SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2008

OR

o 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: 000-25328

FIRST KEYSTONE FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

Pennsylvania	23-2576479
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
22 West State Street
Media, Pennsylvania	19063
(Address of principal executive office)	(Zip Code)

Registrant’s telephone number, including area code: (610) 565-6210

Indicate by check mark whether the Registrant (1) has filed all reports required 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 þ No o

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 (check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer þ
(Do not check if a smaller reporting company) Smaller reporting company o

Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Number of shares of Common Stock outstanding as of April 30, 2008: 2,432,998

FIRST KEYSTONE FINANCIAL, INC.

Contents

		Page
PART I	FINANCIAL INFORMATION:
Item 1.	Financial Statements
	Consolidated Statements of Financial Condition as of March 31, 2008 (Unaudited) and September 30, 2007		1
	Unaudited Consolidated Statements of Income for the Three and Six Months Ended March 31, 2008 and 2007		2
	Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the Six Months Ended March 31, 2008 and 2007		3
	Unaudited Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2008 and 2007		4
	Notes to Unaudited Consolidated Financial Statements		5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		20
Item 4.	Controls and Procedures		20
PART II	OTHER INFORMATION
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		22
Item 5.	Other Information		22
Item 6.	Exhibits		23
SIGNATURES			25

 - i -

FIRST KEYSTONE FINANCIAL, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands)

	March 31,			September 30,
	2008			2007
ASSETS:
Cash and amounts due from depository institutions	$	8,331		$	4,642
Interest-bearing deposits with depository institutions		19,773			48,293
Total cash and cash equivalents		28,104			52,935
Investment securities available for sale		30,614			29,284
Mortgage-related securities available for sale		114,489			79,178
Investment securities held to maturity (approximate fair value of $3,350 at March 31, 2008 and $3,266 at September 30, 2007)		3,255			3,256
Mortgage-related securities held to maturity (approximate fair value of $28,655 at March 31, 2008 and $30,511 at September 30, 2007)		28,495			31,294
Loans receivable (net of allowance for loan losses of $3,377 and $3,322 at March 31, 2008 and September 30, 2007, respectively)		278,410			292,418
Accrued interest receivable		2,532			2,702
FHLBank stock, at cost		6,297			6,338
Office properties and equipment, net		4,587			4,762
Deferred income taxes		2,137			2,505
Cash surrender value of life insurance		17,594			17,234
Prepaid expenses and other assets		3,037			2,975
TOTAL ASSETS	$	519,551		$	524,881
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Liabilities:
Deposits:
Non-interest-bearing	$	16,020		$	18,404
Interest-bearing		331,751			335,304
Total deposits		347,771			353,708
Advances from FHLBank and other borrowings		113,196			115,384
Junior subordinated debentures		15,264			15,264
Accrued interest payable		2,339			2,324
Advances from borrowers for taxes and insurance		2,043			870
Accounts payable and accrued expenses		3,038			2,637
Total liabilities		483,651			490,187
Commitments and contingencies		—			—
Stockholders’ Equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized; none issued
Common stock, $.01 par value, 20,000,000 shares authorized; issued 2,712,556 shares; outstanding at March 31, 2008 and September 30, 2007, 2,432,998 shares		27			27
Additional paid in capital		12,595			12,598
Employee stock ownership plan		(2,930	)		(2,985	)
Treasury stock at cost: 279,558 shares at March 31, 2008 and at September 30, 2007		(4,244	)		(4,244	)
Accumulated other comprehensive loss		(508	)		(1,223	)
Retained earnings — partially restricted		30,960			30,521
Total stockholders’ equity		35,900			34,694
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY:	$	519,551		$	524,881

See notes to unaudited consolidated financial statements.

- 1 -

FIRST KEYSTONE FINANCIAL, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)

	Three months ended					Six months ended
	March 31,					March 31,
	2008		2007			2008		2007
INTEREST INCOME:
Interest and fees on loans	$	4,391	$	5,259		$	9,062	$	10,614
Interest and dividends on:
Mortgage-related securities		1,583		1,209			2,963		2,416
Investment securities:
Taxable		402		315			797		625
Tax-exempt		42		145			84		296
Dividends		66		156			152		243
Interest on interest-bearing deposits		178		114			341		177
Total interest income		6,662		7,198			13,399		14,371
INTEREST EXPENSE:
Interest on:
Deposits		2,423		2,838			5,101		5,542
FHLBank and other borrowings		1,374		1,242			2,599		2,747
Junior subordinated debentures		365		499			732		1,001
Total interest expense		4,162		4,579			8,432		9,290
Net interest income		2,500		2,619			4,967		5,081
PROVISION FOR LOAN LOSS		14		100			56		175
Net interest income after provision for loan losses		2,486		2,519			4,911		4,906
NON-INTEREST INCOME:
Service charges and other fees		410		410			832		797
Net gain on sales of loans held for sale		—		8			—		124
Net gain on sales of investments		—		120			69		120
Net gain on sales of REO		—		61			—		61
Increase in cash surrender value of life insurance		178		147			360		294
Other income		120		107			209		204
Total non-interest income		708		853			1,470		1,600
NON-INTEREST EXPENSE:
Salaries and employee benefits		1,440		1,473			2,870		2,971
Occupancy and equipment		417		404			817		800
Professional fees		299		533			581		870
Federal deposit insurance premium		49		36			100		74
Data processing		144		140			281		278
Advertising		110		119			211		226
Deposit processing		145		142			290		296
Other		378		406			774		875
Total non-interest expense		2,982		3,253			5,924		6,390
Income before income tax expense (benefit)		212		119			457		116
Income tax expense (benefit)		5		(48	)		18		(139	)
Net income	$	207	$	167		$	439	$	255
Earnings per common share:
Basic	$	0.09	$	0.07		$	0.19	$	0.12
Diluted	$	0.09	$	0.07		$	0.19	$	0.12
Weighted average shares — basic		2,317,080		2,303,333			2,315,988		2,146,185
Weighted average shares — diluted		2,317,337		2,323,978			2,316,311		2,166,137

     See notes to unaudited consolidated financial statements.

- 2 -

FIRST KEYSTONE FINANCIAL, INC.

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(dollars in thousands)

						Employee						Accumulated			Retained
			Additional			stock						other			earnings-		Total
	Common		paid-in			ownership			Treasury			comprehensive			partially		stockholders’
	stock		capital			plan			stock			(loss) gain			restricted		equity
BALANCE AT OCTOBER 1, 2006	$	27	$	12,974		$	(3,089	)	$	(10,522	)	$	(787	)	$	30,056	$	28,659
Net income		—		—			—			—			—			255		255
Other comprehensive income, net of tax:
Net unrealized loss on securities net of reclassification adjustment, net of tax benefit of $38(1)		—		—			—			—			(74	)		—		(74	)
Comprehensive income		—		—			—			—			—			—		181
ESOP shares committed to be released		—		—			51			—			—			—		51
Share-based compensation		—		21			—			—			—			—		21
Excess of fair value above cost of ESOP shares committed to be released		—		22			—			—			—			—		22
Exercise of stock options		—		—			—			1			—			—		1
Release of treasury shares for equity offering		—		(412	)		—			6,200			—			—		5,788
BALANCE AT MARCH 31, 2007	$	27	$	12,605		$	(3,038	)	$	(4,321	)	$	(861	)	$	30,311	$	34,723
BALANCE AT OCTOBER 1, 2007	$	27	$	12,598		$	(2,985	)	$	(4,244	)	$	(1,223	)	$	30,521	$	34,694
Net income		—		—			—			—			—			439		439
Other comprehensive income, net of tax:
Net unrealized gain on securities net of reclassification adjustment, net of taxes of $368(1)				—			—			—			—			715		715
Comprehensive income		—		—			—			—			—			—		1,154
ESOP shares committed to be released		—		—			55			—			—			—		55
Excess of fair value above cost of ESOP shares committed to be released		—		(3	)		—			—			—			—		(3	)
BALANCE AT MARCH 31, 2008	$	27	$	12,595		$	(2,930	)	$	(4,244	)	$	(508	)	$	30,960	$	35,900

⁽¹⁾ Disclosure of reclassification amount, net of tax:

	March 31,
	2008		2007
Net unrealized appreciation (depreciation) arising during the period	$	715	$	5
Less: reclassification adjustment for net gains included in net income (net of tax)		—		(79	)
Net unrealized gain (loss) on securities	$	715	$	(74	)

     See notes to unaudited consolidated financial statements.

- 3 -

FIRST KEYSTONE FINANCIAL, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

	Six months ended
	March 31,
	2008			2007
OPERATING ACTIVITIES:
Net income	$	439		$	255
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for depreciation and amortization		285			272
Amortization of premiums and discounts		40			93
Increase in cash surrender value of life insurance		(360	)		(294	)
Net gain on sales of loans held for sale		—			(124	)
Net gain on sales of investments		(69	)		(120	)
Net gain on sale of real estate owned		—			(61	)
Provision for loan losses		56			175
Amortization of ESOP		52			73
Deferred income tax		—			770
Share-based compensation		—			21
Changes in assets and liabilities which provided (used) cash:
Origination of loans held for sale		—			(272	)
Loans sold in the secondary market		—			1,214
Accrued interest receivable		170			(7	)
Prepaid expenses and other assets		(62	)		3,158
Accrued interest payable		15			488
Accrued expenses		401			(978	)
Net cash provided by operating activities		967			3,123
INVESTING ACTIVITIES:
Loans originated		(32,121	)		(54,827	)
Purchases of:
Mortgage-related securities available for sale		(41,625	)		(10,038	)
Investment securities available for sale		(4,977	)		(4,271	)
Redemption of FHLB stock		1,521			1,975
Purchase of FHLB stock		(1,480	)		(1,201	)
Principal collected on loans		46,103			66,477
Proceeds from sales of investments		69			7,912
Proceeds from sales of real estate owned		—			2,511
Proceeds from maturities, calls, or repayments of:
Investment securities available for sale		3,027			1,058
Mortgage-related securities available for sale		7,981			6,559
Mortgage-related securities held to maturity		2,766			3,275
Purchase of property and equipment		(110	)		(106	)
Net cash (used in) provided by investing activities		(18,846	)		19,324
FINANCING ACTIVITIES:
Net decrease in deposit accounts		(5,937	)		5,050
FHLBank advances and other borrowings — repayments		(56,190	)		(64,630	)
FHLBank advances and other borrowings — draws		54,002			51,801
Net increase in advances from borrowers for taxes and insurance		1,173			1,179
Exercise of stock options		—			1
Net proceeds from equity offering		—			5,788
Net cash used in financing activities		(6,952	)		(811	)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(24,831	)		21,636
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		52,935			12,787
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	28,104		$	34,423
SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NON-CASH INFORMATION:
Cash payments for interest on deposits and borrowings	$	8,417		$	8,802
Cash payments of income taxes		50			—

See notes to unaudited consolidated financial statements.

- 4 -

FIRST KEYSTONE FINANCIAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)

1.	BASIS OF PRESENTATION
	The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. However, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the periods.
	The results of operations for the three month period ended March 31, 2008 are not necessarily indicative of the results to be expected for the fiscal year ending September 30, 2008 or any other period. The consolidated financial statements presented herein should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the First Keystone Financial, Inc. (the “Company”) Annual Report on Form 10-K for the year ended September 30, 2007.
2.	INVESTMENT SECURITIES
	The amortized cost and approximate fair value of investment securities available for sale and held to maturity, by contractual maturities, are as follows:

	March 31, 2008
			Gross		Gross
	Amortized		Unrealized		Unrealized			Approximate
	Cost		Gain		Loss			Fair Value
Available for Sale:
U.S. Government and agency bonds:
Over 10 years	$	2,964	$	37	$	—		$	3,001
Municipal obligations:
5 to 10 years		2,138		81		—			2,219
Over 10 years		1,815		112		—			1,927
Corporate bonds:
Less than 1 year		1,000		25		—			1,025
1 to 5 years		1,066		—		(48	)		1,018
5 to 10 years		2,000		—		(640	)		1,360
Over 10 years		9,493		—		(624	)		8,869
Mutual funds		10,441		18		(321	)		10,138
Other equity investments		1,040		17		—			1,057
Total	$	31,957	$	290	$	(1,633	)	$	30,614
Held to Maturity:
Municipal obligations:
1 to 5 years	$	276	$	4	$	—		$	280
5 to 10 years		2,979		91		—			3,070
	$	3,255	$	95	$	—		$	3,350

- 5 -

Provided below is a summary of investment securities available for sale and held to maturity which were in an unrealized loss position at March 31, 2008.

	Loss Position					Loss Position
	Less than 12 Months					12 Months or Longer					Total
			Unrealized					Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
Corporate bonds	$	8,136	$	(409	)	$	3,110	$	(903	)	$	11,246	$	(1,312	)
Mutual funds		—		—			9,602		(321	)		9,602		(321	)
Total	$	8,136	$	(409	)	$	12,712	$	(1,224	)	$	20,848	$	(1,633	)

At March 31, 2008, investment securities in a gross unrealized loss position for twelve months or longer consisted of three securities and investments in two mutual funds having an aggregate depreciation of 8.8% from the Company’s amortized cost basis. Management believes that the estimated fair value of the securities disclosed above is primarily dependent upon the movement in market interest rates. These investment securities are comprised of securities that are rated investment grade by at least one bond credit rating service. Although the fair value will fluctuate as the market interest rates move, management believes that these fair values will recover as the underlying portfolios mature and are reinvested in investments yielding market rates of interest. Mutual funds in an unrealized loss position for 12 months or longer consist of two funds primarily invested in asset-backed securities and have an aggregate depreciation of 3.2%. Corporate bonds in an unrealized loss position for 12 months or longer consisted of three debt securities and had an aggregate depreciation of 22.5%. The Company has the ability and intent to hold all of these securities until such time as the value recovers. Management does not believe any individual unrealized loss as of March 31, 2008 represents an other-than-temporary impairment.

The amortized cost and approximate fair value of investment securities available for sale and held to maturity, by contractual maturities, are as follows:

	September 30, 2007
			Gross		Gross
	Amortized		Unrealized		Unrealized			Approximate
	Cost		Gain		Loss			Fair Value
Available for Sale:
U.S. Government bonds:
1 to 5 years	$	2,000	$	—	$	—		$	2,000
Over 10 years		3,950		10		(9	)		3,951
Municipal obligations:
5 to 10 years		1,130		—		(14	)		1,116
Corporate bonds:
1 to 5 years		2,074		50		—			2,124
5 to 10 years		2,000		—		(560	)		1,440
Over 10 years		7,654		61		(42	)		7,673
Mutual funds		10,203		7		(322	)		9,888
Other equity investments		1,040		60		(8	)		1,092
Total	$	30,051	$	188	$	(955	)	$	29,284
Held to Maturity:
Municipal obligations:
5 to 10 years	$	3,256	$	10	$	—		$	3,266

- 6 -

Provided below is a summary of investment securities available for sale and held to maturity which were in an unrealized loss position at September 30, 2007.

	Loss Position					Loss Position
	Less than 12 Months					12 Months or Longer					Total
			Unrealized					Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
U.S. Government bonds	$	2,954	$	(9	)	$	—	$	—		$	2,954	$	(9	)
Corporate bonds		—		—			3,420		(602	)		3,420		(602	)
Municipal bonds		—		—			986		(14	)		986		(14	)
Mutual funds		—		—			9,374		(322	)		9,374		(322	)
Equity securities		327		(8	)		—		—			327		(8	)
Total	$	3,281	$	(17	)	$	13,780	$	(938	)	$	17,061	$	(955	)

3.	MORTGAGE-RELATED SECURITIES
	Mortgage-related securities available for sale and mortgage-related securities held to maturity are summarized as follows:

	March 31, 2008
			Gross		Gross
	Amortized		Unrealized		Unrealized			Approximate
	Cost		Gain		Loss			Fair Value
Available for Sale:
FHLMC pass-through certificates	$	37,601	$	586	$	(19	)	$	38,168
FNMA pass-through certificates		46,216		690		(52	)		46,854
GNMA pass-through certificates		1,965		70		(1	)		2,034
Collateralized mortgage obligations		28,134		51		(752	)		27,433
Total	$	113,916	$	1,397	$	(824	)	$	114,489
Held to Maturity:
FHLMC pass-through certificates	$	10,931	$	76	$	(12	)	$	10,995
FNMA pass-through certificates		17,542		115		(19	)		17,638
Collateralized mortgage obligations		22		—		—			22
Total	$	28,495	$	191	$	(31	)	$	28,655

Provided below is a summary of mortgage-related securities available for sale and held to maturity which were in an unrealized loss position at March 31, 2008.

	Loss Position					Loss Position
	Less than 12 Months					12 Months or Longer					Total
			Unrealized					Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
Pass-through certificates	$	16,237	$	(83	)	$	1,550	$	(20	)	$	17,787	$	(103	)
Collateralized mortgage obligations		14,069		(434	)		7,157		(318	)		21,226		(752	)
Total	$	30,306	$	(517	)	$	8,707	$	(338	)	$	39,013	$	(855	)

- 7 -

At March 31, 2008, mortgage-related securities in a gross unrealized loss position for twelve months or longer consisted of seven securities that at such date had an aggregate depreciation of 3.7% from the Company’s amortized cost basis. Management does not believe any individual unrealized loss as of March 31, 2008 represents an other-than-temporary impairment. The unrealized losses reported for mortgage-related securities relate primarily to securities issued by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and private institutions. The majority of the unrealized losses associated with mortgage-related securities are attributable to changes in interest rates and not due to the deterioration of the creditworthiness of the issuer. The Company has the ability and intent to hold these securities until the securities mature or recover in value.

Mortgage-related securities available for sale and mortgage-related securities held to maturity are summarized as follows:

	September 30, 2007
			Gross		Gross
	Amortized		Unrealized		Unrealized			Approximate
	Cost		Gain		Loss			Fair Value
Available for Sale:
FHLMC pass-through certificates	$	15,647	$	1	$	(137	)	$	15,511
FNMA pass-through certificates		31,744		80		(320	)		31,504
GNMA pass-through certificates		2,185		3		(7	)		2,181
Collateralized mortgage obligations		30,689		19		(726	)		29,982
Total	$	80,265	$	103	$	(1,190	)	$	79,178
Held to Maturity:
FHLMC pass-through certificates	$	11,957	$	5	$	(316	)	$	11,646
FNMA pass-through certificates		19,289		4		(476	)		18,817
Collateralized mortgage obligations		48		—		—			48
Total	$	31,294	$	9	$	(792	)	$	30,511

Provided below is a summary of mortgage-related securities available for sale and held to maturity which were in an unrealized loss position at September 30, 2007.

	Loss Position					Loss Position
	Less than 12 Months					12 Months or Longer					Total
			Unrealized					Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
Pass-through certificates	$	21,075	$	(176	)	$	47,185	$	(1,080	)	$	68,260	$	(1,256	)
Collateralized mortgage obligations		2,754		(20	)		26,392		(706	)		29,146		(726	)
Total	$	23,829	$	(196	)	$	73,577	$	(1,786	)	$	97,406	$	(1,982	)

- 8 -

4.	LOANS RECEIVABLE
	Loans receivable consist of the following:

	March 31,			September 30,
	2008			2007
Real estate loans:
Single-family	$	143,323		$	139,888
Construction and land		24,963			23,501
Multi-family and commercial		53,512			60,026
Home equity and lines of credit		54,504			57,808
Consumer loans		1,168			1,204
Commercial loans		14,791			19,044
Total loans		292,261			301,471
Loans in process		(10,782	)		(6,008	)
Allowance for loan losses		(3,377	)		(3,322	)
Deferred loan costs		308			277
Loans receivable — net	$	278,410		$	292,418

At March 31, 2008 and September 30, 2007, non-performing loans (which include loans in excess of 90 days delinquent) amounted to approximately $1,187 and $4,685, respectively. At March 31, 2008, non-performing loans consisted of three single-family residential mortgage loans aggregating $219, one non-residential mortgage loan in the amount of $220, three commercial business loans aggregating $504, two home equity lines of credit aggregating $237, and three consumer loans aggregating $7.

At March 31, 2008 and September 30, 2007, the Company had impaired loans with a total recorded investment of $244 and $1,173, respectively. Interest income of $1 was recognized on these impaired loans during the six months ended March 31, 2008. Interest income of approximately $9 was not recognized as interest income due to the non-accrual status of such loans for the six months ended March 31, 2008.

Loans collectively evaluated for impairment include residential real estate, home equity (including lines of credit) and consumer loans and are not included in the data that follow:

	March 31,		September 30,
	2008		2007
Impaired loans with related allowance for loan losses under SFAS No. 114	$	220	$	1,148
Impaired loans with no related allowance for loan losses under SFAS No. 114		24		25
Total impaired loans	$	244	$	1,173
Valuation allowance related to impaired loans	$	110	$	271

The following is an analysis of the allowance for loan losses:

	Six Months Ended
	March 31,
	2008			2007
Balance beginning of period	$	3,322		$	3,367
Provisions charged to income		56			175
Charge-offs		(14	)		(43	)
Recoveries		13			26
Total	$	3,377		$	3,525

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5.	DEPOSITS
	Deposits consist of the following major classifications:

	March 31,					September 30,
	2008					2007
	Amount		Percent			Amount		Percent
Non-interest bearing	$	16,020		4.6	%	$	18,404		5.2	%
NOW		78,233		22.5			75,194		21.2
Passbook		36,302		10.5			37,369		10.6
Money market demand		33,512		9.6			34,252		9.7
Certificates of deposit		183,704		52.8			188,489		53.3
Total	$	347,771		100.0	%	$	353,708		100.0	%

6.	EARNINGS PER SHARE
	Basic net income per share is based upon the weighted average number of common shares outstanding, while diluted net income per share is based upon the weighted average number of common shares outstanding and common share equivalents that would arise from the exercise of dilutive securities. All dilutive shares consist of options the exercise price of which is lower than the market price of the common stock covered thereby at the dates presented. At March 31, 2008 and 2007, anti-dilutive shares consisted of options covering 47,237 and 527 shares, respectively.
	The calculation of basic and diluted earnings per share (“EPS”) is as follows:

	For the Three Months Ended				For the Six Months Ended
	March 31,				March 31,
	2008		2007		2008		2007
Numerator	$	207	$	167	$	439	$	255
Denominators:
Basic shares outstanding		2,317,080		2,303,333		2,315,988		2,146,185
Effect of dilutive securities		257		20,645		323		19,952
Diluted shares outstanding		2,317,337		2,323,978		2,316,311		2,166,137
EPS:
Basic	$	0.09	$	0.07	$	0.19	$	0.12
Diluted	$	0.09	$	0.07	$	0.19	$	0.12

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7.	REGULATORY CAPITAL REQUIREMENTS
	The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum regulatory capital requirements can result in certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by regulators about components, risk weightings, and other factors.
	Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth below) of tangible and core capital (as defined in the regulations) to adjusted assets (as defined), and of Tier I and total capital (as defined) to average assets (as defined). Management believes, as of March 31, 2008, that the Bank meets all regulatory capital adequacy requirements to which it is subject.
	The Bank’s actual capital amounts and ratios are presented in the following table.

						Required for					Well Capitalized
						Capital Adequacy					Under Prompt Corrective
	Actual					Purpose					Action
	Amount		Ratio			Amount		Ratio			Amount		Ratio
At March 31, 2008:
Core Capital (to Adjusted Tangible Assets)	$	50,126		9.68	%	$	20,723		4.0	%	$	25,904		5.0	%
Tier I Capital (to Risk-Weighted Assets)		50,126		16.53			N/A		N/A			18,196		6.0
Total Capital (to Risk-Weighted Assets)		53,503		17.64			24,261		8.0			30,326		10.0
Tangible Capital (to Tangible Assets)		50,052		9.66			7,770		1.5			N/A		N/A
At September 30, 2007:
Core Capital (to Adjusted Tangible Assets)	$	49,207		9.38	%	$	20,975		4.0	%	$	26,219		5.0	%
Tier I Capital (to Risk-Weighted Assets)		49,207		15.44			N/A		N/A			19,118		6.0
Total Capital (to Risk-Weighted Assets)		52,529		16.49			25,491		8.0			31,864		10.0
Tangible Capital (to Tangible Assets)		49,126		9.37			7,864		1.5			N/A		N/A

On February 13, 2006, the Bank entered into a supervisory agreement with the Office of Thrift Supervision (“OTS.”) The supervisory agreement requires the Bank, among other things, to maintain minimum core capital and total risk-based capital ratios of 7.5% and 12.5%, respectively. At March 31, 2008, the Bank was in compliance with such requirement. The Bank has been deemed to be “well-capitalized” for purposes of the prompt corrective action regulations by the OTS. However, due to the supervisory agreement, it is still deemed in “troubled condition.”

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8.	RECENT ACCOUNTING PRONOUNCEMENTS
	In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. SFAS No. 141(R) is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s results of operations.
	In September 2007, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements. The definition of fair value retains the exchange price notion in earlier definitions of fair value. SFAS No. 157 clarifies that the exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability. The definition focuses on the price that would be received to sell the asset or paid to transfer the liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price). SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the impact of this pronouncement but does not expect that the guidance will have a material effect on the Company’s financial position or results of operations.
	In September 2007, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Post-retirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R).” For defined benefit post-retirement plans, SFAS No. 158 requires that the funded status be recognized in the statement of financial position, that assets and obligations that determine funded status be measured as of the end of the employer’s fiscal year, and that changes in funded status be recognized in comprehensive income in the year the changes occur. SFAS No. 158 does not change the amount of net periodic benefit cost included in net income or address measurement issues related to defined benefit post-retirement plans. This requirement is effective for fiscal years ending after December 15, 2008. The other provisions of the Statement were effective as of the end of the fiscal year ending after December 15, 2006, for public companies. The Company has determined that the guidance provided by SFAS No. 158 does not have an impact on its stockholders’ equity or on the Company’s financial position or results of operations.
	In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51.” SFAS No. 160 amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Among other requirements, this statement requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s results of operations.

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The Company adopted the provisions of FIN No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109,” effective October 1, 2007. FIN No. 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. FIN No. 48 also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties. Adoption of FIN No. 48 did not have a significant impact on the Company’s financial statements.

In June 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-11 (“EITF 06-11”), “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.” EITF 06-11 applies to share-based payment arrangements with dividend protection features that entitle employees to receive (a) dividends on equity-classified nonvested shares, (b) dividend equivalents on equity-classified nonvested share units, or (c) payments equal to the dividends paid on the underlying shares while an equity-classified share option is outstanding, when those dividends or dividend equivalents are charged to retained earnings under SFAS No. 123R, Share-Based Payment, and result in an income tax deduction for the employer. A consensus was reached that a realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings and are paid to employees for equity-classified nonvested equity shares, nonvested equity share units, and outstanding equity share options should be recognized as an increase in additional paid-in capital. EITF 06-11 is effective for fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of the EITF will have on the Company’s results of operations.

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

     In addition to historical information, this Quarterly Report on Form 10-Q includes certain “forward-looking statements” based on management’s current expectations. The Company’s actual results could differ materially, as such term is defined in the Securities Act of 1933 and the Securities Exchange Act of 1934, from management’s expectations. Such forward-looking statements include statements regarding management’s current intentions, beliefs or expectations as well as the assumptions on which such statements are based. These forward-looking statements are subject to significant business, economic and competitive uncertainties and contingencies, many of which are not subject to the Company’s control. Existing stockholders and potential stockholders of the Company are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Factors that could cause future results to vary from current management expectations include, but are not limited to, general economic conditions, legislative and regulatory changes, monetary and fiscal policies of the federal government, changes in tax policies, rates and regulations of federal, state and local tax authorities, changes in interest rates, deposit flows, the cost of funds, demand for loan products, demand for financial services, competition, changes in the quality or composition of the Company’s loan and investment portfolios, changes in accounting principles, policies or guidelines, availability and cost of energy resources and other economic, competitive, governmental and technological factors affecting the Company’s operations, markets, products, services and fees.

     The Company undertakes no obligation to update or revise any forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results that occur subsequent to the date such forward-looking statements are made.

General

     The Company is a Pennsylvania corporation and the sole stockholder of the Bank, a federally chartered stock savings bank, which converted to the stock form of organization in January 1995. The Bank is a community-oriented bank emphasizing customer service and convenience. The Bank’s primary business is attracting deposits from the general public and using those funds, together with other available sources of funds, primarily borrowings, to originate loans. The Bank’s management remains focused on its long-term strategic plan to continue to shift the Bank’s loan composition towards increased investment in commercial, construction and home equity loans and lines of credit in order to provide a higher yielding loan portfolio with generally shorter contractual terms. In view of the Company’s reduction in criticized and classified commercial loans over the past eighteen months combined with the implementation of an enhanced credit review and loan administration infrastructure, as well as underwriting standards with respect to the origination of commercial loans, the Company expects to renew its emphasis on the origination of commercial loans. In furtherance of such goal, the Company recently engaged an experienced commercial loan officer and expects to hire additional commercial loan officers during the remainder of fiscal 2008.

Critical Accounting Policies

     Accounting policies involving significant judgments and assumptions by management, which have, or could have, a material impact on the carrying value of certain assets or comprehensive income, are considered critical accounting policies. In management’s opinion, the most critical accounting policy affecting the Company’s financial statements is the evaluation of the allowance for loan losses. The Company maintains an allowance for loan losses at a level management believes is sufficient to provide for known and inherent losses in the loan portfolio that were both probable and reasonable to estimate. The allowance for loan losses is considered a critical accounting estimate because there is a large degree of judgment in (i) assigning individual loans to specific risk levels (pass, substandard, doubtful and loss), (ii) valuing the underlying collateral securing the loans, (iii) determining the appropriate reserve factor to be applied to specific risk levels for criticized and classified loans (special mention, substandard, doubtful and loss) and (iv) determining reserve factors to be applied to pass loans based upon loan type. Accordingly, there is a likelihood that materially different amounts would be reported under different, but reasonably plausible conditions or assumptions.

     The determination of the allowance for loan losses requires management to make significant estimates with respect to the amounts and timing of losses and market and economic conditions. Accordingly, a decline in the

- 14 -

economy could increase loan delinquencies, foreclosures or repossessions resulting in increased charge-off amounts and the need for additional loan loss allowances in future periods. The Bank will continue to monitor and adjust its allowance for loan losses through the provision for loan losses as economic conditions and other factors dictate. Management reviews the allowance for loan losses generally on a monthly basis, but at a minimum at least quarterly. Although the Bank maintains its allowance for loan losses at levels considered adequate to provide for the inherent risk of loss in its loan portfolio, there can be no assurance that future losses will not exceed estimated amounts or that additional provisions for loan losses will not be required in future periods. In addition, the Bank’s determination as to the amount of its allowance for loan losses is subject to review by its primary federal banking regulator, the OTS, as part of its examination process, which may result in additional provisions to increase the allowance based upon the judgment and review of the OTS.

Supervisory Agreements

          On February 13, 2006, the Company and the Bank each entered into a supervisory agreement with the OTS which primarily addressed issues identified in the OTS’ reports of examination of the Company’s and the Bank’s operations and financial condition conducted in 2005.

     Under the terms of the supervisory agreement between the Company and the OTS, the Company agreed to, among other things, (i) develop and implement a three-year capital plan designed to support the Company’s efforts to maintain prudent levels of capital and to reduce its debt-to-equity ratio below 50%; (ii) not incur any additional debt without the prior written approval of the OTS; and (iii) not repurchase any shares of or pay any cash dividends on its common stock until the Company complied with certain conditions. Upon reducing its debt-to-equity below 50%, the Company may resume the payment of quarterly cash dividends at the lesser of the dividend rate in effect immediately prior to entering into the supervisory agreement ($0.11 per share) or 35% of its consolidated net income (on an annualized basis), provided that the OTS, upon review of prior written notice from the Company of the proposed dividend, does not object to such payment.

     The Company has submitted to and received from the OTS approval of a capital plan, which calls for an equity infusion in order to reduce the Company’s debt-to-equity ratio below 50%. As part of its capital plan, the Company conducted a private placement of 400,000 shares of common stock, raising gross proceeds of approximately $6.5 million. In June 2007, the net proceeds of approximately $5.8 million were used to reduce the amount of the Company’s outstanding debt through the redemption of $6.2 million of its junior subordinated debentures. As a result of such redemption, the Company’s debt-to-equity ratio is less than 50%. Although the Company’s debt-to-equity ratio is below 50%, it does not anticipate resuming the payment of dividends until such time as the Company’s operating results materially improve.

     Under the terms of the supervisory agreement between the Bank and the OTS, the Bank agreed to, among other things, (i) not grow in any quarter in excess of the greater of 3% of total assets (on an annualized basis) or net interest credited on deposit liabilities during such quarter; (ii) maintain its core capital and total risk-based capital in excess of 7.5% and 12.5%, respectively; (iii) adopt revised policies and procedures governing commercial lending; (iv) conduct periodic reviews of its commercial loan department; (v) conduct periodic internal loan reviews; (vi) adopt a revised asset classification policy and (vii) not amend, renew or enter compensatory arrangements with senior executive officers and directors, subject to certain exceptions, without the prior approval of the OTS. As a result of the growth restriction imposed on the Bank, the Company’s growth is currently and will continue to be substantially constrained unless and until the supervisory agreements are terminated or modified. As of March 31, 2006 and June 30, 2006, the Bank exceeded the growth limitation contained in the supervisory agreement with the OTS described above. Subsequent to June 30, 2006, the Bank reduced its assets sufficiently to be below the June 30, 2006 limitation. The OTS advised the Bank that it would not take any regulatory action against the Bank provided it was in compliance with the growth limitation as of September 30, 2006. The Bank has continued to comply with the growth restriction as of each quarter since and including September 30, 2006.

     As a result of the supervisory agreement, the Bank hired a Chief Credit Officer (“CCO”) who, under the direction of the Board and the Chief Executive Officer, has taken steps to enhance the Bank’s credit review analysis, develop loan administrative procedures and adopt an asset classification system. The Bank continues to address these areas and to reduce the level of classified and criticized assets in order to remain in full compliance with the terms of the supervisory agreements. At March 31, 2008, the Company believes it and the Bank are in compliance with all the operative provisions of both supervisory agreements.

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Comparison of Financial Condition at March 31, 2008 and September 30, 2007

     The Company’s total assets decreased by $5.3 million from $524.9 million at September 30, 2007 to $519.6 million at March 31, 2008. Cash and cash equivalents decreased by $24.8 million to $28.1 million at March 31, 2008 from $52.9 million at September 30, 2007 primarily due to purchases of mortgage-related securities available for sale, and, to a lesser extent, a reduction in deposits. This reduction in cash and cash equivalents was partially offset by loan repayments. Loans receivable decreased by $14.0 million, from $292.4 million at September 30, 2007 to $278.4 million at March 31, 2008 primarily as a result of the Company’s experiencing repayments within the commercial real estate and business loan portfolios while only originating a limited amount of such loans. This resulted from the Company’s self-imposed curtailment of such lending activity while implementing a substantially enhanced credit review and administration infrastructure. However, in view of the significant progress achieved in enhancing and improving the Company’s credit review and administration, and in order to be able to actively engage in commercial real estate and business lending, the Company recently hired an experienced commercial lending officer. Deposits decreased $5.9 million, or 1.7%, from $353.7 million at September 30, 2007 to $347.8 million at March 31, 2008. The decrease in deposits resulted from a $4.8 million, or 2.5%, decrease in certificates of deposit combined with a $1.1 million, or 0.7%, decrease in core deposits (which consist of passbook, money market, NOW and non-interest bearing accounts). This decline in certificates of deposit was primarily due to the runoff of higher interest-bearing deposits as part of the Company’s management of its cost of funds.

Stockholders’ equity increased $1.2 million to $36.0 million primarily due to a $715,000 improvement in other comprehensive loss combined with net income of $439,000 for the six months ended March 31, 2008.

Comparison of Results of Operations for the Three and Six Months Ended March 31, 2008 and 2007

Net Income. Net income was $207,000, or $.09 per diluted share, for the quarter ended March 31, 2008 as compared to $167,000, or $.07 per diluted share, for the same period in 2007. Net income for the six months ended March 31, 2008 was $439,000, or $.19 per diluted share, an increase of $184,000, or 72.2%, as compared to $255,000, or $.12 per diluted share, for the same period in 2007.

Net Interest Income. Net interest income decreased $119,000, or 4.5%, to $2.5 million and $114,000, or 2.2%, to $5.0 million for the three and six months ended March 31, 2008, respectively, as compared to the same periods in 2007. Such decreases were primarily due to decreases in interest income of $536,000, or 7.4%, and $972,000, or 6.8%, for the three and six months ended March 31, 2008, respectively, as compared to the same periods in 2007. The decreases in interest income were partially offset by decreases in interest expense of $417,000, or 9.1%, and $858,000, or 9.2% for the three and six months ended March 31, 2008, respectively, as compared to the same periods in 2007. The weighted average yield earned on interest-earning assets for the three months ended March 31, 2008 decreased 46 basis points to 5.62% compared to the same period in 2007 and 26 basis points to 5.75% for the six months ended March 31, 2008 compared to the same period in 2007. For the three months ended March 31, 2008, the weighted average rate paid on interest-bearing liabilities decreased 34 basis points to 3.58% from 3.92% for the same period in the prior fiscal year and 22 basis points to 3.69% for the six months ended March 31, 2008 as compared to 3.91% for the six months ended March 31, 2007.

     The interest rate spread and net interest margin were 2.04% and 2.11%, respectively, for the three months ended March 31, 2008 as compared to 2.16% and 2.21%, respectively, for the same period in 2007. The interest rate spread and net interest margin were 2.07% and 2.13%, respectively, for the six months ended March 31, 2008 as compared to 2.10% and 2.13%, respectively, for the same period in 2007. The smaller decrease in the net interest margin for the quarter to quarter comparison as compared to the decrease in spread was primarily due to a decline in the average balance of interest-bearing liabilities primarily as result of the $6.2 million redemption of the junior subordinated debentures during fiscal 2007 which bore an interest rate of 9.1% at time of their redemption. As a result of the Federal Reserve’s actions with the recent reductions in the prime rate, the Company has experienced a more rapid reduction in the yield earned on our interest-earning assets than the cost of our funds.

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     The following tables present the average balances for various categories of assets and liabilities, and income and expense related to those assets and liabilities for the three and six months ended March 31, 2008 and 2007.

	For the three months ended
	March 31, 2008							March 31, 2007
					Average							Average
	Average				Yield/			Average				Yield/
(Dollars in thousands)	Balance		Interest		Cost			Balance		Interest		Cost
Interest-earning assets:
Loans receivable(1) (2)	$	277,586	$	4,391		6.33	%	$	314,315	$	5,259		6.69	%
Mortgage-related securities(2)		130,792		1,583		4.84			105,920		1,209		4.57
Investment securities		40,398		510		5.05			41,133		616		5.99
Other interest-earning assets		25,638		178		2.78			12,449		114		3.66
Total interest-earning assets		474,414		6,662		5.62			473,817		7,198		6.08
Non-interest-earning assets		34,443							35,880
Total assets	$	508,857						$	509,697
Interest-bearing liabilities:
Deposits	$	342,678		2,423		2.83		$	355,649		2,838		3.19
FHLB advances and other borrowings		107,025		1,374		5.14			90,469		1,242		5.49
Junior subordinated debentures		15,264		365		9.56			21,471		499		9.30
Total interest-bearing liabilities		464,967		4,162		3.58			467,589		4,579		3.92
Interest rate spread(3)						2.04	%						2.16	%
Non-interest-bearing liabilities		7,647							7,691
Total liabilities		472,614							475,280
Stockholders’ equity		36,243							34,417
Total liabilities and stockholders’ equity	$	508,857						$	509,697
Net interest-earning assets	$	9,447						$	6,228
Net interest income			$	2,500						$	2,619
Net interest margin(3)						2.11	%						2.21	%
Ratio of average interest-earning assets to average interest-bearing liabilities						102.03	%						101.33	%

(1)	Includes non-accrual loans.
(2)	Includes assets classified as either available for sale or held for sale.
(3)	Net interest income divided by average interest-earning assets.

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	For the six months ended
	March 31, 2008							March 31, 2007
					Average							Average
	Average				Yield/			Average				Yield/
(Dollars in thousands)	Balance		Interest		Cost			Balance		Interest		Cost
Interest-earning assets:
Loans receivable(1) (2)	$	282,055	$	9,062		6.43	%	$	317,960	$	10,614		6.68	%
Mortgage-related securities(2)		122,739		2,963		4.83			106,332		2,416		4.54
Investment securities		39,209		1,033		5.27			42,534		1,164		5.47
Other interest-earning assets		21,700		341		3.14			11,154		177		3.17
Total interest-earning assets		465,703		13,399		5.75			477,980		14,371		6.01
Non-interest-earning assets		34,594							35,837
Total assets	$	500,297						$	513,817
Interest-bearing liabilities:
Deposits	$	344,860		5,101		2.96		$	354,450		5,542		3.13
FHLB advances and other borrowings		97,312		2,599		5.34			99,160		2,747		5.54
Junior subordinated debentures		15,264		732		9.59			21,476		1,001		9.32
Total interest-bearing liabilities		457,436		8,432		3.69			475,086		9,290		3.91
Interest rate spread(3)						2.07	%						2.10	%
Non-interest-bearing liabilities		7,219							7,112
Total liabilities		464,655							482,198
Stockholders’ equity		35,642							31,619
Total liabilities and stockholders’ equity	$	500,297						$	513,817
Net interest-earning assets	$	8,267						$	2,894
Net interest income			$	4,967						$	5,081
Net interest margin(3)						2.13	%						2.13	%
Ratio of average interest-earning assets to average interest-bearing liabilities						101.81	%						100.61	%

(1)	Includes non-accrual loans.
(2)	Includes assets classified as either available for sale or held for sale.
(3)	Net interest income divided by average interest-earning assets.

Provision for Loan Losses. Provisions for loan losses are charged to earnings to maintain the total allowance for loan losses at a level believed by management sufficient to cover all known and inherent losses in the loan portfolio which are both probable and reasonably estimable. Management’s analysis includes consideration of the Company’s historical experience, the volume and type of lending conducted by the Company, the amount of the Company’s classified assets, the status of past due principal and interest payments, general economic conditions, particularly as they relate to the Company’s primary market area, and other factors related to the collectibility of the Company’s loan portfolio. For the three months ended March 31, 2008 as compared to the three months ended March 31, 2007, the provision for loan loss decreased $86,000 to $14,000. For the six months ended March 31, 2008 as compared to the six months ended March 31, 2007, the provision for loan loss decreased $119,000 to $56,000. For the three and six months ended March 31, 2008, the provision for loan loss was based on the Company’s monthly review of the credit quality of its loan portfolio, the net charge-offs during the first and second quarters of fiscal 2008 and the continual evaluation of the classified and pass loan portfolios in order to maintain the overall allowance for loan losses at a level deemed appropriate.

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     At March 31, 2008, non-performing assets decreased $3.5 million to $1.2 million, or 0.2%, of total assets, from $4.7 million at September 30, 2007. During the second quarter, the Company experienced a decrease of $600,000 in non-performing assets which was primarily the result of $1.0 million in commercial loans that had been previously designated as 90 days delinquent and still accruing because the loans had exceeded their contractual maturities, being returned to performing status. This return to performing status was the result of a $618,000 commercial real estate loan being renewed with an extended term and four commercial lines of credit aggregating $427,000 being renewed. This decrease was partially offset by the inclusion in non-performing loans of a $500,000 construction-related line of credit that has exceeded its contractual maturity but, because it is otherwise continuing to pay in accordance with its terms, is designated as 90 days past due and still accruing. The Company’s coverage ratio, which is the ratio of the allowance for loan losses to non-performing loans, was 284.5% and 70.9% at March 31, 2008 and September 30, 2007, respectively.

     At March 31, 2008, the Bank decreased its classified assets by $2.0 million to $10.0 million compared to $12.0 million at September 30, 2007. All the assets were classified as substandard and consisted primarily of commercial business and real estate loans.

     Management continues to review its loan portfolio to determine the extent, if any, to which additional loss provisions may be deemed necessary. There can be no assurance that the allowance for losses will be adequate to cover losses which may in fact be realized in the future and that additional provisions for losses will not be required.

Non-interest Income. For the quarter ended March 31, 2008, non-interest income decreased $145,000 to $708,000 as compared to the same period last year. The decrease was primarily the result of decreases of $120,000, $61,000, and $8,000 in gains on sales of investment securities, real estate owned, and loans, respectively. Partially offsetting these decreases were increases of $31,000 and $13,000 in earnings on bank owned life insurance and other non-operating income, respectively.

     Non-interest income decreased $130,000 to $1.5 million for the six months ended March 31, 2008 by comparison to the same period last year. The decrease for the six months ended March 31, 2008 was primarily due to decreases of $124,000, $61,000, and $51,000 in gains on sales of loans, real estate owned, and investment securities, respectively. These decreases were partially offset by an increase of $66,000 in earnings on bank owned life insurance. These decreases in gains on sales of loans, real estate owned and investment securities for both the three and six months ended March 31, 2008 resulted because no sales of assets occurred during the quarter ended March 31, 2008.

Non-interest Expense. Non-interest expense decreased $271,000 to $3.0 million for the quarter ended March 31, 2008 as compared to the same period last year. The decrease for the quarter ended March 31, 2008 was primarily due to decreases of $234,000, $33,000 and $28,000 in professional fees, salaries and employee benefits, and other non-interest expense, respectively. The decrease in professional fees for the quarter ended March 31, 2008 was primarily the result of $159,000 and $37,000 decreases in audit and legal fees, respectively, related to cost savings measures implemented by the Company. These decreases were partially offset by $13,000 increases in both federal deposit insurance premiums and occupancy and equipment costs.

     For the six months ended March 31, 2008, non-interest expense decreased by $466,000 primarily due to decreases of $289,000, $101,000 and $101,000, in professional fees, salary and employee benefits, and other non-interest expense, respectively, compared to the same period in 2007. The decrease in professional fees for the six months ended March 31, 2008 occurred for reasons discussed in the preceding paragraph. Salaries and employee benefits decreased primarily due to a reduction in the number of employees employed by the Bank. In addition, non-interest expense decreased due to a reduction in cash loss and the completion of amortization of capitalized organizational costs. The decreases in non-interest expense were partially offset by increases of $26,000 and $17,000 in federal deposit insurance premiums and occupancy and equipment costs, respectively, compared to the same period in 2007.

Income Tax Expense. The Company recognized income tax expense of $5,000 and $18,000 for the three and six months ended March 31, 2008, respectively, as compared to income tax benefits of $48,000 and $139,000 for the same periods in 2007. The shift to the recognition of tax expense, for the three and six months ended March 31, 2008, respectively, as compared to income tax benefit for the same periods in 2007 were a result of the increase in the Company’s pretax income combined with the decrease in the tax-exempt income from municipal securities for the three and six months ended March 31, 2008.

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Liquidity and Capital Resources

     The Company’s liquidity, represented by cash and cash equivalents, is a product of its operating, investing and financing activities. The Company’s primary sources of funds are deposits, amortization, prepayments and maturities of outstanding loans and mortgage-related securities, sales of loans and investment securities, maturities of investment securities and other short-term investments, borrowings and funds provided from operations. While scheduled payments from the amortization of loans and mortgage-related securities and maturing investment securities and short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. In addition, the Company invests excess funds in overnight deposits and other short-term interest-earning assets which provide liquidity to meet lending requirements. The Company has been able to generate sufficient cash through its deposits as well as borrowings to satisfy its funding commitments. At March 31, 2008, the Company had short-term borrowings (due within one year or currently callable by the FHLBank Pittsburgh (“FHLB”)) outstanding of $113.2 million, all of which consisted of advances from the FHLB.

     Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments such as overnight deposits. On a longer term basis, the Company maintains a strategy of investing in various lending products, mortgage-related securities and investment securities. The Company uses its sources of funds primarily to meet its ongoing commitments, to fund maturing certificates of deposit and savings withdrawals, fund loan commitments and maintain a portfolio of mortgage-related and investment securities. At March 31, 2008, total approved loan commitments outstanding amounted to $3.1 million, not including loans in process. At the same date, commitments under unused lines of credit amounted to $32.9 million. Certificates of deposit scheduled to mature in one year or less at March 31, 2008 totaled $158.5 million. Based upon the Company’s historical experience, management believes that a significant portion of maturing deposits will remain with the Company.

     The Bank is required under applicable federal banking regulations to maintain tangible capital equal to at least 1.5% of its adjusted total assets, core capital equal to at least 4.0% of its adjusted total assets and total capital equal to at least 8.0% of its risk-weighted assets. At March 31, 2008, the Bank had tangible capital and core capital equal to 9.7% of adjusted total assets and total capital equal to 16.5% of risk-weighted assets. However, as a result of the supervisory agreement discussed in Item 2 of Part I hereof, the Bank is required to maintain core and risk-based capital in excess of 7.5% and 12.5%, respectively. The Bank is in compliance with such higher requirements imposed by the supervisory agreement.

Impact of Inflation and Changing Prices

     The Consolidated Financial Statements of the Company and related notes presented herein have been prepared in accordance with generally accepted accounting principles which requires 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.

     Unlike most industrial companies, substantially all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services, since such prices are affected by inflation to a larger extent than interest rates. In the current interest rate environment, liquidity and the maturity structure of the Company’s assets and liabilities are critical to the maintenance of acceptable performance levels.

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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, see “Management’s Discussion and Analysis of Financial Condition and Results of Operation” in the Company’s Annual Report for the year ended September 30, 2007.

     The Company utilizes reports prepared by the OTS to measure interest rate risk. Using data from the Bank’s quarterly thrift financial reports, the OTS models the net portfolio value (“NPV”) of the Bank over a variety of interest rate scenarios. The NPV is defined as the present value of expected cash flows from existing assets less the present value of expected cash flows from existing liabilities plus the present value of net expected cash inflows from existing off-balance sheet contracts. The model assumes instantaneous, parallel shifts in the U.S. Treasury Securities yield curve up to 300 basis points, and a decline of 100 basis points.

     The interest rate risk measures used by the OTS include an “Exposure Measure” or “Post-Shock” NPV ratio and a “Sensitivity Measure”. The “Post-Shock” NPV ratio is the net present value as a percentage of assets over the various yield curve shifts. A low “Post-Shock” NPV ratio indicates greater exposure to interest rate risk and can result from a low initial NPV ratio or high sensitivity to changes in interest rates. The “Sensitivity Measure” is the decline in the NPV ratio, in basis points, caused by a 2% increase or decrease in rates, whichever produces a larger decline. The following sets forth the Bank’s NPV as of March 31, 2008.

Net Portfolio Value
(Dollars in thousands)
Changes in									Net
Rates in			Dollar			Percentage			Portfolio Value As
Basis Points	Amount		Change			Change			a % of Assets			Change
300	$	43,101	$	(19,695	)		(31	)%		8.48	%	(324) bp
200		50,783		(12,012	)		(19	)		9.80		(192) bp
100		57,618		(5,177	)		(8	)		10.92		(80) bp
50		60,544		(2,252	)		(4	)		11.38		(34) bp
0		62,795		—			—			11.72		—   bp
(50)		64,191		1,396			2			11.91		19   bp
(100)		65,158		2,363			4			12.03		31   bp

     As of March 31, 2008, the Company’s NPV was $62.8 million or 11.72% of the market value of assets. Following a 200 basis point increase in interest rates, the Company’s “post shock” NPV would be $50.8 million or 9.80% of the market value of assets. The change in the NPV ratio or the Company’s sensitivity measure was a decline of 192 basis points.

     As of December 31, 2007 the Company’s NPV was $67.0 million or 12.56% of the market value of assets. Following a 200 basis point increase in interest rates, the Company’s “post shock” NPV was $53.1 million or 10.30% of the market value of assets. The change in the NPV ratio, or the Company’s sensitivity measure, was a decline of 226 basis points.

Item 4. Controls and Procedures

     Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods

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specified in the SEC’s rules and regulations and (ii) accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure and that such disclosure controls and procedures are operating in an effective manner.

     No change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II

Item 1. Legal Proceedings

No material changes have occurred in the legal proceedings previously disclosed in Item 3 of the Company’s Form 10-K for the year ended September 30, 2007.

Item 1A. Risk Factors

There were no material changes from the risk factors described in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2007.

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

(a) – (b) Not applicable.

(c) Not applicable. No shares were repurchased by the Company during the quarter.

Item 3. Defaults Upon Senior Securities

Not applicable.

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

Not applicable

Item 5. Other Information

(a) Not applicable

(b) No changes in procedures.

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Item 6. Exhibits

List of Exhibits

Exhibit No	Description
3.1	Amended and Restated Articles of Incorporation of First Keystone Financial, Inc. 1
3.2	Amended and Restated Bylaws of First Keystone Financial, Inc. 1
4.1	Specimen Stock Certificate of First Keystone Financial, Inc. 2
4.2	Instrument defining the rights of security holders **
10.1	Employment Agreement between First Keystone Financial, Inc. and Thomas M. Kelly dated December 1, 2004 3,*
10.2	Severance Agreement between First Keystone Financial, Inc. and Carol Walsh dated December 1, 2004 3,*
10.3	1995 Stock Option Plan 4, *
10.4	1995 Recognition and Retention Plan and Trust Agreement 5,*
10.5	1998 Stock Option Plan 5, *
10.6	Employment Agreement between First Keystone Bank and Thomas M. Kelly dated December 1, 2004 3, *
10.7	Severance Agreement between First Keystone Bank and Carol Walsh dated December 1, 2004 3, *
10.8	First Keystone Bank Supplemental Executive Retirement Plan 6,*
10.9	Amendment No. 1 to the Employment Agreement between First Keystone Financial, Inc. and Thomas M. Kelly 7,*
10.10	Amendment No. 1 to the Employment Agreement between First Keystone Bank and Thomas M. Kelly 7,*
10.11	Transition, Consulting, Noncompetition and Retirement Agreement by and between First Keystone Financial, Inc., First Keystone Bank and Donald S. Guthrie 8,*
10.12	Letter dated December 11, 2006 with respect to appointment to Board 9
10.13	Form of Registration Rights Agreement 10
11	Statement re: computation of per share earnings. See Note 6 to the Consolidated Financial Statements included in Item I of Part I of this Form 10-Q
23.1	Consent of S.R. Snodgrass, A.C.
23.2	Consent of Deloitte & Touche LLP
31.1	Section 302 Certification of Chief Executive Officer
31.2	Section 302 Certification of Chief Financial Officer
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1	Codes of Ethics 11
99.2	Supervisory Agreement between First Keystone Financial, Inc. and the Office of Thrift Supervision dated February 13, 2006. 12
99.3	Supervisory Agreement between First Keystone Bank and the Office of Thrift Supervision dated February 13, 2006. 12

(1)	Incorporated by reference from Exhibit 3.1(with respect to the Articles) and Exhibit 3.2 (with respect to the Bylaws) on Form 8-K filed by the Registrant with the SEC on February 12, 2008.
(2)	Incorporated by reference from the Registration Statement on Form S-1 (Registration No. 33-84824) filed by the Registrant with the SEC on October 6, 1994, as amended.

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(3)	Incorporated by reference from Exhibits 10.5, 10.8, 10.14, and 10.16, respectively, in the Form 8-K filed by the Registrant with the SEC on December 7, 2004 (File No. 000-25328).
(4)	Incorporated by reference from Exhibit 10.9 in the Form 10-K filed by the Registrant with SEC on December 29, 1995 (File No. 000-25328).
(5)	Incorporated from Appendix A of the Registrant’s definitive proxy statement dated December 24, 1998 (File No. 000-25328).
(6)	Incorporated by reference from Exhibit 10.1 in the Form 8-K filed by the Registrant with the SEC on July 2, 2007.
(7)	Incorporated by reference from Exhibits 10.19 and 10.20, respectively, in the Form 8-K filed by the Registrant with the SEC on March 29, 2005.
(8)	Incorporated by reference from Exhibit 10.21 in the Form 8-K filed by the Registrant with the SEC on March 29, 2005.
(9)	Incorporated by reference from Exhibit 10.1 in the Form 8-K filed by the Registrant with the SEC on December 20, 2006.
(10)	Incorporated by reference from Exhibit 10.17 in the Form 10-K for the year ended September 30, 2006 filed by the Registrant with the SEC on December 29, 2006.
(11)	Incorporated by reference from the Form 10-Q for the quarter ended December 31, 2005 filed by the Registrant with the SEC on February 14, 2006.
(12)	Incorporated by reference from Exhibit 99.2 and 99.3 in the Form 10-Q for the quarter ended December 31, 2005 filed by the Registrant with the SEC on February 14, 2006.
(*)	Consists of a management contract or compensatory plan
(**)	The Company has no instruments defining the rights of holders of long-term debt where the amount of securities authorized under such instrument exceeds 10% of the total assets of the Company and its subsidiaries on a consolidated basis. The Company hereby agrees to furnish a copy of any such instrument to the SEC upon request.

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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.

		FIRST KEYSTONE FINANCIAL, INC.
Date: May 9, 2008	By:	/s/ Thomas M. Kelly
		Thomas M. Kelly
		President and Chief Executive Officer
Date: May 9, 2008	By:	/s/ Rose M. DiMarco
		Rose M. DiMarco
		Chief Financial Officer

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