UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-Q

(Mark One)

   X     QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
-------  EXCHANGE ACT OF 1934
         For the quarterly period ended June 30, 2005


         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
-------  SECURITIES EXCHANGE ACT OF 1934
         For the transition period from           to
                                         --------    --------

                          COMMISSION FILE NUMBER 1-5735


                        UNION FINANCIAL BANCSHARES, INC.
                        --------------------------------
             (Exact name of Registrant as specified in its Charter)

               Delaware                                  57-1001177
               --------                                  ----------
    (State or other Jurisdiction of                   (I.R.S. Employer
     Incorporation or Organization)                  Identification No.)


                203 West Main Street, Union, South Carolina 29379
                -------------------------------------------------
                    (Address of Principal Executive Offices)

                                 (864) 429-1864
                                 --------------
              (Registrant's telephone number, including area code)

                                 Not Applicable
                                 --------------
              (Former name, former address and former fiscal year,
                          if changed since last report)


Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the  Exchange  Act 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_

The  Corporation had 1,904,368  shares,  $0.01 par value, of common stock issued
and outstanding as of July 27, 2005.


                                       1
<PAGE>



                        UNION FINANCIAL BANCSHARES, INC.

                                      INDEX


Part I.    Financial Information                                           Page
           ---------------------                                           ----

           Item 1.  Consolidated Financial Statements (unaudited)

           Consolidated Balance Sheets as of June 30, 2005
            and December 31, 2004                                             3

           Consolidated Statements of Income for the three and six
            months ended June 30, 2005 and 2004                               4

           Consolidated Statements of Cash Flows for the six
            months ended June 30, 2005 and 2004                               5

           Consolidated Statements of Shareholders' Equity for the
            six months ended June 30, 2005 and 2004                           6

           Notes to Consolidated Financial Statements                      7-10

           Item 2. Management's Discussion and Analysis of Financial
           Condition and Results of Operations                            11-20

           Item 3. Quantitative and Qualitative Disclosures about
           Market Risk                                                    21-22

           Item 4. Controls and Procedures                                   23


Part II.   Other Information
           -----------------

           Item 1. Legal Proceedings                                         24

           Item 2. Unregistered Sales of Equity Securities and Use
           of Proceeds                                                       24

           Item 3. Defaults Upon Senior Securities                           24

           Item 4. Submission of Matters to a Vote of Security Holders       25

           Item 5. Other Information                                         25

           Item 6. Exhibits                                                  25

           Signatures                                                        26


                                       2
<PAGE>

<TABLE>
<CAPTION>
Part 1.  Financial Information
UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2005 (unaudited) and December 31, 2004


                                                                      June 30,      December 31,
ASSETS                                                                  2005            2004
                                                                   --------------  --------------
                                                                       (DOLLARS IN THOUSANDS)

<S>                                                               <C>             <C>
Cash                                                              $        2,942  $        1,586
Short term interest-earning deposits                                       4,253          11,611
                                                                   --------------  --------------
Total cash and cash equivalents                                            7,195          13,197
                                                                   --------------  --------------
Investment and mortgage-backed securities
  Held to maturity                                                         1,625           1,630
  Available for sale                                                     159,082         141,864
                                                                   --------------  --------------
Total investment and mortgage-backed securities                          160,707         143,494
                                                                   --------------  --------------
Loans, net                                                               183,493         171,094
Office properties and equipment, net                                       5,262           5,635
Federal Home Loan Bank Stock, at cost                                      3,966           3,522
Federal Reserve Stock, at cost                                               539             539
Accrued interest receivable                                                2,447           2,068
Intangible assets                                                          3,894           4,212
Cash surrender value of life insurance                                     5,304           5,206
Other assets                                                               2,439           2,631
                                                                   --------------  --------------
TOTAL ASSETS                                                      $      375,246  $      351,598
                                                                   ==============  ==============

LIABILITIES

Deposit accounts                                                  $      235,969  $      227,589
Advances from the Federal Home Loan Bank and other borrowings             72,500          63,500
Securities sold under agreements to repurchase                            29,000          24,000
Floating rate junior subordinated deferrable interest debentures           8,247           8,247
Accrued interest on deposits                                                 488             333
Advances from borrowers for taxes and insurance                              158              40
Other liabilities                                                          2,884           1,870
                                                                   --------------  --------------
TOTAL LIABILITIES                                                        349,246         325,579
                                                                   --------------  --------------

Commitments and contingencies-Note 4

SHAREHOLDERS' EQUITY

Serial preferred stock, no par value, authorized - 500,000 shares,
 issued and outstanding - None                                                --              --
Common stock - $0.01 par value, authorized - 5,000,000 shares,
 issued and outstanding - 1,904,368 shares at 6/30/05 and
 1,957,989 at 12/31/04                                                        19              20
Additional paid-in capital                                                12,212          12,109
Accumulated other comprehensive gain                                         372             109
Retained earnings, substantially restricted                               15,923          15,221
Treasury stock, at cost                                                   (2,526)         (1,440)
                                                                   --------------  --------------
TOTAL SHAREHOLDERS' EQUITY                                                26,000          26,019
                                                                   --------------  --------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                        $      375,246  $      351,598
                                                                   ==============  ==============

See notes to consolidated financial statements.
</TABLE>


                                       3
<PAGE>

<TABLE>
<CAPTION>
UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three and Six Months Ended June 30, 2005 and 2004 (unaudited)

                                                           Three Months Ended       Six Months Ended
                                                          June 30,    June 30,    June 30,    June 30,
                                                            2005        2004        2005        2004
                                                         ----------  ----------  ----------  ----------
                                                            (DOLLARS IN THOUSANDS EXCEPT PER SHARE)
<S>                                                     <C>         <C>         <C>         <C>
Interest Income:
  Loans                                                 $    3,042  $    2,498  $    5,865  $    4,956
  Deposits and federal funds sold                               13           3          71          15
  Mortgage-backed securities                                   356         509         744         979
  Interest and dividends on investment securities            1,297       1,190       2,438       2,292
                                                         ----------  ----------  ----------  ----------
Total Interest Income                                        4,708       4,200       9,118       8,242
                                                         ----------  ----------  ----------  ----------

Interest Expense:
  Deposit accounts                                           1,282         941       2,421       1,920
  Floating rate junior subordinated deferrable interest
   debentures                                                  140         100         267         199
  Advances from the FHLB and other borrowings                  786         743       1,481       1,447
                                                         ----------  ----------  ----------  ----------
Total Interest Expense                                       2,208       1,784       4,169       3,566
                                                         ----------  ----------  ----------  ----------

Net Interest Income                                          2,500       2,416       4,949       4,676
  Provision for loan losses                                    341         250         548         385
                                                         ----------  ----------  ----------  ----------
Net Interest Income After
  Provision for Loan Losses                                  2,159       2,166       4,401       4,291
                                                         ----------  ----------  ----------  ----------

Non-Interest Income:
  Fees for financial services                                  646         634       1,189       1,209
  Other fees                                                    15          17          29          33
  Net gain on sale of loans                                     15           6          26          43
  Net gain (loss) on sale of investments                        (3)         --           6          --
                                                         ----------  ----------  ----------  ----------
Total Non-Interest Income                                      673         657       1,250       1,285
                                                         ----------  ----------  ----------  ----------

Non-Interest Expense:
  Compensation and employee benefits                           983         959       1,998       1,974
  Occupancy and equipment                                      522         515       1,031       1,023
  Deposit insurance premiums                                     9           8          17          16
  Professional services                                        102          82         189         159
  Advertising/Public relations                                  23          45          61          82
  Loan operations                                               35          35          77          62
  Deposit premium intangible                                   159         159         318         318
  Items processing                                              29          59          61         124
  Telephone                                                     38          39          84          77
  Other                                                        190         186         356         333
                                                         ----------  ----------  ----------  ----------
Total Non-Interest Expense                                   2,090       2,087       4,192       4,168
                                                         ----------  ----------  ----------  ----------

Income Before Income Taxes                                     742         736       1,459       1,408
Income tax expense                                             193         188         371         351
                                                         ----------  ----------  ----------  ----------
Net Income                                              $      549  $      548  $    1,088  $    1,057
                                                         ==========  ==========  ==========  ==========

Basic Net Income Per Common Share                       $     0.29  $     0.28  $     0.57  $     0.54
                                                         ==========  ==========  ==========  ==========

Diluted Net Income Per Common Share                     $     0.28  $     0.27  $     0.55  $     0.51
                                                         ==========  ==========  ==========  ==========

Weighted Average Number of Common Shares Outstanding


Basic                                                    1,907,551   1,949,950   1,918,190   1,958,255

Diluted                                                  1,970,142   2,045,549   1,981,012   2,062,495

See notes to consolidated financial statements.
</TABLE>


                                       4
<PAGE>
UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2005 and 2004 (unaudited)

                                                           Six Months Ended
                                                        June 30,      June 30,
                                                          2005          2004
                                                      ------------  ------------
                                                            (IN THOUSANDS)

OPERATING ACTIVITIES:

Net income                                                 $1,088        $1,057
Adjustments to reconcile net income to
  net cash provided by operating activities:
   Provision for loan losses                                  548           385
   Amortization of intangibles                                318           318
   Depreciation expense                                       467           482
   Recognition of deferred income, net of costs              (184)         (165)
   Deferral of fee income, net of costs                       173           191
   Changes in operating assets and liabilities:
   Increase in accrued interest receivable                   (379)         (530)
   (Increase) decrease in other assets                        148        (1,113)
   Increase in other liabilities                            1,132         1,794
   Increase in accrued interest payable                       155            68
                                                      ------------  ------------

Net cash provided by operating activities                   3,466         2,487
                                                      ------------  ------------

INVESTING ACTIVITIES:

Purchase of investment and mortgage-backed securities:
   Available for sale                                     (41,373)      (89,114)
   Held to maturity                                        (3,576)           --
Proceeds from sale of investment and mortgage-
backed securities                                          10,911            --
Proceeds from maturity of investment and mortgage-
backed securities:
   Available for sale                                      12,073        41,359
   Held to maturity                                         3,000            --
Principal repayments on mortgage-backed securities:
   Available for sale                                       2,015         9,990
Net increase in loans                                     (12,990)       (8,433)
Purchase of FHLB stock                                       (444)           --
Redemption of FHLB stock                                       --           712
Purchase of office properties and equipment                   (94)          (93)
                                                      ------------  ------------

Net cash used by investing activities                     (30,478)      (45,579)
                                                      ------------  ------------

FINANCING ACTIVITIES:

Proceeds from the dividend reinvestment plan                   52            57
Dividends paid in cash ($0.20 per share -2005
and $0.20 per share - 2004)                                  (387)         (392)
Proceeds from the exercise of stock options                    51            30
Share repurchase program                                   (1,086)         (510)
Proceeds from term borrowings                              14,000        18,750
Increase in deposit accounts                                8,380         3,740
                                                      ------------  ------------

Net cash  provided by financing activities                 21,010        21,675
                                                      ------------  ------------

NET DECREASE IN CASH AND CASH EQUIVALENTS                  (6,002)      (21,417)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD           13,197        28,702
                                                      ------------  ------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                 $7,195        $7,285
                                                      ============  ============

SUPPLEMENTAL DISCLOSURES:

Cash paid for:
   Income taxes                                              $515          $120
   Interest                                                 4,014         3,498

Non-cash transactions:
   Loans foreclosed                                           $54          $647

See notes to consolidated financial statements.


                                       5
<PAGE>
<TABLE>
<CAPTION>
UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Six Months Ended June 30, 2005 and 2004 (unaudited)


                                                                                  Retained     Accumulated
                                                                     Additional   Earnings,       Other     Treasury    Total
                                                        Common Stock   Paid-in  Substantially Comprehensive   Stock  Shareholders'
                                                Shares     Amount      Capital   Restricted      Income      At Cost    Equity
                                             ------------------------------------------------------------------------------------
                                               (Dollars in Thousands,
                                                 Except Share Data)
<S>                                          <C>            <C>      <C>          <C>              <C>       <C>        <C>
BALANCE AT DECEMBER 31, 2003                   1,969,770     $20      $11,906      $13,848          $99       ($366)     $25,507

Net income                                                                           1,057                                 1,057

  Other comprehensive income
    Unrealized losses on securities:
      Unrealized holding losses arising
      during period                                                                              (2,135)                  (2,135)
                                                                                              ---------                ---------
  Comprehensive loss                                                                                                      (1,078)

Stock option activity                              4,248                   30                                                 30

Dividend reinvestment plan contributions           3,455                   57                                                 57

Share repurchase program                         (29,364)                                                      (510)        (510)

Cash dividend ($.20 per share)                                                        (392)                                 (392)

                                             ------------------------------------------------------------------------------------

BALANCE AT JUNE 30, 2004                       1,948,109     $20      $11,993      $14,513      ($2,036)      ($876)     $23,614
                                             ====================================================================================

BALANCE AT DECEMBER 31, 2004                   1,957,989     $20      $12,109      $15,221         $109     ($1,440)     $26,019

Net income                                                                           1,088                                 1,088

  Other comprehensive income, net of tax
    Unrealized holding gains arising during
    period                                                                                          257                      257
      Less reclassification adjustment for
      gains included in net income                                                                    6                        6
                                                                                              ---------                ---------
  Comprehensive income                                                                                                     1,351

Stock option activity                              7,246                   51                                                 51

Dividend reinvestment plan contributions           3,101                   52                                                 52

Share repurchase program                         (63,968)     (1)                        1                   (1,086)      (1,086)

Cash dividend ($.20 per share)                                                        (387)                                 (387)

                                             ------------------------------------------------------------------------------------

BALANCE AT JUNE 30, 2005                       1,904,368     $19      $12,212      $15,923         $372     ($2,526)     $26,000
                                             ====================================================================================
</TABLE>


                                       6
<PAGE>


                        UNION FINANCIAL BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

1.   Presentation of Consolidated Financial Statements
     -------------------------------------------------

     The  accompanying  unaudited  consolidated  financial  statements  of Union
     Financial  Bancshares,  Inc. (the  "Corporation" or "Union Financial") were
     prepared in accordance with instructions for Form 10-Q and,  therefore,  do
     not  include  all  disclosures  necessary  for a complete  presentation  of
     consolidated financial condition,  results of operations, and cash flows in
     conformity  with  accounting  principles  generally  accepted in the United
     States of America.  However,  all adjustments  which are, in the opinion of
     management, necessary for the fair presentation of the interim consolidated
     financial  statements  have been included.  All such  adjustments  are of a
     normal and recurring  nature.  The results of operations for the six months
     ended June 30, 2005 are not necessarily indicative of the results which may
     be expected  for the entire  calendar  year.  Certain  amounts in the prior
     year's financial  statements have been reclassified to conform with current
     year classifications.

     Recently Issued Accounting Standards

     The  following  is a summary of recent  authoritative  pronouncements  that
     affect accounting,  reporting,  and disclosure of financial  information by
     the Corporation:

     In December 2004, the Financial  Accounting Standards Board ("FASB") issued
     Statement  of  Financial  Accounting  Standards  ("SFAS")  No. 123 (revised
     2004),  "Share-Based  Payment" ("SFAS No. 123(R))").  SFAS No. 123(R)) will
     require companies to measure all employee  stock-based  compensation awards
     using  a fair  value  method  and  record  such  expense  in its  financial
     statements.  In  addition,  the  adoption  of  SFAS  No.  123(R))  requires
     additional  accounting  and  disclosure  related to the income tax and cash
     flow effects  resulting from  share-based  payment  arrangements.  SFAS No.
     123(R)) is  effective  beginning as of the first  annual  reporting  period
     beginning after June 15, 2005. The Corporation is currently  evaluating the
     impact that the  adoption of SFAS No.  123(R))  will have on its  financial
     position,  results of operations and cash flows.  The cumulative  effect of
     adoption,  if any,  will be measured  and  recognized  in the  statement of
     income on the date of adoption.

     In  November  2003,  the  Emerging  Issues  Task Force  ("EITF")  reached a
     consensus that certain  quantitative and qualitative  disclosures should be
     required for debt and marketable equity securities  classified as available
     for sale or held to  maturity  under SFAS No. 115 and SFAS No. 124 that are
     impaired  at the  balance  sheet  date but for  which  other-than-temporary
     impairment has not been recognized.  Accordingly,  the EITF issued EITF No.
     03-1, "The Meaning of  Other-Than-Temporary  Impairment and Its Application
     to Certain  Investments."  This issue  addresses the meaning of other-than-
     temporary  impairment  and its  application  to  investments  classified as
     either  available  for sale or held to  maturity  under  SFAS  No.  115 and


                                       7
<PAGE>

     provides  guidance  on  quantitative  and  qualitative   disclosures.   The
     disclosure  requirements  of  EITF  No.  03-1  were  effective  for  annual
     financial  statements  for fiscal years  ending  after June 15,  2004.  The
     effective date for the  measurement  and  recognition  guidance of EITF No.
     03-1 has been delayed. The FASB staff has issued a proposed  Board-directed
     FASB Staff Position ("FSP"), FSP EITF 03-1-a,  "Implementation Guidance for
     the  Application of Paragraph 16 of Issue No. 03-1." The proposed FSP would
     provide  implementation  guidance with respect to debt  securities that are
     impaired  solely due to interest  rates and/or sector  spreads and analyzed
     for  other-than-temporary  impairment under the measurement and recognition
     requirements  of EITF No.  03-1.  The delay of the  effective  date for the
     measurement  and  recognition   requirements  of  EITF  No.  03-1  will  be
     superseded concurrent with the final issuance of FSP EITF 03-1-a.  Adopting
     the  disclosure  provisions of EITF No. 03-1 did not have any impact on the
     Corporation's financial position or results of operations.

     Additional  accounting  standards  that have been issued or proposed by the
     FASB or other standards-setting bodies that do not require adoption until a
     future date are not expected to have a material impact on the  consolidated
     financial statements upon adoption.

2.   Income Per Share
     ----------------

     Basic income per share  amounts for the three and six months ended June 30,
     2005 and 2004 were computed based on the weighted  average number of common
     shares outstanding during the period.  Diluted income per share adjusts for
     the dilutive effect of outstanding common stock options during the periods.

3.   Assets Pledged
     --------------

     Approximately  $81,571,000  and  $62,396,000 of debt securities at June 30,
     2005 and  December  31,  2004,  respectively,  were  pledged  by  Provident
     Community  Bank,  N.A. (the "Bank") as collateral to secure deposits of the
     State of South  Carolina,  and Union,  Laurens and York counties.  The Bank
     pledges  as  collateral  for  Federal  Home Loan Bank  advances  the Bank's
     Federal  Home Loan Bank  stock and has  entered  into a blanket  collateral
     agreement with the Federal Home Loan Bank whereby the Bank maintains,  free
     of other  encumbrances,  qualifying  mortgages  (as  defined)  with  unpaid
     principal balances equal to, when discounted at 75% of the unpaid principal
     balances,  100% of total advances.  The Bank will also pledge securities to
     cover  additional  advances from the Federal Home Loan Bank that exceed the
     qualifying  mortgages  balance  along with security  repurchase  lines with
     various brokerage houses.


                                       8
<PAGE>

4.   Contingencies and Loan Commitments
     ----------------------------------

     In the  ordinary  course  of  business,  the  Bank  enters  into  financial
     instruments with  off-balance-sheet risk to meet the financing needs of its
     customers.  These  instruments  expose the Bank to credit risk in excess of
     the amount recognized on the balance sheet.

     The Bank's  exposure to credit loss in the event of  nonperformance  by the
     other party to the financial instrument for commitments to extend credit is
     represented by the contractual amount of those  instruments.  The Bank uses
     the same credit policies in making commitments and conditional  obligations
     as it does for on-balance-sheet instruments.  Total credit exposure at June
     30, 2005 related to these items is summarized below:

     Loan Commitments:                                      Contract Amount
     ----------------                                       ---------------

         Approved loan commitments                           $   1,557,000
         Unadvanced portions of loans and credit lines          39,089,000
                                                                ----------
         Total loan commitments                              $  40,646,000
                                                                ==========

     Loan  commitments  to extend credit are agreements to lend to a customer as
     long as there is no violation of any condition established in the contract.
     Loan commitments generally have fixed expiration dates or other termination
     clauses  and  may  require  payment  of a  fee.  The  Bank  evaluates  each
     customer's   creditworthiness  on  a  case-by-case  basis.  The  amount  of
     collateral  obtained  upon  extension  of credit  is based on  management's
     credit  evaluation  of the  counter  party.  Collateral  held is  primarily
     residential and commercial property.

     Commitments  outstanding at June 30, 2005 consisted of fixed and adjustable
     rate loans at rates  ranging  from 5.0% to 6.5%.  Commitments  to originate
     loans generally expire within 30 to 60 days.

     Commitments to fund credit lines (principally variable rate, consumer lines
     secured by real  estate and  overdraft  protection)  totaled  approximately
     $86,147,000 at June 30, 2005. Of these lines, the outstanding loan balances
     totaled approximately $47,058,000.

5.   Floating Rate Junior Subordinated Deferrable Interest Debentures
     ----------------------------------------------------------------

     On December 18, 2001, the Trust issued  $8,000,000 of floating rate capital
     securities  through  a pooled  trust  preferred  securities  offering.  The
     proceeds from this issuance,  along with the Corporation's $247,000 capital
     contribution  for the  Trust's  common  securities,  were  used to  acquire
     $8,247,000  aggregate  principal amount of the Corporation's  floating rate
     junior  subordinated  deferrable  interest debentures due December 18, 2031
     (the  "Debentures"),  which  constitute  the sole asset of the  Trust.  The
     interest rate on the Debentures and the capital  securities is variable and
     adjustable  quarterly at 3.60% over the  three-month  LIBOR.  A rate cap of
     12.50% is effective through December 18, 2006. The Corporation has, through
     the Trust Agreement  establishing the Trust, the Guarantee  Agreement,  the
     notes and the related  Debentures,  taken together,  fully  irrevocably and
     unconditionally guaranteed all of the Trust's obligations under the capital
     securities.


                                       9
<PAGE>

     A summary of the Trust securities issued and outstanding follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
                             Amount Outstanding
                                 at June 30,
                                                                                                  Distribution
                                                              Prepayment                            Payment
                                                              Option Date         Maturity         Frequency
---------------------------------------------------------------------------------------------------------------
         Name                2005         2004     Rate
---------------------------------------------------------------------------------------------------------------
<S>                      <C>          <C>          <C>     <C>                 <C>                  <C>
---------------------------------------------------------------------------------------------------------------
 Union Financial
 Statutory Trust I       $8,000,000   $8,000,000   6.64%   December 18, 2006   December 18, 2031    Quarterly
---------------------------------------------------------------------------------------------------------------
</TABLE>

     The stated  maturity of the  Debentures  is December 18, 2031. In addition,
     the  Debentures  are  subject  to  redemption  at par at the  option of the
     Corporation,  subject to prior regulatory approval,  in whole or in part on
     any interest  payment date after December 18, 2006. The Debentures are also
     subject to redemption prior to December 18, 2006 at 107.5% of par after the
     occurrence  of certain  events that would either have a negative tax effect
     on the Trust or the  Corporation or would result in the Trust being treated
     as an  investment  company  that is  required  to be  registered  under the
     Investment Company Act of 1940.

     The  Corporation  has the right,  at one or more times,  to defer  interest
     payments on the Debentures for up to twenty consecutive  quarterly periods.
     During  any  deferral  period,  each  installment  of  interest  that would
     otherwise have been due and payable will bear  additional  interest (to the
     extent  payment  of such  interest  would be  legally  enforceable)  at the
     applicable  distribution rate, compounded quarterly.  Additionally,  during
     any deferral  period,  the Corporation will be prohibited from declaring or
     paying cash dividends on its common stock.








                                       10
<PAGE>

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

     Forward-Looking Statements
     --------------------------

     Management's  discussion and analysis of financial condition and results of
     operations  and  other  portions  of this  Form  10-Q may  contain  certain
     "forward-looking  statements"  concerning  the  future  operations  of  the
     Corporation and the Bank.  These  forward-looking  statements are generally
     identified  by  the  use  of  the  words  "believe,"   "expect,"  "intend,"
     "anticipate,"  "estimate,"  "project," or similar  expressions.  Management
     intends to take  advantage  of the safe  harbor  provisions  of the Private
     Securities  Litigation  Reform Act of 1995 and is including  this statement
     for the express  purpose of availing the  Corporation of the protections of
     such safe harbor with respect to all forward-looking  statements  contained
     in this  report  to  describe  future  plans and  strategies.  Management's
     ability to predict  results or the effect of future plans or  strategies is
     inherently  uncertain.  Factors which could effect actual  results  include
     interest rate trends, the general economic climate in the Corporation's and
     the  Bank's  market  area and the  country as a whole,  the  ability of the
     Corporation  and the  Bank  to  control  costs  and  expenses,  competitive
     products and pricing,  loan  delinquency  rates, and changes in federal and
     state  regulation.  These factors  should be  considered in evaluating  the
     forward-looking statements, and undue reliance should not be placed on such
     statements.

     Financial Condition
     -------------------

     Assets
     ------

     Total  assets  of the  Corporation  increased  $23,648,000,  or  6.73%,  to
     $375,246,000  at June 30,  2005 from  $351,598,000  at December  31,  2004.
     Investment   and   mortgage-backed   securities   increased   approximately
     $17,213,000, or 12.00%, from December 31, 2004 to June 30, 2005, due to the
     purchase of shorter-term agency securities.

     Loans  increased  $12,399,000,  or 7.25%, to $183,493,000 at June 30, 2005.
     The Corporation  continues to focus on consumer and commercial lending with
     reduced  emphasis on residential  fixed rate mortgage  loans.  Consumer and
     commercial loans outstanding during this period increased  $15,895,000,  or
     14.52%,  while outstanding  residential mortgage loans decreased $2,063,000
     or 3.32%.  Short term interest earning deposits  decreased  $7,358,000,  or
     63.37%,  to  $4,253,000,  from December 31, 2004 to June 30, 2005, as these
     deposits  were used to fund growth in loans and  investments.  Other assets
     decreased $192,000, or 7.30%, to $2,439,000, from December 31, 2004 to June
     30,  2005,  due to a decrease in a net  deferred  tax  receivable  that was
     related to the mark to market  adjustment  for  investments  available  for
     sale.


                                       11
<PAGE>

     Liabilities
     -----------

     Total liabilities increased $23,667,000,  or 7.27%, to $349,246,000 at June
     30,  2005 from  $325,579,000  at  December  31,  2004.  Deposits  increased
     $8,380,000, or 3.68%, to $235,969,000 at June 30, 2005 from $227,589,000 at
     December 31, 2004.  The increase was due  primarily to growth in lower cost
     demand accounts partially offset by a reduction in higher cost certificates
     of deposit accounts.  The Corporation continues to target lower cost demand
     deposit accounts through media advertising  versus  traditional higher cost
     certificates of deposits.

     Borrowings from the Federal Home Loan Bank "FHLB" increased $9,000,000,  or
     14.17%,  to $72,500,000  at June 30, 2005 from  $63,500,000 at December 31,
     2004. Securities sold under agreement to repurchase increased $5,000,000 to
     $29,000,000  at June 30, 2005 from  $24,000,000  at December 31, 2004.  The
     increases in  borrowings  were utilized to fund  additional  growth for the
     Corporation.  Other liabilities  increased $1,014,000 to $2,884,000 at June
     30, 2005 from $1,870,000 at December 31, 2004, due primarily to an increase
     in outstanding loan fundings.

     Shareholders' Equity
     --------------------

     Shareholders'  equity decreased  $19,000,  or 0.07%, to $26,000,000 at June
     30, 2005 from  $26,019,000  at December 31, 2004 due to the  repurchase  of
     63,968  shares at a cost of $1,086,000  and dividend  payments of $0.20 per
     share at a cost of  $387,000,  offset  by net  income of  $1,088,000  and a
     $257,000 increase in unrealized gains on securities available for sale.

     Liquidity
     ---------

     Liquidity  is the  ability to meet demand for loan  disbursements,  deposit
     withdrawals,  repayment of debt,  payment of interest on deposits and other
     operating  expenses.  The primary  sources of liquidity are deposits,  loan
     repayments, borrowings, maturity of securities and interest payments.

     While  maturities  and scheduled  amortization  of loans and securities are
     predictable sources of funds, deposit outflows and mortgage prepayments are
     greatly  influenced by general  interest  rates,  economic  conditions  and
     competition.  The primary  investing  activities of the Corporation are the
     origination  of  commercial  and  consumer  loans,   and  the  purchase  of
     investment,  municipal and mortgage-backed securities. These activities are
     funded primarily by principal and interest payments on loans and investment
     securities,  deposit growth, securities sold under agreements to repurchase
     and the utilization of FHLB advances.

     During  the  six  months  ended  June  30,  2005,  the  Corporation's  loan
     originations  totaled  $31,994,000.  At June 30,  2005,  the  Corporation's
     investment in agency and mortgage-backed  securities totaled  $160,707,000,
     nearly all of which is available for sale.


                                       12
<PAGE>

     Additionally,  outstanding loan commitments  (including commitments to fund
     credit  lines)  totaled  $40,646,000  at June 30, 2005.  Management  of the
     Corporation  anticipates  that it will have  sufficient  funds available to
     meet its current loan commitments.

     At June 30,  2005,  the  undisbursed  portion  of  construction  loans  was
     $2,922,000 and the unused portion of credit lines was $36,167,000.  Funding
     for these  commitments is expected to be provided from  deposits,  loan and
     mortgage-backed  securities principal repayments,  maturing investments and
     income generated from operations.

     During  the six  months  ended  June 30,  2005,  total  deposits  increased
     $8,380,000.  The Corporation  closely monitors its liquidity  position on a
     daily basis.  Certificates of deposit, which are scheduled to mature in one
     year or less from  June 30,  2005,  totaled  $83,809,000.  The  Corporation
     relies primarily on competitive rates,  customer service, and long-standing
     relationships  with  customers to retain  deposits.  From time to time, the
     Corporation  will also offer special  products to its customers to increase
     retention  and to  attract  new  deposits.  Based  upon  the  Corporation's
     experience  with  deposit  retention  and  current  retention   strategies,
     management  believes  that,  although it is not possible to predict  future
     terms and conditions upon renewal,  a significant  portion of such deposits
     will remain with the Corporation.  If the Corporation requires funds beyond
     its ability to generate them  internally,  additional  sources of funds are
     available  through FHLB advances and  securities  sold under  agreements to
     repurchase.  At June 30, 2005,  the  Corporation  had  $72,500,000  of FHLB
     borrowings  and  $29,000,000  of  securities   sold  under   agreements  to
     repurchase.  At June 30, 2005, the Corporation had unused  short-term lines
     of  credit  to  purchase   federal  funds  from  unrelated  banks  totaling
     $29,000,000.  The lines of credit are  available on a one-to-ten  day basis
     for general purposes of the  Corporation.  All of the lenders have reserved
     the right to withdraw these lines at their option.

     Capital Management
     ------------------

     The Bank and the  Corporation  are  subject to various  regulatory  capital
     requirements  administered by banking  regulators.  Failure to meet minimum
     capital   requirements  can  initiate  certain  mandatory  -  and  possibly
     additional discretionary - actions by regulators that, if undertaken, could
     have a direct material effect on the Corporation's  consolidated  financial
     statements.  Under capital adequacy guidelines and the regulatory framework
     for  prompt  corrective   action,  the  Bank  must  meet  specific  capital
     guidelines  that  involve  quantitative  measures  of  the  Bank's  assets,
     liabilities,  and  certain  off-balance-sheet  items  as  calculated  under
     regulatory   accounting   practices.   The  Bank's   capital   amounts  and
     classifications are also subject to qualitative judgments by the regulators
     about components, risk weightings and other factors.

     Quantitative measures established by regulations to ensure capital adequacy
     require the Bank and the Corporation to maintain minimum amounts and ratios
     of total and Tier 1 capital to risk-weighted  assets, and of Tier 1 capital
     to average assets (as defined in the regulations).  Management believes, as
     of June  30,  2005,  that the Bank  and the  Corporation  meet the  capital
     adequacy requirements to which they are subject.


                                       13
<PAGE>

     As of June 30, 2005, the Bank was "well  capitalized"  under the regulatory
     framework  for  prompt   corrective  action  based  on  its  capital  ratio
     calculations.  In order to be "well  capitalized",  the Bank must  maintain
     minimum total risk-based,  Tier 1 risk-based, and Tier 1 leverage ratios as
     set forth in the following table.  Under present  regulations of the Office
     of the  Comptroller  of the  Currency,  the Bank  must  have  core  capital
     (leverage  requirement)  equal to 4.0% of  assets,  of which  1.5%  must be
     tangible capital,  excluding intangible assets. The Bank must also maintain
     risk-based regulatory capital as a percent of risk weighted assets at least
     equal to 8.0%.  In measuring  compliance  with capital  standards,  certain
     adjustments must be made to capital and total assets.

     The following  tables present the total  risk-based,  Tier 1 risk-based and
     Tier 1 leverage  requirements  for the Corporation and the Bank (dollars in
     thousands).

<TABLE>
<CAPTION>

                                           June 30, 2005
                                           -------------

                                         Actual            Regulatory Minimum       "Well Capitalized"
                                         ------            ------------------       ------------------

-----------------------------------------------------------------------------------------------------------
                                  Amount       Ratio       Amount       Ratio       Amount       Ratio
                                       $           %            $           %            $           %
-----------------------------------------------------------------------------------------------------------
<S>                               <C>          <C>         <C>          <C>         <C>          <C>

Leverage ratio

  Corporation                     29,687       8.16%       14,560       4.00%          n/a         n/a

  Bank                            29,350       8.06%       14,560       4.00%       18,200       5.00%

Tier 1 capital ratio

  Corporation                     29,687      13.37%        8,883       4.00%          n/a         n/a

  Bank                            29,350      13.21%        8,888       4.00%       13,332       6.00%

Total risk-based capital
 ratio

  Corporation                     32,153      14.48%       17,766       8.00%          n/a         n/a

  Bank                            31,816      14.32%       17,776       8.00%       22,220      10.00%
-----------------------------------------------------------------------------------------------------------
</TABLE>


                                       14
<PAGE>

     During fiscal 2003, the Corporation  implemented a share repurchase program
     under  which the  Board of  Directors  of the  Corporation  authorized  the
     repurchase  of up to 5% of the  outstanding  shares or 98,000  shares.  The
     program was expanded by an additional 5% in fiscal 2004 and again in fiscal
     2005. The shares are to be repurchased either through open market purchases
     or  privately  negotiated  transactions  and will be made from time to time
     depending on market conditions and other factors.  Repurchased  shares will
     be held in treasury and will be  available  for the  Corporation's  benefit
     plans.  The  repurchase  program is expected  to improve the  Corporation's
     operating  performance on a per share basis, enhance, in the long term, the
     market price per share of the  Corporation's  common stock and increase the
     liquidity of the Corporation's  common stock. During the quarter ended June
     30, 2005, the Corporation  repurchased  11,302 shares. As of June 30, 2005,
     the  Corporation  had  repurchased  a total of  146,953  shares  under this
     authorization.

     Off-Balance Sheet Risk
     ----------------------

     In the normal course of operations, the Corporation engages in a variety of
     financial   transactions   that,  in  accordance  with  generally  accepted
     accounting principles, are not recorded in its financial statements.  These
     transactions involve, to varying degrees, elements of credit, interest rate
     and  liquidity  risk.  Such  transactions  are  used  primarily  to  manage
     customer's  requests  for  funding  and take the  form of  legally  binding
     agreements to lend money to customers at predetermined interest rates for a
     specified  period  of  time.   Outstanding   loan  commitments   (including
     commitments  to fund credit lines)  totaled  $40,646,000  at June 30, 2005.
     Each customer's credit worthiness is evaluated on a case-by-case basis. The
     amount of collateral obtained,  if deemed necessary by the Corporation upon
     extension of credit,  is based on the credit  evaluation  of the  borrower.
     Collateral varies but may include accounts receivable, inventory, property,
     plant and equipment,  commercial and  residential  real estate.  The credit
     risk on these  commitments is managed by subjecting each customer to normal
     underwriting and risk management processes.

     For the period ended June 30, 2005, the  Corporation  did not engage in any
     off-balance sheet transactions  reasonably likely to have a material effect
     on its financial condition, results of operation and cash flows.





                                       15
<PAGE>

     Results of operations for the three months ended June 30, 2005 and 2004
     -----------------------------------------------------------------------

     General
     -------

     Net income  increased  $1,000,  or 0.18%,  to $549,000 for the three months
     ended June 30, 2005 as compared to the same period in 2004 as  increases in
     net interest  income and non-  interest  income were offset by increases in
     the provision for loan losses.

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

     Interest income increased $508,000,  or 12.10%, to $4,708,000 for the three
     months ended June 30, 2005 as compared to the same period in 2004. Interest
     income on loans  increased by 21.78%,  or $544,000,  to $3,042,000  for the
     three months ended June 30, 2005 from $2,498,000 for the three months ended
     June 30, 2004, due primarily to increasing market interest rates along with
     a  higher  average  balance  of  loans  due to our  increased  emphasis  on
     commercial and consumer loan originations. Interest on deposits and federal
     funds  sold,  combined  with  interest  and  dividends  on  investment  and
     mortgage-backed  securities  decreased  $36,000,  or  2.12%,  for the three
     months ended June 30, 2005 to $1,666,000  from  $1,702,000  during the same
     period in 2004 due to lower average investable  balances,  offset by higher
     yields.  Investment  securities  average  balances  as  of  June  30,  2005
     decreased  by  $5,324,000,  or 3.38%,  when  compared to the same period in
     2004.  Proceeds  from the maturity and sale of investment  securities  were
     utilized to fund loans that produced a higher yield.

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

     Interest expense increased $424,000, or 23.77%, to $2,208,000 for the three
     months  ended June 30, 2005 as compared to the three  months ended June 30,
     2004. Interest expense on deposit accounts increased  $341,000,  or 36.24%,
     to $1,282,000 for the three months ended June 30, 2005 from $941,000 during
     the same  period  in 2004 due to  higher  cost of  deposits  as a result of
     higher market rates offset by growth in lower costing transaction accounts.
     The  Corporation  continues  to target lower cost demand  deposit  accounts
     versus traditional  higher cost certificates of deposits.  Interest expense
     on borrowings  increased $43,000, or 5.79%, for the three months ended June
     30, 2005 as compared to the same period in the previous  year due to higher
     borrowing  levels and market interest rates.  Interest  expense on floating
     rate junior subordinated  deferrable interest debentures increased $40,000,
     or 40.00%,  to  $140,000  for the three  months  ended  June 30,  2005 from
     $100,000  during  the same  period  in 2004 due to higher  market  interest
     rates.


                                       16
<PAGE>

     Provision for Loan Losses
     -------------------------

     During the three months ended June 30, 2005,  the provision for loan losses
     was  $341,000 as compared to $250,000  for the same period in the  previous
     year,  due  to the  growth  in the  loan  portfolio  and  the  increase  in
     commercial  and consumer  loans with greater risk along with an increase in
     non-accrual loans, offset by a decrease in net charge-offs.  Commercial and
     consumer loans  accounted for 67.63% of the loan portfolio at June 30, 2005
     compared  to 60.53% for the same  period in 2004.  During the three  months
     ended June 30, 2005, bad debt charge-offs,  net of recoveries,  was $46,000
     as compared to $683,000 in net bad debt  charge-offs for the same period in
     the previous year. During the three months ended June 30, 2005, non-accrual
     loans increased $3,012,000 from $989,000 at March 31, 2005 to $4,001,000 at
     June 30,  2005.  This  compares  to  non-accrual  loans at June 30, 2004 of
     $955,000. The increase in non-accrual loans for the quarter ending June 30,
     2005 included one  commercial  loan for $2.4 million that is well supported
     by a low loan to value  mortgage  and a second  commercial  loan that is in
     process of being  restructured.  Management believes the Corporation's loan
     loss allowance is adequate to absorb  possible loan losses  inherent in the
     portfolio.

     The allowance for loan loss  calculation  includes a  segmentation  of loan
     categories  subdivided by  residential  mortgage,  commercial  and consumer
     loans.  Each category is rated for all loans including  performing  groups.
     The weight  assigned to each  performing  group is developed  from previous
     loan loss  experience  and as the loss  experience  changes,  the  category
     weight  is  adjusted  accordingly.  In  addition,  as the  loan  categories
     increase and decrease in balance,  the allowance for loan loss  calculation
     will adjust accordingly.

     Non-Interest Income
     -------------------

     Total non-interest  income increased $16,000, or 2.44%, to $673,000 for the
     three months  ended June 30, 2005 from  $657,000 for the same period in the
     previous year. Fees from financial services increased $12,000, or 1.89%, to
     $646,000  for the three  months  ended June 30, 2005 from  $634,000 for the
     same period in the previous  year. The increase was due primarily to higher
     service charges that resulted from an increase in transaction accounts that
     was offset by lower fees  generated from third party  investment  brokerage
     and financing receivables programs due to a reduction in product volumes.

     Non-Interest Expense
     --------------------

     For the three  months  ended  June 30,  2005,  total  non-interest  expense
     increased  $3,000,  or 0.14%,  to $2,090,000  from  $2,087,000 for the same
     period in 2004.  Compensation and employee benefits increased  $24,000,  or
     2.50%,  to $983,000 for the three months ended June 30, 2005 from  $959,000
     for  the  same  period  in  2004  due to  normal  merit  salary  increases.
     Professional services expense increased $20,000, or 24.39%, to $102,000 for
     the three  months  ended June 30, 2005 from  $82,000 for the same period in
     2004 due to higher consultant  expense utilized to implement  improved loan
     documentation  policies  and  procedures.   Advertising  expense  decreased
     $22,000,  or 48.89%,  to $23,000 for the three  months  ended June 30, 2005
     from  $45,000  for the same  period  in 2004,  due to  reductions  in media
     advertising in slower growth markets.  Items processing  expense  decreased
     $30,000,  or 50.85%,  to $29,000 for the three  months  ended June 30, 2005
     from $59,000 for the same period in 2004.  The  Corporation  entered into a
     new items  processing  contract  that was  effective  January  1, 2005 that
     reduced the long term expense for demand accounts.


                                       17
<PAGE>

     Results of operations for the six months ended June 30, 2005 and 2004
     ---------------------------------------------------------------------

     General
     -------

     Net income  increased  $31,000,  or 2.93%, to $1,088,000 for the six months
     ended June 30,  2005 as  compared to the same period in 2004 as an increase
     in net interest  income was partially  offset by increases in provision for
     loan losses and non-interest expense along with a reduction in non-interest
     income.

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

     Interest income increased  $876,000,  or 10.63%,  to $9,118,000 for the six
     months ended June 30, 2005 as compared to the same period in 2004. Interest
     income on loans increased by 18.34%, or $909,000, to $5,865,000 for the six
     months  ended June 30, 2005 from  $4,956,000  for the six months ended June
     30, 2004,  due primarily to increasing  market  interest rates along with a
     higher average balance of loans due to our increased emphasis on commercial
     and consumer  loan  originations.  Interest on deposits  and federal  funds
     sold,   combined   with   interest   and   dividends  on   investment   and
     mortgage-backed  securities decreased $33,000, or 1.00%, for the six months
     ended June 30, 2005 to $3,253,000 from $3,286,000 during the same period in
     2004 due to lower average balances,  offset by higher yields. Proceeds from
     the maturity and sale of investment securities were utilized to fund growth
     in higher yielding loans

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

     Interest expense increased  $603,000,  or 16.91%, to $4,169,000 for the six
     months  ended June 30, 2005 as compared  to  $3,566,000  for the six months
     ended  June 30,  2004.  Interest  expense  on  deposit  accounts  increased
     $501,000,  or 26.09%,  to $2,421,000 for the six months ended June 30, 2005
     from  $1,920,000  during  the same  period  in 2004 due to  higher  cost of
     deposits  as a result  of  higher  market  rates  offset by growth in lower
     costing  transaction  accounts.  The Corporation  continues to target lower
     cost demand deposit accounts versus traditional higher cost certificates of
     deposits.  Interest expense on borrowings  increased $34,000, or 2.35%, for
     the six months  ended June 30,  2005 as  compared to the same period in the
     previous year due to higher  borrowing  levels and market  interest  rates.
     Interest expense on floating rate junior  subordinated  deferrable interest
     debentures  increased  $68,000,  or 34.17%,  to $267,000 for the six months
     ended June 30,  2005 from  $199,000  during the same  period in 2004 due to
     higher market interest rates.

     Provision for Loan Losses
     -------------------------

     During the six months ended June 30, 2005,  the  provision  for loan losses
     was  $548,000 as compared to $385,000  for the same period in the  previous
     year,  primarily  due to loan growth along with an increase in  non-accrual
     loans, offset by a decrease in net charge-offs. The provision also reflects
     the  Corporation's   continued   movement  from  longer  term,  fixed  rate
     residential  mortgage  loans to shorter  term,  floating  rate consumer and
     commercial loans.


                                       18
<PAGE>

     Consumer  and  commercial  loans carry  higher risk  weighted  rates in the
     reserve  calculation  as  compared  to  residential   mortgage  loans.  Non
     performing loans increased $3,251,000 from $750,000 at December 31, 2004 to
     $4,001,000 at June 30, 2005. The increase in non-accrual  loans for the six
     months ending June 30, 2005 includes one  commercial  loan for $2.4 million
     that is well  supported by a low loan to value  mortgage.  Loans 30-89 days
     past due and still  accruing was  $3,521,000  at June 30, 2005  compared to
     $7,214,000 at December 31, 2004.  The  reduction in  delinquent  loans is a
     result of increased emphasis and focus from the Credit  Administration area
     of the Bank  that  was  developed  with the  utilization  of  outside  loan
     consultants.   During  the  six  months  ended  June  30,  2005,  bad  debt
     charge-offs,  net of  recoveries,  was $108,000 as compared to $881,000 for
     the  same  period  in  the  previous  year.  The  previous  year  bad  debt
     charge-offs included  approximately $737,000 from two commercial loans that
     were written down due to a reduction in the market value of the  supporting
     loan collateral. The Corporation's loan loss allowance at June 30, 2005 was
     approximately  1.33% of the  Corporation's  outstanding  loan portfolio and
     61.63%  of  non-performing  loans  compared  to 1.18% of the  Corporation's
     outstanding loan portfolio and 270.13% of non-performing  loans at December
     31, 2004.

     The changes in the allowance for loan losses consisted of the following (in
     thousands):

         Balance at beginning of year                   $2,026
         Provision for loan losses                         548
         Charge-offs, net                                 (108)
                                                         -----
         Balance at end of quarter                      $2,466
                                                         =====

     The  following  table sets  forth  information  with  respect to the Bank's
     non-performing assets at the dates indicated (dollars in thousands):

                                              June 30, 2005    December 31, 2004
                                              -------------    -----------------
         Non-accruing loans which are
          contractually past due 90 days
          or more:

         Real Estate                             $   547             $   217
         Commercial                                3,236                 142
         Consumer                                    218                 391
                                                 -------             -------
         Total                                   $ 4,001             $   750
                                                 =======             =======

         Percentage of loans receivable, net       2.16%               0.44%
                                                   =====               =====

         Percentage of allowance for loan losses
         to total loans outstanding                1.33%               1.18%
                                                   =====               =====

         Allowance for loan losses               $ 2,466             $ 2,026
                                                 =======             =======


         Real estate acquired through
          foreclosure and repossessed
          assets, net of allowances              $   286             $   373
                                                 =======             =======


                                       19
<PAGE>

     Non-Interest Income
     -------------------

     Total non-interest  income decreased  $35,000,  or 2.72%, to $1,250,000 for
     the six months ended June 30, 2005 from  $1,285,000  for the same period in
     the previous  year.  Fees from financial  services  decreased  $20,000,  or
     1.65%, to $1,189,000 for the six months ended June 30, 2005 from $1,209,000
     for the same period in the previous year. The decrease was due primarily to
     lower fees  generated from third party  investment  brokerage and financing
     receivables programs due to a reduction in product volumes. Gain on sale of
     loans for the six  months  ended  June 30,  2005 was  $26,000  compared  to
     $43,000 for the same period in the previous  year due to lower  residential
     loan originations as a result of the rising interest rate environment along
     with the  Corporation's  shift in focus to  consumer/commercial  loans. The
     sales  represent loans funded and sold through a third party on a servicing
     released basis.

     Non-Interest Expense
     --------------------

     For  the six  months  ended  June  30,  2005,  total  non-interest  expense
     increased  $24,000,  or 0.58%,  to $4,192,000  from $4,168,000 for the same
     period in 2004.  Compensation and employee benefits increased  $24,000,  or
     1.22% to  $1,998,000  for the six month  period  ended  June 30,  2005 from
     $1,974,000  for the  same  period  in  2004,  due to  normal  merit  salary
     increases.  Professional  services expense increased $30,000, or 18.87%, to
     $189,000 for the six months ended June 30, 2005 from  $159,000 for the same
     period in 2004 due to  higher  consultant  expense  utilized  to  implement
     improved loan documentation  policies and procedures.  Advertising  expense
     decreased $21,000,  or 25.61%, to $61,000 for the six months ended June 30,
     2005 from $82,000 for the same period in 2004,  due to  reductions in media
     advertising  in slower growth  markets.  Loan  operations  costs  increased
     $15,000,  or 24.19%, to $77,000 for the six months ended June 30, 2005 from
     $62,000 for the same period in 2004,  due to higher costs  associated  with
     foreclosures.  Items processing  expense decreased  $63,000,  or 50.81%, to
     $61,000 for the six months  ended June 30, 2005 from  $124,000 for the same
     period  in  2004.  The  Corporation  entered  into a new  items  processing
     contract  that was  effective  January 1, 2005 that  reduced  the long term
     expense for demand accounts.  Telephone expense increased $7,000, or 9.09%,
     to $84,000 for the six months ended June 30, 2005 from $77,000 for the same
     period in 2004, due to  installation  charges  incurred for two new banking
     center systems.  Other expense increased $23,000, or 6.91%, to $356,000 for
     the six months  ended June 30,  2005 from  $333,000  for the same period in
     2004,  due  primarily  to higher  expenses  for postage and general  office
     supplies along with increases in insurance expense.




                                       20
<PAGE>

     Item 3. Quantitative and Qualitative Disclosures about Market Risk

     The  Corporation is committed to following a program of asset and liability
     management in an effort to manage the  fluctuations  in earnings  caused by
     movements in interest  rates.  A significant  portion of the  Corporation's
     income   results  from  the  spread  between  the  yield  realized  on  its
     interest-earning  assets and the rate of interest  paid on its deposits and
     other borrowings.  Differences in the timing and volume of repricing assets
     versus  the  timing  and  volume  of  repricing   liabilities   expose  the
     Corporation  to interest rate risk.  Management's  policies are directed at
     minimizing the impact on earnings of movements in interest rates.

     The  Corporation's  Asset/Liability  Committee  makes pricing and marketing
     decisions on deposit and loan  products in  conjunction  with  managing the
     Corporation's   interest  rate  risk.  In  addition,   the  Asset/Liability
     Committee reviews the Corporation's securities portfolio, FHLB advances and
     other borrowings as well as the Corporation's asset and liability policies.

     The primary objective of  Asset/Liability  management at the Corporation is
     to  manage  interest  rate risk and  achieve  reasonable  stability  in net
     interest  income  throughout  interest  rate  cycles  in order to  maintain
     adequate  liquidity.  This is achieved by maintaining the proper balance of
     rate-sensitive earning assets and rate-sensitive  costing liabilities.  The
     relationship of  rate-sensitive  earning assets to  rate-sensitive  costing
     liabilities  is  the  principal   factor  in  projecting  the  effect  that
     fluctuating  interest  rates  will  have on  future  net  interest  income.
     Rate-sensitive  assets and interest-bearing  liabilities are those that can
     be repriced to current market rates within a relatively  short time period.
     Management   monitors   the  rate   sensitivity   of  earning   assets  and
     interest-bearing liabilities over the entire life of these instruments.

     The Corporation has  established  policies and monitors  results to control
     interest rate sensitivity.  Although the Corporation utilizes measures such
     as static gap, which is simply the  measurement  of the difference  between
     interest-sensitive assets and interest-sensitive  liabilities repricing for
     a particular time period,  just as important a process is the evaluation of
     how particular  assets and  liabilities are impacted by changes in interest
     rates  or  selected  indices  as  they  reprice.  Asset/liability  modeling
     techniques are utilized by the Corporation to assess varying  interest rate
     and balance sheet mix assumptions.

     Net Interest  Income  Simulation  Analysis.  We analyze our  interest  rate
     sensitivity  position  to manage the risk  associated  with  interest  rate
     movements  through the use of interest income  simulation.  The matching of
     assets and  liabilities  may be analyzed by  examining  the extent to which
     such assets and liabilities are "interest sensitive." An asset or liability
     is said to be interest rate  sensitive  within a specific time period if it
     will mature or reprice within that time period.

     Our goal is to manage asset and liability positions to moderate the effects
     of interest  rate  fluctuations  on net interest  income.  Interest  income
     simulations  utilizing  interest  rate shocks are  completed  quarterly and
     presented to the  Asset/Liability  Committee.  The  simulations  provide an
     estimate of the impact of changes in interest rates on net interest  income
     under a range of  assumptions.  The  interest  rate shocks are  compared to
     board  approved  policy  limits  and are  reviewed  by the  Asset/Liability


                                       21
<PAGE>

     Committee on a quarterly  basis.  The simulation  incorporates  assumptions
     regarding  the  potential  timing in the  repricing  of certain  assets and
     liabilities  when market  rates  change and the changes in spreads  between
     different market rates. The simulation analysis  incorporates  management's
     current  assessment of the risk that pricing margins will change  adversely
     over time due to competition or other factors.

     Simulation  analysis is only an estimate of our interest rate risk exposure
     at a particular  point in time. We continually  review the potential effect
     changes in interest  rates could have on the  repayment  of rate  sensitive
     assets and funding requirements of rate sensitive liabilities.

     The table below sets forth an approximation of our exposure as a percentage
     of  estimated  net  interest  income for the next twelve month period using
     interest  income  simulation.  The simulation  uses projected  repricing of
     assets and liabilities on the basis of contractual maturities,  anticipated
     repayments  and scheduled  rate  adjustments.  Prepayment  rates can have a
     significant impact on interest income simulation. When interest rates rise,
     prepayments  tend to slow.  When interest rates fall,  prepayments  tend to
     rise.

     The following table reflects  changes in estimated net interest income from
     rate shocks of (+) or (-)1% and (+)2% in a rising and falling interest rate
     environment for the Corporation.

                                                            At          At
                                                         June 30,   December 31,
                                                           2005        2004
                                                           ----        ----
     ---------------------------------------------------------------------------
     200 basis point increase in rates
                                                          +6.28%      +5.75%
     ---------------------------------------------------------------------------
     100 basis point increase in rate
                                                          +3.54%      +3.12%
     ---------------------------------------------------------------------------
     100 basis point decrease in rates
                                                          (7.80)%      (3.22)%
     ---------------------------------------------------------------------------


     The 200 and 100 basis  point  change in rates in the above table is assumed
     to occur evenly over the  following  twelve  months.  Based on the scenario
     above, net interest income would be positively affected in the twelve-month
     periods if rates rose by 100 and 200 basis  points,  but would be adversely
     affected if rates declined by 100 basis points.




                                       22
<PAGE>

     Item 4. Controls and Procedures

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










                                       23
<PAGE>

PART II - OTHER INFORMATION

     Item 1. Legal Proceedings
             -----------------

     The  Corporation is involved in various claims and legal actions arising in
     the normal course of business.  Management  believes that these proceedings
     are  immaterial  to the  Corporation's  financial  condition and results of
     operations.

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

     The following  table  provides  certain  information  with regard to shares
     repurchased by the Corporation during the second quarter of 2005.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
                                                               (c)
                             (a)                        Total Number of              (d)
                         Total               (b)        Shares Purchased        Maximum Number of
                         Number of      Average         as part of              Shares that may be
                         Shares         Price Paid      Publicly Announced      purchased under
     Period              Purchased      per share       Programs                Program
-----------------------------------------------------------------------------------------------------
<S>                      <C>            <C>             <C>                     <C>
April 1, 2005 through                                                               155,724
April 30, 2005
-----------------------------------------------------------------------------------------------------
May 1, 2005 through        11,126         $16.68              11,126                144,598
May 31, 2005
-----------------------------------------------------------------------------------------------------
June 1, 2005 through          176         $17.00                 176                144,422
June 30, 2005
-----------------------------------------------------------------------------------------------------
  Total                    11,302         $16.69              11,302                  N/A
-----------------------------------------------------------------------------------------------------
</TABLE>

     In November 2004, the Corporation  implemented a share  repurchase  program
     under which the  Corporation  may  repurchase  up to 5% of the  outstanding
     shares or 98,000  shares.  In May 2005,  the  program  was  expanded  by an
     additional 5% or 95,000 shares.  The repurchase program will continue until
     it is completed or terminated by the Board of Directors.

     Item 3. Defaults upon Senior Securities
             -------------------------------

     Not applicable.


                                       24
<PAGE>

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

     The Annual Meeting of the Stockholders of the Corporation was held on April
     20, 2005.  The results of the vote on the matters  presented at the meeting
     is as follows:

     1.   The  following  individuals  were  elected  as  directors,  each for a
          three-year term by the following vote:

                                    Votes For         Votes Withheld
                                    ---------         --------------

          Carl L. Mason             1,493,860             20,067
          William M. Graham         1,507,318              6,609

     2.   The appointment of Elliott Davis, LLC, as auditors for the Corporation
          for the year ending December 31, 2005 was ratified by the stockholders
          by the following vote:

          For 1,505,084         Against 2,565         Abstain 6,278
              ---------                 -----                 -----

     Item 5. Other Information
             -----------------

     None

     Item 6. Exhibits
             --------

        3    Bylaws of Union Financial Bancshares, Inc.

     31(a)   Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

     31(b)   Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

     32(a)   Chief Executive Officer Certification  Pursuant to Section 906 of
             the Sarbanes-Oxley Act of 2002

     32(b)   Chief Financial Officer Certification  Pursuant to Section 906 of
             the Sarbanes-Oxley Act of 2002




                                       25
<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.


                                       UNION FINANCIAL BANCSHARES, INC.
                                       --------------------------------
                                                  (Registrant)



     Date: August 8, 2005                    By: /s/ Dwight V. Neese
           -----------------                     -------------------
                                                 Dwight V. Neese, CEO


     Date: August 8, 2005                    By: /s/ Richard H. Flake
           -----------------                     --------------------
                                                 Richard H. Flake, CFO






                                       26