UNITED STATES SECURITITES AND EXCHANGE COMMISSION
                             Washington, D.C. 29549

                                   FORM 10-QSB
                                   (Mark One)

[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURTIES EXCHANGE
      ACT OF 1934

For the quarterly period ended June 30, 2005

[_]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from ___________________ to ________________________

                        Commission File Number: 000-30515

                     Weststar Financial Services Corporation
             (Exact name of registrant as specified in its charter)

        North Carolina                                     56-2181423
(State or other jurisdiction of                (IRS Employer Identification No.)
  incorporation or organization)

                      79 Woodfin Place, Asheville NC 28801
                    (Address of principal executive offices)

                                  828.252.1735
              (Registrant's telephone number, including area code)

------------------------------------------------------------------------------
              (Former name, former address and former fiscal year,
                          if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes  X  No
                                       ---    ---

                      APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date.

Common stock,  $1.00 par value - 1,400,266  shares  outstanding  as of August 9,
2005.


                                                                               1
<PAGE>









INDEX                                                                       Page

Part I - FINANCIAL INFORMATION

Financial Statements:
         Consolidated Balance Sheets
           June 30, 2005 and December 31, 2004                                3

         Consolidated Statements of Operations
           Three and Six Months Ended June 30, 2005 and 2004                  4

         Consolidated Statements of Comprehensive Income
           Three and Six Months Ended June 30, 2005 and 2004                  5

         Consolidated Statements of Changes in Shareholders' Equity
           Six Months Ended June 30, 2005 and 2004                            6

         Consolidated Statements of Cash Flows
           Six Months Ended June 30, 2005 and 2004                            7

         Notes to Consolidated Financial Statements                           8

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

Item 3 - Controls and Procedures                                             20

Part II - OTHER INFORMATION

Exhibit Index                                                                21

Signatures                                                                   22



                                                                               2
<PAGE>

Part I.  FINANCIAL INFORMATION

Item I.  Financial Statements


Weststar Financial Services Corporation & Subsidiary
Consolidated Balance Sheets (unaudited)

<TABLE>
<CAPTION>
                                                                                June 30,       December 31,
                                                                                 2005              2004*
                                                                             -------------    -------------
<S>                                                                          <C>              <C>
ASSETS:
Cash and cash equivalents:
  Cash and due from banks                                                    $   5,018,532    $   3,729,987
  Interest-bearing deposits                                                        370,310          321,280
  Federal funds sold                                                            15,372,000       15,570,000
                                                                             -------------    -------------
      Total cash and cash equivalents                                           20,760,842       19,621,267
Investment securities -
  Available for sale, at fair value (amortized cost of
  $23,162,475 and $23,301,098, respectively)                                    22,857,961       23,106,660
Loans                                                                           88,713,000       84,852,070
Allowance for loan losses                                                       (1,685,627)      (1,608,366)
                                                                             -------------    -------------
Net loans                                                                       87,027,373       83,243,704
Premises and equipment, net                                                      2,601,041        2,650,156
Accrued interest receivable                                                        555,878          564,816
Federal Home Loan Bank stock, at cost                                              531,500          307,900
Deferred income taxes                                                              522,320          390,140
Foreclosed properties                                                              165,077          443,586
Other assets                                                                       649,230          678,478
                                                                             -------------    -------------
TOTAL                                                                        $ 135,671,222    $ 131,006,707
                                                                             =============    =============

LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
  Demand                                                                     $  25,107,121    $  19,572,549
  NOW accounts                                                                  19,567,362       22,603,723
  Money market accounts                                                         34,059,018       41,332,780
  Savings                                                                        2,191,418        2,164,015
  Time deposits of $100,000 or more                                              9,313,524        6,380,898
  Other time deposits                                                           26,435,436       22,387,783
                                                                             -------------    -------------
        Total deposits                                                         116,673,879      114,441,748
Short-term borrowings                                                                   --        2,000,000
Accrued interest payable                                                           210,364          138,362
Other liabilities                                                                  608,881          492,410
Long-term debt                                                                   8,124,000        4,124,000
                                                                             -------------    -------------
      Total liabilities                                                        125,617,124      121,196,520
                                                                             -------------    -------------

SHAREHOLDERS' EQUITY:
Preferred stock; authorized $1,000,000; issued and outstanding - none                   --               --
Common stock, $1 par value, authorized - 9,000,000
    shares; issued and outstanding - 1,400,266 and 1,166,208, respectively       1,400,266        1,166,208
Additional paid-in capital                                                       6,801,431        7,030,589
Retained earnings                                                                2,039,525        1,732,872
Accumulated other comprehensive loss                                              (187,124)        (119,482)
                                                                             -------------    -------------
      Total shareholders' equity                                                10,054,098        9,810,187
                                                                             -------------    -------------
TOTAL                                                                        $ 135,671,222    $ 131,006,707
                                                                             =============    =============

*Derived from audited consolidated financial statements.

See notes to consolidated financial statements.


                                                                                                          3
</TABLE>
<PAGE>

Weststar Financial Services Corporation & Subsidiary
Consolidated Statements of Operations (unaudited)

<TABLE>
<CAPTION>
                                                              Three Months                Six Months
                                                              Ended June 30,             Ended June 30,
                                                           2005          2004         2005           2004
                                                       -----------   -----------   -----------    -----------
<S>                                                    <C>           <C>           <C>            <C>
INTEREST INCOME:
Interest and fees on loans                             $ 1,536,955   $ 1,271,482   $ 2,973,019    $ 2,585,818
Federal funds sold                                         100,200        27,318       144,316         35,427
Interest-bearing deposits                                    8,133         2,114        15,032          2,729
Investments:
  Taxable interest income                                  173,167       124,543       347,420        253,515
  Nontaxable interest income                                13,472        13,054        26,901         27,607
  Corporate dividends                                        3,436         1,554         6,055          3,101
                                                       -----------   -----------   -----------    -----------
       Total interest income                             1,835,363     1,440,065     3,512,743      2,908,197
                                                       -----------   -----------   -----------    -----------
INTEREST EXPENSE:
Time deposits of $100,000 or more                           75,307        28,559       131,433         55,411
Other time and savings deposits                            430,215       280,334       783,881        527,176
Short-term borrowings                                        7,878           271        16,016          1,629
Long-term debt                                             115,155        51,295       179,524        102,698
                                                       -----------   -----------   -----------    -----------
     Total interest expense                                628,555       360,459     1,110,854        686,914
                                                       -----------   -----------   -----------    -----------
NET INTEREST INCOME                                      1,206,808     1,079,606     2,401,889      2,221,283
PROVISION FOR LOAN LOSSES                                  112,650       290,000       353,155        612,800
                                                       -----------   -----------   -----------    -----------
NET INTEREST INCOME AFTER PROVISION
 FOR LOAN LOSSES                                         1,094,158       789,606     2,048,734      1,608,483
                                                       -----------   -----------   -----------    -----------
OTHER INCOME:
Service charges on deposit accounts                        295,440       321,613       565,141        622,272
Other service fees and commissions                          64,168        84,034       150,002        167,379
Securities gains                                                --            --            --         31,613
Equity in income (loss) of unconsolidated subsidiary         9,264            --       (17,908)            --
Other                                                        7,775         8,563        15,887         18,643
                                                       -----------   -----------   -----------    -----------
       Total other income                                  376,647       414,210       713,122        839,907
                                                       -----------   -----------   -----------    -----------
OTHER EXPENSES:
Salaries and wages                                         465,408       350,784       901,819        756,522
Employee benefits                                           88,823        67,847       171,870        146,101
Occupancy expense, net                                      83,757        79,995       169,295        157,729
Equipment rentals, depreciation and
  maintenance                                               95,711        81,594       183,350        161,724
Supplies                                                    60,160        62,980       122,844        124,646
Professional fees                                           77,930        69,715       159,808        140,737
                                                                                       248,815        232,083
Data processing fees                                       129,783       115,395
Marketing                                                   60,610        51,503       107,713         86,951
Net expenses from foreclosed properties                     11,696        43,204        87,209         71,829
Other                                                       62,532        52,844       121,148        107,914
                                                       -----------   -----------   -----------    -----------
        Total other expenses                             1,136,410       975,861     2,273,871      1,986,236
                                                       -----------   -----------   -----------    -----------
INCOME BEFORE INCOME TAXES                                 334,395       227,955       487,985        462,154
INCOME TAX PROVISION                                       122,880        87,295       178,945        169,305
                                                       -----------   -----------   -----------    -----------
NET INCOME                                             $   211,515   $   140,660   $   309,040    $   292,849
                                                       ===========   ===========   ===========    ===========

EARNINGS PER SHARE:
Basic                                                  $      0.15   $      0.10   $      0.22    $      0.21
                                                       ===========   ===========   ===========    ===========
Diluted                                                $      0.14   $      0.10   $      0.21    $      0.20
                                                       ===========   ===========   ===========    ===========

See notes to consolidated financial statements


                                                                                                            4
</TABLE>
<PAGE>

Weststar Financial Services Corporation & Subsidiary
Consolidated Statements of Comprehensive Income (Loss) (unaudited)

<TABLE>
<CAPTION>
                                                          Three Months             Six Months
                                                          Ended June30,           Ended June 30,
                                                       2005         2004         2005         2004
                                                    ---------    ---------    ---------    ---------
<S>                                                 <C>          <C>          <C>          <C>
NET INCOME                                          $ 211,515    $ 140,660    $ 309,040    $ 292,849
OTHER COMPREHENSIVE INCOME (LOSS)
  Unrealized holding gains (losses) on securities
    available for sale                                202,064     (451,555)    (110,077)    (280,878)
  Tax effect                                          (77,896)     174,074       42,435      108,278
                                                    ---------    ---------    ---------    ---------
  Unrealized holding gains (losses) on securities
  available for sale, net of tax                      124,168     (277,481)     (67,642)    (172,600)

  Reclassification adjustment for realized gains
     Tax effect                                            --           --           --      (31,613)
  Reclassification adjustment for realized gains,
     Net of tax                                            --           --           --       12,193
                                                    ---------    ---------    ---------    ---------
                                                           --           --           --      (19,420)
OTHER COMPREHENSIVE INCOME (LOSS), NET  OF TAX

COMPREHENSIVE INCOME (LOSS)                           124,168     (277,481)     (67,642)    (192,020)
                                                    ---------    ---------    ---------    ---------
                                                    $ 335,683    $(136,821)   $ 241,398    $ 100,829
                                                    =========    =========    =========    =========


See notes to consolidated financial statements.

                                                                                                   5
</TABLE>
<PAGE>

Weststar Financial Services Corporation & Subsidiary
Consolidated Statements of Changes in Shareholders' Equity (unaudited)
For the Six Months Ended June 30, 2005 and 2004

<TABLE>
<CAPTION>
                                                                                                       Accumulated
                                                Common Stock            Additional                        Other          Total
                                            --------------------         Paid-In        Retained      Comprehensive   Shareholders'
                                            Shares         Amount        Capital        Earnings           Loss          Equity
                                            ------         ------        -------        --------           ----          ------
<S>                                       <C>         <C>            <C>             <C>             <C>             <C>
Balance December 31, 2003                  1,166,208   $  1,166,208   $  7,030,589    $  1,074,747    $    (80,596)   $  9,190,948
  Net change in unrealized
     gain on securities held for sale                                                                     (192,020)   $   (192,020)
  Cash dividend paid in lieu of
     fractional shares                                                                         (78)                            (78)
  Net income                                                                               292,849                         292,849
                                           ---------------------------------------------------------------------------------------
Balance June 30, 2004                      1,166,208   $  1,166,208   $  7,030,589    $  1,367,518    $   (272,616)   $  9,291,699
                                           =======================================================================================

Balance December 31, 2004                  1,166,208   $  1,166,208   $  7,030,589    $  1,732,872    $   (119,482)   $  9,810,187
 Stock split                                 233,058        233,058       (233,058)
  Net change in unrealized
     loss on securities held for sale                                                                      (67,642)        (67,642)
  Issuance of common stock                     1,000          1,000          3,900                                           4,900
 Cash dividend paid in lieu of
     fractional shares                                                                      (2,387)                         (2,387)
  Net income                                                                               309,040                         309,040
                                           ---------------------------------------------------------------------------------------
Balance June 30, 2005                      1,400,266   $  1,400,266   $  6,801,431    $  2,039,525    $   (187,124)   $ 10,054,098
                                           =======================================================================================


See notes to consolidated financial statements.


                                                                                                                                 6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Weststar Financial Services Corporation & Subsidiary
Consolidated Statements of Cash Flows (unaudited)
For the Six Months Ended June 30,                               2005            2004
                                                            ------------    ------------
<S>                                                         <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                  $    309,040    $    292,849
Adjustments to reconcile net income to net cash
provided by operating activities:
  Depreciation                                                   189,750         194,706
  Provision for loan losses                                      353,155         612,800
  Premium amortization and discount accretion, net                41,472          59,019
  Deferred income tax benefit                                    (89,746)       (100,300)
  Net expenses from foreclosed properties                         77,683          65,565
  Gain on sales of securities                                         --         (31,613)
  Loss on disposal/sale of premises and equipment                  1,584             166
  Decrease in accrued interest receivable                          7,118           8,030
  Decrease in other assets                                       106,069         122,626
  Increase in accrued interest payable                            72,002          33,414
  Increase in other liabilities                                  116,471          86,595
                                                            ------------    ------------
    Net cash provided by operating activities                  1,184,598       1,343,857
                                                            ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available for sale                    (1,400,529)     (6,523,895)
Maturities of securities available for sale                    1,497,680       2,367,780
Net increase in loans                                         (4,181,776)     (2,803,040)
Proceeds from sales of foreclosed properties                     170,778         230,851
Proceeds from sales of securities                                     --         553,600
Proceeds from sales of premises and equipment                      1,947             100
FHLB stock purchase                                             (223,600)        (96,600)
Additions to premises and equipment                             (144,166)       (407,339)
                                                            ------------    ------------
    Net cash used in investing activities                     (4,279,666)     (6,678,543)
                                                            ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:

Net increase (decrease) in demand deposits, NOW accounts,
MMDA and savings accounts                                     (4,748,148)      2,198,435
Net increase in time deposits                                  6,980,279       7,619,338
Cash paid for fractional shares                                   (2,387)            (78)
Issuance of common stock                                           4,900              --
Proceeds from FHLB advance                                     4,000,000              --
Maturity of FHLB advance                                      (2,000,000)             --
                                                            ------------    ------------
Net cash provided by financing activities                      4,234,644       9,817,695
                                                            ------------    ------------

NET INCREASE IN CASH AND CASH EQUIVALENTS                      1,139,576       4,483,009
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD              19,621,267      11,990,677
                                                            ------------    ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                  $ 20,760,843    $ 16,473,686
                                                            ============    ============


See notes to consolidated financial statements.


                                                                                       7
</TABLE>
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORTION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    Weststar  Financial  Services  Corporation  (the  "Company")  is a holding
      company with one subsidiary,  The Bank of Asheville (the "Bank"). The Bank
      is a state  chartered  commercial  bank  which was  incorporated  in North
      Carolina on October 29, 1997.  The Bank provides  consumer and  commercial
      banking services in Buncombe County and surrounding area. Common shares of
      The Bank of  Asheville  were  exchanged  for  common  shares  of  Weststar
      Financial  Services  Corporation  on April 29,  2000.  Weststar  Financial
      Services Corporation formed Weststar Financial Services Corporation I (the
      "Trust")  during October 2003 in order to facilitate the issuance of trust
      preferred securities. The Trust is a statutory business trust formed under
      the laws of the state of  Delaware,  of which all  common  securities  are
      owned  by  Weststar  Financial  Services  Corporation.  Bank of  Asheville
      Mortgage  Company,  LLC  (the  "Mortgage  Company")  is a state  chartered
      mortgage bank which was incorporated in North Carolina on October 19, 2004
      of which  Weststar  Financial  Services  Corporation  is a 50% owner.  The
      Mortgage Company originates conventional mortgage loans.

      In the opinion of  management,  the  accompanying  consolidated  financial
      statements  contain  all  adjustments  necessary  to  present  fairly  the
      consolidated  financial  position  of the  Company as of June 30, 2005 and
      December 31, 2004, and the  consolidated  results of their  operations for
      the three and  six-month  periods  ended June 30,  2005 and 2004 and their
      cash  flows  for the  six-month  periods  ended  June 30  2005  and  2004.
      Operating  results for the three and six-month  period ended June 30, 2005
      are not necessarily indicative of the results that may be expected for the
      fiscal year ending December 31, 2005.

      The  accounting  policies  followed  are set  forth  in Note 1 to the 2004
      Annual Report to  Shareholders  (Form 10-KSB) on file with the  Securities
      and Exchange Commission.

2.    Loans at June 30, 2005 and  December  31, 2004  classified  by type are as
      follows:

                                                 June 30,       December 31,
                                                   2005             2004
                                                   ----             ----
      Real Estate:
        Construction                           $ 10,938,174    $ 11,470,223
        Mortgage                                 56,257,894      51,633,458
      Commercial, financial and agricultural     20,149,795      20,162,307
      Consumer                                    1,537,996       1,747,694
                                               ------------    ------------
      Subtotal                                   88,883,859      85,013,682
      Net deferred loan origination fees           (170,859)       (161,612)
                                               ------------    ------------
      Total                                    $ 88,713,000    $ 84,852,070
                                               ============    ============


3.    In the  normal  course of  business  there  are  various  commitments  and
      contingent liabilities such as commitments to extend credit, which are not
      reflected on the financial statements.  The unused portions of commitments
      to extend credit were  $23,055,145  and  $19,683,801  at June 30, 2005 and
      December 31, 2004, respectively.


4.    Earnings per share have been computed using the weighted average number of
      shares of common stock and potentially  dilutive common stock  equivalents
      outstanding as follows:


                                                                               8
<PAGE>
<TABLE>
<CAPTION>
                                                               Three Months              Six Months
                                                               Ended June 30,          Ended June 30,
                                                              2005       2004         2005        2004
                                                              ----       ----         ----        ----
<S>                                                        <C>         <C>         <C>         <C>
      Weighted average shares outstanding                  1,400,266   1,399,266   1,399,923   1,399,266
      Potentially dilutive effect of stock options            90,170      71,916      92,567      72,308
                                                           ---------------------------------------------
      Weighted  average  shares  outstanding,  including
      potentially dilutive effect of stock options         1,490,436   1,471,182   1,492,490   1,471,574
                                                           =============================================
</TABLE>

      Prior period  amounts have been  adjusted to reflect a 6-for-5 stock split
      paid in the form of a 20% stock dividend during January 2005.

5.    Statement of Financial  Accounting  Standards ("SFAS") No. 123, Accounting
      for  Stock-Based  Compensation,  encourages  all  entities to adopt a fair
      value based method of accounting  for employee stock  compensation  plans,
      whereby compensation cost is measured at the grant date based on the value
      of the award and is recognized over the service  period,  which is usually
      the  vesting  period.  However,  it also  allows an entity to  continue to
      measure  compensation cost for those plans using the intrinsic value based
      method of accounting prescribed by Accounting Principles Board Opinion No.
      25, Accounting for Stock Issued to Employees, whereby compensation cost is
      the excess,  if any, of the quoted  market price of the stock at the grant
      date (or other  measurement  date) over the amount an employee must pay to
      acquire the stock. The Company has elected to continue with the accounting
      methodology in Opinion No. 25 and, as a result, has provided the below pro
      forma  disclosures  of  net  income  and  earnings  per  share  and  other
      disclosures  as if the fair  value  based  method of  accounting  had been
      applied.

      At June 30, 2005, the Company had two stock-based  compensation plans. The
      Company  accounts for  compensation  costs related to the Company's  stock
      option plans using the intrinsic value method.  Therefore, no compensation
      costs has been  recognized for stock option awards because the options are
      granted at  exercise  prices  based on the market  value of the  Company's
      stock on the date of grant. Had compensation costs for the Company's stock
      option plans been  determined  using the fair value method,  the Company's
      pro forma net income would have been as follows:

<TABLE>
<CAPTION>
                                                   Three Months Ended           Six Months Ended
                                                 6/30/2005     6/30/2004     6/30/2005     6/30/2004
                                                -----------   -----------   -----------   -----------
<S>                                             <C>           <C>           <C>           <C>
      Net income as reported                    $   211,515   $   140,660   $   309,040   $   292,849
      Less:  Total stock based employee
      compensation expense determined
      under fair value method for all awards,                                                       3
      net of related tax effects                     22,667        25,414        47,815         50,77
                                                -----------   -----------   -----------   -----------
      Pro forma net income                      $   188,848   $   115,246   $   261,225   $   242,076
                                                ===========   ===========   ===========   ===========
      Net income per share:
      As reported:

      Basic                                     $      0.15   $      0.10   $      0.22   $      0.21
      Diluted                                   $      0.14   $      0.10   $      0.21   $      0.20

      Pro forma:

      Basic                                     $      0.13   $      0.08   $      0.19   $      0.17
      Diluted                                   $      0.13   $      0.08   $      0.18   $      0.17
</TABLE>

In December 2004, the FASB issued revised SFAS No. 123R,  "Share-Based  Payment"
("SFAS No. 123R"). SFAS No. 123R sets accounting  requirements for "share-based"
compensation  to  employees


                                                                               9
<PAGE>

and requires  companies to recognize in the income statement the grant-date fair
value of the stock  options and other  equity-based  compensation.  On April 14,
2005, the Securities and Exchange  Commission  adopted a new rule that made SFAS
No. 123R effective for annual periods beginning after June 15, 2005. The Company
will be  required  to  adopt  SFAS No.  123R in the  first  quarter  of 2006 and
currently  discloses the effect on net income and earnings per share of the fair
value  recognition  provision  of SFAS  No.  123  "Accounting  for  Stock  Based
Compensation." The Company is currently evaluating the impact of the adoption of
SFAS No. 123R on its financial position and results of operations, including the
valuation methods and support for the assumptions that underlie the valuation of
the awards.


                                                                              10
<PAGE>

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

Weststar Financial Services Corporation & Subsidiary
Management's Discussion and Analysis

EXECUTIVE OVERVIEW

During 2005, the Company  continued its focus on improving asset quality,  asset
growth  and  market  penetration.  Management  emphasized  prudent  underwriting
standards, increased periodic reviews of loans of $100,000 or more, and expanded
its loan quality monitoring  systems.  During the period asset quality continued
to demonstrate  improvement.  Non-performing assets decreased from $3,011,402 at
December 31, 2004 to $2,465,002 at June 30, 2005. Net charge-offs for the period
totaled  $275,894  compared to $361,999 for the six-month  period ended June 30,
2005. Loans  outstanding grew by 5% to $88,713,000 from December 31, 2004, which
reflected  improved  economic  conditions and increased  market share.  Deposits
increased 2% to  $116,673,879.  The increase was reflected in time,  savings and
demand  deposits.  Including an outflow of  approximately  $13,400,000  in money
market  accounts,  which were temporary funds from one of the Company's  largest
real estate trust accounts,  deposits increased  approximately 14% over December
31, 2004.

The Company  increased  its net  interest  income by 12% during the  three-month
period due to growth in net earning assets.  As a result of charge-offs and loan
growth, the Company added $112,650 to the loan loss reserve compared to $290,000
during  the  comparable  period in 2004.  Non-interest  income  decreased  9% to
$376,647. The decrease was primarily attributable to $25,041 decreased fees from
overdraft charges,  which is based on activity volume. The Company's  investment
in Bank of Asheville Mortgage Company,  LLC earned a profit of $9,264 during the
quarter,  which was its second  quarter  of  operations.  Non-interest  expenses
increased  16%  primarily as a result of growth in loans,  deposits,  marketing,
personnel and personnel expenses.

Net income  totaled  $211,515 and $140,660 for the quarters  ended June 30, 2005
and 2004, respectively - an increase of 50%.

The Company  increased its net interest income by 8% during the six-month period
due to growth in earning assets. As a result of charge-offs and loan growth, the
Company added $353,155 to the loan loss reserve  compared to $612,800 during the
comparable period in 2005.  Non-interest  income decreased 15% to $713,122.  The
decrease was primarily  attributable  to $60,424  decreased  fees from overdraft
charges,  which is based on activity volume. The Company's investment in Bank of
Asheville Mortgage Company, LLC reflected a net operating loss of $17,908 during
the  six-month  period  compared  to none  during  2004.  Non-interest  expenses
increased  14%  primarily as a result of growth in loans,  deposits,  marketing,
personnel and  personnel  expenses.  Management  monitors  expenses  closely and
reviews each expense relative to the benefit provide.

Net income  totaled  $309,040 and $292,849 for the six-month  periods ended June
30, 2005 and 2004, respectively - an increase of 6%.


                                                                              11
<PAGE>

CHANGES IN FINANCIAL CONDITION
JUNE 30, 2005 COMPARED TO DECEMBER 31, 2004

During  the  period  from  December  31,  2004 to June 30,  2005,  total  assets
increased  $4,664,515 or 4%. This increase,  reflected primarily in the cash and
cash  equivalents and loans,  resulted from an increase in deposits and borrowed
funds.

Securities,   federal  funds  sold  and  interest-bearing  balances  with  other
financial  institutions  at  June  30,  2005  totaled  $38,600,271  compared  to
$38,997,940 at December 31, 2004. Through an investment in the Federal Home Loan
Bank,  the Company  gained  access to the Federal  Home Loan Bank  system.  This
access  grants  the  Company   sources  of  funds  for  lending  and  liquidity.
Investments in Federal Home Loan Bank stock to date total $531,500.

At June 30, 2005,  the loan  portfolio  constituted  65% of the Company's  total
assets.  Loans  increased  $3,860,930  from  December 31, 2004 to June 30, 2005.
Improved  economic  conditions  resulted  in the 5%  increase  in  loan  growth.
Management  places a strong  emphasis on loan quality.  At June 30, 2005,  there
were no loans that (i)  represented  or resulted  from  trends or  uncertainties
which  management  reasonably  expects to  materially  impact  future  operating
results,  liquidity,  or capital resources, or (ii) represented material credits
about which management was aware of any information  which caused  management to
have serious  doubts as to the ability of such borrowers to comply with the loan
repayment terms.

The  recorded  investment  in  loans  that  are  considered  to be  impaired  in
accordance  with  criteria  set  forth  in  Statement  of  Financial  Accounting
Standards No. 114 of the Financial  Accounting  Standards  Board was $1,019,222,
$1,466,890,  and  $1,869,920  at June 30, 2005 and 2004,  and December 31, 2004,
respectively.  The average  recorded  balance of impaired  loans during 2005 and
2004 was not significantly  different from the balance at June 30, 2005 and 2004
and December 31,  2004.  The related  allowance  for loan losses  determined  in
accordance  with SFAS No. 114 for  impaired  loans was $113,391 and $175,513 and
$219,846 at June 30, 2005 and 2004, and December 31, 2004 respectively.  For the
six-month  periods ended June 30, 2005 and 2004,  Weststar  recognized  interest
income from  impaired  loans of  approximately  $18,039 and $25,219.  See "Asset
Quality" for discussion for an analysis of loan loss reserves.

Deposits  increased  $2,232,131  during the six months ended June 30, 2005.  The
increase in deposits is reflected in demand,  time and savings accounts.  During
the first quarter of 2005 approximately  $13.4 million in money market accounts,
which were temporary  funds from one of the Company's  largest real estate trust
accounts,  flowed out of the Bank.  Excluding  these funds,  deposits  increased
approximately 14% over December 31, 2004. Total demand deposits accounts grew by
$5,534,663 to  $25,107,121  due to continued  market  penetration.  NOW accounts
decreased  primarily as a result of rate  sensitive  customer  shifting funds to
higher  yielding  time  deposits.  Time  deposits  increased  $6,980,279  due to
competitive interest rates and market penetration.

Long-term  borrowings  consisted  of one advance  from the FHLB,  which  totaled
$4,000,000  and  subordinated  debt of  $4,124,000.  The  interest  rate on this
advance  was 5.01% and  matures on March 23,  2010.  Advances  from the FHLB are
secured by a blanket lien on 1-4 family real estate loans and certain commercial
real estate loans.  The  subordinated  debt bears a rate of LIBOR plus 315 basis
point and pay dividends quarterly.  The rate is subject to quarterly resets. The
subordinated  debt matures October 7, 2033, and are callable on or after October
7, 2008.  Approximately  $3.4  million  was  eligible  for  inclusion  as Tier I
capital.

The Company's  capital at June 30, 2005 to risk weighted  assets totaled 16.01%.
Current  regulations  require a minimum  ratio of total capital to risk weighted
assets of 8%,  with at least 4% being in the form of Tier 1 capital,  as defined
in the  regulation.  As of June 30, 2005,  the  Company's  capital  exceeded the
current regulatory capital requirements.


                                                                              12
<PAGE>

RESULTS OF OPERATIONS
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2005 AND 2004

Net interest  income,  the principal  source of the Company's  earnings,  is the
amount of income  generated by earning  assets  (primarily  loans and investment
securities)  less the total  interest  cost of the funds  obtained to carry them
(primarily  deposits  and other  borrowings).  The volume,  rate and mix of both
earning assets and related funding sources determine net interest income.

COMPARATIVE THREE MONTHS

Net  interest  income for the  quarter  ended June 30, 2005  totaled  $1,206,808
compared to $1,079,606 in 2004. This increase was  attributable to growth in net
earning  assets.  The Company's net interest margin was  approximately  3.7% and
3.8% for the quarters ended June 30, 2005 and 2004, respectively.

Weststar  recorded a provision  for loan losses of $112,650 and $290,000 for the
quarters  ended June 30, 2005 and 2004,  respectively.  The  provision  for loan
losses is  charged  to  operations  to bring  the  allowance  to a level  deemed
appropriate by management based on the factors  discussed under "Asset Quality."
Despite improved  performance in credits, the allowance for loan losses remained
relatively high due to charge-off experience during the past three years.

Other  non-interest  income  for the June 30,  2005  and 2004  quarters  totaled
$376,647  and  $414,210,  respectively.  The decrease in service  charge  income
primarily  reflects  a decrease  in  overdraft  charge  income of  $25,041.  The
decrease in  overdraft  charges was based on activity  during the period.  Other
service  fees and  commission  decreased as a result of shifting  mortgage  loan
origination  from the Bank to the mortgage  company.  The Bank recorded $144 and
$24,463  from  the   origination   of  mortgage  loans  during  2005  and  2004,
respectively.  Net profit from Bank of Asheville  Mortgage Company,  LLC totaled
$9,264 during the 2005 quarter  compared to none during the 2004 quarter.  Other
income decreased $788 primarily due to a decrease in sales of checks and deposit
slips.

Other non-interest expense totaled $1,136,410 compared to $975,861 in 2004. This
increase was primarily  attributable  to overall company growth to support loans
and deposits,  and accounting  fees associated  with the  Sarbanes-Oxley  Act of
2002. Net expenses from foreclosed properties decreased from $43,204 to $11,696,
which  parallels a decrease in foreclosed  properties.  Income before income tax
provision totaled $334,395 and $227,955 for the quarters ended June 30, 2005 and
2004,  respectively.  Income tax provision  totaled $122,880 and $87,295 for the
quarters  ended  June 30,  2005 and  2004,  respectively,  which  equated  to an
effective  tax rate of 36.75%  and  38.29%.  Net  income  totaled  $211,515  and
$140,660 for the quarters ended June 30, 2005 and 2004, respectively.

COMPARATIVE SIX MONTHS

Net interest  income for the six-month  period June 30, 2005 totaled  $2,401,889
compared to $2,221,283 in 2004. This increase was  attributable to growth in net
earning  assets.  The Company's net interest margin was  approximately  3.8% and
4.0% for the periods ended June 30, 2005 and 2004, respectively.

Weststar  recorded a provision  for loan losses of $353,155 and $612,800 for the
six months ended June 30, 2005 and 2004,  respectively.  The  provision for loan
losses is  charged  to  operations  to bring  the  allowance  to a level  deemed
appropriate by management based on the factors  discussed under "Asset Quality."
Despite improved  performance in credits, the allowance for loan losses remained
relatively high due to charge-off experience during the past three years.


                                                                              13
<PAGE>

Other  non-interest  income  for the June 30,  2005  and  2004  periods  totaled
$713,122  and  $839,907,  respectively.  The decrease in service  charge  income
primarily  reflects  a decrease  in  overdraft  charge  income of  $60,424.  The
decrease in  overdraft  charges was based on activity  during the period.  Other
service  fees and  commission  decreased as a result of shifting  mortgage  loan
origination from the Bank to the mortgage company. The Bank recorded $12,612 and
$62,405  from  the   origination   of  mortgage  loans  during  2005  and  2004,
respectively.  Net  loss  from the  Company's  investment  in Bank of  Asheville
Mortgage  Company,  LLC totaled  $17,908 during the 2005 period compared to none
during  2004.  Other  income  decreased  $2,756  primarily  due to a decrease in
miscellaneous income.

Other non-interest  expense totaled  $2,273,871  compared to $1,986,236 in 2004.
This increase was primarily  attributable  to overall  company growth to support
loans and deposits,  and accounting fees associated with the  Sarbanes-Oxley Act
of 2002.  Equipment  expenses  increased  $21,626 as the company  purchased  new
equipment for  additional  employees,  and upgraded  outdated  servers  personal
computer  company-wide.  Marketing  expenses  increased  $20,762 as the  Company
continued to penetrate the service area. Net expenses from foreclosed properties
increased from $71,829 to $87,209, primarily due to expenses incurred during the
first quarter of 2005.  Income before income tax provision  totaled $487,985 and
$462,154  for the  periods  June 30,  2005 and 2004,  respectively.  Income  tax
provision  totaled $178,945 and $169,305 for the periods ended June 30, 2005 and
2004, respectively, which equated to an effective tax rate of 36.67% and 36.63%.
Net income totaled $309,040 and $292,849 for the periods ended June 30, 2005 and
2004, respectively.

                           ASSET/LIABILITY MANAGEMENT

The Company's  asset/liability  management,  or interest  rate risk  management,
program is focused  primarily on evaluating and managing the  composition of its
assets and  liabilities  in view of various  interest  rate  scenarios.  Factors
beyond the Company's control, such as market interest rates and competition, may
also have an impact on the Company's interest income and interest expense.

In the  absence  of other  factors,  the  yield or  return  associated  with the
Company's  earning  assets  generally  will increase  from existing  levels when
interest rates rise over an extended  period of time and,  conversely,  interest
income will decrease when interest rates decline.  In general,  interest expense
will  increase  when  interest  rates rise over an extended  period of time and,
conversely, interest expense will decrease when interest rates decline.

Interest  Rate Gap  Analysis.  As a part of its  interest  rate risk  management
policy,  the Company  calculates  an interest  rate "gap."  Interest  rate "gap"
analysis is a common,  though  imperfect,  measure of interest rate risk,  which
measures   the  relative   dollar   amounts  of   interest-earning   assets  and
interest-bearing liabilities which reprice within a specific time period, either
through  maturity or rate  adjustment.  The "gap" is the difference  between the
amounts  of such  assets  and  liabilities  that are  subject  to  repricing.  A
"positive"  gap for a given  period  means that the  amount of  interest-earning
assets maturing or otherwise  repricing within that period exceeds the amount of
interest-bearing  liabilities  maturing or otherwise  repricing  within the same
period.  Accordingly,  in a declining interest rate environment,  an institution
with a positive gap would  generally  be  expected,  absent the effects of other
factors,  to  experience a decrease in the yield on its assets  greater than the
decrease  in the cost of its  liabilities  and its income  should be  negatively
affected.  Conversely,  the cost of funds for an institution with a positive gap
would generally be expected to increase more slowly than the yield on its assets
in a rising  interest  rate  environment,  and such  institution's  net interest
income generally would be expected to be positively  affected by rising interest
rates.  Changes in  interest  rates  generally  have the  opposite  effect on an
institution with a "negative gap."


                                                                              14
<PAGE>

During the three-month and six-month periods of 2005, rates on  interest-bearing
liabilities  repriced at  incrementally  higher  than rates on  interest-earning
assets due to  competitive  factors in the market  place,  which  caused the net
interest margin to decrease slightly over 2004.

The  following  table sets  forth the  amounts  of  interest-earning  assets and
interest-bearing  liabilities  outstanding at June 30, 2005, which are projected
to reprice or mature in each of the future time periods shown.  Except as stated
below,  the  amounts of assets and  liabilities  shown  which  reprice or mature
within a particular  period were  determined in accordance  with the contractual
terms of the assets or  liabilities.  Loans with  adjustable  rates are shown as
being due at the end of the next upcoming  adjustment  period. The interest rate
sensitivity of the Company's assets and liabilities illustrated in the following
table would vary  substantially if different  assumptions were used or if actual
experience differs from that indicated by such assumptions.

<TABLE>
<CAPTION>
                                                              TERMS TO REPRICING AT JUNE 30, 2005
                                        1-90 Days   91-180 Days    181-365 Days   Total One Year   Non-Sensitive     Total
                                      ---------------------------------------------------------------------------------------
<S>                                    <C>           <C>             <C>            <C>             <C>           <C>
Interest-earning assets:
Interest bearing deposits             $    370,310                                 $    370,310                  $   370,310
Federal funds sold                      15,372,000                                   15,372,000                    15,372,000
Investment securities                    6,162,829  $   662,829   $   2,325,658       9,151,316     $14,011,159    23,162,475
Federal Home Loan Bank stock
                                                --           --              --              --         531,500       531,500
Loans (1)                               67,089,590    1,174,346       1,710,008      69,973,944      16,439,131    86,413,075
Total interest-earning assets           88,994,729    1,837,175       4,035,666      94,867,570      30,981,790   125,849,360

Interest-bearing liabilities:
Time deposits                           10,562,879    2,282,894      17,447,814      30,293,587       5,455,373    35,748,960
All other deposits                      55,817,798           --              --      55,817,798              --    55,817,798
Long-term debt                           4,124,000           --              --       4,124,000       4,000,000     8,124,000
Total interest-bearing liabilities      70,504,677    2,282,894      17,447,814      90,235,385       9,455,373    99,690,758

Interest sensitivity gap               $18,490,052  $ (445,719)   $(13,412,148)    $  4,632,185     $21,526,417
Cumulative interest sensitivity
Gap                                    $18,490,052  $18,044,333   $  4,632,185
Cumulative ratio of interest -
earning assets as a percent
of interest sensitive liabilities            126.2%        80.5%           23.1%          105.1%

</TABLE>

(1) Non-accrual loans have been excluded. Weststar has established an acceptable
range  of 80% to 120% for  interest-earning  assets  as a  percent  of  interest
sensitive liabilities.

                                  ASSET QUALITY

Management  considers  Weststar's asset quality to be of primary importance.  We
maintain an allowance for loan losses to absorb  probable losses inherent in the
loan portfolio.  The loan portfolio is analyzed monthly in an effort to identify
potential  problems before they actually occur. The allowance for loan losses is
established  as losses are  estimated to have  occurred  through a provision for
loan losses  charged to earnings.  The  provision  for loan losses is based upon
management's  best  estimate of the amount  needed to maintain the allowance for
loan losses at an adequate level.  Loan losses are charged against the allowance
when management  believes the  uncollectibility  of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance.


                                                                              15
<PAGE>

The allowance for loan losses is evaluated on a regular basis by management  and
is based upon management's periodic review of the collectibility of the loans in
light of the current status of the portfolio,  historical experience, the nature
and  volume  of the loan  portfolio,  adverse  situations  that may  affect  the
borrower's ability to repay, estimated value of any underlying  collateral,  and
prevailing economic  conditions.  Management segments the loan portfolio by loan
type in considering each of the aforementioned factors and their impact upon the
level of the allowance for loan losses.

This  evaluation is inherently  subjective,  as it requires  estimates  that are
susceptible  to  significant  revision as more  information  becomes  available.
Therefore,  while  management  uses  the  best  information  available  to  make
evaluations,  future adjustments to the allowance may be necessary if conditions
differ  substantially  from the assumptions used in making the  evaluations.  In
addition,  regulatory  examiners may require the Company to recognize changes to
the  allowance  for  loan  losses  based on their  judgments  about  information
available to them at the time of their examination.

A loan is considered  impaired when, based on current information and events, it
is probable that the Company will be unable to collect the scheduled payments of
principal or interest  when due according to the  contractual  terms of the loan
agreement.  Factors  considered by management in determining  impairment include
payment status,  collateral  value, and the probability of collecting  scheduled
principal and interest  payments when due. Loans that  experience  insignificant
payment delays and payment shortfalls  generally are not classified as impaired.
Management  determines the significance of payment delays and payment shortfalls
on a case-by-case  basis,  taking into  consideration  all of the  circumstances
surrounding  the loan and the borrower,  including the length of the delay,  the
reasons for the delay,  the borrower's  prior payment record,  and the amount of
the  shortfall in relation to the  principal  and interest  owed.  Impairment is
measured on a loan by loan basis for commercial and construction loans by either
the  present  value of  expected  future  cash  flows  discounted  at the loan's
effective  interest rate, the loan's  obtainable market price, or the fair value
of the collateral if the loan is collateral  dependent.  Large groups of smaller
balance   homogeneous   loans  are   collectively   evaluated  for   impairment.
Accordingly,  the Company does not separately  identify  individual consumer and
residential loans for impairment disclosures.

The provision for loan losses  represents a charge  against  income in an amount
necessary  to  maintain  the  allowance  at an  appropriate  level.  The monthly
provision for loan losses may fluctuate  based on the results of this  analysis.
The allowance  for loan losses at June 30, 2005 and 2004,  and December 31, 2004
and 2003 was $1,685,627,  $1,424,804, $1,608,366 and $1,174,003 or 1.90%, 1.85%,
1.90%  and  1.57%,  respectively,  of  gross  loans  outstanding.  The  ratio of
annualized net charge-offs to average loans outstanding was .63%, .94%, .72% and
1.82%,  at June 30, 2005 and 2004,  and  December  2004 and 2003,  respectively.
Improved asset quality and fewer  charge-offs  resulted in a lower  provision to
the loan loss reserve during 2005 compared to the same period in 2004. Primarily
because of a recessionary economy,  charge-offs for the years ended 2003 totaled
$1,357,614.   As  the  economy  demonstrated  signs  of  recovery  during  2004,
charge-offs decreased to $697,612.

The  following  table  contains an analysis for the  allowance  for loan losses,
including the amount of  charge-offs  and  recoveries by loan type,  for the six
months ended June 30, 2005 and 2004,  and for the years ended  December 31, 2004
and 2003.


                                                                              16
<PAGE>

Summary of Allowance for Loan Losses

<TABLE>
<CAPTION>
                                                For the six months             For the years ended
                                                  ended June 30,                  December 31,
                                               2005            2004            2004           2003
                                               ----            ----            ----           ----
<S>                                        <C>             <C>             <C>             <C>
Balance, beginning of period               $ 1,608,366     $ 1,174,003     $ 1,174,003     $ 1,020,198
  Charge-offs:
  Commercial, financial and agricultural      (186,228)       (354,414)       (579,930)     (1,075,792)
  Real estate:
    Construction                                    --              --              --              --
    Mortgage                                   (96,000)             --         (48,000)       (157,142)
  Consumer                                     (17,325)        (30,958)        (69,682)       (124,680)
                                           -----------     -----------     -----------     -----------
Total charge-offs                             (299,553)       (385,372)       (697,612)     (1,357,614)

Recoveries
  Commercial, financial and agricultural         7,048           8,475          73,054          71,942
  Real estate:
    Construction                                    --              --              --              --
    Mortgage                                        --              --          25,000              --
  Consumer                                      16,611          14,898          23,621          33,677
                                           -----------     -----------     -----------     -----------
Total recoveries                                23,659          23,373         121,675         105,619
                                           -----------     -----------     -----------     -----------
Net (charge-offs) recoveries                  (275,894)       (361,999)       (575,937)     (1,251,995)
                                           -----------     -----------     -----------     -----------
Provision charged to operations                353,155         612,800       1,010,300       1,405,800
                                           -----------     -----------     -----------     -----------
Balance, end of period                     $ 1,685,627     $ 1,424,804     $ 1,608,366     $ 1,174,003
                                           ===========     ===========     ===========     ===========

Annualized percentage of net
  charge-offs to average loans                     .63%            .94%            .72%           1.82%
Percentage of allowance to
  period-end loans                                1.90%           1.85%           1.90%           1.57%

</TABLE>

The following  table allocates the allowance for loan losses by loan category at
the dates  indicated.  The  allocation  of the allowance to each category is not
necessarily  indicative  of future  losses and does not  restrict the use of the
allowance to absorb losses in any category.

                                 June 30, 2005             December 31, 2004
                            Amount of    Percent of     Amount of   Percent of
                            Allowance    Total Loans    Allowance   Total Loans

TYPE OF LOAN:
Real estate                 $1,249,641           75%   $1,139,769           74%
Commercial and industrial
  loans                        355,600           23%      388,559           24%
Consumer                        55,006            2%       54,528            2%
Unallocated                     25,380           --        25,510           --
                            ----------   ----------    ----------   ----------
Total allowance             $1,685,627          100%   $1,608,366          100%
                            ==========   ==========    ==========   ==========

The  Company  does not have any  significant  loan  concentrations.  During  the
period,   loan  quality   demonstrated   improvement.   Impaired  loans  totaled
$1,019,222,  $1,598,956  and  $1,869,920  at June 30 2005,  March  31,  2005 and
December 31, 2004, respectively. Nonaccrual loans totaled $2,299,925, $2,823,869
and $2,567,816 at June 30, 2005, March 31, 2005 and December 31, 2004.

During 2005,  there were no changes in estimation  methods or  assumptions  that
affected our  methodology for assessing the  appropriateness  of the formula and
specific  allowance  for credit  losses.  Changes in estimates  and  assumptions
regarding the effect of economic and business conditions on borrowers affect the
assessment of the allowance.


                                                                              17
<PAGE>

                                CAPITAL RESOURCES

Banks and bank holding companies, as regulated institutions,  must meet required
levels of capital.  The Federal Deposit Insurance  Corporation  ("FDIC") and the
Federal Reserve,  the primary  regulators of The Bank of Asheville and Weststar,
respectively,  have adopted  minimum  capital  regulations  or  guidelines  that
categorize  components  and the level of risk  associated  with various types of
assets.  Financial  institutions  are  expected  to  maintain a level of capital
commensurate  with the risk profile  assigned to its assets in  accordance  with
these  guidelines.  As shown in the  following  table,  Weststar and The Bank of
Asheville both maintained  capital levels exceeding the minimum levels for "well
capitalized" banks and bank holding companies.




                                                                              18
<PAGE>
<TABLE>
<CAPTION>

                                            REGULATORY CAPITAL

                                                                                                      To Be Well
                                                                                                   Capitalized Under
                                                                             For Capital           Prompt Corrective
                                                       Actual             Adequacy Purposes        Action Provisions
                                                 Amount       Ratio      Amount       Ratio       Amount       Ratio
                                                 ------       -----      ------       -----       ------       -----
                                                                        (Dollars in Thousands)
<S>                                              <C>          <C>         <C>           <C>        <C>         <C>
As of June 30, 2005
Total Capital (to Risk Weighted Assets)
  Consolidated                                   $15,453      16.01%      $7,721        8.00%      $9,652      10.00%
  Bank                                           $14,825      15.41%      $7,697        8.00%      $9,622      10.00%

Tier 1 Capital (to Risk Weighted Assets)
  Consolidated                                   $13,655      14.15%      $3,861        4.00%      $5,791       6.00%
  Bank                                           $13,616      14.15%      $3,849        4.00%      $5,773       6.00%

Tier 1 Capital (to Average Assets)
  Consolidated                                   $13,655      10.26%      $5,325        4.00%      $6,656       5.00%
  Bank                                           $13,616      10.25%      $5,313        4.00%      $6,641       5.00%

</TABLE>

                                    LIQUIDITY

Maintaining  adequate liquidity while managing interest rate risk is the primary
goal of Weststar's  asset and liability  management  strategy.  Liquidity is the
ability  to fund the  needs  of the  Company's  borrowers  and  depositors,  pay
operating expenses, and meet regulatory liquidity requirements. Loan repayments,
deposit  growth,  federal funds  purchased and borrowings  from the Federal Home
Loan  Bank are  presently  the main  sources  of the  Company's  liquidity.  The
Company's primary uses of liquidity are to fund loans and to make investments.

As of June 30, 2005 liquid  assets (cash due from banks,  interest-earning  bank
deposits  and  federal  funds  sold) were  approximately  $20.8  million,  which
represents 15.3% of total assets and 17.8% of total deposits. Supplementing this
liquidity,  Weststar has available lines of credit from  correspondent  banks of
approximately $12.5 million. At June 30, 2005, outstanding commitments to extend
credit and available  lines of credit were $23.1  million.  Management  believes
that the combined  aggregate  liquidity position of the Company is sufficient to
meet  the  funding  requirements  of loan  demand  and  deposit  maturities  and
withdrawals in the near term.

Certificates  of deposit  represented  approximately  30.6% of Weststar's  total
deposits at June 30, 2005. The Company's  growth  strategy will include  efforts
focused on increasing the relative volume of transaction  deposit  accounts,  as
the branch  network  is  expanded,  making it more  convenient  for our  banking
customers.  Certificates of deposit of $100,000 or more  represented 8.0% of the
Company's  total  deposits  at June  30,  2005.  These  deposits  are  generally
considered   rate   sensitive,   but  management   believes  most  of  them  are
relationship-oriented.  While the Company will need to pay competitive  rates to
retain these deposits at maturity,  there are other subjective factors that will
determine  the  Company's  continued  retention  of these  deposits.

                              INVESTMENT ACTIVITIES

At June 30, 2005,  Weststar's  investments  consisted of U.S.  Government agency
securities,  mortgage backed securities and North Carolina  municipal bonds. The
investments,  with


                                                                              19
<PAGE>

aggregate amortized cost of $23.2 million,  are classified as available for sale
and are  presented  in the  consolidated  financial  statements  at their market
values of $22.9 million at June 30, 2005.  These  securities have tax equivalent
yields of 3.2%, 3.9% and 5.3% respectively,  with an aggregate remaining term of
approximately 50.7 months. The Company's investment in stock of the Federal Home
Loan Bank,  which is  required  of every  member and is  redeemable  only by the
Federal  Home Loan Bank,  was  $531,500  with a yield of 4.50% at June 30, 2005.
Because the  investment is redeemable  only by the Federal Home Loan Bank, it is
listed separately rather than a component of the Company's investment portfolio.

                     IMPACT OF INFLATION AND CHANGING PRICES

A financial institution has assets and liabilities that are distinctly different
from those of a company  with  substantial  investments  in plant and  inventory
because the major  portion of its assets is monetary in nature.  As a result,  a
bank's performance may be significantly influenced by changes in interest rates.
Although the banking industry is more affected by changes in interest rates than
by inflation in the prices of goods and services,  inflation is a factor,  which
may influence interest rates.  However,  the frequency and magnitude of interest
rate  fluctuations  do not  necessarily  coincide  with  changes in the  general
inflation  rate.  Inflation  does affect  operating  expenses in that  personnel
expenses,  cost of supplies and outside  services  tend to increase  more during
periods of high inflation.

Item 3.  Controls and Procedures

The Company  carried out an  evaluation  as of the end of the period  covered by
this report under the  supervision and with the  participation  of the company's
management,  including the Company's Chief Executive Officer and Chief Financial
Officer,  of the  effectiveness  of the design and  operation  of the  Company's
disclosure  controls and procedures pursuant to Securities and Exchange Act Rule
13a-14.  Based  upon that  evaluation,  the Chief  Executive  Officer  and Chief
Financial  Officer  concluded  that  the  Company's   disclosure   controls  and
procedures  are  effective  in  timely  alerting  them to  material  information
relating to the Company  required to be included in the  Company's  periodic SEC
Filings. There were no significant changes in the Company's internal controls or
in other factors during the most recent quarter.


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<PAGE>

Part II. OTHER INFORMATION

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

      The  Annual  Meeting  of  Stockholders  was held on  April  21,  2005.  Of
1,399,249 shares entitled to vote at the meeting,  1,112,240 or 79.5% voted. The
following matters were voted on at the meeting:

Proposal 1:  To elect three board  members to  three-year  terms. Votes for each
             nominee were as follows:

         3-year terms                    Votes For                Votes Withheld
      ------------------                 ----------               --------------
      Patricia P. Grimes                 1,108,847                    3,393
      Carol L. King                      1,109,420                    2,820
      David N. Wilcox                    1,106,546                    5,694

Proposal 2:  To ratify  the  appointment  of Dixon  Hughes  PLLC as  independent
             accountants  for  the  year ending December 31, 2003. Votes were as
             follows:

None.    Votes For                     Votes Against              Votes Withheld
         ---------                     -------------              --------------
         1,110,259                          538                        1,443

Item 6.  Exhibits

      (a) Exhibits.

          31.1  -   Certification  of  the  Chief Executive  Officer pursuant to
                    Rule 13a-14(a) under the Securities  Exchange Act of 1934 as
                    adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
                    2002

          31.2  -   Certification  of  the  Chief Financial  Officer pursuant to
                    Rule 13a-14(a) under the Securities  Exchange Act of 1934 as
                    adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
                    2002

          32.1  -   Certification  by  the  Chief Executive  Officer pursuant to
                    18 U.S.C.  1350 as adopted  pursuant  to Section  906 of the
                    Sarbanes-Oxley Act of 2002

          32.2  -   Certification  by  the  Chief Financial  Officer pursuant to
                    18 U.S.C.  1350 as adopted  pursuant  to Section  906 of the
                    Sarbanes-Oxley Act of 2002


                                                                              21
<PAGE>

SIGNATURES

Under 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.



                                    WESTSTAR FINANCIAL SERVICES CORPORATION



Date: August 9, 2005            By: /s/   G. Gordon Greenwood
                                    --------------------------------------------


                                    G. Gordon Greenwood
                                    President and Chief Executive Officer




Date: August 9, 2005            By: /s/   Randall C. Hall
                                    --------------------------------------------


                                    Randall C. Hall
                                    Executive Vice President and Chief Financial
                                    and Principal Accounting Officer




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