase in deposits.

Cash, Cash Equivalents and Interest-Earning Deposits

Cash, cash equivalents, and interest-earning deposits were $8.5 million at March 31, 2007 compared to $12.0 million at June 30, 2006. We manage the level of cash, cash equivalents and interest-earning deposits to meet loan demand and daily liquidity needs.

Investments

Our investment portfolio consists primarily of federal agency securities with maturities of seven years or less, and municipal securities. Investment securities decreased $4.5 million, or 14.1%, to $27.4 million due primarily to sales of investment securities during the nine-month period. Proceeds from the sale of investments were used to fund loan growth during the period. Investment securities classified as available-for-sale are carried at fair market value and reflect an unrealized loss of $327,000, or $202,000 net of taxes.

The following table sets forth the carrying values of our investment securities portfolio at the dates indicated. All of our investment securities are classified as available-for-sale.

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At March 31, 2007
	Amortized Cost			Unrealized Gains		Unrealized Losses			Fair Value
	(Dollars in thousands)
Securities available-for-sale
Debt securities:
Federal agency	$	23,338		$	—	$	(258	)	$	23,080
Municipals		4,343			2		(71	)		4,274
Total securities available-for-sale	$	27,681		$	2	$	(329	)	$	27,354
Weighted-average rate		3.78	%
At June 30, 2006
	Amortized Cost			Unrealized Gains		Unrealized Losses			Fair Value
	(Dollars in thousands)
Securities available-for-sale
Debt securities:
Federal agency	$	28,330		$	—	$	(827	)	$	27,503
Municipals		4,502			—		(160	)		4,342
Total securities available-for-sale	$	32,832		$	—	$	(987	)	$	31,845
Weighted-average rate		3.36	%

Loans

Net loans increased $12.6 million, or 4.9%, to $266.7 million at March 31, 2007. Our expansion into the Knoxville, Tennessee market has generated additional lending opportunities, which has resulted in growth in our loan portfolio. Our primary lending activity is the origination of loans secured by real estate. Real estate loans totaled $218.5 million, or 81.2% of total loans, at March 31, 2007 compared to $209.4 million, or 81.6% of total loans, at June 30, 2006. The largest portion of loan growth occurred in commercial real estate, due to our emphasis on this type of lending, particularly in the Knoxville market. Commercial real estate loans increased $8.3 million, or 10.7%, to $85.8 million at March 31, 2007. In addition, commercial business loans increased $4.5 million, or 12.7%, to $40.2 million at March 31, 2007, while consumer loans decreased $1.2 million, or 10.0%, to $10.4. The decline in consumer loans was largely attributable to a decrease in automobile loans.

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Loans receivable, net, are summarized as follows:

	At March 31, 2007					At June 30, 2006
	Amount			Percent of Portfolio		Amount			Percent of Portfolio		$ Change			% Change
	(Dollars in thousands)
Real estate loans:
Residential one-to four-family	$	71,847		26.7	%	$	77,415		30.2	%	$	(5,568	)	(7.2	%)
Home equity lines of credit		4,975		1.8	%		5,954		2.3	%		(979	)	(16.4	%)
Commercial		85,812		31.9	%		77,519		30.2	%		8,293		10.7	%
Multi-family		8,033		3.0	%		7,929		3.1	%		104		1.3	%
Construction		17,086		6.3	%		13,454		5.2	%		3,632		27.0	%
Land		30,772		11.4	%		27,133		10.6	%		3,639		13.4	%
Total real estate loans		218,525		81.2	%		209,404		81.6	%		9,121		4.4	%
Commercial business loans		40,206		14.9	%		35,665		13.9	%		4,541		12.7	%
Consumer loans
Automobile loans		7,086		2.6	%		8,458		3.3	%		(1,372	)	(16.2	%)
Mobile home loans		121		0.0	%		234		0.1	%		(113	)	(48.3	%)
Loans secured by deposits		926		0.3	%		977		0.4	%		(51	)	(5.2	%)
Other consumer loans		2,238		0.8	%		1,854		0.7	%		384		20.7	%
Total consumer loans		10,371		3.9	%		11,523		4.5	%		(1,152	)	(10.0	%)
Total gross loans		269,102		100.0	%		256,592		100.0	%		12,510		4.9	%
Less:
Deferred loan fees, net		(377	)				(293	)				(84	)	28.7	%
Allowance for losses		(2,048	)				(2,172	)				124		(5.7	%)
Loans receivable, net	$	266,677				$	254,127				$	12,550		4.9	%

Loan Loss Allowance

The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the adequacy of the allowance for loan losses on a monthly basis. When additional reserves are necessary, a provision for loan losses is charged to earnings.

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In connection with assessing the allowance, we have established a systematic methodology for determining the adequacy of the allowance for loan losses. The methodology utilizes a loan grading system which segments loans with similar risk characteristics. Management conducts monthly loan reviews to assess credit risks and the overall quality of the loan portfolio.

The Office of Thrift Supervision, as an integral part of its examination process, periodically reviews our allowance for loan losses. The Office of Thrift Supervision may require us to make additional provisions for loan losses based on judgments different from ours.

Due to net charge-offs, the allowance for loan losses decreased $154,000 to $2.0 million at March 31, 2007. The provision for loan losses totaled $30,000 for the nine months ended March 31, 2007 as a result of growth in the loan portfolio, compared to no provision for the comparable period in 2006. Our allowance for loan losses represented 0.76% of total loans at March 31, 2007 compared to 0.85% of total loans at June 30, 2006.

	Three Months Ended March 31,						Nine Months Ended March 31,
	2007			2006			2007			2006
	(Dollars in thousands)						(Dollars in thousands)
Balance at beginning of period	$	2,108		$	2,234		$	2,172		$	2,293
Provision for loan losses		—			—			30			—
Recoveries		32			49			75			125
Charge-offs		(92	)		(92	)		(229	)		(227	)
Net charge-offs		(60	)		(43	)		(154	)		(102	)
Allowance at end of period	$	2,048		$	2,191		$	2,048		$	2,191
Net charge-offs to average outstanding loans during the period, annualized		0.09	%		0.07	%		0.08	%		0.06	%

Nonperforming Assets

We consider repossessed assets and nonaccrual loans to be nonperforming assets. Loans are reviewed on a monthly basis and are generally placed on nonaccrual status when the loan becomes more than 90 days delinquent. Nonperforming assets were $467,000 at March 31, 2007 compared to $435,000 at June 30, 2006. Nonperforming loans were $333,000 and $345,000 at March 31, 2007 and June 30, 2006, respectively. Foreclosed real estate amounted to $130,000 at March 31, 2007 compared to $74,000 at June 30, 2006. Foreclosed real estate is initially recorded at the lower of the amount of the loan or the fair value, less estimated selling costs. Any writedown to fair value is charged to the allowance for loan losses. Any subsequent writedown of foreclosed real estate is charged against earnings.

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	March 31, 2007			June 30, 2006
	(Dollars in thousands)
Nonaccruing loans:
Real estate	$	333		$	296
Commercial business		—			49
Consumer		—			—
Total nonaccrual loans		333			345
Real estate owned		130			74
Other repossessed assets		4			16
Total nonperforming assets	$	467		$	435
Total nonperforming assets to total assets		0.14	%		0.13	%
Total nonperforming loans to total loans		0.12	%		0.13	%
Allowance for loan losses to total nonperforming loans		615.02	%		629.57	%

Bank Owned Life Insurance

We hold bank owned life insurance (“BOLI”) to help offset the cost of employee benefit plans. BOLI provides earnings from accumulated cash value growth and provides tax advantages inherent in a life insurance contract. The cash surrender value of the BOLI at March 31, 2007 was $5.6 million.

Deposits

Total deposits increased $20.1 million, or 10.1%, to $218.9 million at March 31, 2007 primarily as a result of marketing efforts, promotions and certificate of deposit specials. Certificates of deposit increased $12.7 million, or 10.2%, to $137.3 million primarily due to promotions and customer preference for higher-yielding accounts. The increase in deposits has reduced our reliance on FHLB advances during the nine months ended March 31, 2007.

	March 31, 2007		June 30, 2006		$ Change			% Change
	(Dollars in thousands)
Noninterest-bearing accounts	$	13,599	$	10,806	$	2,793		25.8	%
NOW accounts		17,019		16,408		611		3.7	%
Savings accounts		10,010		11,524		(1,514	)	(13.1	%)
Money market accounts		40,992		35,502		5,490		15.5	%
Certificates of deposit		137,312		124,603		12,709		10.2	%
	$	218,932	$	198,843	$	20,089		10.1	%

Advances and Other Liabilities

FHLB advances decreased $16.1 million to $36.3 million at March 31, 2007. We utilize FHLB advances as a funding source to support loan growth and to manage daily liquidity needs. Additional FHLB advances may be utilized in the future to fund continued loan growth.

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Stockholders’ Equity

Total equity decreased $886,000, to $73.7 million at March 31, 2007 due primarily to the repurchase of shares in the amount of $2.6 million. Stock repurchases for the three months ended March 31, 2007 totaled 93,558 shares at an average cost of $12.86 per share. On February 24, 2006, the Company announced its third stock repurchase program in which up to 690,261 shares of the Company’s outstanding common stock, may be repurchased. At March 31, 2007, 375,803 shares remained eligible for repurchase under the current stock repurchase program. The Company paid a $0.06 per share dividend to shareholders during the quarter ended March 31, 2007 totaling $387,000.

Liquidity and Capital Resources

Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposits, loan repayments, maturities and sales of investment securities and borrowings from the FHLB of Cincinnati. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

We regularly adjust our investments in liquid assets based on our assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short- and intermediate-term U.S. Government agency obligations.

Our most liquid assets are cash and cash equivalents and interest-earning assets. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At March 31, 2007, cash and cash equivalents totaled $2.8 million and interest-earning deposits totaled $5.7 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $27.4 million at March 31, 2007. In addition, at March 31, 2007, our advances agreement with the FHLB provides us with the ability to borrow a total of approximately $56.1 million from the FHLB of Cincinnati. In the nine-month period ended March 31, 2007, FHLB advances decreased $16.1 million to $36.3 million due to the growth in deposits.

We anticipate that we will have sufficient funds available to meet current loan commitments. At March 31, 2007, we had approximately $1.2 million in loan commitments, consisting of commitments to originate real estate loans. In addition to commitments to originate loans, we had $16.8 million in loans-in-process, $9.9 million in unused standby letters of credit and approximately $14.2 million in unused lines of credit. We had $108.1 million in certificates of deposit due within one year and $81.6 million in other deposits without specific maturities at March 31, 2007. We believe, based on past experience, that a significant portion of those deposits will remain with us. Deposit flows are affected by the overall level of interest rates and products offered by us and our local competitors and other factors. We have the ability to attract and retain deposits by adjusting the interest rates offered. We experienced a net increase in total deposits of $20.1 million during the nine-month period ended March 31, 2007.

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At March 31, 2007, the average liquidity ratio was 11.81% compared to 18.55% at March 31, 2006. The level of liquidity has been reduced as net proceeds from the stock offering have been used for lending, operational growth and expansion activities.

Off-Balance Sheet Arrangements

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with 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, unused lines of credit, amounts due mortgagors on construction loans, amounts due on commercial loans and commercial letters of credit.

For the three months ended March 31, 2007, 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.

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Capital Compliance

The following table presents our capital position relative to our regulatory capital requirements at March 31, 2007 and June 30, 2006:

	Actual				For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount			Ratio		Amount			Ratio
	(Dollars in thousands)
At March 31, 2007
Total Capital
(To Risk Weighted Assets)	$	67,138	26.4	%	$	20,361	>	8.0	%	$	25,451	>	10.0	%
Core Capital
(To Tangible Assets)		65,265	19.9	%		13,090	>	4.0	%		16,362	>	5.0	%
Tangible Capital
(To Tangible Assets)		65,265	19.9	%		4,909	>	1.5	%		N/A
Tier 1 Capital
(To Risk Weighted Assets)		65,265	25.6	%		N/A					15,271	>	6.0	%
At June 30, 2006
Total Capital
(To Risk Weighted Assets)	$	67,000	27.5	%	$	19,523	>	8.0	%	$	24,404	>	10.0	%
Core Capital
(To Tangible Assets)		65,100	20.1	%		12,961	>	4.0	%		16,201	>	5.0	%
Tangible Capital
(To Tangible Assets)		65,100	20.1	%		4,860	>	1.5	%		N/A
Tier 1 Capital
(To Risk Weighted Assets)		65,100	26.7	%		N/A					14,643	>	6.0	%

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

For a discussion of the Company’s asset and liability management policies, as well as 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 June 30, 2006. 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 June 30, 2006.

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 March 31, 2007 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. OTHER INFORMATION

Item 1. Legal Proceedings

Jefferson Bancshares is not a party to any pending legal proceedings. Periodically, there have been various claims and lawsuits involving Jefferson Federal, such as claims to enforce liens, condemnation proceedings on properties in which Jefferson Federal holds security interests, claims involving the making and servicing of real property loans and other issues incident to Jefferson Federal’s business. Jefferson Federal is not a party to any pending legal proceedings that it believes would have a material adverse effect on the financial condition or operations of the Company.

Item 1A. Risk Factors

There have been no material changes to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended June 30, 2006.

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

Period	(a) Total Number of Shares (or units) Purchased	(b) Average Price Paid per Share (or Unit)		( c ) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Progams	( d ) Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under the Plans or Programs
Month #1
January 1, 2007 through January 31, 2007	46,991	$	12.95	46,991	422,370	(1)
Month #2
February 1, 2007 through February 28, 2007	15,546	$	12.88	15,546	406,824	(1)
Month #3
March 1, 2007 through March 31, 2007	31,021	$	12.71	31,021	375,803	(1)
Total	93,558	$	12.86	93,558	375,803

(1) On February 24, 2006, the Company announced a Stock Repurchase Program under which the Company may repurchase an additional 690,261 shares of the Company’s common stock, from time to time, subject to market conditions. The repurchase program will continue until completed or terminated by the Board of Directors.

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Item 3. Defaults Upon Senior Securities

None.

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

None.

Item 5. Other Information

None.

Item 6. Exhibits

31.1 Rule 13a-14(a)/15d-14(a) certification of the principal executive officer

31.2 Rule 13a-14(a)/15d-14(a) certification of the principal financial officer

32.1 Section 1350 certification

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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.

	JEFFERSON BANCSHARES, INC.
May 10, 2007	/s/ Anderson L. Smith
	Anderson L. Smith
	President and Chief Executive Officer
May 10, 2007	/s/ Jane P. Hutton
	Jane P. Hutton
	Chief Financial Officer, Treasurer and Secretary