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

                                   FORM 10-KSB

                 Annual Report Under Section 13 or 15(d) of the
                         Securities Exchange Act of 1934

                  For the fiscal year ended September 30, 2003

                        Commission File Number: 000-25999

                          WAKE FOREST BANCSHARES, INC.
                 (Name of small business issuer in its charter)

        UNITED STATES                                     56-2131079
(State or other jurisdiction of                (IRS Employer Identification No.)
        Incorporation)

                             302 South Brooks Street
                        Wake Forest, North Carolina 27587
                    (Address of Principal Executive Offices)

                                 (919) 556-5146
                (Issuer's Telephone Number, Including Area Code)

      Securities registered pursuant to Section 12(g) of the Exchange Act:

                     Common Stock, par value $0.01 per share
                                (Title of Class)

       Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes |X| No |_|

        Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this 10-KSB or
any amendment to this Form 10-KSB. |X|

       The revenues for the issuer's fiscal year ended September 30, 2003 were
$5,640,450.

       The issuer had 1,145,296 shares of common stock outstanding as of
December 21, 2003. The aggregate market value of the common equity held by
non-affiliates of the Registrant, computed by reference to the average bid and
asked prices of the common stock as of December 21, 2003 was $8,709,775.

       Transitional Small Business Disclosure Format (check one): Yes |_| No |X|


                      DOCUMENTS INCORPORATED BY REFERENCE.

       Portions of the registrant's Annual Report to Stockholders for the year
ended September 30, 2003 are incorporated by reference into Parts I and II of
this Form 10-KSB.

       Portions of the registrant's Proxy Statement for the 2004 Annual Meeting
of Shareholders are incorporated by reference into Part III of this Form 10-KSB.


<PAGE>

                                        TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S>      <C>                                                                            <C>
Part I

         FORWARD LOOKING STATEMENTS......................................................3
         Item 1.  Description of Business................................................4
         Item 2.  Description Of Property...............................................29
         Item 3.  Legal Proceedings.....................................................29
         Item 4.  Submission of Matters to a Vote of Security Holders...................29

PART II

         Item 5.  Market for Equity and Related Stockholder Matters.....................29
         Item 6.  Management's Discussion and Analysis or Plan of Operation.............30
         Item 7.  Financial Statements..................................................30
         Item 8.  Changes in and Disagreements with Accountants on Accounting
                  and Financial Disclosure..............................................31
         ITEM 8A. Controls and Procedures...............................................31

PART III

         Item 9.  Directors and Executive Officers of the Registrant....................31
         Item 10. Executive Compensation................................................31
         Item 11. Security Ownership of Certain Beneficial Owners and Management
                  and Related Stockholder Matters.......................................31
         Item 12. Certain Relationships and Related Transactions........................31
         Item 13. Exhibits, Lists and Reports on Form 8-K...............................32
         Item 14. Principal Accountant Fees and Services................................33

</TABLE>


SIGNATURES


<PAGE>

                                     PART I

FORWARD-LOOKING STATEMENTS

         This document, including information incorporated by reference,
contains, and future filings by Wake Forest Bancshares, Inc. (the "Company") on
Form 10-QSB and Form 8-K and future oral and written statements by the Company
and its management may contain forward-looking statements about the Company and
its subsidiary which we believe are within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include, without
limitation, statements with respect to anticipated future operating and
financial performance, growth opportunities, interest rates, cost savings and
funding advantages expected or anticipated to be realized by management. Words
such as "may," "could," "should," "would," "believe," "anticipate," "estimate,"
"expect," "intend," "plan" and similar expressions are intended to identify
these forward-looking statements. Forward-looking statements by the Company and
its management are based on beliefs, plans, objectives, goals, expectations,
anticipations, estimates and intentions of management and are not guarantees of
future performance. The Company disclaims any obligation to update or revise any
forward-looking statements based on the occurrence of future events, the receipt
of new information, or otherwise. The important factors we discuss below and
elsewhere in this document, as well as other factors discussed under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in our Annual Report to Shareholders (attached to this document as
Exhibit 13) and identified in our filings with the SEC and those presented
elsewhere by our management from time to time, could cause actual results to
differ materially from those indicated by the forward-looking statements made in
this document:

         o   the strength of the United States economy in general and the
             strength of the local economies in which we conduct operations;

         o   the effects of, and changes in, trade, monetary and fiscal policies
             and laws, including interest rate policies of the Federal Reserve
             Board ("FRB");

         o   inflation, interest rate, market and monetary fluctuations;

         o   the timely development and acceptance of our new products and
             services and the perceived overall value of these products and
             services by users, including the features, pricing and quality
             compared to competitors' products and services;

         o   the willingness of users to substitute our products and services
             for products and services of our competitors;

         o   our success in gaining regulatory approval of our products and
             services, when required;

         o   the impact of changes in financial services' laws and regulations
             (including laws concerning taxes, banking, securities and
             insurance);

         o   the impact of technological changes;

         o   acquisitions;

         o   changes in consumer spending and saving habits; and

         o   our success at managing the risks involved in the foregoing.


                                       3
<PAGE>

ITEM 1.   DESCRIPTION OF BUSINESS

GENERAL

         Wake Forest Bancshares, Inc. is a federally-chartered stock holding
company for Wake Forest Federal Savings & Loan Association (the "Association"),
a federally chartered stock savings and loan association which conducts business
from its one office located in Wake Forest, North Carolina. The office is
located in Wake County, North Carolina. The Company was formed on May 7, 1999
pursuant to an Agreement and Plan of Reorganization whereby the Company
exchanged its common stock for all outstanding common stock of the Association.
The Company is a majority owned subsidiary of Wake Forest Bancorp, M.H.C., a
federal mutual holding company (the "MHC"). The Association was founded in 1922
as a building and loan association. In 1982, the Association converted from a
North Carolina chartered mutual savings and loan association to a federally
chartered mutual savings and loan association. During fiscal year 1996, the
Association converted from a federally chartered mutual savings and loan
association to a federally chartered stock savings and loan association. The
Association is the Company's sole subsidiary. The Association's deposits are
insured by the Savings Association Insurance Fund of the Federal Deposit
Insurance Corporation (the "FDIC") to the maximum extent permitted by law. At
September 30, 2003, the Company had total assets of $85.7 million, total
deposits of $68.8 million and total stockholders' equity of $15.5 million.

         The Company conducts no business other than holding stock in the
Association, investing dividends received from the Association, repurchasing its
common stock from time to time, and distributing dividends on its common stock
to its shareholders.

         The primary focus of the Association is to provide financing for single
family housing in its market area of northern Wake County and southern Franklin
County. The Association has concentrated its lending activities on real estate
loans secured by single family residential properties and construction loans on
primarily residential properties. To a lesser extent, the Association invests in
commercial real estate, land, multi-family residential and savings account
loans. The Association also invests its excess funds primarily in Federal Home
Loan Bank stock, Federal Home Loan Mortgage Corporation ("FHLMC") stock, U.S.
Treasury and Agency obligations, and other short term interest-bearing deposits.
The Association's principal sources of funds are deposits and principal and
interest payments on loans. The principal source of income is interest on loans
and investment securities. The Association's principal expenses are interest
paid on deposits and compensation and benefits.

         The Association's results of operations are dependent primarily on net
interest income, which is the difference between the interest income earned on
its interest-earning assets, such as loans and securities, and interest expense
on its interest-bearing liabilities, such as deposits. The Association also
generates non-interest income such as service charges and other account fees,
fees from sale of loans in the secondary market, and gains from sale of
investments. The Association's non-interest expenses primarily consist of
compensation and benefits, occupancy expenses, data processing fees and other
operating expenses. The Association's results of operations are also
significantly affected by general economic and competitive conditions
(particularly changes in market interest rates), government policies, changes in
accounting standards and actions of regulatory agencies. The Association
exceeded all of its regulatory capital requirements at September 30, 2003. See
"Regulation -- Regulation of Federal Savings Association -- Capital
Requirements."

         The Association is primarily engaged in the business of attracting
retail deposits from the general public in the Association's marketing area, and
investing those deposits, together with other sources of funds, primarily in
loans secured by one- to four-family residential real estate for retention in
its loan portfolio. For further details, see below under "Lending Activities."

REORGANIZATION

         On October 23, 1995, the Board of Directors adopted the Plan of
Reorganization from Mutual Savings and Loan Association to Mutual Holding
Company, pursuant to which the Association (i) exchanged its federal mutual
savings and


                                       4
<PAGE>

loan association charter for a federal stock savings and loan association
charter and (ii) formed the MHC, a federally chartered mutual holding company
which owned in excess of 50% of the common stock of the Association. In
connection with the reorganization, the Association sold shares of its common
stock to certain depositors of the Association and the Association's Employee
Stock Ownership Plan ("ESOP"). The Association completed the reorganization on
April 3, 1996.

         The Board of Directors of the Association approved an Agreement and
Plan of Reorganization (the "Plan of Reorganization") on November 16, 1998. The
Plan of Reorganization provided for the establishment of the Company as a stock
holding company parent of the Association. The Company is majority owned
(approximately 55%) by the MHC. The reorganization into the "two-tier" mutual
holding company structure (the "Reorganization") was approved by the
Association's stockholders at their annual meeting held on February 23, 1999 and
by regulatory authorities on April 9, 1999. The formation of the Company was
consummated on May 7, 1999.

         As part of the Reorganization each outstanding share of Association's
common stock was converted into one share of common stock par value $.01 per
share of the Company and the holders of the Association's common stock became
the holders of all the outstanding shares of the Company's common stock.
Accordingly, as a result of the Reorganization, the Association's minority
shareholders became minority shareholders of the Company. The Company was formed
solely for the purpose of becoming a savings and loan holding company and is
regulated by the Office of Thrift Supervision (the "OTS"). It had no prior
operating history. The Reorganization had no impact on the operations of the
Association or the MHC. The Association continues to operate at the same
location with the same management and subject to all the rights, obligations and
liabilities of the Association existing immediately prior to the Reorganization.

         The Board of Directors of the Association initially capitalized the
Company with $100,000. Future capitalization of the Company will depend upon
dividends declared by the Association based on future earnings or the raising of
additional capital by the Company through a future issuance of securities, debt
or by other means. The Board of Directors of the Company has no present plans or
intentions with respect to any future issuance of securities or debt at this
time. Furthermore, as long as it is in existence, the MHC must own at least a
majority of the Company's outstanding voting stock.

         The Reorganization was treated similar to a pooling of interests for
accounting purposes. Therefore, the consolidated capitalization, assets,
liabilities, income and expenses of the Company immediately following the
Reorganization were substantially the same as those of the Association
immediately prior to consummation of the Reorganization, all of which were shown
on the Company's books at their historical recorded values.

MARKET AREA AND COMPETITION

         The Association is a community-oriented savings institution which
primarily gathers deposits and originates one- to four-family residential
mortgage loans and construction loans within its market area. The Association's
market area for deposit gathering and lending is concentrated in northern Wake
County and southern Franklin County, North Carolina.

         The Association's market area has benefited from its close proximity to
the "Research Triangle Park" which includes the cities of Chapel Hill, Durham
and Raleigh. The commuting distance from the Research Triangle Park to the town
of Wake Forest is approximately 15 miles. While most of the commercial
development within the Research Triangle Park has been in Durham County, most of
the residential development for the employees of the Research Triangle Park has
taken place in Wake County. Northern Wake County is expected to benefit from the
continued expansion of this area. Access to the Research Triangle Park is
excellent due to the proximity of Federal Interstate System I540 which is just
south of Wake Forest. The driving time between Wake Forest and the Research
Triangle Park is about 20 minutes.


                                       5
<PAGE>

         Currently, employment within the region varies, from a more high tech
and service-oriented industry near the Research Triangle Park to a more
agricultural/manufacturing base further away from the Research Triangle Park.
The largest employers in the northern Wake County area include Sprint,
Novo-Nordisk, and Mallinckrodt. Proximity to the Research Triangle Park, to
Raleigh-Durham International Airport and to the City of Raleigh, the state
capital, should result in the future growth in the Association's market area.

         The population of the Association's market area grew rapidly during the
1990's and is expected to continue its growth over the next ten years. Based on
information provided by the Economic Development Program of the Wake Forest
Chamber of Commerce, the town of Wake Forest's population was 5,832 in 1990 and
doubled in size to 12,550 by 2000. In 2003, the population is estimated to be
approximately 15,000. This data also states that the population within a five
mile radius of Wake Forest was 24,623 in 2000 and is expected to grow by
approximately 70% by 2010. Residential households totaled 13,107 within a five
mile radius of Wake Forest in 2002 and are expected to increase by approximately
20% by 2005.

         The Association faces substantial competition for both the deposits it
accepts and the loans it makes. Located within the Wake Forest area are branch
offices of eight other depository institutions, six of which are commercial
banks and two are large credit unions. The Association also encounters
significant competition for deposits from commercial banks, savings banks,
savings and loan associations and credit unions located in the Raleigh-Durham
area. Due to the Association's size relative to its competitors, the Association
offers a more limited product line, with an emphasis on product delivery and
customer service. The Association competes for deposits by offering a variety of
customer services and deposit accounts at competitive interest rates. The
Association, as well as its competitors, is affected by general economic
conditions, particularly changes in market interest rates, real estate market
values, government policies and regulatory authorities' actions. Changes in the
ratio of the demand for loans relative to the availability of credit may affect
the level of competition from financial institutions which may have greater
resources than the Association, but which have not generally engaged in lending
activities in the Association's market area in the past. Competition may also
increase as a result of the lifting of restrictions on the interstate operations
of financial institutions. See "--Regulation."

LENDING ACTIVITIES

         Loan Portfolio Composition. The Association's loan portfolio consists
primarily of conventional one- to four-family first mortgage loans and
construction loans. To a lesser extent, the Association also makes multi-family
residential loans, commercial real estate loans, land loans, and loans secured
by savings accounts at the Association.

         The types of loans that the Association may originate are subject to
federal and state laws and regulations. Interest rates charged by the
Association on loans are affected by the demand for such loans, the supply of
money available for lending purposes and the rates offered by competitors. These
factors are in turn affected by, among other things, economic conditions,
monetary policies of the federal government, including the Federal Reserve
Board, and legislative tax policies.


                                       6
<PAGE>


         The following table sets forth the composition of the Association's
mortgage and other loan portfolios in dollar amounts and percentages at the
dates indicated.

<TABLE>
<CAPTION>
                                                         At September 30,
                                          --------------------------------------------
                                                  2003                    2002
                                          --------------------     -------------------
                                                        % of                    % of
                                           Amount       Total       Amount      Total
                                           ------       -----       ------      -----
                                                      (Dollars in Thousands)
<S>                                       <C>          <C>         <C>         <C>
Type of loans:
      One- to four-family residential     $19,054       28.43%     $25,410      33.55%
      Multi-family residential                537        0.80          442       0.58
      Commercial real estate               13,171       19.65       15,141      19.99
      Land                                 14,864       22.18       12,503      16.51
      Commercial construction               2,420        3.61          593       0.78
      Residential construction             28,554       42.61       29,302      38.68
      Equity line mortgages                 1,729        2.58        1,878       2.48
      Savings Account                         108        0.16          160       0.21
                                          -------      ------      -------     ------
                                           80,437      120.03%      85,429     112.78%
                                          -------      ------      -------     ------
Less:
      Deferred loan fees                       98        0.15%         194       0.26%
      Undisbursed portion of
        loans in process                   12,683       18.93        9,025      11.91
      Allowance for loan losses               640        0.95          463       0.61
                                          -------      ------      -------     ------
                                           13,421       20.03        9,682      12.78
                                          -------      ------      -------     ------
       Total loans receivable, net        $67,016      100.00%     $75,747     100.00%
                                          =======      ======      =======     ======

</TABLE>


         Loan Maturity. The following table shows the contractual maturity of
the Association's loans at September 30, 2003. The table reflects the entire
unpaid principal balance in the maturity period that includes the final loan
payment date and, accordingly, does not give effect to periodic principal
repayments or possible prepayments. Principal repayments and prepayments totaled
$45.9 million and $26.4 million for the years ended September 30, 2003 and 2002,
respectively.

<TABLE>
<CAPTION>
                                                                    At September 30, 2003
                      --------------------------------------------------------------------------------------------------------------
                       Residential  Residential Commercial                                          Equity     Savings
                          1-4         Multi        Real                 Commercial   Residential     Line      Account
                         Family      -family     Estate        Land    Construction Construction  Mortgages     Loans        Total
                         --------    --------    --------    --------    --------     --------     --------    --------    --------
<S>                      <C>         <C>         <C>         <C>         <C>          <C>          <C>         <C>         <C>
Contractual maturity:
  One year or less       $  2,660    $     --    $    184    $  2,406    $  2,420     $ 28,554     $     --    $     86    $ 36,310
                         --------    --------    --------    --------    --------     --------     --------    --------    --------
   After one year:
      1 to 3 years         10,881          --       4,326       7,897          --           --           --          22      23,126
      3 to 5 years          3,074          --       4,745       2,988          --           --           --          --      10,807
      5 to 10 years           473          --         157         348          --           --          479          --       1,457
      10 to 20 years        1,966          --       3,682       1,226          --           --        1,249          --       8,123
      Over 20 years            --         537          77          --          --           --           --          --         614
                         --------    --------    --------    --------    --------     --------     --------    --------    --------
Total after one year       16,394         537      12,987      12,459          --           --        1,728          22      44,127
                         --------    --------    --------    --------    --------     --------     --------    --------    --------
Total amount due           19,054         537      13,171      14,865       2,420       28,554        1,728         108      80,437
Undisbursed loans              --          --          --          --      (1,363)     (11,320)          --          --     (12,683)
                         --------    --------    --------    --------    --------     --------     --------    --------    --------
Loans outstanding        $ 19,054    $    537    $ 13,171    $ 14,865    $  1,057     $ 17,234     $  1,728         108    $ 67,754
                         ========    ========    ========    ========    ========     ========     ========    ========    ========

</TABLE>



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


                                       7
<PAGE>

         The following table sets forth the dollar amounts in each loan category
at September 30, 2003 that are contractually due after September 30, 2004, and
whether such loans have fixed interest rates or adjustable interest rates.

                                           Due After September 30, 2004
                                      -------------------------------------
                                       Fixed       Adjustable
                                       Rates          Rates           Total
                                      --------     -----------        -----
                                                 (Dollars in Thousands)
One-to-four family residential        $   586        $15,808        $16,394
Multi-family residential                  537             --            537
Commercial real estate                    376         12,611         12,987
Land                                        4         12,455         12,459
Commercial construction                    --             --             --
Residential construction                   --             --             --
Equity line mortgages                      --          1,728          1,728
Savings account loans                      22             --             22
                                      -------        -------        -------
                                      $ 1,525        $42,602        $44,127
                                      =======        =======        =======

         Origination, Purchase, Sale and Servicing of Loans. The Association's
lending activities are conducted through its office in Wake Forest, North
Carolina. The Association originates both adjustable-rate mortgage loans and
fixed-rate mortgage loans. Adjustable-rate mortgage loans and fixed-rate
mortgage loans carry maximum amortizations of 30 years. The Association's
ability to originate loans is dependent upon the relative customer demand for
fixed-rate or adjustable-rate mortgage loans, which is affected by the current
and expected future levels of interest rates. The Association currently holds
for its portfolio all the adjustable rate loans it originates. The Association
has a correspondent lending program with a large national mortgage company and
sells substantially all of its longer-term fixed rate residential mortgage loans
in the secondary market. Loans sold through the program are sold servicing
released and typically will be 15 and 30 year fixed rate loans that contain a
greater amount of interest rate risk than the Association is willing to carry in
its own portfolio. The Association does not service loans for others and has no
current plans to begin such activities. From time to time, the Association
purchases participations in mortgage loans originated by other institutions or
affordable housing consortiums. The determination to purchase participations in
specific loans or pools of loans is based upon criteria substantially similar to
the Association's underwriting policies, which consider the financial condition
of the borrower, the location of the underlying property and the appraised value
of the property, among other factors.

         One -to Four-Family Mortgage Lending. The Association offers both
fixed-rate and adjustable-rate mortgage loans, with amortizations of up to 30
years. These loans are secured by one- to four-family residences, which
generally are owner-occupied. Substantially all such loans are secured by
property located in northern Wake County and southern Franklin County, North
Carolina. Loan originations are generally obtained from existing or past
customers and members of the local communities. See "-Origination, Purchase,
Sale and Servicing of Loans."

         At September 30, 2003, the Association's total loans were $67.0
million, of which $19.1 million, or 28.43% were one-to four-family residential
mortgage loans. Of the one- to four-family residential mortgage loans
outstanding at that date, 3.10%, or $290,200, were fixed-rate loans and 96.90%,
or $18.8 million, were adjustable-rate loans. The Association offers three or
five year balloon loans, which are either called or modified based on the
Association's interest rates currently in effect at the balloon date. These
loans are similar to adjustable rate loans in that the loans generally amortize
over terms of up to 30 years but are not indexed to any widely recognized rate,
such as the one year U.S. Treasury securities rate, and do not have interest
rate caps or floors. Instead, the majority of such loans are modified at the
balloon date and the rate is adjusted to the Association's current rate offered
for similar loans being originated on such dates. For purposes of the tabular
presentations throughout this document, such loans are considered to be
adjustable. Such loans involve risks similar to more traditional adjustable rate
loans because the Association modifies the loan documents at the end of the
three and five year terms to adjust for rates currently offered by the
Association for similar loans being originated on such dates. The loans are not
generally underwritten again at modification unless the Association is aware of
collateral or ability-to-pay issues.


                                       8
<PAGE>

         In view of its operating strategy, the Association adheres to its Board
approved underwriting guidelines for loan origination, which, though prudent in
approach to credit risk and evaluation of collateral, allow management
flexibility with respect to documentation of certain matters and certain credit
requirements. As a result, such underwriting guidelines in certain lending
situations are less rigid than comparable Federal National Mortgage Association
("Fannie Mae") or FHLMC underwriting guidelines. The Association's loans are
typically originated under terms, conditions and documentation which permit them
to be sold to U.S. government sponsored agencies such as the Fannie Mae or the
FHLMC. The Association sells certain residential loans in the secondary market
through a correspondent lending program which requires that the Association
originate such loans utilizing the standard secondary market underwriting
requirements. Unless sold in the secondary market, the Association's policy is
to originate one- to four-family residential mortgage loans in amounts up to 80%
of the lower of the appraised value or the selling price of the property
securing the loan. Mortgage loans originated by the Association generally
include due-on-sale clauses which provide the Association with the contractual
right to deem the loan immediately due and payable in the event the borrower
transfers ownership of the property without the Association's consent.
Due-on-sale clauses are an important means of adjusting the rates on the
Association's fixed-rate mortgage loan portfolio and the Association has
generally exercised its rights under these clauses.

         Construction Lending. The Association originates loans for construction
to local real estate contractors in its market area, generally with whom it has
an established relationship and to individuals for construction of one- to
four-family residences. The Association's construction loans primarily have been
made to finance the construction of one- to four-family residential properties
which will generally be owner-occupied. These loans are generally indexed to
Prime with maturities of six to nine months, and allow for extensions with Board
approval. The Association's policies provide that construction loans may be made
in amounts up to 80% of the appraised value of the property or the cost of
construction, whichever is less, for construction of one- to four-family
residences. All construction loans are subject to the limitation on
loans-to-one-borrower and the Association considers the location of the proposed
construction in order to avoid over-concentration in a single area. Prior to
making a commitment to fund a construction loan, the Association requires an
independent appraisal of the property by a state-certified appraiser if the
requested amount exceeds $125,000. The Association's Chairman of the Board
generally inspects each project at the commencement of construction and
throughout the term of the construction. Loan proceeds are disbursed in
increments as construction progresses and as inspections warrant based upon a
percentage of completion. At September 30, 2003, the Association had $17.2
million (net of undisbursed loan funds of $11.3 million) of residential
construction loans which amounted to 25.72%, of the Association's net loans
outstanding. The largest residential construction loan in the Association's
portfolio at September 30, 2003 was $848,000, is secured by a single family
residence under construction and is performing according to its terms.

         Construction loans to individuals are typically made in connection with
the granting of the permanent loan on the property. Such loans convert to a
fully amortizing adjustable- or fixed-rate loan at the end of the construction
term. In most cases, the Association requires that the closing with respect to
permanent financing occur simultaneously with the closing of any construction
loan to an individual.

         The Association makes construction loans to local builders on either a
pre-sold or speculative (unsold) basis. However, the Association generally
limits the number of unsold homes under construction by its builders, with the
amount dependent on the reputation of the builder, the present exposure of the
builder, the location of the property, the size of the loan and prior sales of
homes in the development. The Association estimates that approximately 65% of
its construction loans to builders are on a speculative basis.

         The Association also originates construction loans on commercial
properties. The underwriting requirements are similar to those required for
construction loans on residential properties. However, the loan to value may not
exceed 75% of the property's appraised value, certain debt service and income
ratios are considered, and financial projections and business plans are
reviewed. At September 30, 2003, the Association had $1.0 million (net of
undisbursed loan funds of $1.4 million) of commercial construction loans which
amounted to 1.57% of the Association's net loans outstanding. The largest
commercial construction loan in the Association's portfolio at September 30,
2003 was $1.2 million, is secured by a partially completed church facility, and
is performing according to its terms.


                                       9
<PAGE>

         Construction loans are generally considered to involve a higher degree
of credit risk than one- to four-family residential mortgage loans because
circumstances outside the borrower's control may adversely affect the market
value of the property. The Association has attempted to minimize these risks by,
among other things, limiting the extent of its construction lending as a
proportion of lending and by limiting its construction lending to primarily
residential properties. In addition, the Association has adopted underwriting
guidelines which impose stringent loan-to-value, debt service and other
requirements for loans which are believed to involve higher elements of credit
risk, by limiting the geographic area in which the Association will do business
to its existing market and by working with builders with whom it has established
relationships. It is also the Association's general policy to obtain personal
guarantees from the principal of its corporate borrowers on its construction
loans.

         Commercial Real Estate Mortgage Lending. The Association originates
commercial real estate mortgage loans that are generally secured by properties
used for business purposes and retail facilities, such as small office
buildings, located in the Association's market area as well as a significant
number of church loans. The Association's underwriting procedures provide that
commercial real estate loans may be made in amounts up to the lesser of (i) 75%
of the lesser of the appraised value or purchase price of the property and (ii)
the Association's current loans-to-one-borrower limit. These loans are generally
originated with amortization periods of up to 20 years with (i) a three or five
year balloon, or (ii) prime based loans. The Association's underwriting
standards and procedures for these loans are similar to those applicable to its
construction lending, whereby the Association considers factors such as the
borrower's expertise, credit history and profitability. At September 30, 2003,
the Association's commercial real estate mortgage portfolio was $13.2 million,
or 19.65% of total loans outstanding. The largest commercial real estate loan in
the Association's portfolio at September 30, 2003 was $1.7 million and is
secured by a local church.

         Mortgage loans secured by commercial real estate properties are
generally larger and involve a greater degree of risk than one- to four-family
residential mortgage loans. This risk is attributable to the uncertain
realization of projected income-producing cash flows which are affected by
vacancy rates, the ability to maintain rent levels against competitively-priced
properties and the ability to collect rent from tenants on a timely basis.
Because payments on loans secured by commercial real estate properties are often
dependent on the successful operation or management of the properties, repayment
of such loans may be subject to a greater extent to adverse conditions in the
real estate market or the economy. The Association seeks to minimize these risks
through its underwriting standards, which require such loans to be qualified on
the basis of the property's income and debt service ratio.

         Equity Lines and Commercial Lines of Credit. The Association originates
equity line loans on one- to four- residential properties and line of credit
loans on commercial real estate and residential land. The Association's
underwriting policies require that equity line loans on one to four- residential
properties be secured by real estate where the Association may or may not have
the first mortgage on the property. The equity line loans on one-to four-
residential properties may be made in amounts up to 80% of the appraised value
or adjusted tax value of the property, and take into consideration any
outstanding first mortgage liens in determining the loan-to-value ratio. Equity
line loans are originated at Prime plus 1% and adjust for changes in prime
thereafter on the first day of the month following a change in Prime. The terms
on the equity line loans on one- to four- residential properties are for a
period of 15 years. At September 30, 2003, the Association's equity line
portfolio was $1.7 million, or 2.58% of total loans outstanding.

         The risks associated with equity line loans on one- to four-
residential properties are generally similar to the risks associated with other
forms of single-family residential lending due to the loan-to value limits
placed on such loans. The lines are revolving and may or may not be fully
disbursed at any given time.

         The Association's underwriting policies require that commercial lines
of credit be secured by real estate where the Association has a first mortgage
position. Commercial lines of credit are made in amounts up to 75% of the
appraised value of developed real estate or 65% of the appraised value of
undeveloped land. Commercial lines of credit are made with terms of between 3
and 20 years at prime plus 1%, with adjustments to Prime made on the first day
of the month following a change in Prime. The risks associated with lines of
credit on real estate is substantially the same as the risks described above on
the Association's other forms of commercial real estate lending.


                                       10
<PAGE>

         Other Mortgage Lending. The Association also offers loans secured by
land and multi-family residences. Land loans generally consist of residential
building lots for which the borrower intends to ultimately construct residential
properties, but may also include tracts purchased for speculative purposes and a
minor amount of farm land. Multi-family loans generally consist of residential
properties with more than four units, typically apartment complexes, in which
the Association has a participating interest through an affordable housing
consortium. The Association does not solicit such loans which do not constitute
an active part of its business, and generally offers such loans to accommodate
its present customers or to fulfill commitments to affordable housing
consortiums. At September 30, 2003, the Association's total land loan portfolio
was $14.9 million or 22.18% of total loans outstanding and its multi-family loan
portfolio was $536,850 or 0.80% of total loans outstanding.

         The Association requires appraisals of all properties securing
multi-family residential loans. Appraisals are performed by an independent
appraiser designated by the Association, all of which are reviewed by
management. The Association considers the quality and location of the real
estate, the credit of the borrower, the cash flow of the project and the quality
of management involved with the property.

         The Association originates multi-family residential loans with both
fixed and adjustable interest rates which vary as to maturity. Such loans are
typically income-producing investment loans. Loan to value ratios on the
Association's multi-family residential loans are generally limited to 75%. As
part of the criteria for underwriting these loans, the Association's general
policy is to obtain personal guarantees from the principals of its corporate
borrowers.

         Multi-family residential lending entails significant additional risks
as compared with single-family residential property lending. Such loans
typically involve large loan balances to single borrowers or groups of related
borrowers. The payment experience on such loans is typically dependent on the
successful operation of the real estate project. The success of such projects is
sensitive to changes in supply and demand, conditions in the market for
multi-family residential properties as well as regional and economic conditions
generally.

         Savings Account Loans. The Association offers loans secured by savings
accounts at the Association. Interest rates charged on such loans are set at
competitive rates, taking into consideration the amount and term of the loan and
are available in amounts up to 95% of the value of the account. Savings account
loans are reviewed and approved in conformity with standards approved by the
Association's Board of Directors. At September 30, 2003, the Association's
savings account loan portfolio totaled $107,850 or 0.16% of total loans
outstanding.

         Loan Approval Procedures and Authority. The Board of Directors
establishes the lending policies of the Association and reviews properties
offered as security. The Board of Directors has established the following
lending authority: the lending officers may approve loans in amounts up to
$500,000 while loans above $500,000 require Board approval. The foregoing
lending limits are reviewed annually and, as needed, revised by the Board of
Directors. The Board ratifies all loans on a monthly basis.

         For all loans originated by the Association, upon receipt of a
completed loan application from a prospective borrower, a credit report is
ordered and certain other information is verified by an independent credit
reporting agency, and, if necessary, additional financial information is
required to be submitted by the borrower. An appraisal of any real estate
intended to secure the proposed loan is required, which appraisal currently is
performed by an independent appraiser designated and approved by the
Association. Loans of up to $125,000 may be approved by the Association's loan
officers using property tax values and drive-by appraisals. The Board annually
approves the independent appraisers used by the Association and approves the
Association's appraisal policy. It is the Association's policy to obtain title
and hazard insurance on all real estate loans. In connection with a borrower's
request for a renewal of a mortgage loan, the Association evaluates the
borrower's ability to service the renewed loan applying an interest rate that
reflects prevailing market conditions. The current value of the underlying
collateral property is considered and the Association reserves the right to
reappraise the property.


                                       11
<PAGE>

ASSET QUALITY

         Non-Performing Loans. Loans are considered non-performing if they are
in foreclosure or are 90 or more days delinquent. Management and the Board of
Directors perform a monthly review of all delinquent loans. The actions taken by
the Association with respect to delinquencies vary depending on the nature of
the loan and period of delinquency. The Association's policies generally provide
that delinquent mortgage loans be reviewed and that a written late charge notice
be mailed no later than the 30th day of delinquency. The Association's policies
provide that telephone contact will be attempted to ascertain the reasons for
delinquency and the prospects of repayment. When contact is made with the
borrower at any time prior to foreclosure, the Association attempts to obtain
full payment or work out a repayment schedule with the borrower to avoid
foreclosure.

         It is the Association's general policy to place all loans which are 90
days past due on nonaccrual status through the establishment of a reserve for
uncollected interest unless collectibility of all delinquent interest is
assured. Exceptions to placing a loan on non-accrual status are made when the
loan officer or management believe that no loss will be incurred on such loan.
Any such exceptions are reported to the Board of Directors on a monthly basis.
Circumstances under which such an exception may be granted include when the
underlying property is being actively marketed for sales, when a sales contract
has been executed and is pending closing or when the Association and the
borrower are actively negotiating a work-out schedule and all such interest is
considered collectible.

         The Association, as part of its loan review process, including the
decision whether to place a loan on nonaccrual status, attempts to determine the
underlying cause of the borrower's delinquency and ability to repay the loan.
The Association has been able to take this approach because it is a relatively
small institution and its problem loans have been historically insignificant as
a percentage of the Association's total loan portfolio. As the Association
grows, it may be necessary for the Association to take a more rigid approach and
automatically place loans on non-accrual status upon becoming 90 days or more
past due and evaluate only those loans that trigger certain mechanisms that
might indicate that an exception is warranted. However, management believes that
its current approach keeps it better informed as to the progress of a problem
loan and its underlying difficulties and that its non-accrual policy results in
an accurate depiction of loans that are collectible or likely to result in a
loss. There can be no assurances that the Association will be able to maintain
its problem loans at or below historical levels.









                                       12
<PAGE>


         Non-Accrual and Other Past Due Loans. The following table sets forth
information regarding non-accrual loans, other past due loans and REO. There
were no troubled debt restructurings within the meaning of SFAS No. 15 at any of
the dates presented below.

                                                     At or For the Year
                                                    Ended September 30,
                                                   ----------------------
                                                    2003            2002
                                                   -------         ------
                                                   (Dollars in Thousands)

Nonaccrual loans                                   $   247         $  832
Accruing loans past due 90 days or more:
     Single family, one-to-four units                   --            215
                                                   -------         ------
Total non-performing loans                         $   247         $1,047
                                                   =======         ======
Allowance for loan losses                          $   640         $  463
                                                   =======         ======
Real estate owned, net                             $   443         $  423
                                                   =======         ======
Ratios:
     Non-accrual loans to total loans                 0.37%          1.10%
     Non-performing loans to total loans              0.37%          1.38%
     Non-performing loans and real estate
       owned to total assets                          0.81%          1.58%
     Allowance for loan losses to:
       Non-accrual loans                            259.11%         55.65%
       Non-performing loans                         259.11%         44.22%
       Total loans                                    0.95%          0.61%

Contractual interest income that would have
  been recognized on nonaccrual loans              $    17         $   24
Actual interest income recognized                       --             --
                                                   -------         ------
Interest income not recognized                     $    17         $   24
                                                   =======         ======




         Classified Assets. Federal regulations and the Association's
Classification of Assets Policy require that the Association utilize an internal
asset classification system as a means of reporting problem and potential
problem assets. The Association has incorporated the OTS internal asset
classifications as a part of its credit monitoring system. The Association
currently classifies problem and potential problem assets as "Special Mention,"
"Substandard," "Doubtful" or "Loss" assets. An asset is considered "Substandard"
if it is inadequately protected by the current equity and paying capacity of the
obligor or of the collateral pledged, if any. "Substandard" assets include those
characterized by the "distinct possibility" that the insured institution will
sustain "some loss" if the deficiencies are not corrected. Assets classified as
"Doubtful" have all of the weaknesses inherent in those classified "Substandard"
with the added characteristic that the weaknesses present make "collection or
liquidation in full," on the basis of currently existing facts, conditions, and
values, "highly questionable and improbable." Assets classified as "Loss" are
those considered "uncollectible" and of such little value that their continuance
as assets without the establishment of a specific loss reserve is not warranted.
Assets which do not currently expose the insured institution to sufficient risk
to warrant classification in one of the aforementioned categories but possess
weaknesses are required to be designated "Special Mention."

         When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish an allowance
for loan losses in an amount deemed prudent by management. Allowance for loan
losses represent loss allowances which have been established to recognize the
inherent risk associated with lending activities, but which, unlike specific
allowances, have not been allocated to particular problem assets. When an
insured institution classifies one or more assets, or proportions thereof, as
"Loss," it is required either to establish a specific allowance for loan losses
equal to 100% of the amount of the asset so classified or to charge off such
amount.


                                       13
<PAGE>

         A savings institution's determination as to the classification of its
assets and the amount of its allowance for loan losses is subject to review by
the OTS which can order the establishment of additional allowances. The OTS, in
conjunction with the other federal banking agencies, recently adopted an
interagency policy statement on allowance for loan losses. The policy statement
provides guidance for financial institutions on both the responsibilities of
management for the assessment and establishment of adequate allowances and
guidance for banking agency examiners to use in determining the adequacy of
valuation guidelines. Generally, the policy statement recommends that
institutions have effective systems and controls to identify, monitor and
address asset quality problems; that management has analyzed all significant
factors that affect the collectibility of the portfolio in a reasonable manner;
and that management has established acceptable allowance evaluation processes
that meet the objectives set forth in the policy statement. While the
Association believes that it has established an adequate allowance for loan
losses, there can be no assurance that regulators, in reviewing the
Association's loan portfolio as part of a future regulatory examination, will
not request the Association to materially increase its allowance for loan
losses, thereby negatively affecting the Association's financial condition and
earnings at that time. Although management believes that adequate allowance for
loan losses have been established, actual losses are dependent upon future
events and, as such, further additions to the level of specific or allowance for
loan losses may become necessary.

         The Association's management reviews and classifies the Association's
assets quarterly and reports the results to the Association's Board of Directors
on a quarterly basis. The Association classifies assets in accordance with the
management guidelines described above. The Association had $689,850 of assets
classified as substandard or classified as Special Mention, Doubtful or Loss at
September 30, 2003. All of the assets classified at September 30, 2003 are
residential properties, the largest being a $196,900 loan on a single-family
residence. Included in the total classified assets is $442,650 for real estate
owned. The Association had $1.5 million of assets classified as substandard or
classified as Special Mention, Doubtful or Loss at September 30, 2002.

         Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in the Association's loan portfolio and the general economy. The
allowance for loan losses is maintained at an amount management considers
adequate to cover loan losses which are deemed probable and estimable. The
allowance is based upon a number of factors, including asset classifications,
economic trends, industry experience and trends, industry and geographic
concentrations, estimated collateral values, management's assessment of the
credit risk inherent in the portfolio, historical loan loss experience, and the
Association's underwriting policies. At September 30, 2003, the Association's
allowance for loan losses was $640,400, or 0.95% of total loans, as compared to
$463,250 or 0.61%, at September 30, 2002. The Association had non-performing
loans of $247,200 and $1.0 million at September 30, 2003 and September 30, 2002,
respectively. The Association provided $215,000 in additional loan loss
provisions during 2003. During the current year, the Association charged off
$37,850 in loans. The Association provided $144,250 in additional loan loss
provisions during 2002 and did not charge off any loans during that period. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revisions as more information becomes available.
Various regulatory agencies, as an integral part of their examination process,
periodically review the Association's allowance for loan losses. These agencies
may require the Association to establish additional valuation allowances, based
on their judgments of the information available at the time of the examination.

         Real Estate Owned. Property acquired by the Association as a result of
foreclosure on a mortgage loan is classified as real estate owned and is
initially recorded at the fair value of the property at the date of acquisition,
establishing a new cost basis with any resulting write-down charged to the
allowance for loan losses. Thereafter, an allowance for losses on real estate
owned is established if the cost of a property exceeds its current fair value
less estimated sales costs. The Association obtains an appraisal on a real
estate owned property as soon as practicable after it takes possession of the
real property. The Association will generally reassess the value of real estate
owned at least quarterly thereafter. During the current year, the Association
provided $2,500 in provisions for loss on REO. The policy for loans secured by
real estate, which comprise the bulk of the Association's portfolio, is to
establish loss reserves in accordance with the Association's asset
classification process, based on GAAP. At September 30, 2003, the Association
had three REO properties totaling $442,650. All of the properties were for one-
to four-residential properties. The largest REO property had a cost basis of
$161,500.


                                       14
<PAGE>

         The following table sets forth activity in the Association's allowance
for loan losses and the allowance for losses on real estate owned at or for the
periods indicated.

<TABLE>
<CAPTION>
                                                                  For the Year Ended
                                                                     September 30,
                                                                  -------------------
                                                                  2003           2002
                                                                  ----           ----
ALLOWANCE FOR LOAN LOSSES:                                           (In Thousands)
<S>                                                               <C>            <C>
     Balance at beginning of year                                 $ 463          $ 319
     Provision for loan losses                                      215            144
     Charge-offs                                                    (38)            --
     Recoveries                                                      --             --
                                                                  -----          -----
     Balance at end of year                                       $ 640          $ 463
                                                                  =====          =====
     Ratio of net charge-offs to average loans outstanding         0.05%          0.00%
                                                                  =====          =====
ALLOWANCE FOR LOSSES ON REAL ESTATE OWNED:
     Balance at beginning of year                                 $ 128          $   5
     Provision for loan losses                                        3            206
     Charge-offs                                                    (54)            --
     Recoveries                                                      --            (83)
                                                                  -----          -----
     Balance at end of year                                       $  77          $ 128
                                                                  =====          =====

</TABLE>

         Accrued interest receivable on accruing loans past due by 90 days or
more amounted to $-0- and $12,800 at September 30, 2003 and 2002, respectively.
Accordingly, if the Association had placed all such loans on non-accrual status
at those dates, interest income for the fiscal years ended September 30, 2003
and 2002 would have decreased by $-0- and $12,800, respectively.

         The following table sets forth the Association's allowance for loan
losses allocated by loan category and the percent of loans in each category to
total loans at the dates indicated.

<TABLE>
<CAPTION>
                                                                     At September 30,
                                      ----------------------------------------------------------------------------
                                                    2003                                   2002
                                      ------------------------------------    ------------------------------------
                                                               Percent of                              Percent of
                                                 Percent of     Loans in                 Percent of     Loans in
                                                  Allowance       Each                    Allowance       Each
                                      Allowance   to Total     Category to    Allowance   to Total     Category to
                                       Amount     Allowance    Total Loans      Amount    Allowance    Total Loans
                                      ---------  ----------    -----------    ---------  ----------    -----------
                                                                 (Dollars in Thousands)
<S>                                    <C>         <C>           <C>            <C>        <C>            <C>
Mortgage loans:
    One-to-four family residential     $  100       15.63%        23.69%        $  100      21.60%         29.74%
    Multi-family residential                5        0.78          0.67              3       0.64           0.52
    Commercial real estate                110       17.19         16.37             75      16.20          17.72
    Land                                  120       18.75         18.48             75      16.20          14.64
    Commercial construction                20        3.13          3.01              5       1.08           0.69
    Residential construction              275       42.97         35.50            200      43.20          34.30
    Equity line mortgages                  10        1.56          2.15              5       1.08           2.20
                                       ------      ------        ------         ------     ------         ------
Total mortgage loans                      640      100.00         99.87            463     100.00          99.81
Savings account loans                      --          --          0.13             --         --           0.19
                                       ------      ------        ------         ------     ------         ------
Total allowance for loan losses        $  640      100.00%       100.00%        $  463     100.00%        100.00%
                                       ======      ======        ======         ======     ======         ======

</TABLE>


                                       15
<PAGE>

INVESTMENT ACTIVITIES

         The Association's investment policy permits it to invest in U.S.
government obligations, certain securities of various government-sponsored
agencies, certificates of deposit of insured banks and savings institutions,
federal funds, and overnight deposits at the Federal Home Loan Bank. At
September 30, 2003, the Association held: FHLMC stock with an amortized cost of
$8,000 and a current market value of $426,850 and Federal Home Loan Bank stock
with a cost and market value of $225,900. At September 30, 2003, the Association
held $16.4 million in investments, including short-term interest earning
deposits.

         The following table sets forth activity in the Association's
investments portfolio for the periods indicated:

                                                 For the Year Ended
                                                    September 30
                                              ------------------------
                                                2003            2002
                                                ----            ----
                                                   (In Thousands)
Amortized cost at beginning of period         $ 14,718        $ 15,649
Purchases/(Maturities or Sales), net             1,244            (931)
Premium and discount amortization, net              --              --
                                              --------        --------
Amortized cost at end of period                 15,962          14,718
Net unrealized gain (1)                            419             613
                                              --------        --------
Total securities, net                         $ 16,381        $ 15,331
                                              ========        ========

(1)The net unrealized gain at September 30, 2003 and 2002 relates to available
for sale securities in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115. The net unrealized gain is presented in order to
reconcile the "Amortized Cost" of the Association's securities portfolio to the
"Carrying Cost," as reflected in the Statements of Financial Condition.

         Amortized cost and fair value of the Association's investments at the
dates indicated are as follows:

<TABLE>
<CAPTION>
                                                            At September 30,
                                         -------------------------------------------------------
                                                   2003                         2002
                                         -------------------------     -------------------------
                                         Amortized                     Amortized
                                           Cost         Fair Value        Cost       Fair Value
                                         ---------      ----------     ---------     -----------
Held to maturity:                                             (In Thousands)
<S>                                       <C>            <C>            <C>            <C>
     Other debt securities                $    --        $    --        $    --        $    --
                                          -------        -------        -------        -------
       Total held to maturity                  --             --             --             --
                                          -------        -------        -------        -------
Available-for-Sale:
     Debt securities                           --             --             --             --
     Equity securities (1)                      8            427             11            624
                                          -------        -------        -------        -------
       Total available-for-sale                 8            427             11            624
                                          -------        -------        -------        -------
Short-term certificates of deposit          1,090          1,090             --             --
FHLB Overnight deposits                    14,638         14,638         14,377         14,377
                                          -------        -------        -------        -------
Federal Home Loan Bank Stock                  226            226            330            330
                                          -------        -------        -------        -------
       Total investments, net (2)         $15,962        $16,381        $14,718        $15,331
                                          =======        =======        =======        =======

</TABLE>

(1)  Equity securities consist of FHLMC common stock.

(2)  The difference  between "Amortized Cost" and "Fair Value" represents net
     unrealized  gains at September 30, 2003 and 2002 on available for sale
     securities in accordance with SFAS No. 115.


                                       16
<PAGE>

SOURCES OF FUNDS

         General. Deposits, loan and security repayments and prepayments and
cash flows generated from operations are the primary sources of the
Association's funds for use in lending and for other general purposes.

         Deposits. The Association offers a variety of deposit accounts with a
range of interest rates and terms. The Association's deposits consist of regular
(passbook) savings accounts, NOW accounts, checking accounts, money market
deposit accounts, IRAs and certificates of deposit. Certificates of deposit are
offered with maturities of up to 60 months. At September 30, 2003, the
Association's core deposits (which the Association considers to consist of NOW
accounts, money market deposit accounts and regular savings accounts)
constituted 26.73% of total deposits. The flow of deposits is influenced
significantly by general economic conditions, changes in money market rates,
prevailing interest rates and competition. The Association's deposits are
obtained predominantly from the areas located near its office location. The
Association relies primarily on customer service and long-standing relationships
with customers to attract and retain these deposits. However, market interest
rates and rates offered by competing financial institutions significantly affect
the Association's ability to attract and retain deposits. The Association does
not use brokers to obtain deposits.

         The following table presents the deposit activity of the Association
for the periods indicated.

                                                  For The Year Ended
                                                    September 30,
                                               -------------------------
                                                 2003             2002
                                                 ----             ----
                                                 (Dollars in Thousands)
Total deposits at beginning of period          $ 76,768         $ 77,174
Net (decrease) before interest credited          (9,942)          (3,035)
Interest credited                                 2,014            2,629
                                               --------         --------
Total deposits at end of period                $ 68,840         $ 76,768
                                               ========         ========

      At September 30, 2003, the Association had $18.6 million in Jumbo
certificate of deposits (accounts in amounts over $100,000) maturing as follows:

                                                                  Weighted
                                                                   Average
                                                Amount              Rate
                                                ------            --------
Maturity Period:                                  (Dollars in Thousands)
      Within three months                      $  1,799             3.10%
      After three but within six months           1,183             2.55
      After six but within twelve months          1,946             2.91
      After twelve months                        13,699             4.77
                                               --------
         Total                                 $ 18,627             4.27%
                                               ========

         The distribution of the Association's deposits and the related weighted
average interest rates are as follows:

<TABLE>
<CAPTION>
                                                             At September 30,
                                  ------------------------------------------------------------------------
                                                2003                                   2002
                                  ---------------------------------      ---------------------------------
                                               Percent    Weighted                    Percent     Weighted
                                               of Total    Average                    of Total    Average
                                  Amount       Deposits      Rate        Amount       Deposits      Rate
                                  ------       --------   --------       ------       --------   ---------
                                                          (Dollars in Thousands)
<S>                               <C>           <C>          <C>        <C>           <C>          <C>
Passbook accounts                 $ 3,063         4.45%      0.40%      $ 3,646         4.75%      1.00%
MMDA accounts                      12,877        18.71%      1.04%       14,810        19.29%      1.50%
NOW accounts                        1,584         2.30%      0.25%        1,569         2.04%      1.00%
Noninterest-bearing accounts          877         1.27%      0.00%          537         0.70%      0.00%
Certificate accounts               50,439        73.27%      3.73%       56,206        73.22%      4.59%
                                  -------      -------                  -------      -------
     Totals                       $68,840       100.00%      2.94%      $76,768       100.00%      3.72%
                                  =======      =======                  =======      =======

</TABLE>


                                       17
<PAGE>

         The following table presents the amount of certificate accounts
outstanding by maturity date at the dates indicated:

                                      September 30,
                                 -----------------------
     Maturity Period               2003            2002
   -------------------             ----            ----
                                   Dollars in Thousands
          2003                   $     --       $ 30,146
          2004                     25,350         11,511
          2005                     16,695          9,941
          2006                      3,559          1,751
          2007                      2,868          2,857
          2008                      1,967             --
                                 --------       --------
                                 $ 50,439       $ 56,206
                                 ========       ========

         Borrowings. The Association historically has not used borrowings as a
source of funds. However, the Association may obtain advances from the Federal
Home Loan Bank as an alternative to retail deposit funds and may do so in the
future as part of its operating strategy. These advances would be collateralized
primarily by certain of the Association's mortgage loans and secondarily by the
Association's investment in capital stock of the Federal Home Loan Bank. See
"Regulation--Regulation of Federal Savings Associations--Federal Home Loan Bank
System." Such advances may be made pursuant to several different credit
programs, each of which has its own interest rate and range of maturities. The
maximum amount that the Federal Home Loan Bank will advance to member
institutions, including the Association, fluctuates from time to time in
accordance with the policies of the OTS and the Federal Home Loan Bank. At
September 30, 2003, neither the Company nor the Association had any borrowings
outstanding.

PERSONNEL

         As of September 30, 2003, the Company had no employees who were
compensated through the Company.

         As of September 30, 2003, the Association had 10 employees, all of whom
were full-time employees. In the last three years, the Association has
experienced a low turnover rate among its employees and, as of September 30,
2003, 9 of the Association's employees had been with the Association for more
than 5 years and 5 had been with the Association more than 10 years. The
employees are not represented by a collective bargaining unit and the
Association considers its relationship with its employees to be good. See Part
III, Item 10 "Executive Compensation" for a description of certain compensation
and benefit programs offered to the Association's employees.

REGULATION

GENERAL

         The Company and the MHC are regulated as savings and loan holding
companies by the OTS. The Company, as a federal stock savings bank, is subject
to regulation, examination and supervision by the OTS. The Company must file
reports with the OTS concerning its activities and financial condition. The
Company and the MHC are also required to file reports with, and otherwise comply
with the rules and regulations of the OTS. The Company is also required to file
reports with, and otherwise comply with, the rules and regulations of the SEC
under the federal securities laws.

GRAMM-LEACH-BLILEY ACT

         On November 12, 1999, President Clinton signed into law landmark
financial services legislation, titled the Gramm-Leach-Bliley Act ("GLB Act").
The GLB Act repeals depression-era laws restricting affiliations among banks,


                                       18
<PAGE>

securities firms, insurance companies and other financial services providers.
The impact of the GLB Act on the Company, the MHC, and the Association where
relevant, is discussed throughout the regulation section below.

         Any change in such laws and regulations, whether by the OTS, the FDIC,
or through legislation, could have a material adverse impact on the Company and
the Association and their operations and stockholders.

FEDERAL BANKING REGULATION

         Activity Powers. The Association derives its lending and investment
powers from the Home Owners' Loan Act, as amended, and the regulations of the
OTS. Under these laws and regulations, the Association may invest in mortgage
loans secured by residential and commercial real estate; commercial and consumer
loans; certain types of debt securities; and certain other assets. The
Association may also establish service corporations that may engage in
activities not otherwise permissible for the Association, including certain real
estate equity investments and securities and insurance brokerage. The
Association's authority to invest in certain types of loans or other investments
is limited by federal law.

         Loans-to-One-Borrower Limitations. The Association is generally subject
to the same limits on loans to one borrower as a national bank. With specified
exceptions, the Association's total loans or extensions of credit to a single
borrower cannot exceed 15% of the Association's unimpaired capital and surplus
which does not include accumulated other comprehensive income. The Association
may lend additional amounts up to 10% of its unimpaired capital and surplus, if
the loans or extensions of credit are fully-secured by readily-marketable
collateral. The Association currently complies with applicable
loans-to-one-borrower limitations.

         QTL Test. Under federal law, the Association must comply with the
qualified thrift lender, or "QTL" test. Under the QTL test, the Association is
required to maintain at least 65% of its "portfolio assets" in certain
"qualified thrift investments" in at least nine months of the most recent
12-month period. "Portfolio assets" means, in general, the Association's total
assets less the sum of:

         o   specified liquid assets up to 20% of total assets;

         o   goodwill and other intangible assets; and

         o   the value of property used to conduct the Association's business.

         The Association may also satisfy the QTL test by qualifying as a
"domestic building and loan association" as defined in the Internal Revenue Code
of 1986. The Association met the QTL test at September 30, 2003, and in each of
the prior 12 months, and, therefore, qualifies as a thrift lender. For purposes
of calculating compliance with the QTL test, we use the cost basis of our
investment in our Freddie Mac common stock, rather than the current market value
of the stock.

         If the Association fails the QTL test it must either operate under
certain restrictions on its activities or convert to a bank charter.

         Capital Requirements.  OTS regulations require the Association to meet
three minimum capital standards:

         (1) a tangible capital ratio requirement of 1.5% of total assets, as
             adjusted under the OTS regulations;

         (2) a leverage ratio requirement of 3% of core capital to such adjusted
             total assets, if a savings association has been assigned the
             highest composite rating of 1 under the Uniform Financial
             Institutions Ratings System; and

         (3) a risk-based capital ratio requirement of 8% of core and
             supplementary capital to total risk-weighted assets.


                                       19
<PAGE>

         The minimum leverage capital ratio for any other depository institution
that does not have a composite rating of 1 will be 4%, unless a higher leverage
capital ratio is warranted by the particular circumstances or risk profile of
the depository institution. In determining compliance with the risk-based
capital requirement, the Association must compute its risk-weighted assets by
multiplying its assets and certain off-balance sheet items by risk-weights,
which range from 0% for cash and obligations issued by the United States
Government or its agencies to 100% for consumer and commercial loans, as
assigned by the OTS capital regulation based on the risks that the OTS believes
are inherent in the type of asset.

         Tangible capital is defined, generally, as common stockholders' equity
(including retained earnings but excluding unrealized gains and losses on
available for sale securities), certain non-cumulative perpetual preferred stock
and related earnings and minority interests in equity accounts of fully
consolidated subsidiaries, less intangibles (other than certain mortgage
servicing rights) and investments in and loans to subsidiaries engaged in
activities not permissible for a national bank. Core capital is defined
similarly to tangible capital, but core capital also includes certain qualifying
supervisory goodwill and certain purchased credit card relationships.
Supplementary capital currently includes cumulative and other perpetual
preferred stock, mandatory convertible securities, subordinated debt and
intermediate preferred stock and the allowance for loan and lease losses, as
defined. In addition, up to 45% of unrealized gains on available-for-sale equity
securities with a readily determinable fair value may be included in tier 2
capital. The allowance for loan and lease losses, as defined, is includable in
tier 2 capital to a maximum of 1.25% of risk-weighted assets, and the amount of
supplementary capital that may be included as total capital cannot exceed the
amount of core capital.

         At September 30, 2003, the Association met each of its capital
requirements.

         All the Federal banking agencies, including OTS, must revise their
risk-based capital requirements to ensure that such requirements account for
interest rate risk, concentration of credit risk and the risks of
non-traditional activities, and that they reflect the actual performance of and
expected loss on multi-family loans.

         On May 10, 2002, the OTS adopted an amendment to its capital
regulations which eliminated the interest rate risk component of the risk-based
capital requirement.

         Community Reinvestment Act. Under the Community Reinvestment Act
("CRA"), as implemented by OTS regulations, the Association has a continuing and
affirmative obligation to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for the Association nor does it limit
its discretion to develop the types of products and services that it believes
are best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of the Association, to
assess the Company's record of meeting the credit needs of its community and to
take the record into account in its evaluation of certain applications by the
Association. The CRA also requires all institutions to make public disclosure of
their CRA ratings. The Association received a "Satisfactory" CRA rating in its
most recent examination.

         CRA regulations rate an institution based on its actual performance in
meeting community needs. In particular, the system focuses on three tests:

         o   a lending test, to evaluate the institution's record of making
             loans in its assessment areas;

         o   an investment test, to evaluate the institution's record of
             investing in community development projects, affordable housing,
             and programs benefiting low or moderate income individuals and
             businesses; and

         o   a service test, to evaluate the institution's delivery of services
             through its branches, ATMs and other offices.

         Transactions with Related Parties. The Association's authority to
engage in transactions with its "affiliates" is limited by the OTS regulations
and by Sections 23A and 23B of the Federal Reserve Act (the "FRA"). In general,
these transactions must be on terms which are as favorable to the Association as
comparable transactions with non-affiliates.


                                       20
<PAGE>

In addition, certain types of these transactions are restricted to an aggregate
percentage of the Association's capital. Collateral in specified amounts must
usually be provided by affiliates in order to receive loans from the
Association. In addition, the OTS regulations prohibit a savings association
from lending to any of its affiliates that is engaged in activities that are not
permissible for bank holding companies and from purchasing the securities of any
affiliate, other than a subsidiary.

         Effective April 1, 2003, the Federal Reserve Board, or FRB, is
rescinded its interpretations of Sections 23A and 23B of the FRA and replaced
these interpretations with Regulation W. In addition, Regulation W expands the
definition of what constitutes an affiliate subject to Sections 23A and 23B and
exempting certain subsidiaries of state-chartered banks from the restrictions of
Sections 23A and 23B.

         Under Regulation W, all transactions entered into on or before December
12, 2002, which either became subject to Sections 23A and 23B solely because of
Regulation W, and all transactions covered by Sections 23A and 23B, the
treatment of which changed solely because of Regulation W, became subject to
Regulation W on July 1, 2003. All other covered affiliate transactions became
subject to Regulation W on April 1, 2003. The Federal Reserve Board expects each
depository institution that is subject to Sections 23A and 23B to implement
policies and procedures to ensure compliance with Regulation W. We do not expect
that the changes made by Regulation W will have a material adverse effect on our
business.

         The Association's authority to extend credit to its directors,
executive officers and 10% shareholders, as well as to entities controlled by
such persons, is currently governed by the requirements of Sections 22(g) and
22(h) of the FRA and Regulation O of the Federal Reserve Board. Among other
things, these provisions require that extensions of credit to insiders (a) be
made on terms that are substantially the same as, and follow credit underwriting
procedures that are not less stringent than, those prevailing for comparable
transactions with unaffiliated persons and that do not involve more than the
normal risk of repayment or present other unfavorable features and (b) not
exceed certain limitations on the amount of credit extended to such persons,
individually and in the aggregate, which limits are based, in part, on the
amount of the Association's capital. The regulations allow small discounts on
fees on residential mortgages for directors, officers and employees. In
addition, extensions of credit in excess of certain limits must be approved by
the Association's Board of Directors.

         Section 402 of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley,
prohibits the extension of personal loans to directors and executive officers of
issuers (as defined in Sarbanes-Oxley). The prohibition, however, does not apply
to mortgages advanced by an insured depository institution, such as the
Association, that are subject to the insider lending restrictions of Section
22(h) of the FRA.

         Enforcement. The OTS has primary enforcement responsibility over
savings associations, including the Association. This enforcement authority
includes, among other things, the ability to assess civil money penalties, to
issue cease and desist orders and to remove directors and officers. In general,
these enforcement actions may be initiated in response to violations of laws and
regulations and to unsafe or unsound practices.

         Standards For Safety And Soundness. Under federal law, the OTS has
adopted a set of guidelines prescribing safety and soundness standards. These
guidelines establish general standards relating to internal controls,
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, asset quality, earnings
standards, and compensation, fees and benefits. In general, the guidelines
require appropriate systems and practices to identify and manage the risks and
exposures specified in the guidelines.

         In addition, the OTS adopted regulations that authorize, but do not
require, the OTS to order an institution that has been given notice that it is
not satisfying these safety and soundness standards to submit a compliance plan.
If, after being notified, an institution fails to submit an acceptable plan or
fails in any material respect to implement an accepted plan, the OTS must issue
an order directing action to correct the deficiency and may issue an order
directing corrective actions and may issue an order directing other actions of
the types to which an undercapitalized association is subject


                                       21
<PAGE>

under the "prompt corrective action" provisions of federal law. If an
institution fails to comply with such an order, the OTS may seek to enforce such
order in judicial proceedings and to impose civil money penalties.

         Limitation on Capital Distributions. The OTS imposes various
restrictions or requirements on the Association's ability to make capital
distributions, including cash dividends. A savings institution that is the
subsidiary of a savings and loan holding company must file a notice with the OTS
at least 30 days before making a capital distribution. The Association must file
an application for prior approval if the total amount of its capital
distributions, including the proposed distribution, for the applicable calendar
year would exceed an amount equal to the Association's net income for that year
plus the Association's retained net income for the previous two years.

         The OTS may disapprove of a notice or application if:

         o   the Association would be undercapitalized following the
             distribution;

         o   the proposed capital distribution raises safety and soundness
             concerns; or

         o   the capital distribution would violate a prohibition contained in
             any statute, regulation or agreement.

         Liquidity. The Association is required to maintain a sufficient amount
of liquid assets to ensure its safe and sound operation.

         Prompt Corrective Action Regulations. Under the OTS prompt corrective
action regulations, the OTS is required to take certain, and is authorized to
take other, supervisory actions against undercapitalized savings associations.
For this purpose, a savings association would be placed in one of the following
four categories based on the association's capital:

         o   well-capitalized;

         o   adequately capitalized;

         o   undercapitalized; and

         o   critically undercapitalized.

         At September 30, 2003, the Association met the criteria for being
considered "well-capitalized."

         When appropriate, the OTS can require corrective action by a savings
association holding company under the "prompt corrective action" provisions of
federal law.

         Insurance of Deposit Accounts. The Association is a member of the
Savings Association Insurance Fund, and the Association pays its deposit
insurance assessments to the SAIF. The FDIC also maintains another insurance
fund, the Bank Insurance Fund, which primarily insures the deposits of banks and
state chartered savings banks.

         Under federal law, the FDIC established a risk-based assessment system
for determining the deposit insurance assessments to be paid by insured
depository institutions. Under the assessment system, the FDIC assigns an
institution to one of three capital categories based on the institution's
financial information as of its most recent quarterly financial report filed
with the applicable bank regulatory agency prior to commencement of the
assessment period. An institution's assessment rate depends on the capital
category and supervisory sub-category to which it is assigned. Under the
regulation, there are nine assessment risk classifications (i.e., combinations
of capital groups and supervisory subgroups) to which different assessment rates
are applied. Assessment rates currently range from 0.0% of deposits for an
institution in the highest category (i.e., well-capitalized and financially
sound, with no more than a few minor weaknesses) to 0.27% of deposits for an
institution in the lowest category (i.e., undercapitalized and substantial
supervisory concern). The FDIC is authorized to raise the assessment rates as
necessary to maintain the required reserve ratio of 1.25%.



                                       22
<PAGE>

         In addition, all FDIC insured institutions are required to pay
assessments to the FDIC at an annual rate of approximately .0212% of insured
deposits to fund interest payment on bonds issued by the Financing Corporation,
an agency of the federal government established to recapitalize the predecessor
to the SAIF. These assessments will continue until the Financing Corporation
bonds mature in 2017.

         Federal Home Loan Bank System. The Association is a member of the
Federal Home Loan Bank (the "FHLB") of Atlanta, which is one of the regional
FHLBs making up the FHLB System. Pursuant to regulations promulgated by the
Federal Housing Finance Board, as required by Gramm-Leach, the FHLB of Atlanta
has adopted a capital plan, which is expected to be implemented no earlier than
Decemebr 2003, and that will change the foregoing minimum stock ownership
requirements for Atlanta stock. Under the new capital plan, each member of the
FHLB of Atlanta will have to maintain a minimum investment in FHLB of Atlanta
stock in an amount estimated to be the sum of (i) an amount (up to a maximum of
$25 million) equal to approximately 0.25% of the member's total assets and (ii)
4.5% of the member's outstanding advances, plus 4.5% of the outstanding assets
purchased from the member and held by the FHLB under master commitments, plus 8%
of any Affordable Multi-Family Participation Program loans purchase from the
member. Any advances from a FHLB must be secured by specified types of
collateral, and all long-term advances may be obtained only for the purpose of
providing funds for residential housing finance.

         FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of earnings that the FHLBs can pay as
dividends to their members and could also result in the FHLBs imposing a higher
rate of interest on advances to their members. If dividends were reduced, or
interest on future FHLB advances increased, the Association's net interest
income would be affected.

         Prohibitions Against Tying Arrangements. Federal savings banks are
subject to the prohibitions of 12 U.S.C. ss. 1972 on certain tying arrangements.
A depository institution is prohibited, subject to some exceptions, from
extending credit to or offering any other service, or fixing or varying the
consideration for such extension of credit or service, on the condition that the
customer obtain some additional service from the institution or its affiliates
or not obtain services of a competitor of the institution.

FEDERAL RESERVE SYSTEM

         Under regulations of the Federal Reserve Board (the "FRB"), the
Association is required to maintain noninterest-earning reserves against its
transaction accounts. FRB regulations generally require that reserves of 3% must
be maintained against aggregate transaction accounts of $42.1 million or less,
subject to adjustment by FRB, and an initial reserve of $6.0 million plus 3%,
subject to adjustment by FRB of 10%, against that portion of total transaction
accounts in excess of $42.1 million. The first $6.0 million of otherwise
reservable balances, subject to adjustments by FRB, are exempted from the
reserve requirements. The Association is in compliance with these requirements.
Because required reserves must be maintained in the form of either vault cash, a
noninterest-bearing account at a Federal Reserve bank or a pass-through account
as defined by FRB, the effect of this reserve requirement is to reduce the
Association's interest-earning assets, to the extent the requirement exceeds
vault cash.

HOLDING COMPANY REGULATION

         The Company and the MHC are savings and loan holding companies
regulated by the OTS. As such, the Company and the MHC are registered with and
are subject to OTS examination and supervision, as well as certain reporting
requirements. In addition, the OTS has enforcement authority over the Company
and the MHC and any of their non-savings institution subsidiaries. Among other
things, this authority permits the OTS to restrict or prohibit activities that
are determined to be a serious risk to the financial safety, soundness or
stability of a subsidiary savings institution. Unlike bank holding companies,
federal savings and loan holding companies are not subject to any regulatory
capital requirements or to supervision by the Federal Reserve System.



                                       23
<PAGE>

         Restrictions Applicable to the Company. Because the Company was
organized after May 4, 1999, under the GLB Act, it is prohibited from engaging
in non-financial activities. Unitary savings and loan associations acquired
before this date are "grandfathered" under the GLB Act and generally have no
restrictions on their business activities. The Company's activities, however,
will be restricted to:

         o   furnishing or performing management services for a savings
             institution subsidiary of such holding company;

         o   conducting an insurance agency or escrow business;

         o   holding, managing, or liquidating assets owned or acquired from a
             savings institution subsidiary of such company;

         o   holding or managing properties used or occupied by a savings
             institution subsidiary of such company;

         o   acting as trustee under a deed of trust;

         o   any other activity (a) that the FRB, by regulation, has determined
             to be permissible for bank holding companies under Section 4(c) of
             the Bank Holding Company Act of 1956 ("BHC"), unless the Director
             of the OTS, by regulation, prohibits or limits any such activity
             for savings and loan holding companies, or (b) in which multiple
             savings and loan holding companies were authorized by regulation to
             directly engage on March 5, 1987;

         o   purchasing, holding, or disposing of stock acquired in connection
             with a qualified stock issuance if the purchase of such stock by
             such holding company is approved by the Director of the OTS; and

         o   any activity permissible for financial holding companies under
             section 4(k) of the BHC.

         Permissible activities which are deemed to be financial in nature or
incidental thereto under section 4(k) of the Banking Holding Company Act
include:

         o   lending, exchanging, transferring, investing for others or
             safeguarding money or securities;

         o   insurance activities or providing and issuing annuities, and acting
             as principal, agent or broker;

         o   financial, investment or economic advisory services;

         o   issuing or selling instruments representing interests in pools of
             assets that a bank is permitted to hold directly;

         o   underwriting, dealing in, or making a market in securities;

         o   activities previously determined by the FRB to be closely related
             to banking;

         o   activities that bank holding companies are permitted to engage in
             outside of the U.S.;

         o   merchant banking activities; and

         o   portfolio investments made by an insurance company.

         In addition, the Company cannot be acquired or acquire a company unless
the acquirer is engaged solely in financial activities.


                                       24
<PAGE>

         Restrictions Applicable to Activities of Mutual Holding Companies.
Under federal law, a mutual holding company may engage only in the following
activities:

         o   investing in the stock of a savings institution;

         o   acquiring a mutual association through the merger of such
             association into a savings institution subsidiary of such holding
             company or an interim savings institution subsidiary of such
             holding company;

         o   merging with or acquiring another holding company, one of whose
             subsidiaries is a savings institution;

         o   investing in a corporation the capital stock of which is available
             for purchase by a savings institution under federal law or under
             the law of any state where the subsidiary savings institution or
             association is located; and

         o   the permissible activities described above for non-grandfathered
             savings and loan holding companies.

         If a mutual holding company acquires or merges with another holding
company, the holding company acquired or the holding company resulting from such
merger or acquisition may only invest in assets and engage in activities listed
above, and it has a period of two years to cease any non conforming activities
and divest any non-conforming investments.

         Restrictions Applicable to All Savings and Loan Holding Companies.
Federal law prohibits a savings and loan holding company, including the Company
and the MHC, directly or indirectly, from acquiring:

         o   control (as defined under HOLA) of another savings institution (or
             a holding company parent) without prior OTS approval;

         o   through merger, consolidation, or purchase of assets, another
             savings institution or a holding company thereof, or acquiring all
             or substantially all of the assets of such institution (or a
             holding company) without prior OTS approval; or

         o   control of any depository institution not insured by the FDIC
             (except through a merger with and into the holding company's
             savings institution subsidiary that is approved by the OTS).

         A savings and loan holding company may not acquire as a separate
subsidiary an insured institution that has a principal office outside of the
state where the principal office of its subsidiary institution is located,
except:

         o   in the case of certain emergency acquisitions approved by the FDIC;

         o   if such holding company controls a savings institution subsidiary
             that operated a home or branch office in such additional state as
             of March 5, 1987; or

         o   if the laws of the state in which the savings institution to be
             acquired is located specifically authorize a savings institution
             chartered by that state to be acquired by a savings institution
             chartered by the state where the acquiring savings institution or
             savings and loan holding company is located or by a holding company
             that controls such a state chartered association.

         If the savings institution subsidiary of a federal mutual holding
company fails to meet the QTL test set forth in Section 10(m) of the HOLA and
regulations of the OTS, the holding company must register with the FRB as a bank
holding company under the BHC Act within one year of the savings institution's
failure to so qualify.


                                       25
<PAGE>

THE SARBANES-OXLEY ACT

         On July 30, 2002, President George W. Bush signed into law the
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act implements a broad range of
corporate governance and accounting measures for public companies designed to
promote honesty and transparency in corporate America and better protect
investors from the type of corporate wrongdoing that occurred in Enron, WorldCom
and similar companies. The Sarbanes-Oxley Act's principal legislation includes:

         o   the creation of an independent accounting oversight board;

         o   auditor independence provisions which restrict non-audit services
             that accountants may provide to their audit clients;

         o   additional corporate governance and responsibility measures,
             including the requirement that the chief executive officer and
             chief financial officer certify financial statements;

         o   the forfeiture of bonuses or other incentive-based compensation and
             profits from the sale of an issuer's securities by directors and
             senior officers in the twelve month period following initial
             publication of any financial statements that later require
             restatement;

         o   an increase in the oversight of, and enhancement of certain
             requirements relating to audit committees of public companies and
             how they interact with the company's independent auditors;

         o   requirement that audit committee members must be independent and
             are absolutely barred from accepting consulting, advisory or other
             compensatory fees from the issuer;

         o   requirement that companies disclose whether at least one member of
             the committee is a "financial expert" (as such term will be defined
             by the Securities and Exchange Commission) and if not, why not;

         o   expanded disclosure requirements for corporate insiders, including
             accelerated reporting of stock transactions by insiders and a
             prohibition on insider trading during pension blackout periods;

         o   a prohibition on personal loans to directors and officers, except
             certain loans made by insured financial institutions;

         o   disclosure of a code of ethics and filing a Form 8-K for a change
             or waiver of such code;

         o   mandatory disclosure by analysts of potential conflicts of
             interest; and

         o   a range of enhanced penalties for fraud and other violations.

         Although we anticipate that we will incur additional expense in
complying with the provisions of the Sarbanes-Oxley Act and the resulting
regulations, management does not expect that such compliance will have a
material impact on our results of operations or financial condition.

USA PATRIOT ACT

         In response to the events of September 11th, President George W. Bush
signed into law the Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA
PATRIOT Act, on October 26, 2001. The USA PATRIOT Act gives the federal
government new powers to address terrorist threats through enhanced domestic
security measures, expanded surveillance powers, increased amendments to the
Bank Secrecy Act. Title III of the USA PATRIOT Act takes measures intended to
encourage information sharing among bank regulatory agencies and law enforcement
bodies. Further, certain provisions of Title III impose affirmative

                                       26
<PAGE>

obligations on a broad range of financial institutions, including banks,
thrifts, brokers, dealers, credit unions, money transfer agents and parties
registered under the Commodity Exchange Act.

         o   Among other requirements, Title III of the USA PATRIOT Act imposes
             the following requirements with respect to financial institutions:

         o   Pursuant to Section 352, all financial institutions must establish
             anti-money laundering programs that include, at minimum: (i)
             internal policies, procedures, and controls, (ii) specific
             designation of an anti-money laundering compliance officer, (iii)
             ongoing employee training programs, and (iv) an independent audit
             function to test the anti-money laundering program.

         o   Pursuant to Section 326, on May 9, 2003 the Secretary of the
             Department of Treasury, in conjunction with other bank regulators,
             issued Joint Final Rules that provide for minimum standards with
             respect to customer identification and verification. These rules
             became effective on October 1, 2003.

         o   Section 312 requires financial institutions that establish,
             maintain, administer, or manage private banking accounts or
             correspondent accounts in the United States for non-United States
             persons or their representatives (including foreign individuals
             visiting the United States) to establish appropriate, specific,
             and, where necessary, enhanced due diligence policies, procedures,
             and controls designed to detect and report money laundering.

         o   Effective December 26, 2001, financial institutions are prohibited
             from establishing, maintaining, administering or managing
             correspondent accounts for foreign shell banks (foreign banks that
             do not have a physical presence in any country), and will be
             subject to certain recordkeeping obligations with respect to
             correspondent accounts of foreign banks.

         o   Bank regulators are directed to consider a holding company's
             effectiveness in combating money laundering when ruling on Federal
             Reserve Act and Bank Merger Act applications.

FEDERAL SECURITIES LAW

         Our common stock is registered with the SEC under Section 12(g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). We are subject
to information, proxy solicitation, insider trading restrictions, and other
requirements under the Exchange Act.

FEDERAL AND STATE TAXATION

FEDERAL TAXATION

         General. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Company, the Association or the MHC. The Association was last
audited for its taxable year ended September 30, 1993.

         For federal income tax purposes, the Company and the Association report
their income using a taxable year ending September 30 and the accrual method of
accounting. The Company, the Association and the MHC file separate income tax
returns and each reports its income on the same basis as the Association now
reports its income. Because the MHC owns less than 80% of the outstanding common
stock of the Company, the MHC and the Company are not permitted to file such
returns on a consolidated basis. The Company and the Association may file their
returns on a consolidated basis, but have elected to file separately. The
Company and the Association have entered into a tax sharing agreement which
governs the apportionment of taxable income between the entities. The Company,
the MHC and the Association are subject to federal income taxation in the same
manner as other corporations with some exceptions, including particularly the
Association's tax reserve for bad debts discussed below.


                                       27
<PAGE>

         Bad Debt Reserves. The Association, as a "small bank" (one with assets
having an adjusted tax basis of $500 million or less) is permitted to maintain a
reserve for bad debts with respect to "qualifying loans," which, in general, are
loans secured by certain interests in real property, and to make, within
specified formula limits, annual additions to the reserve which are deductible
for purposes of computing the Association's taxable income. Pursuant to the
Small Business Job Protection Act of 1996, the Association is now recapturing
(taking into income) over a multi-year period a portion of the balance of its
bad debt reserve as of September 30, 1988.

         Distributions. To the extent that the Association makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Association's "base year reserve," i.e., its reserve as of
September 30, 1988, and then from the Association's supplemental reserve for
losses on loans, to the extent thereof, and an amount based on the amount
distributed (but not in excess of the amount of such reserves) will be included
in the Association's income. Non-dividend distributions include distributions in
excess of the Association's current and accumulated earnings and profits, as
calculated for federal income tax purposes, distributions in redemption of
stock, and distributions in partial or complete liquidation. Dividends paid out
of the Association's current or accumulated earnings and profits will not be so
included in the Association's income.

         The amount of additional taxable income created from a non-dividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if, after the
Reorganization, the Association makes a non-dividend distribution to the Holding
Company, approximately one and one-half times the amount of such distribution
(but not in excess of the amount of such reserves) would be includible in income
for federal income tax purposes, assuming a 34% federal corporate income tax
rate. The Association does not intend to pay dividends that would result in a
recapture of any portion of its tax bad debt reserves.

         Corporate Alternative Minimum Tax. The Code imposes a tax ("AMT") on
alternative minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI
can be offset by net operating loss carryovers of which the Association
currently has none. AMTI is adjusted by determining the tax treatment of certain
items in a manner that negates the deferral of income resulting from the regular
tax treatment of those items. Thus, the Association's AMTI is increased by an
amount equal to 75% of the amount by which the Association's adjusted current
earnings exceeds its AMTI (determined without regard to this adjustment and
prior to reduction for net operating losses). The Association does not expect to
be subject to the AMT.

         Although the corporate environmental tax of 0.12% of the excess of AMTI
(with certain modifications) over $2.0 million has expired, under current
Administration proposals, such tax will be retroactively reinstated for taxable
years beginning after December 31, 1997 and before January 2009.

         Dividends Received Deduction. As the owner of more than 20% of the
stock of the Company, the MHC may deduct from its income 80% of dividends
received from the Company. (A 70% dividends received deduction generally applies
with respect to dividends received by a corporation if such corporation owns
less than 20% of the stock of the corporation paying the dividend).

STATE TAXATION

         Under North Carolina law, the corporate income tax is 6.90% of federal
taxable income as computed under the Code, subject to certain prescribed
adjustments. An annual state franchise tax is imposed at a rate of .0015 applied
to the greatest of the institution's (i) capital stock, surplus and undivided
profits, (ii) investment in tangible property in North Carolina or (iii) 55% of
the appraised valuation of property in North Carolina.


                                       28
<PAGE>

ITEM 2.   DESCRIPTION OF PROPERTY

         The Company conducts its business through its sole office, located in
Wake Forest, North Carolina, which was renovated in 1995. The Company owns the
main office with net book value for property and equipment of $386,950 as of
September 30, 2003. Management believes that the Company's current facilities
are adequate to meet the present and immediately foreseeable needs of the
Company, the Association and the MHC. However, the Company may consider opening
a branch office in the future. In the opinion of management, the Company's main
office is adequately covered by insurance.

<TABLE>
<CAPTION>
                                                                              Net Book
                                           Leased or         Date             Value at
                                             Owned         Acquired       September 30, 2003
                                           ---------       --------       ------------------
                                                                            (in thousands)
        <S>                                  <C>             <C>                 <C>
        Main Office................          Owned           1961                $357
        302 S. Brooks Street
        Wake Forest, NC  27587

</TABLE>

ITEM 3.   LEGAL PROCEEDINGS

      At September 30, 2003, there were no legal proceedings to which the
Company was a party or to which any of its property was subject, other than
routine litigation that is incidental to the business.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      Not applicable.

                                    PART II

ITEM 5.   MARKET FOR EQUITY AND RELATED STOCKHOLDER MATTERS

      Information relating to the market for Company's common equity and related
stockholder matters appears under "Common Stock Information" in the Company's
2003 Annual Report to Stockholders, and is incorporated herein by reference.

      Information relating to the payment of dividends by the Company appears
under "Common Stock Information" in the Company's 2003 Annual Report to
Stockholders, and is incorporated herein by reference. A dividend declared by
the Board of Directors of the Company is considered a capital distribution from
the Company to the stockholders, including the MHC, its mutual holding company.
Under the requirements of the OTS, there are certain restrictions on the ability
of the Company to pay a capital distribution. See "Regulation--Limitation on
Capital Distributions."

      The Association's dividend payout ratios were 29.68% and 52.15% and the
equity to asset ratios were 17.15% and 15.39% for years ended September 30, 2003
and 2002, respectively. In 2003, the MHC elected to forego the receipt of its
dividends from the Company for the last three quarters of the year.


                                       29
<PAGE>

      The following table sets forth the aggregate information of our equity
compensation plans in effect as of September 30, 2003.

<TABLE>
<CAPTION>

                                                                                             NUMBER OF SECURITIES
                                     NUMBER OF SECURITIES                                   REMAINING AVAILABLE FOR
                                         TO BE ISSUED             WEIGHTED-AVERAGE           FUTURE ISSUANCE UNDER
                                       UPON EXERCISE OF          EXERCISE PRICE OF         EQUITY  COMPENSATION PLANS
                                     OUTSTANDING OPTIONS,       OUTSTANDING OPTIONS,        (EXCLUDING SECURITIES
      PLAN CATEGORY                   WARRANTS AND RIGHTS       WARRANTS AND RIGHTS        REFLECTED IN COLUMN (A))
      -------------                   -------------------       --------------------       --------------------------
                                              (A)                       (B)                            (C)
      <S>                                   <C>                       <C>                          <C>
      Equity compensation plans
         approved by security
         holders.................           37,336                    $ 12.75                      14,030

      Equity compensation plans
         not approved by
         security holders........               --                         --                          --
                                           -------                    -------                     -------

           Total.................           37,336                    $ 12.75                      14,030(1)
                                           =======                    =======                     =======

</TABLE>

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

      (1)     Reflects 13,500 shares reserved for future grant under the
              Company's Option Plan. This also reflects 530 shares reserved for
              future awards under the Company's Recognition and Retention Plan
              which are held by the RRP Trust.

ITEM 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

         The information required for this item is incorporated herein by
reference to the information under the caption "Management's Discussion and
Analysis" in the our 2003 Annual Report to Stockholders.

ITEM 7.   FINANCIAL STATEMENTS

         The following financial statements are incorporated by reference to the
indicated pages of our 2003 Annual Report to Stockholders.

                                                                     Page(s) in
                                                                   Annual Report
                                                                   -------------

  o  Independent Auditor's Report...........................................14
  o  Consolidated Statements of Financial Condition,
             September 30, 2003 and 2002....................................15
  o  Consolidated Statements of Income, Years Ended
             September 30, 2003 and 2002....................................16
  o  Consolidated Statements of Stockholders' Equity,
             Years Ended September 30, 2003 and 2002.....................17-18
  o  Consolidated Statements of Cash Flows,
             Years Ended September 30, 2003 and 2002.....................19-20
  o  Notes to Consolidated Financial Statements..........................21-34


                                       30
<PAGE>

ITEM 8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE

        None.

ITEM 8A.  CONTROLS AND PROCEDURES

         Management, including the Company's President and Chief Executive
Officer and Principal Executive and Accounting Officer, has evaluated the
effectiveness of the Company's disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered
by this report. Based upon that evaluation, the Company's President and Chief
Executive Officer and Executive and Accounting Officer concluded that the
disclosure controls and procedures were effective, in all material respects, to
ensure that information required to be disclosed in the reports the Company
files and submits under the Exchange Act is recorded, processed, summarized and
reported as and when required.

         There have been no changes in the Company's internal control over
financial reporting identified in connection with the evaluation that occurred
during the Company's last fiscal quarter that has materially affected, or that
is reasonably likely to materially affect, the Company's internal control over
financial reporting.

                                    PART III

ITEM 9.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The information relating to directors and executive officers of the
Company is incorporated herein by reference to the information in the Company's
2004 Proxy Statement under the headings: "Biographical Information"; "Audit
Committee", "Section 16(a) Beneficial Ownership and Reporting Compliance" and
"Code of Ethics".

ITEM 10.  EXECUTIVE COMPENSATION

         The information relating to executive compensation is incorporated
herein by reference to the information in the Company's 2004 Proxy Statement
under the headings: "Executive Compensation"; "Stock Options"; "Employment
Agreements"; Director's Compensation"; and "Benefits".

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
          RELATED STOCKHOLDER MATTERS

         The information relating to security ownership of certain beneficial
owners and management is incorporated herein by reference to the information in
the Company's 2004 Proxy Statement under the heading "Security Ownership of
Beneficial Owners and Management".

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information relating to certain relationships and related
transactions is incorporated herein by reference to the information in the
Company's 2004 Proxy Statement under the headings "Transactions with Certain
Related Persons".


                                       31
<PAGE>

ITEM 13.  EXHIBITS, LISTS AND REPORTS ON FORM 8-K

          (a)   Exhibits

                2.1      Plan of Reorganization (Incorporated by reference to
                         Exhibit 2.1 of the Company's Registration Statement on
                         Form 8-A, filed with the SEC on May 7, 1999).

                3.1      Federal Stock Charter of the Company (Incorporated by
                         reference to Exhibit 3.1 of the Company's Registration
                         Statement on Form 8-A filed with the SEC on May 7,
                         1999).

                3.2      Bylaws of the Company (Incorporated by reference to
                         Exhibit 3.2 of the Company's Registration Statement on
                         Form 8-A filed with the SEC on May 7, 1999 ).

                4.3      Common Stock Certificate of the Company (Incorporated
                         by reference to Exhibit 4.3 of the Company's
                         Registration Statement on Form 8-A filed with the SEC
                         on May 7, 1999).

                10.2     Employment Agreement with Robert C. White, President
                         and Chief Executive Officer, December 26, 2002
                         (Incorporated by reference to Exhibit 10.2 of the
                         Company's Form 10-KSB for the fiscal year ended
                         September 30, 2002, filed with the SEC on December 26,
                         2002).

                10.3     Employment Agreement with Billy B. Faulkner, Vice
                         President (Incorporated by reference to Exhibit 10.3 of
                         the Company's Form 10-KSB for the fiscal year ended
                         September 30, 2002, filed with the SEC on December 26,
                         2002).

                10.4(a)  Employee Stock Ownership Plan of Wake Forest Federal
                         Savings & Loan Association. (Incorporated by reference
                         to Exhibit 10.4 of the Company's Form 10-KSB for the
                         fiscal year ended September 30, 1999 filed with the SEC
                         on December 28, 1999).

                10.4(b)  Amendment No. 1 to the Stock Ownership Plan of Wake
                         Forest Federal Savings & Loan Association.

                10.4(c)  Amendments No. 2 to the Stock Ownership Plan of Wake
                         Forest Federal Savings & Loan Association.

                10.4(d)  Amendment No. 3 to the Stock Ownership Plan of Wake
                         Forest Federal Savings & Loan Association.

                10.5     Wake Forest Federal Savings & Loan Association 1997
                         Recognition and Retention Plan (Incorporated by
                         reference to the Company's Form S-8 filed with the SEC
                         on July 27, 1999).

                10.6     Wake Forest Federal Savings & Loan Association 1997
                         Stock Option Plan (Incorporated by reference to the
                         Company's Form S-8 filed with SEC on July 27, 1999).

                13.1     2003 Annual Report to Stockholders.

                14.1     Code of Ethics.

                21.1     Subsidiaries of the Registrant (Incorporated by
                         reference to Part 1 - "General" and "Reorganization").

                23.1     Independent Auditor's Consent.

                31.1     Rule 13a-14(a) / 15d-14(a) Certifications.

                32.1     Section 1350 Certifications.


                                       32
<PAGE>

          (b)   REPORTS ON FORM 8-K

          We furnished a report on Form 8-K, dated July 22, 2003, reporting
          under Item 12 that we had issued a press release announcing our
          earnings for the quarter ended June 30, 2003 and furnishing the press
          release.

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

          The information relating to the Company's principal accountant fees
          and services is incorporated by references to the information in the
          Company's 2004 Proxy Statement under the heading "Principal Accountant
          Fees and Services".













                                       33
<PAGE>

                                   SIGNATURES

         Pursuant to the Requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized.

                                           WAKE FOREST BANCSHARES, INC.
                                           (Registrant)



 Date: December 23, 2003                   By:  /s/ Robert C. White
       -------------------------                --------------------------
                                           Robert C. White
                                           President and Chief Executive Officer



         In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.



/s/ Robert C. White                             December 23, 2003
---------------------------------------         --------------------------------
Robert C. White                                 Date
President , Chief Executive Officer
and Director (Principal Executive and
Accounting Officer)



/s/ Howard L. Brown                             December 23, 2003
---------------------------------------         --------------------------------
Howard L. Brown -Chairman of the Board          Date
and Director



/s/  John D. Lyon                               December 23, 2003
---------------------------------------         --------------------------------
John D. Lyon - Director                         Date



/s/ Rodney M. Privette                          December 23, 2003
---------------------------------------         --------------------------------
Rodney M. Privette - Director                   Date



/s/ Anna O. Sumerlin                            December 23, 2003
---------------------------------------         --------------------------------
Anna O. Sumerlin - Director                     Date




<PAGE>



/s/ Harold R. Washington                        December 23, 2003
---------------------------------------         --------------------------------
Harold R. Washington - Director                 Date



/s/  R.W. Wilkinson, III                        December 23, 2003
---------------------------------------         --------------------------------
R.W. Wilkinson, III - Vice-Chairman             Date
and Director



/s/ Leelan A. Woodlief                          December 23, 2003
---------------------------------------         --------------------------------
Leelan A. Woodlief - Director                   Date
















<PAGE>


                                  EXHIBIT INDEX
<TABLE>
<CAPTION>

<S>         <C>                                                                    <C>
2.1         Plan of Reorganization                                                 *

3.1         Federal Stock Charter of the Company                                   *

3.2         Bylaws of the Company                                                  *

4.3         Common Stock Certificate of the Company                                *

10.2        Employment Agreement with Robert C. White, President and Chief         +
            Executive Officer

10.3        Employment Agreement with Billy B. Faulkner, Vice President            +

10.4(a)     Employee Stock Ownership Plan of Wake Forest Federal Savings & Loan    **
            Association

10.4(b)     Amendment No. 1 to the Employee Stock Ownership Plan of Wake Forest    Filed herewith
            Federal Savings & Loan Association

10.4(c)     Amendment No. 2 to the Employee Stock Ownership Plan of Wake Forest    Filed herewith
            Federal Savings & Loan Association

10.4(d)     Amendment No. 3 to the Employee Stock Ownership Plan of Wake Forest    Filed herewith
            Federal Savings & Loan Association

10.5        Wake Forest Federal Savings & Loan Association 1997 Recognition and    ***
            Retention Plan

10.6        Wake Forest Federal Savings & Loan Association 1997 Stock Option       ***
            Plan

13.1        2003 Annual Report to Stockholders                                     Filed herewith

14.1        Code of Ethics                                                         Filed herewith

21.1        Subsidiaries of the Registrant                                         ++

23.1        Independent Auditor's Consent                                          Filed herewith

31.1        Rule 13a-14(a) / 15d-14(a) Certifications                              Filed herewith

32.1        Section 1350 Certifications                                            Filed herewith

</TABLE>

   *    Incorporated by reference to the Company's Registration Statement on
        Form 8-A, filed with the SEC on May 7, 1999.

   **   Incorporated by reference the Company's Form 10-KSB for the fiscal year
        ended  September 30, 1999 filed with the SEC on December 28, 1999.


<PAGE>

   ***  Incorporated by reference to the Company's Form S-8 filed with the
        SEC on July 27, 1999.

   +    Incorporated by reference to the Company's Form 10-KSB for the fiscal
        year ended September 30, 2002, filed with the SEC on December 26, 2002.

   ++   Incorporated by reference to Part 1 - "General" and "Reorganization".