FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20552

(Mark One)

|X|   QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended   September 30, 2004
                               ----------------------

                                       OR

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

For the transition period from ________________ to ________________

Commission File No. 0-23433

                         WAYNE SAVINGS BANCSHARES, INC.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

           Delaware                                             31-1557791
-------------------------------                           ----------------------
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or organization)                            Identification Number)

    151 North Market Street
         Wooster, Ohio                                             44691
    -----------------------                                     ----------
     (Address of principal                                      (Zip Code)
       executive office)

Registrant's telephone number, including area code: (330) 264-5767

Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements for the past
90 days.

Yes |X|                                 No |_|

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)

Yes |_|                                 No |X|

As of November 8, 2004, the latest practicable date, 3,688,057 shares of the
registrant's common stock, $.10 par value, were issued and outstanding.


                                       1
<PAGE>

                         Wayne Savings Bancshares, Inc.

                                      INDEX

                                                                            Page

PART I   -   FINANCIAL INFORMATION

  Item 1     Consolidated Statements of Financial Condition                   3
             Consolidated Statements of Earnings                              4
             Consolidated Statements of Comprehensive Income                  5
             Consolidated Statements of Cash Flows                            6
             Notes to Consolidated Financial Statements                       8

  Item 2     Management's Discussion and Analysis of
             Financial Condition and Results of Operations                   11

  Item 3     Quantitative and Qualitative Disclosures About Market Risk      15

  Item 4     Controls and Procedures                                         19

PART II -    OTHER INFORMATION

  Item 1     Legal Proceedings                                               20

  Item 2     Unregistered Sales of Equity Securities and Use of Proceeds     20

  Item 3     Defaults Upon Senior Securities                                 20

  Item 4     Submission of Matters to a Vote of Security Holders             20

  Item 5     Other Information                                               20

  Item 6     Exhibits and Reports on Form 8-K                                21

SIGNATURES                                                                   22


                                       2
<PAGE>

                         Wayne Savings Bancshares, Inc.

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                        (In thousands, except share data)

<TABLE>
<CAPTION>
                                                                                        September 30,    March 31,
                                                                                                 2004         2004
<S>                                                                                         <C>           <C>
         ASSETS

Cash and due from banks                                                                     $   5,430     $   3,291
Federal funds sold                                                                              8,045         9,875
Interest-bearing deposits in other financial institutions                                       5,296         6,721
                                                                                            ---------     ---------
         Cash and cash equivalents                                                             18,771        19,887

Investment securities available for sale - at market                                           38,433        17,546
Investment securities held to maturity  - at amortized cost, approximate market value
  of $15,124 and $14,830 as of September 30, 2004 and March 31, 2004, respectively             14,084        14,036
Mortgage-backed securities available for sale - at market                                      66,520        83,945
Mortgage-backed securities held to maturity - at cost, approximate market value of
  $3,284 and  $4,510 as of September 30, 2004 and March 31, 2004, respectively                  3,265         4,483
Loans receivable - net                                                                        213,757       205,443
Office premises and equipment - net                                                             9,171         8,742
Real estate acquired through foreclosure                                                          141           100
Federal Home Loan Bank stock - at cost                                                          4,292         4,205
Cash surrender value of life insurance                                                          6,458         6,321
Accrued interest receivable on loans                                                              900           801
Accrued interest receivable on mortgage-backed securities                                         312           400
Accrued interest receivable on investments and interest-bearing deposits                          515           318
Prepaid expenses and other assets                                                               4,899         2,549
Prepaid federal income taxes                                                                       --           231
                                                                                            ---------     ---------
         Total assets                                                                       $ 381,518     $ 369,007
                                                                                            =========     =========
         LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits                                                                                    $ 311,910     $ 291,830
Advances from the Federal Home Loan Bank                                                       25,000        30,000
Advances by borrowers for taxes and insurance                                                     565           617
Accrued interest payable                                                                          206           186
Accounts payable on mortgage loans serviced for others                                             40           118
Other liabilities                                                                               1,103         1,383
Accrued federal income taxes                                                                      183            --
Deferred federal income taxes                                                                     656         1,312
                                                                                            ---------     ---------
         Total liabilities                                                                    339,663       325,446

Commitments                                                                                        --            --

Stockholders' equity
  Common stock (8,000,000 shares of $ .10 par value authorized; 3,907,318 shares
    issued at both September 30, 2004 and March 31, 2004)                                         391           391
  Additional paid-in capital                                                                   34,377        34,365
  Retained earnings - substantially restricted                                                 12,799        12,727
  Shares acquired by Management Recognition Plan                                                 (913)       (1,142)
  Less required contributions for shares acquired by Employee Stock Ownership Plan             (1,380)       (1,456)
  Less 215,584 and 112,500 shares of treasury stock at September 30, 2004 and
    March 31, 2004 - at cost                                                                   (3,565)       (1,803)
  Accumulated other comprehensive income - gain on securities designated as
    available for sale                                                                            146           479
                                                                                            ---------     ---------
         Total stockholders' equity                                                            41,855        43,561
                                                                                            ---------     ---------
         Total liabilities and stockholders' equity                                         $ 381,518     $ 369,007
                                                                                            =========     =========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       3
<PAGE>

                         Wayne Savings Bancshares, Inc.

                       CONSOLIDATED STATEMENTS OF EARNINGS

                        (In thousands, except share data)

<TABLE>
<CAPTION>
                                                                         Six months           Three months
                                                                           ended                  ended
                                                                        September 30,         September 30,
                                                                       2004       2003       2004        2003
<S>                                                                 <C>        <C>        <C>         <C>
Interest income
  Loans                                                             $ 6,394    $ 7,238    $ 3,231     $ 3,513
  Mortgage-backed securities                                          1,168      1,119        573         551
  Investment securities                                                 925        737        505         385
  Interest-bearing deposits and other                                   138        130         72          52
                                                                    -------    -------    -------     -------
         Total interest income                                        8,625      9,224      4,381       4,501

Interest expense
  Deposits                                                            2,695      3,103      1,363       1,491
  Borrowings                                                            539        625        246         305
                                                                    -------    -------    -------     -------
         Total interest expense                                       3,234      3,728      1,609       1,796
                                                                    -------    -------    -------     -------
         Net interest income                                          5,391      5,496      2,772       2,705
Provision for losses on loans                                            30         63         15          31
                                                                    -------    -------    -------     -------
         Net interest income after provision for losses on loans      5,361      5,433      2,757       2,674

Other income
  Gain on sale of loans                                                 142         61        126          24
  Increase in cash surrender value of life insurance                    137        134         66          67
  Service fees, charges and other operating                             619        794        301         388
                                                                    -------    -------    -------     -------
         Total other income                                             898        989        493         479

General, administrative and other expense
  Employee compensation and benefits                                  2,784      2,600      1,436       1,334
  Occupancy and equipment                                               847        741        426         355
  Federal deposit insurance premiums                                     23         24         12          11
  Franchise taxes                                                       297        154        168          77
  Other operating                                                       998        964        538         494
                                                                    -------    -------    -------     -------
         Total general, administrative and other expense              4,949      4,483      2,580       2,271
                                                                    -------    -------    -------     -------
         Earnings before income taxes                                 1,310      1,939        670         882

Federal incomes taxes
  Current                                                                 9        433        602          58
  Deferred                                                              350        162       (421)        211
                                                                    -------    -------    -------     -------
         Total federal income taxes                                     359        595        181         269
                                                                    -------    -------    -------     -------
         NET EARNINGS                                               $   951    $ 1,344    $   489     $   613
                                                                    =======    =======    =======     =======
         EARNINGS PER SHARE
           Basic                                                    $  0.26    $  0.36    $  0.13     $  0.16
                                                                    =======    =======    =======     =======
           Diluted                                                  $  0.26    $  0.36    $  0.13     $  0.16
                                                                    =======    =======    =======     =======
</TABLE>

See accompanying notes to consolidated financial statements.


                                       4
<PAGE>

                         Wayne Savings Bancshares, Inc.

                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                Six months ended      Three months ended
                                                                                  September 30,          September 30,
                                                                                 2004        2003        2004       2003
<S>                                                                           <C>         <C>         <C>        <C>
Net earnings                                                                  $   951     $ 1,344     $   489    $   613

Other comprehensive income (loss), net of tax:
  Unrealized holding gains (losses) on securities, net of taxes (benefits)
    of $(172), $(128), $429 and $(234) during the respective periods             (333)       (248)        832       (454)
                                                                              -------     -------     -------    -------

Comprehensive income                                                          $   618     $ 1,096     $ 1,321    $   159
                                                                              =======     =======     =======    =======

Accumulated other comprehensive income (loss)                                 $   146     $  (400)    $   146    $  (400)
                                                                              =======     =======     =======    =======
</TABLE>

See accompanying notes to consolidated financial statements.


                                       5
<PAGE>

                         Wayne Savings Bancshares, Inc.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                     For the six months ended September 30,
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                                           2004         2003
<S>                                                                                                    <C>          <C>
Cash flows from operating activities:
  Net earnings for the period                                                                          $    951     $  1,344
  Adjustments to reconcile net earnings to net cash
  provided by operating activities:
    Amortization of discounts and premiums on loans,
      investments and mortgage-backed securities - net                                                      711          912
    Amortization of deferred loan origination fees                                                         (134)        (342)
    Depreciation and amortization                                                                           301          261
    Gain on sale of loans                                                                                  (142)         (39)
    Proceeds from sale of loans in the secondary market                                                   2,406        2,529
    Loans originated for sale in the secondary market                                                    (2,355)      (2,329)
    Provision for losses on loans                                                                            30           63
    Federal Home Loan Bank stock dividends                                                                  (87)         (81)
    Increase (decrease) in cash, net of acquisition of Stebbins Bancshares, Inc. due to changes in:
      Accrued interest receivable on loans                                                                  (71)         114
      Accrued interest receivable on mortgage-backed securities                                              88          (34)
      Accrued interest receivable on investments and interest-bearing deposits                             (197)          (4)
      Prepaid expenses and other assets                                                                    (848)        (251)
      Accrued interest payable                                                                                3           18
      Accounts payable on mortgage loans serviced for others                                                (78)         128
      Other liabilities                                                                                    (283)        (445)
      Federal income taxes
        Current                                                                                             414         (202)
        Deferred                                                                                           (350)         162
                                                                                                       --------     --------
          Net cash provided by operating activities                                                         359        1,804

Cash flows provided by investing activities:
  Purchase of investment securities designated as available for sale                                    (10,989)     (13,017)
  Proceeds from maturity of investment securities designated as held to maturity                             25        3,640
  Proceeds from maturity of investment securities designated as available for sale                        1,500       12,523
  Purchase of mortgage-backed securities designated as available for sale                                (3,049)     (37,406)
  Principal repayments on mortgage-backed securities designated as held to maturity                       1,199        3,474
  Principal repayments on mortgage-backed securities designated as available for sale                    19,594       18,366
  Loan principal repayments                                                                              24,951       57,642
  Loan disbursements                                                                                    (20,986)     (42,072)
  Purchase of office premises and equipment - net                                                          (263)         (14)
  Proceeds from sale of real estate acquired through foreclosure                                            100           --
  Increase in cash surrender value of life insurance                                                       (137)        (134)
  Net cash used in the purchase of Stebbins Bancshares, Inc.                                             (1,314)          --
                                                                                                       --------     --------
          Net cash provided by investing activities                                                      10,631        3,002
                                                                                                       --------     --------
          Net cash provided by operating and investing activities
            (balance carried forward)                                                                    10,990        4,806
                                                                                                       --------     --------
</TABLE>


                                       6
<PAGE>

                         Wayne Savings Bancshares, Inc.

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                     For the six months ended September 30,
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                         2004         2003
<S>                                                                                  <C>          <C>
          Net cash provided by operating and investing activities
            (balance brought forward)                                                $ 10,990     $  4,806

Cash flows used in financing activities:
  Net decrease in deposit accounts                                                     (4,730)      (5,290)
  Repayment of Federal Home Loan Bank Advances                                         (5,000)          --
  Advances by borrowers for taxes and insurance                                           (52)         (88)
  Dividends paid on common stock                                                         (879)        (881)
  Proceeds from exercise of stock options                                                  --           61
  Amortization of stock benefit plans                                                     317           --
  Shares acquired by Management Recognition Plan                                           --       (1,142)
  Purchase of treasury shares                                                          (1,762)          --
                                                                                     --------     --------
          Net cash used in financing activities                                       (12,106)      (7,340)
                                                                                     --------     --------

Net decrease in cash and cash equivalents                                              (1,116)      (2,534)

Cash and cash equivalents at beginning of period                                       19,887       17,496
                                                                                     --------     --------

Cash and cash equivalents at end of period                                           $ 18,771     $ 14,962
                                                                                     ========     ========

Supplemental disclosure of cash flow information:
  Cash paid during the period for:
    Federal income taxes                                                             $     --     $    635
                                                                                     ========     ========

    Interest on deposits and borrowings                                              $  3,214     $  3,710
                                                                                     ========     ========

Supplemental disclosure of noncash investing activities:
  Issuance of mortgage loan upon sale of real estate acquired through foreclosure    $     --     $     --
                                                                                     ========     ========

  Transfers from loans to real estate acquired through foreclosure                   $    141     $    179
                                                                                     ========     ========

  Unrealized losses on securities designated as available for sale,
    net of related tax effects                                                       $   (333)    $   (248)
                                                                                     ========     ========

  Recognition of mortgage servicing rights in accordance
    with SFAS No. 140                                                                $     21     $     22
                                                                                     ========     ========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       7
<PAGE>

                         Wayne Savings Bancshares, Inc.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      For the six and three month periods ended September 30, 2004 and 2003

1.    Basis of Presentation
      ---------------------

      The accompanying  unaudited  consolidated financial statements for the six
      and three  months  ended  September  30,  2004 and 2003 were  prepared  in
      accordance  with  instructions  for Form 10-Q and Article 10 of Regulation
      S-X and, therefore,  do not include information or footnotes necessary for
      a complete  presentation of financial position,  results of operations and
      cash flows in conformity with accounting  principles generally accepted in
      the United  States of America.  Accordingly,  these  financial  statements
      should be read in conjunction with the consolidated  financial  statements
      and notes  thereto  of Wayne  Savings  Bancshares,  Inc.  (the  "Company")
      included  in the Annual  Report on Form 10-K for the year ended  March 31,
      2004.

      In the opinion of management,  all adjustments  (consisting only of normal
      recurring  accruals)  which are necessary for a fair  presentation  of the
      unaudited  financial  statements  have  been  included.   The  results  of
      operations  for the three and six month periods  ended  September 30, 2004
      are not  necessarily  indicative  of the results which may be expected for
      the entire fiscal year.

      Critical  Accounting  Policy - The Company's  critical  accounting  policy
      relates to the allowance for losses on loans.  The Company has established
      a systematic  method of  periodically  reviewing the credit quality of the
      loan portfolio in order to establish a sufficient  allowance for losses on
      loans. The allowance for losses on loans is based on management's  current
      judgments about the credit quality of individual loans and segments of the
      loan portfolio. The allowance for losses on loans is established through a
      provision,  and  considers  all known  internal and external  factors that
      affect loan  collectability  as of the reporting  date.  Such  evaluation,
      which included a review of all loans on which full  collectability may not
      be reasonably  assured,  considers among other matters,  the estimated net
      realizable value or the fair value of the underlying collateral,  economic
      conditions,  historical loan loss  experience,  management's  knowledge of
      inherent risks in the portfolio that are probable and reasonably estimable
      and other  factors that warrant  recognition  in providing an  appropriate
      loan  loss  allowance.   Management  has  discussed  the  development  and
      selection of this critical  accounting  policy with the audit committee of
      the Board of Directors.

      Use of Estimates - The  preparation of financial  statements in conformity
      with  accounting  principles  generally  accepted in the United  States of
      America 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 revenues and  expenses  during the  reporting
      period. Actual results could differ from those estimates.

2.    Principles of Consolidation
      ---------------------------

      The accompanying  consolidated  financial statements include Wayne Savings
      Bancshares, Inc. and the Company's wholly-owned subsidiary,  Wayne Savings
      Community  Bank ("Wayne  Savings" or the "Bank").  On September  30, 2003,
      Village  Savings Bank,  F.S.B.  ("Village  Bank") was merged with and into
      Wayne  Savings  Community  Bank to be operated as a branch.  Prior to this
      date,  Village  Bank  was  a  wholly-owned  subsidiary  of  Wayne  Savings
      Community Bank.

      During fiscal 2004, the Company's  Board of Directors  approved a business
      combination,   which  was  completed  in  June  2004,   whereby   Stebbins
      Bancshares,  Inc.,  the parent of Stebbins  National Bank, was merged into
      Wayne Savings Bancshares,  Inc. and Stebbins National Bank merged with and
      into Wayne Savings Community Bank. The business  combination was accounted
      for using the purchase  method of accounting.  Accordingly,  the September
      30, 2004 consolidated  financial statements herein include the accounts of
      Stebbins National Bank from the June 1, 2004 acquisition through September
      30, 2004.


                                       8
<PAGE>

                         Wayne Savings Bancshares, Inc.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      For the six and three month periods ended September 30, 2004 and 2003

2.    Principles of Consolidation (continued)
      ---------------------------

      Wayne  Savings has eleven  banking  locations in Wayne,  Holmes,  Ashland,
      Medina and Stark counties. All significant  intercompany  transactions and
      balances have been eliminated in the consolidation.

3.    Earnings Per Share
      ------------------

      Basic   earnings   per   common   share  is   computed   based   upon  the
      weighted-average  number of common shares  outstanding  during the period,
      less shares in the Company's  Employee Stock  Ownership Plan ("ESOP") that
      are  unallocated  and not committed to be released.  Diluted  earnings per
      common  share  include the  dilutive  effect of all  additional  potential
      common  shares  issuable  under  the  Company's  stock  option  plan.  The
      computations are as follows:

<TABLE>
<CAPTION>
                                             For the six months ended   For the three months ended
                                                   September 30,               September 30,
                                                  2004          2003          2004          2003
<S>                                          <C>           <C>           <C>           <C>
      Weighted-average common shares
        outstanding (basic)                  3,616,294     3,742,188     3,596,303     3,752,400
      Dilutive effect of assumed exercise
        of stock options                        31,175         1,456        29,694         1,574
                                             ---------     ---------     ---------     ---------
      Weighted-average common shares
        outstanding (diluted)                3,647,469     3,743,644     3,625,997     3,753,974
                                             =========     =========     =========     =========
</TABLE>

      At  September  30, 2004 all  outstanding  options were  considered  in the
      diluted earnings per share calculation. Options to purchase 204,081 shares
      of  common  stock  at  a  weighted  average  exercise  price  $13.95  were
      outstanding  at September 30, 2003 but were excluded from the  computation
      of diluted  earnings per share because the exercise price was greater than
      the average market price of the common shares.

4.    Stock Option Plan
      -----------------

      The Company has a 1993  incentive  Stock Option Plan that provided for the
      issuance of 196,390 shares of authorized  common stock, as adjusted,  with
      10,123  options  outstanding  at September 30, 2004.  In fiscal 2004,  the
      Company  adopted a new Stock Option Plan that provided for the issuance of
      142,857 incentive options and 61,224  non-incentive  options of authorized
      common stock.  As of September  30, 2004,  all options under the 2004 Plan
      have  been  granted  and will  expire  in  fiscal  2014  unless  otherwise
      exercised.

      The Company  accounts for its stock option plans in  accordance  with SFAS
      No. 123, "Accounting for Stock-Based  Compensation," which provides a fair
      value-based method for valuing stock-based  compensation that entities may
      use, which measures  compensation cost at the grant date based on the fair
      value of the  award.  Compensation  is then  recognized  over the  service
      period, which is usually the vesting period.  Alternatively,  SFAS No. 123
      permits  entities to  continue  to account  for stock  options and similar
      equity  instruments under Accounting  Principles Board ("APB") Opinion No.
      25, "Accounting for Stock Issued to Employees."  Entities that continue to
      account for stock  options  using APB Opinion No. 25 are  required to make
      pro forma  disclosures  of net earnings and earnings per share,  as if the
      fair  value-based  method of  accounting  defined in SFAS No. 123 had been
      applied.  Management  has  determined  that the Company  will  continue to
      account for stock based  compensation  in accordance  with APB Opinion No.
      25.

      There  were no  options  granted  during  the  three or six  months  ended
      September 30, 2004.  There were 204,081  options  granted during the three
      and six months ended September 30, 2003.


                                       9
<PAGE>

                         Wayne Savings Bancshares, Inc.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      For the six and three month periods ended September 30, 2004 and 2003

4.    Stock Option Plan (continued)
      -----------------

      At September 30, 2004, 50,939 of the stock options granted were subject to
      exercise at the discretion of the grantees and expire in fiscal 2014 while
      the  remaining  options  vest at a rate of 20% annually and will expire in
      fiscal 2014.

      A summary of the status of the Company's  stock option plans as of and for
      the  years  ended  March  31,  2004 and  2003,  and the six  months  ended
      September 30, 2004 is presented below:

<TABLE>
<CAPTION>
                                            Six months ended                    Year ended
                                              September 30,                      March 31,
                                                  2004                  2004                   2003
                                                      Weighted-             Weighted-              Weighted-
                                                      average               average                average
                                                      exercise              exercise               exercise
                                            Shares     price      Shares     price       Shares     price
<S>                                         <C>        <C>        <C>        <C>         <C>        <C>
      Outstanding at beginning of period    214,204    $13.84     28,666     $ 6.26      23,378     $ 3.31
      Granted                                    --        --    204,081      13.95      10,123      11.67
      Exercised                                  --        --    (18,543)      3.31      (4,835)      3.31
      Forfeited                                  --        --         --         --          --         --
                                            -------    ------    -------     ------    --------     ------
      Outstanding at end of period          214,204    $13.84    214,204     $13.84      28,666     $ 6.26
                                            =======    ======    =======     ======    ========     ======
      Options exercisable at period-end      50,939    $13.50     10,123     $11.67      28,666     $ 6.26
                                            =======    ======    =======     ======    ========     ======
      Fair value of options granted                                          $ 3.93                 $ 3.17
                                                                             ======                 ======
</TABLE>

      The following  information applies to options outstanding at September 30,
      2004:

      Number outstanding.......................................          214,204
      Range of exercise prices.................................   $11.67 - 13.95
      Weighted-average exercise price..........................           $13.84
      Weighted-average remaining contractual life..............       8.75 years

      The fair value of  options  granted  has been  based on the Black  Scholes
      pricing model using a dividend yield of 3.3% and 3.8%, expected volatility
      of 28.8%  and  32.4%,  a  risk-free  interest  rate of 4.38% and 3.70% for
      fiscal 2004 and 2003, respectively. All options granted in fiscal 2004 and
      fiscal 2003 have expected lives of ten years.


                                       10
<PAGE>

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

Average Balance Sheet

The  following  tables set forth certain  information  relating to the Company's
average  balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid.  Such yields and costs are  derived by  dividing  income or expense by the
average  balance  of  assets  or  liabilities,  respectively,  for  the  periods
presented.

<TABLE>
<CAPTION>
                                              For the six months ended September 30,
                                  --------------------------------------------------------------
                                               2004                             2003
                                  -----------------------------    -----------------------------
                                   Average              Average     Average              Average
                                   Balance   Interest    Rate       Balance   Interest    Rate
                                   -------   --------   -------     -------   --------   -------
                                                      (Dollars in thousands)
<S>                               <C>         <C>       <C>        <C>         <C>       <C>
Interest-earning assets:
  Loans receivable, net(1)        $211,424    $6,394      6.05%    $219,835    $7,238      6.58%
  Mortgage-backed
    securities(2)                   79,773     1,168      2.93       84,150     1,119      2.66
  Investment securities             47,487       925      3.90       30,726       737      4.80
  Interest-bearing deposits(3)      21,387       138      1.29       19,814       130      1.31
                                  --------    ------               --------    ------
     Total interest-
       earning assets              360,071     8,625      4.79      354,525     9,224      5.20
Non-interest-earning assets         21,171                           14,674
                                  --------                         --------
     Total assets                 $381,242                         $369,199
                                  ========                         ========

Interest-bearing liabilities:
  Deposits                        $307,258     2,695      1.75     $289,750     3,103      2.14
  Borrowings                        26,900       539      4.01       30,000       625      4.17
                                  --------    ------               --------    ------
     Total interest-
       bearing liabilities         334,158     3,234      1.94      319,750     3,728      2.33
                                              ------                           ------
Non-interest bearing
  liabilities                        4,645                            4,209
                                  --------                         --------
     Total liabilities             338,803                          323,959
Stockholders' equity                42,439                           45,240
                                  --------                         --------
     Total liabilities and
       stockholders' equity       $381,242                         $369,199
                                  ========                         ========
Net interest income                           $5,391                           $5,496
                                              ======                           ======
Interest rate spread(4)                                   2.85%                            2.87%
                                                        ======                           ======
Net yield on interest-
  earning assets(5)                                       2.99%                            3.10%
                                                        ======                           ======
Ratio of average interest-
  earning assets to average
  interest-bearing liabilities                          107.75%                          110.88%
                                                        ======                           ======
</TABLE>

----------
See footnotes on following page.


                                       11
<PAGE>

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

Average Balance Sheet (continued)

<TABLE>
<CAPTION>
                                             For the three months ended September 30,
                                  --------------------------------------------------------------
                                               2004                             2003
                                  -----------------------------    -----------------------------
                                   Average              Average     Average              Average
                                   Balance   Interest    Rate       Balance   Interest    Rate
                                   -------   --------   -------     -------   --------   -------
                                                      (Dollars in thousands)
<S>                               <C>         <C>       <C>        <C>         <C>       <C>
Interest-earning assets:
  Loans receivable, net(1)        $214,958    $3,231      6.01%    $215,192    $3,513      6.53%
  Mortgage-backed
    securities(2)                   74,422       573      3.08       87,957       551      2.51
  Investment securities             51,013       505      3.96       34,648       385      4.44
  Interest-bearing deposits(3)      15,286        72      1.88       21,429        52       .97
                                  --------    ------               --------    ------
     Total interest-
       earning assets              355,679     4,381      4.93      359,226     4,501      5.01
Non-interest-earning assets         25,790                            7,001
                                  --------                         --------
     Total assets                 $381,469                         $366,227
                                  ========                         ========

Interest-bearing liabilities:
  Deposits                        $313,544     1,363      1.74     $287,723     1,491      2.07
  Borrowings                        25,000       246      3.94       30,000       305      4.07
                                  --------    ------               --------    ------
     Total interest-
       bearing liabilities         338,544     1,609      1.90      317,723     1,796      2.26
                                              ------                           ------
Non-interest bearing
  liabilities                          690                            3,926
                                  --------                         --------
     Total liabilities             339,234                          321,649
Stockholders' equity                42,235                           44,578
                                  --------                         --------
     Total liabilities and
       stockholders' equity       $381,469                         $366,227
                                  ========                         ========
Net interest income                           $2,772                           $2,705
                                              ======                           ======
Interest rate spread(4)                                   3.03%                            2.75%
                                                        ======                           ======
Net yield on interest-
  earning assets(5)                                       3.12%                            3.01%
                                                        ======                           ======
Ratio of average interest-
  earning assets to average
  interest-bearing liabilities                          105.06%                          113.06%
                                                        ======                           ======
</TABLE>

----------
(1)   Includes non-accrual loan balances.

(2)   Includes mortgage-backed securities designated as available for sale.

(3)   Includes  federal  funds  sold  and  interest-bearing  deposits  in  other
      financial institutions.

(4)   Interest rate spread  represents the difference  between the average yield
      on  interest-earning  assets  and the  average  cost  of  interest-bearing
      liabilities

(5)   Net yield on  interest-earning  assets represents net interest income as a
      percentage of average interest-earning assets.


                                       12
<PAGE>

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Discussion of Financial  Condition  Changes from March 31, 2004 to September 30,
--------------------------------------------------------------------------------
2004
----

At September  30, 2004,  we had total assets of $381.5  million,  an increase of
$12.5  million,  or 3.4%,  from March 31, 2004 levels mainly due to the Stebbins
acquisition of $24.5 million in net assets offset by a decrease in cash to repay
borrowings of $5.0 million and the net purchase of Stebbins of $1.3 million.

Liquid  assets,  consisting of cash,  interest-bearing  deposits and  investment
securities,  increased by $19.8 million, or 38.5%, to $71.3 million at September
30,  2004  mainly  due to $13.0  million  of  liquid  assets  from the  Stebbins
acquisition  and the purchase of $11.0 million in available for sale  investment
securities  offset  by the  maturing  of $1.5  million  of the same  securities.
Mortgage-backed  securities  decreased  by $18.6  million,  or  21.1%,  to $69.8
million as these  securities  continued  to  receive a high  level of  principal
repayments due to the general low interest rate environment.

During the six month period ended September 30, 2004 loans receivable  increased
$8.3  million  as  $12.2  million  of loans  were  acquired  from  the  Stebbins
acquisition.  This increase in loans receivable was offset by loan sales of $2.4
million  consisting  primarily  of  long-term  fixed rate  residential  loans in
furtherance of  management's  interest rate risk strategy.  Rather than reinvest
funds from sales of and  repayments  on loans in  long-term,  fixed rate and low
yielding  residential  loans  during this period of  historically  low  interest
rates,  management has invested in marketable  securities  and  adjustable  rate
commercial  loans.  The composition of the loan portfolio has changed during the
six months due to repayments of $7.9 million in  residential  mortgage loans and
increased originations of nonresidential mortgage loans totaling $6.9 million in
connection with the Bank's increased emphasis on commercial lending.

Nonperforming  and impaired loans of $1.1 at September 30, 2004 consisted mainly
of  residential  mortgage loans as compared with $747,000 in  nonperforming  and
impaired residential mortgage loans at March 31, 2004. The Company generally has
not recognized losses on impaired and nonperforming loans secured by residential
mortgages.  As of September 30, 2004, the Company  reclassified  $1.3 million of
the Stebbins  portfolio as  substandard.  These loans are not delinquent and are
still being reviewed to determine their proper classification.

Deposits at September 30, 2004,  totaled  $311.9  million,  an increase of $20.1
million from $291.8 million at March 31, 2004 due primarily to the $24.8 million
of  deposits  acquired  from the  Stebbins  acquisition,  offset by a decline in
deposits as customers sought alternative investment opportunities due to the low
rate  environment.  The Bank's deposit pricing is very competitive in all market
areas.

Stockholders'  equity  decreased  by $1.7  million  during the six months  ended
September  30, 2004,  due mainly to an  unrealized  loss on  available  for sale
securities  of $333,000 as a result of the recent  increase in rates,  dividends
paid totaling $879,000 and the purchase of treasury stock of $1.8 million. These
amounts  were  offset by  $951,000  in net  earnings  for the six  months  ended
September  30, 2004 and an increase of $317,000 due to the  amortization  of the
stock benefit plans.

Comparison of Operating  Results for the Six Month  Periods Ended  September 30,
--------------------------------------------------------------------------------
2004 and 2003
-------------

General
-------

Net earnings  totaled  $951,000 for the six months ended  September  30, 2004, a
decrease of $393,000, or 29.2%, compared to the net earnings of $1.3 million for
the six months  ended  September  30,  2003.  The  decline in net  earnings  was
primarily  attributable  to a decrease in net interest  income of  $105,000,  or
1.9%, mainly due to the Company's  strategy of maintaining assets with a shorter
average life to protect the Company's interest rate risk position.  These assets
consist  primarily of investment and  mortgage-backed  securities  available for
sale which generally yield less than loans. Although this strategy has adversely
impacted our short-term income, we believe we


                                       13
<PAGE>

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Comparison of Operating  Results for the Six Month  Periods Ended  September 30,
--------------------------------------------------------------------------------
2004 and 2003 (continued)
-------------

General (continued)
-------

are favorably positioned for a rising rate environment.  Secondly,  net earnings
decreased due to a decrease in other income of $91,000,  or 9.2%,  due primarily
to the reduction in merchant fee income  offset with a $81,000  increase in gain
on sale of loans. Finally,  general,  administrative and other expense increased
$466,000,  or 10.4%, due mainly to increased  compensation and benefits expense,
franchise  tax expense and  occupancy  and  equipment  expense.  These  earnings
decreases  were  mainly  offset by a decrease  in federal  income tax expense of
$236,000, or 39.7%.

The Company has maintained  its strategy to  aggressively  manage  interest rate
risk during the period of low interest rates. This strategy  negatively affected
earnings  for the  first six  months of the  fiscal  year.  However,  management
believes that the  investment  of excess funds  primarily in shorter term assets
will help the Company in a rising interest rate environment.

Interest Income
---------------

Interest income decreased $599,000,  or 6.5%, to $8.6 million for the six months
ended September 30, 2004,  compared to the same period in 2003. This decline was
mainly  due  to  an  11  basis  point   reduction   in  the  average   yield  on
interest-earning  assets to 2.99% from 3.10% for the period ended  September 30,
2003.  The  yield  reduction  was  partially  offset  with  an  increase  in the
weighted-average balance of interest-earning assets of $5.5 million, or 1.6%, to
a balance of $360.1 million for the six months ended September 30, 2004 compared
to  the  same  period  in  2003.   This   reduction  in  the  average  yield  on
interest-earning  assets  reflects  a  general  decrease  in market  rates,  the
refinancing  of  higher  rate  loans  and  the  downward  repricing  of  certain
adjustable rate loans. In addition,  as part of its interest rate risk strategy,
the Company invested excess funds in shorter-term  securities available for sale
rather  than  long-term  fixed rate loans.  Although  this  strategy  sacrifices
short-term income since investment  securities  generally yield less than loans,
it  strengthens  the Company's  interest rate position and allows the Company to
redeploy such assets in a rising rate environment.

Interest income on loans declined  $844,000,  or 11.7%, for the six months ended
September  30,  2004,  compared to the same period in 2003,  due  primarily to a
decrease in the weighted average  outstanding  balance of loans period to period
of $8.4 million, or 3.8%, coupled with a 53 basis-point decrease in the weighted
average yield on loans to 6.05% for the 2004 period.

Interest income on mortgage-backed  securities  increased $49,000 during the six
months  ended  September  30,  2004,  compared to the same  period in 2003,  due
primarily  to  a  decline  in  premium  amortization.  The  decline  in  premium
amortization  was due  primarily  to the  decrease in the  prepayments  of these
securities as a result of the prevailing  lower interest rate  environment.  The
weighted  average  balance  decreased  by a $4.4  million,  or  5.2%,  from  the
comparable 2003 period offsetting the aforementioned increase in income.

Interest income on investment securities increased by $188,000, or 25.5%, during
the 2004 period  compared to the same period in 2003,  reflecting an increase in
the weighted  average balance of $16.8 million,  or 54.5%, to $47.5 million from
$30.7 million during the comparable 2003 period,  partially offset by a decrease
in the average yield of 90 basis points to 3.90%.

Interest income on  interest-bearing  deposits increased by $8,000, or 6.2%, for
the six months ended  September  30, 2004,  due  primarily to an increase in the
weighted average balance of $1.6 million,  or 7.9%,  compared to the 2003 period
of $19.8 million.  The increase in the weighted  average balance was offset by a
decline in the  average  yield of 2 basis  points to an  average  yield of 1.29%
compared to 1.31% for the quarter ended September 30, 2003.


                                       14
<PAGE>

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Comparison of Operating  Results for the Six Month  Periods Ended  September 30,
--------------------------------------------------------------------------------
2004 and 2003 (continued)
-------------

Interest Expense
----------------

Interest  expense  for the six months  ended  September  30, 2004  totaled  $3.2
million, a decrease of $494,000,  or 13.3%, compared to interest expense of $3.7
million for the six months ended September 30, 2003. The decrease  resulted from
a 39 basis point  decrease  in the  average  cost of funds to 1.94% for the 2004
period,  offset by an increase in the average balance of deposits and borrowings
outstanding  of $14.4  million,  or 4.5%, to $334.2 million for the period ended
September 30, 2004.

Interest  expense on deposits  totaled  $2.7  million  for the six months  ended
September 30, 2004, a decrease of $408,000,  or 13.1%, from the six months ended
September 30, 2003, as a result of a 39 basis point decrease in the average cost
of deposits  to 1.75% for the 2004  period  offset by an increase in the average
balance  outstanding of $17.5  million,  or 6.0%, to $307.3 million for the 2004
period.

Interest  expense  on  borrowings  totaled  $539,000  for the six  months  ended
September  30,  2004,  a decrease of $86,000,  or 13.8%,  from the 2003  period,
primarily due to a decrease in the average balance of borrowings of $3.1 million
to an average  outstanding  balance of $26.9  million  for the six months  ended
September 30, 2004, coupled with a decrease in the average cost of borrowings to
4.01% from the average cost of 4.17% for the 2003 period.

Net Interest Income
-------------------

Net interest  income totaled $5.4 million for the six months ended September 30,
2004, a decrease of $105,000, or 1.9%, from the six month period ended September
30, 2003. The average interest rate spread decreased to 2.85% for the six months
ended September 30, 2004 from 2.87% for the six months ended September 30, 2003.
The net interest  margin  decreased to 2.99% for the six months ended  September
30, 2004 from 3.10% for the six months ended September 30, 2003.

Provision for Losses on Loans
-----------------------------

The Company  recorded a $30,000  provision for losses on loans for the six month
period ended  September  30, 2004 as compared to $63,000 in 2003. To the best of
management's  knowledge,  all known and  inherent  losses that are  probable and
which can be  reasonably  estimated  have been recorded as of September 30, 2004
and 2003.

Other Income
------------

Other  income,  consisting  primarily  of  the  cash  surrender  value  of  life
insurance,  gains  on sale of  loans,  service  fees,  and  charges  on  deposit
accounts,  decreased by $91,000,  or 9.2%,  to $898,000 for the six months ended
September 30, 2004,  from $989,000 for the six months ended  September 30, 2003.
The  decrease  resulted  primarily  from a decrease of $146,000 in merchant  fee
income  offset  by an  increase  of  $81,000  on the  gain on sale of  loans  in
connection  with  management's   interest  rate  risk  strategy,   as  discussed
previously.  The  Company  recognized  a $44,000  gain on sale of loans from the
disposal of the credit card portfolio.  Management chose to sell the credit card
portfolio  due  to  its  minimal  performance  and  to  avoid  potential  future
chargeoffs.  The  decrease  in  merchant  fee  income  was due to a  significant
transaction  decrease from period to period which the Company may not experience
in future earnings.


                                       15
<PAGE>

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Comparison of Operating  Results for the Six Month  Periods Ended  September 30,
--------------------------------------------------------------------------------
2004 and 2003 (continued)
-------------

General, Administrative, and Other Expense
------------------------------------------

General,  administrative  and other expense increased by $466,000,  or 10.4%, to
$4.9 million for the six months  ended  September  30, 2004  compared to the six
months  ended  September  30,  2003.  The increase  resulted  primarily  from an
increase in employee  compensation and benefits expense of $184,000,  or 7.1%, a
$143,000,  or  92.9%,  increase  in  franchise  taxes and a  $106,000,  or 14.3%
increase  in  occupancy  and  equipment   expense.   The  increase  in  employee
compensation  and  benefits  was  mainly  due  to  the  Stebbins  National  Bank
acquisition and the normal merit increases and increased benefit plan costs. The
increase in franchise  taxes was mainly due to the additional  capital raised in
the full stock  conversion  in January  2003.  The  increase  in  occupancy  and
equipment  expense  was  mainly  due  to  the  new  computer   operating  system
depreciation coupled with the acquisition of Stebbins National Bank.

Federal Income Taxes
--------------------

The  provision  for federal  income  taxes was $359,000 for the six months ended
September  30,  2004,  a decrease of  $236,000,  or 39.7%,  compared to the same
period in 2003,  primarily due to the $629,000,  or 32.4%,  decrease in earnings
before  federal  income  taxes.  The effective tax rate for the six months ended
September 30, 2004,  was 27.4% as compared to 30.7% for the same period in 2003.
The  effective tax rate for the six months ended  September  30, 2004  decreased
mainly due to the  additional  income earned from the purchase of additional tax
advantaged municipal securities and the tax free earnings on the bank owned life
insurance.

Comparison of Operating  Results for the Three Month Periods Ended September 30,
--------------------------------------------------------------------------------
2004 and 2003
-------------

General
-------

Net  earnings  totaled  $489,000  for the quarter  ended  September  30, 2004, a
decrease of $124,000, or 20.2%, compared to the net earnings of $613,000 for the
quarter  ended  September  30, 2003.  The decline in net earnings was  primarily
attributable  to an  increase in general,  administrative  and other  expense of
$309,000,  or 13.6%,  offset  primarily by an increase in net interest income of
$67,000, or 2.5%, and a decrease in federal income taxes of $88,000, or 32.7%.

The Company has maintained  its strategy to  aggressively  manage  interest rate
risk.  This  strategy  negatively  affected  earnings for the three months ended
September 30, 2004.  However,  management believes that the investment of excess
funds  primarily  in  shorter  term  assets  will help the  Company  in a rising
interest rate environment.

Interest Income
---------------

Interest  income  decreased  $120,000,  or 2.7%,  to $4.4  million for the three
months  ended  September  30,  2004,  compared to the same period in 2003.  This
decrease  was mainly due to an 8 basis point  decrease  in the average  yield on
interest-earning  assets to 4.93% from 5.01% for the period ended  September 30,
2003.  The yield  reduction was coupled with a decrease in the  weighted-average
balance of  interest-earning  assets of $3.5  million,  or 1.0%, to a balance of
$355.7 million for the three months ended  September 30, 2004. This reduction in
the average  yield on  interest-earning  assets  reflects a general  decrease in
market rates, the refinancing of higher rate loans and the downward repricing of
certain adjustable rate loans. In addition,  the Company  purposefully  invested
excess funds in shorter-term securities available for sale rather than long-term
fixed rate loans.  Although  this  strategy  sacrifices  short-term  income,  it
strengthens  the  Company's  interest  rate  position  and allows the Company to
redeploy such assets in a rising rate environment.


                                       16
<PAGE>

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Comparison of Operating  Results for the Three Month Periods Ended September 30,
--------------------------------------------------------------------------------
2004 and 2003 (continued)
-------------

Interest Income (continued)
---------------

Interest income on loans declined $282,000,  or 8.0%, for the three months ended
September  30,  2004,  compared to the same period in 2003,  due  primarily to a
decrease in the weighted average  outstanding  balance of loans period to period
of $234,000,  coupled  with a 52  basis-point  decrease in the weighted  average
yield on loans to 6.01% for the 2004 period.

Interest income on mortgage-backed securities increased $22,000 during the three
months  ended  September  30,  2004,  compared to the same  period in 2003,  due
primarily  to the  slowing  of the  record  levels of  prepayments,  offset by a
decrease in the weighted  average balance of $13.5 million,  or 15.4%,  from the
comparable 2003 period.  The slowdown of prepayments  cause the  amortization of
the security  premium to also decrease causing an increase in interest income on
mortgage-backed securities.

Interest income on investment securities increased by $120,000, or 31.2%, during
the 2004 period  compared to the same period in 2003,  reflecting an increase in
the weighted  average balance of $16.4 million,  or 47.2%, to $51.0 million from
$34.6 million during the comparable 2003 period,  partially offset by a decrease
in the average yield of 48 basis points to 3.96%.

Interest income on interest-bearing deposits increased by $20,000, or 38.5%, for
the three months ended  September 30, 2004,  due primarily to an increase in the
average  yield of 91 basis  points to an average  yield of 1.88% from an average
yield of .97% for the quarter ended  September 30, 2003 offset by an decrease in
the weighted  average  balance of $6.1 million,  or 28.7%,  compared to the 2003
period of $21.4 million

Interest Expense
----------------

Interest  expense for the three  months  ended  September  30, 2004 totaled $1.6
million, a decrease of $187,000, or 10.4%, from interest expense of $1.8 million
for the three months ended  September 30, 2003. The decrease  resulted from a 36
basis point  decrease in the average cost of funds to 1.90% for the 2004 period,
offset  by an  increase  in the  average  balance  of  deposits  and  borrowings
outstanding  of $20.8  million,  or 6.6%, to $338.5 million for the period ended
September 30, 2004.

Interest  expense on deposits  totaled  $1.4  million for the three months ended
September  30,  2004,  a decrease of  $128,000,  or 8.6%,  compared to the three
months ended September 30, 2003, as a result of a 33 basis point decrease in the
average  cost of deposits to 1.74% for the 2004 period  offset by an increase in
the average balance outstanding of $25.8 million, or 9.0%, to $313.5 million for
the 2004 period.

Interest  expense on  borrowings  totaled  $246,000  for the three  months ended
September  30,  2004,  a decrease of $59,000,  or 19.3%,  from the 2003  period,
primarily due to a decrease in the average balance of borrowings of $5.0 million
to an average  outstanding  balance of $25.0  million for the three months ended
September 30, 2004, coupled with a decrease in the average cost of borrowings to
3.94% from the average cost of 4.07% for the 2003 period.

Net Interest Income
-------------------

Net interest  income  totaled $2.8 million for the three months ended  September
30,  2004,  an increase of $67,000,  or 2.5%,  from the three month period ended
September 30, 2003. The average  interest rate spread increased to 3.03% for the
three  months  ended  September  30, 2004 from 2.75% for the three  months ended
September  30, 2003.  The net interest  margin  increased to 3.12% for the three
months ended  September 30, 2004 from 3.01% for the three months ended September
30, 2003.


                                       17
<PAGE>

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Comparison of Operating  Results for the Three Month Periods Ended September 30,
--------------------------------------------------------------------------------
2004 and 2003 (continued)
-------------

Provision for Losses on Loans
-----------------------------

The Company recorded a $15,000 provision for losses on loans for the three month
period ended  September  30, 2004 as compared to $31,000 in 2003. To the best of
management's  knowledge,  all known and  inherent  losses that are  probable and
which can be  reasonably  estimated  have been recorded as of September 30, 2004
and 2003.

Other Income
------------

Other  income,  consisting  primarily  of  the  cash  surrender  value  of  life
insurance,  gains  on sale of  loans,  service  fees,  and  charges  on  deposit
accounts,  increased by $14,000, or 2.9%, to $493,000 for the three months ended
September 30, 2004, from $479,000 for the three months ended September 30, 2003.
The increase resulted primarily from an increase of $102,000 on the gain on sale
of loans which included a $44,000 gain on sale of loans from the disposal of the
credit card portfolio. Management chose to sell the credit card portfolio due to
its minimal performance and to avoid potential future charge offs. This increase
was offset  mainly by a decrease  of  $68,000  in  merchant  fee income due to a
significant  decrease  in  transactions  from period to period,  coupled  with a
decrease in loan  servicing  fees of $7,000.  The Company may not experience the
prior levels in future  earnings on merchant fee income and loan  servicing  fee
income due to the significant transaction decreases.

General, Administrative, and Other Expense
------------------------------------------

General,  administrative  and other expense increased by $309,000,  or 13.6%, to
$2.6 million for the three months ended September 30, 2004 compared to the three
months  ended  September  30,  2003.  The increase  resulted  primarily  from an
increase in employee  compensation and benefits expense of $102,000,  or 7.6%, a
$91,000,  or  118.2%,  increase  in  franchise  taxes and a  $71,000,  or 20.0%,
increase  in  occupancy  and  equipment   expense.   The  increase  in  employee
compensation  and  benefits  was  mainly  due  to  the  Stebbins  National  Bank
acquisition and the normal merit increases and increased benefit plan costs. The
increase in franchise  taxes was mainly due to the additional  capital raised in
the full stock  conversion  in January  2003.  The  increase  in  occupancy  and
equipment  expense was mainly due to depreciation of the new computer  operating
system and increased expenses related to the Stebbins National Bank acquisition.

Federal Income Taxes
--------------------

The provision  for federal  income taxes was $181,000 for the three months ended
September 30, 2004, a decrease of $88,000, or 32.7%, compared to the same period
in 2003,  primarily  due to the  $212,000  decrease in earnings  before  federal
income taxes.  The  effective tax rate for the three months ended  September 30,
2004,  was 27.0% as compared to 30.5% for the same period in 2003. The effective
tax rate for the three months ended  September 30, 2004 decreased  mainly due to
the  additional  income  earned from the purchase of additional  tax  advantaged
municipal securities.


                                       18
<PAGE>

ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      There has been no material  change in the Company's  market risk since the
Company's Form 10-K filed with the  Securities  and Exchange  Commission for the
year ended March 31, 2004.

ITEM 4 CONTROLS AND PROCEDURES

      (a) Evaluation of disclosure controls and procedures.

      Under  the  supervision  and  with  the  participation  of  the  Company's
management,  including our Chief Executive Officer and Chief Financial  Officer,
the Company  evaluated  the  effectiveness  of the design and  operation  of its
disclosure  controls and  procedures (as defined in Rule 13a-15(e) and 15d-15(e)
under the  Exchange  Act) as of the end of the period  covered  by this  report.
Based upon that  evaluation,  the Chief  Executive  Officer and Chief  Financial
Officer concluded that, as of the end of the period covered by this report,  the
Company's  disclosure  controls and procedures were effective in timely alerting
them to the material  information  relating to the Company (or our  consolidated
subsidiaries) required to be included in the Company's periodic SEC filings.

      (b) Changes in internal controls.

      There has been no  change  made in the  Company's  internal  control  over
financial reporting during the period covered by this report that has materially
affected,  or is reasonably likely to materially  affect, the Company's internal
control over financial reporting.


                                       19
<PAGE>

                         Wayne Savings Bancshares, Inc.

                                     PART II

ITEM 1.     Legal Proceedings
            -----------------

            Not applicable

ITEM 2.     Unregistered Sales of Equity Securities and Use of Proceeds
            -----------------------------------------------------------

<TABLE>
<CAPTION>
                                                                   Total # of       Maximum # of shares
                                      Total         Average     shares purchased    which may still be
                                   # of shares    price paid     as part of the     purchased as part
            Period                  purchased      per share     announced plan    of the announced plan
            ------                  ---------      ---------      -------------    ---------------------
<S>                                   <C>            <C>             <C>                 <C>
            July 1-31, 2004               --         $   --              --               82,400
            August 1-31, 2004         60,000         $16.55          57,500              185,491
            September 1-30, 2004      21,761         $16.35          21,761              163,730
</TABLE>

            Notes to Table:

            (a)   The  Board of  Directors  of the  Company  authorized  a stock
                  repurchase  program to repurchase 5%, or 195,365 shares of the
                  Company's   outstanding  shares.  This  program  was  publicly
                  announced in a press release issued January 29, 2004.

            (b)   The  stock  repurchase  plan  for  195,365  shares,  or  5% of
                  outstanding  shares,  was  completed  on August 11, 2004 at an
                  average share price of $16.25.

            (c)   The completion of the stock repurchase  program was the result
                  of a block  purchase  of  shares  on  August  11,  2004  which
                  included  2,500  shares in excess of the  amount  required  to
                  complete the program.

            (d)   On August 26,  2004,  the Board of  Directors  of the  Company
                  authorized a new stock repurchase  program to purchase 185,491
                  shares, or 5% of the Company's outstanding shares. This is the
                  only program  currently  in effect.  This program was publicly
                  announced in a press  release  issued  September 2, 2004.  The
                  program has an expiration date of August 26, 2005.

ITEM 3.     Defaults Upon Senior Securities
            -------------------------------

            Not applicable

ITEM 4.     Submission of Matters to a Vote of Security Holders
            ---------------------------------------------------

            On July 22, 2004, the Annual  Meeting of the Company's  Stockholders
            was held.  Three  directors were elected to terms expiring in fiscal
            2007 by the following votes:

                  Russell L. Harpster     For: 3,051,530       Withheld: 221,799
                  Terry A. Gardner        For: 3,188,352       Withheld:  84,977
                  Frederick J. Krum       For: 3,225,321       Withheld:  48,008


                                       20
<PAGE>

                         Wayne Savings Bancshares, Inc.

                               PART II (CONTINUED)

ITEM 4.     Submission of Matters to a Vote of Security Holders (continued)
            ---------------------------------------------------

            Three other matters were submitted to the stockholders for
            ratification, for which the following votes were cast:

            Proposal to amend and restate the 2003 Stock Option Plan.

                  For: 2,101,803        Against: 200,682        Abstain: 37,121

            Proposal to amend and restate of the 2003 Retention and Recognition
            Plan.

                  For: 1,921,486        Against: 370,997        Abstain: 47,123

            Ratification of the appointment of Grant Thornton LLP as independent
            auditors of the Company for the fiscal year ended March 31, 2005.

                  For: 3,220,691        Against: 33,375         Abstain: 19,680

ITEM 5.     Other Information
            -----------------

            Not applicable

ITEM 6.     Exhibits
            --------

                  EX-31.1    Certification of Chief Executive Officer pursuant
                              to Section 302 of the Sarbanes-Oxley Act of 2002,
                              18 U.S.C. Section 1350

                  EX-31.2    Certification of Chief Financial Officer pursuant
                              to Section 302 of the Sarbanes-Oxley Act of 2002,
                              18 U.S.C. Section 1350

                  EX-32      Written Statement of Chief Executive Officer and
                              Chief Financial Officer furnished pursuant to
                              Section 906 of the Sarbanes-Oxley Act of 2002, 18
                              U.S.C. Section 1350


                                       21
<PAGE>

                                   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.


Date:    November 10, 2004                 By:  /s/ Charles C. Finn
       ---------------------                    --------------------------------
                                                Charles C. Finn
                                                Chairman and President


Date:    November 10, 2004                 By:  /s/ Michael C. Anderson
       ---------------------                    --------------------------------
                                                Michael C. Anderson
                                                Chief Financial Officer


                                       22