The following discussion should be read in conjunction with our unaudited condensed consolidated financial statement included elsewhere in this Form 10-Q and with our Annual Report on Form 10-K. The following discussion gives effect to the restatement discussed in Note 10 - Financial Statement Restatement of the notes to the unaudited condensed consolidated financial statements.

Overview. Prudential Bancorp, Inc. of Pennsylvania (the "Company") was formed by Prudential Savings Bank (the "Bank") in connection with the Bank's reorganization into the mutual holding company form of organization. The Company's results of operations are primarily dependent on the results of the Bank, which is a wholly owned subsidiary of the Company. The Company's results of operations depend to a large extent on net interest income, which is the difference between the income earned on its loan and securities portfolios and the cost of funds, which is the interest paid on deposits and borrowings. Results of operations are also affected by our provisions for loan losses, non-interest income and non-interest expense. Non-interest expense principally consists of salaries and employee benefits, office occupancy, depreciation, data processing expense, payroll taxes and other expense. Our results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities. Future changes in applicable laws, regulations or government policies may materially impact our financial condition and results of operations. The Bank is subject to regulation by the Federal Deposit Insurance Corporation ("FDIC") and the Pennsylvania Department of Banking (the "Department"). The Bank's main office is in Philadelphia, Pennsylvania, with six additional banking offices located in Philadelphia and Delaware Counties in Pennsylvania. The Bank's primary business consists of attracting deposits from the general public and using those funds together with borrowings to originate loans and to invest primarily in U.S. Government and agency securities and mortgage-backed securities. In November 2005, the Bank formed PSB Delaware, Inc., a Delaware corporation, as a subsidiary of the Bank. In March 2006, all mortgage-backed securities owned by the Company were transferred to PSB Delaware, Inc. PSB Delaware, Inc.'s. activities are included as part of the consolidated financial statements.

Critical Accounting Policies. In reviewing and understanding financial information for the Company, you are encouraged to read and understand the significant accounting policies used in preparing our financial statements. These policies are described in Note 2 of the Notes to Consolidated Financial Statements included in the Annual Report filed on Form 10-K for the year ended September 30, 2008. The accounting and financial reporting policies of the Company conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. The preparation of the Company's consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Management evaluates these estimates and assumptions on an ongoing basis. The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the period or in future periods.

Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. Subsequent recoveries are added to the allowance. Allowance for loan losses represents management's estimate of probable credit losses known and inherent in the loan portfolio as of the balance sheet date. 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. Management considers such factors as changes in the types and amount of loans in the loan portfolio, historical loss experience, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, estimated losses relating to specifically identified loans, and current economic conditions. This evaluation is inherently subjective as it requires material estimates including, among others, exposure at default, the amount and timing of expected future cash flows on affected loans, value of collateral, estimated losses on our commercial, construction and residential loan portfolios and general amounts for historical loss experience. All of these estimates may be susceptible to significant change.

While management uses the best information available to make loan loss allowance evaluations, adjustments to the allowance may be necessary based on changes in economic and other conditions or changes in accounting guidance. Historically, our estimates of the allowance for loan loss have not required significant adjustments from management's initial estimates. In addition, the Department and the FDIC, as an integral part of their examination processes, periodically review our allowance for loan losses. The Department and the FDIC may require the recognition of adjustments to the allowance for loan losses based on their judgment of information available to them at the time of their examinations. To the extent that actual outcomes differ from management's estimates, additional provisions to the allowance for loan losses may be required that would adversely impact earnings in future periods.

Income Taxes. We also estimate a reserve for deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, and Financial Accounting Standards Board (the "FASB") Interpretation ("FIN") No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109. SFAS No. 109 requires the recording of deferred income taxes that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Management exercises significant judgment in the evaluation of the amount and timing of the recognition of the resulting tax assets and liabilities. The judgments and estimates required for the evaluation are updated based upon changes in business factors and the tax laws. If actual results differ from the assumptions and other considerations used in estimating the amount and timing of tax recognized, there can be no assurance that additional expenses will not be required in future periods. FIN No. 48 prescribes a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The Company recognizes, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the Unaudited Condensed Consolidated Statement of Operations. Assessment of uncertain tax positions under FIN No. 48 requires careful consideration of the technical merits of a position based on management's analysis of tax regulations and interpretations. Significant judgment may be involved in applying the requirements of FIN No. 48.

Fair Value Measurement. The Company adopted SFAS No. 157, Fair Value Measurements, on October 1, 2008 and FASB Staff Position ("FSP") SFAS No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, on September 30, 2008. SFAS No. 157 establishes a framework for measuring fair value. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, emphasizing that fair value is a market-based measurement and not an entity-specific measurement. FSP SFAS No. 157-3 clarifies the application of SFAS No. 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. SFAS No. 157 addresses the valuation techniques used to measure fair value. These valuation techniques include the market approach, income approach and cost approach. The market approach uses prices or relevant information generated by market transactions involving identical or comparable assets or liabilities. The income approach involves converting future amounts to a single present amount. The measurement is valued based on current market expectations about those future amounts. The cost approach is based on the amount that currently would be required to replace the service capacity of the asset.

SFAS No. 157 establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the instrument's fair value measurement. The three levels within the fair value hierarchy are described as follows:

? Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities.

? Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

? Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

The Company measures financial assets and liabilities at fair value in accordance with SFAS No. 157 and FSP SFAS No. 157-3. These measurements involve various valuation techniques and models, which involve inputs that are observable, when available, and include the following significant financial instruments: investment securities available for sale and derivative financial instruments. The following is a summary of valuation techniques utilized by the Company for its significant financial assets and liabilities which are valued on a recurring basis.

Investment securities available for sale. Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated using quoted prices of securities with similar characteristics or discounted cash flows and are classified within Level 2 of the fair value hierarchy. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. At December 31, 2008, the Company's investment in certain non-agency MBS securities were shifted from a Level 2 market value measurement to a Level 3 market value measurement. This Level 3 market value measurement included an internally developed discounted cash flow model combined with using market data points of similar securities with comparable credit ratings in addition to market yield curves with similar maturities in determining the discount rate.

In addition, certain assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The Company measures impaired loans, FHLB stock and loans or bank properties transferred into real estate owned at fair value on a non-recurring basis.

Valuation techniques and models utilized for measuring financial assets and liabilities are reviewed and validated by the Company at least quarterly.

Forward-looking Statements. 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, as amended, and the Securities Exchange Act of 1934, as amended, 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. You 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 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 unless required by law or regulations.

Market Overview. The continued turbulence in the economy and the current financial crisis, which began in mid-2007, resulting in housing-related credit decline, combined with a capital markets liquidity crisis that has affected the liquidity and valuation of many investment vehicles, remains a concern for the Company. The severity of the downturn in the economic conditions deteriorated into a recession during 2008 and which has continued into the beginning of 2009. One of the primary concerns for the Company is the slump in the housing market. While the Philadelphia area has not suffered wholesale declines in the value of residential real estate as have other areas of the country, this downturn has rippled through many parts of the economy, including construction lending and lending to contractors. Such conditions increase our exposure to the risk of non-performance in our construction and commercial loan portfolios. The Company continues to focus on the credit quality of its customers - closely monitoring the financial status of borrowers throughout the Company's markets, gathering information, working on early detection of potential problems, taking pre-emptive steps where necessary and doing the analysis required to maintain adequate reserves. This decline in real estate market values has also led to increases in our allowance for loan losses and loan loss provision.

The decline in real estate market values has caused illiquidity in the financial markets which has led to the devaluation of certain non-agency securities. The Company continues to be impacted by continued pressure in the capital markets with respect to the value of our non agency mortgage-backed securities and collateralized mortgage obligations, leading to the deterioration that the declines in the fair value were other-than-temporary resulting in the occurrence of other -than -temporary impairment charges.

Despite the current market conditions, the Company continues to maintain a strong capital position. The Company determined that it will not participate in the U.S. Department of the Treasury's Capital Purchase Program, intended to provide capital to U.S. financial institutions through the purchase of preferred stock.

The following discussion provides further details on the financial condition and results of operations of the Company at and for the periods ended December 31, 2008.

At December 31, 2008, the Company's total assets were $491.8 million, an increase of $2.3 million from $489.5 million at September 30, 2008. The increase was primarily attributable to increase in net loans receivable of $9.9 million, primarily in one-to-four family residential loans. The increase was partially offset by net repayments in the investment and mortgage-backed securities portfolios.

Total liabilities increased $4.5 million to $425.5 million at December 31, 2008 from $421.1 million at September 30, 2008. The increase was primarily the result of a $10.7 million increase in deposits, primarily in certificates of deposit. The increase was partially offset by a decrease in accounts payable and accrued expenses as $5.0 million was disbursed in fiscal 2009 to fund purchases of investment securities committed in fiscal 2008.

Stockholders' equity decreased by $2.2 million to $66.3 million at December 31, 2008 as compared to $68.5 million at September 30, 2008 primarily due to the net loss of $993,000, the declaration of cash dividends of $535,000, the increase in the net unrealized loss on available for sale securities due to the declines in market values of $498,000 and a decrease of $256,000 related to the adoption of the Emerging Issues Task Force Issue No. 06-10 related to post retirement benefits associated with endorsement split dollar life insurance arrangements.

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2008 AND 2007

Net income. A net loss of $993,000 was recognized for the quarter ended December 31, 2008 as compared to net income of $614,000 for the same period in 2007. The net loss for the period was due to a $2.2 million non-cash other than temporary impairment ("OTTI") charge in connection with the mortgage-backed securities received as a result of the redemption in kind of a mutual fund during fiscal 2008. The net loss for the period was partially offset by an increase in net interest income after provision for loan losses of $760,000.

Net interest income. Net interest income increased $998,000 or 36.1% to $3.8 million for the three months ended December 31, 2008 as compared to $2.8 million for the same three month period in 2007. The increase was due to a $566,000 or 8.5% increase in interest income combined with a $432,000, or 11.1% decrease in interest expense. The increase in interest income resulted primarily from an increase in the average balance of interest-earnings assets of $23.7 million, or 5.2%, to $480.1 million for the three months ended December 31, 2008 as compared to $456.4 million for the same period in 2007. Also contributing to the increase was an 18 basis point increase in the weighted average yield earned on interest-earning assets to 6.02% in the 2008 period. A portion of the increase in yield for the period was due to the acceleration in the accretion rate of discounts created in connection with the earlier purchases of certain mortgage-backed securities as the pre-payment speeds of such securities have increased and the Company is required to "true up" accretion taken through earnings in the quarter ended December 31, 2008 in accordance with the effective yield method of accounting. The decrease in interest expense resulted primarily from a 78 basis point decrease to 3.27% in the weighted average rate paid on interest-bearing liabilities, reflecting the decrease in market rates of interest during the past year, partially offset by a $39.0 million increase in the average balance of interest-bearing liabilities for the three months ended December 31, 2008 as compared to the same period in 2007.

For the quarter ended December 31, 2008, the net interest margin was 3.14%, as compared to 2.43% for the comparable period in 2007. The increase in the interest margin was due to the combined effects of the increase in the yield earned on interest-earning assets and the decrease in the rate paid on interest-bearing liabilities.

Average Balances, Net Interest Income, and Yields Earned and Rates Paid. The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. Average yields and rates have been annualized. Tax-exempt income and yields have not been adjusted to a tax-equivalent basis. All average balances are based on monthly balances. Management does not believe that the monthly averages differ significantly from what the daily averages would be.

                                                                                Three Months
                                                                             Ended December 31,
                                                         2008                                                2007
                                                                                                  (as restated - see note 10)
                                     Average                           Average            Average                             Average
                                     Balance         Interest         Yield/Rate          Balance           Interest         Yield/Rate

                                                                           (Dollars in Thousands)
Interest-earning assets:
Investment securities               $ 130,742      $     1,727               5.28 %    $    172,485       $     2,235               5.18 %
Mortgage-backed securities (3)         92,025            1,756               7.63            54,574               724               5.31
Loans receivable(1)                   249,564            3,727               5.97           220,893             3,635               6.58
Other interest-earning assets
(4)                                     7,743               17               0.88             8,406                67               3.19
Total interest-earning assets         480,074            7,227               6.02           456,358             6,661               5.84
Cash and non-interest-bearing
balances                                3,538                                                 4,034
Other non-interest-earning
assets                                 14,008                                                12,616
Total assets                        $ 497,620                                          $    473,008
Interest-bearing liabilities:
Savings accounts                    $  65,007              442               2.72      $     67,486               376               2.23
Money market deposit and NOW
accounts                               92,465              606               2.62            90,879               800               3.52
Certificates of deposit               221,264            2,109               3.81           193,898             2,316               4.78
Total deposits                        378,736            3,157               3.33           352,263             3,492               3.97
Advances from Federal Home Loan
Bank                                   43,064              303               2.81            30,658               400               5.22
Advances from borrowers for
taxes and insurance                     1,589                2               0.50             1,462                 2               0.55
Total interest-bearing
liabilities                           423,389            3,462               3.27           384,383             3,894               4.05
Non-interest-bearing
liabilities:
Non-interest-bearing demand
accounts                                4,016                                                 4,883
Other liabilities                       2,907                                                 3,122
Total liabilities                     430,312                                               392,388
Stockholders' equity                   67,308                                                81,020
Total liabilities and
Stockholders' equity                $ 497,620                                          $    473,408
Net interest-earning assets         $  56,685                                          $     71,975
Net interest income; interest
rate spread                                        $     3,765               2.75 %                       $     2,767               1.79 %
Net interest margin(2)                                                       3.14 %                                                 2.43 %

Average interest-earning assets
to average
interest-bearing liabilities                            113.39 %                                               118.72 %

(1) Includes non-accrual loans. Calculated net of unamortized deferred fees, undisbursed portion of loans-in-process and allowance for loan losses.

(2) Equals net interest income divided by average interest-earning assets.

(3) The increase in yield of the Company's MBS portfolio is primarily a result of changes in portoflio composition as well as in estimate of prepayment speed assumptions. The Company employs the effective yield method of accounting, which requires retrospective adjustments to the yield on the Company's assets, which in turn directly affects earnings. The Company estimates yield at the time of purchase of each asset. To the extent prepayment speeds assumptions differ from Company's estimates at the time of purchase, the Company is required to adjust the yield on that asset as well as the amortization of premium or discount taken to date on the asset. This cumulative "true up" of the amortization is taken through earnings in the current period.

(4) Yield substantially decreased due to declining federal reserve overnight investment rates over the twelve month period.

Provisions for loan losses. The allowance is maintained at a level sufficient to . . .