<PAGE>


                                  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, 2005

                        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)

      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. |_|

         Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_|  No |X|

         The revenues for the issuer's fiscal year ended September 30, 2005 were
$5,846,400.

         The issuer had 1,152,761 shares of common stock outstanding as of
December 21, 2005. 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 15, 2005 was $9,727,500.

      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, 2005 are incorporated by reference into Parts I and II of
this Form 10-KSB.

         Portions of the registrant's Proxy Statement for the 2006 Annual
Meeting of Shareholders are incorporated by reference into Part III of this Form
10-KSB.



<PAGE>



                                TABLE OF CONTENTS


PART I

     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 Common 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
     ITEM 8B   Other Information..............................................31

PART III

     ITEM 9.   Directors, Executive Officers, Promoters and Control Persons;
               Compliance  With Section 16(a) of the Exchange Act.............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.......................................................32
     ITEM 14.  Principal Accountant Fees and Services.........................33



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   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, 2005, the Company had total assets of $99.7 million, total
deposits of $80.9 million and total stockholders' equity of $17.4 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, 2005. See
"Regulation -- Federal Banking Regulation -- 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 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.


                                       4
<PAGE>

         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.

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 Interstate 540, which is just south of Wake
Forest. The driving time between Wake Forest and the Research Triangle Park is
about 20 minutes.

         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 has grown rapidly
during the last decade 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 2005, the town's population
totaled 17,400. This data also states that the population within a five mile
radius of Wake Forest was 24,623 in 2000. Residential households totaled 13,107
within a five mile radius of Wake Forest in 2002. Wake County's and Franklin
County's populations were 719,500 and 53,500 in 2005, respectively.


                                       5
<PAGE>

         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 eleven other depository institutions, nine 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.

         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,
                                         ------------------------------------------------------------
                                                    2005                            2004
                                         --------------------------      ----------------------------
                                                           % of                             % of
                                           Amount         Total            Amount           Total
                                         -----------    -----------      ------------    ------------
                                                              (Dollars in Thousands)
<S>                                     <C>                  <C>         <C>                <C>
Type of loans:
      One- to four-family residential   $    24,948          33.76 %     $   22,307         28.15 %
      Multi-family residential                  699           0.95              677          0.85
      Commercial real estate                 13,668          18.50           14,232         17.96
      Land                                   11,581          15.67           12,412         15.66
      Commercial construction                     -              -              600          0.76
      Residential construction               36,559          49.47           43,030         54.30
      Equity line mortgages                   2,495           3.38            2,266          2.86
      Savings Account                            88           0.12               90          0.11
                                         -----------    -----------       ----------    ----------
                                             90,038         121.85 %         95,614        120.66 %
                                         -----------    -----------       ----------    ----------
Less:
      Deferred loan fees                        115           0.16 %            116          0.15 %
      Undisbursed portion of                                                                    -
        loans in process                     15,179          20.54           15,527         19.59
      Allowance for loan losses                 850           1.15              730          0.92
                                         -----------    -----------       ----------    ----------
                                             16,144          21.85           16,373         20.66
                                         -----------    -----------       ----------    ----------

           Total loans receivable, net  $    73,894         100.00 %     $   79,241        100.00 %
                                         ===========    ===========       ==========    ==========
</TABLE>


                                       6
<PAGE>


         Loan Maturity. The following table shows the contractual maturity of
the Association's loans at September 30, 2005. 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
$48.7 million and $37.4 million for the years ended September 30, 2005 and 2004,
respectively.

<TABLE>
<CAPTION>

                                                                 At September 30, 2005
                      ------------------------------------------------------------------------------------------------------------
                                                                                                    Equity    Savings
                        Residential Residential  Commercial              Commercial   Residential    Line     Account
                        1-4 Family  Multi-family Real Estate    Land     Construction Construction Mortgages   Loans        Total
                        ----------  ------------ -----------  ---------  ------------ ------------ ---------  ---------  ---------
Contractual maturity:                                                   (In Thousands)
<S>                     <C>          <C>         <C>          <C>          <C>          <C>       <C>         <C>        <C>
  One year or less       $    254    $      -    $   1,117    $   2,356    $        -  $  36,559  $      -   $      68    $ 40,354
                         ---------   --------    ---------    ---------    ----------  ---------  --------   ---------    --------
   After one year:
      1 to 3 years          1,196           -         1,230       4,975             -          -          -          20      7,421
      3 to 5 years            421           -         1,076       1,866             -          -          -           -      3,363
      5 to 10 years           776           -           888         802             -          -        500           -      2,966
      10 to 20 years        8,100           -         4,301       1,582             -          -      1,995           -     15,978
      Over 20 years        14,201         699         5,056           -             -          -          -           -     19,956
                        ----------  ----------   ----------   ---------    ----------   --------  ---------   ---------   --------
Total after one year       24,694         699        12,551       9,225             -          -      2,495          20     49,684
                        ----------  ----------   ----------   ---------    ----------   --------  ---------   ---------   --------
Total amount due           24,948         699        13,668      11,581             -     36,559      2,495          88     90,038
Undisbursed loans               -           -             -           -             -    (15,179)         -           -    (15,179)
                        ----------  ----------   ----------   ---------    ----------   --------  ---------   ---------   --------
Loans outstanding       $  24,948   $     699    $   13,668   $  11,581     $       -   $ 21,380  $   2,495   $      88   $ 74,859
                        ==========  ==========   ==========   =========    ==========   ========  =========   =========   ========
</TABLE>

      The following table sets forth the dollar amounts in each loan category at
September 30, 2005 that are contractually due after September 30, 2006, and
whether such loans have fixed interest rates or adjustable interest rates.

<TABLE>
<CAPTION>

                                                          Due After September 30, 2006
                                            -------------------------------------------------------
                                                  Fixed            Adjustable
                                                  Rates              Rates                 Total
                                            --------------   ---------------------  ---------------
                                                             (Dollars in Thousands)
<S>                                         <C>                 <C>                 <C>
One-to-four family residential              $       6,463       $      18,231       $     24,694
Multi-family residential                              699                   -                699
Commercial real estate                                232              12,319             12,551
Land                                                    -               9,225              9,225
Commercial construction                                 -                   -                  -
Residential construction                                -                   -                  -
Equity line mortgages                                   -               2,495              2,495
Savings account loans                                  20                   -                 20
                                            -------------       -------------       ------------
                                            $       7,414       $      42,270       $     49,684
                                            =============       =============       ============
</TABLE>


      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 a portion 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. 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.


                                       7
<PAGE>

         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, 2005, the Association's total loans were $73.9
million, of which $24.9 million, or 33.76% were one-to four-family residential
mortgage loans. Of the one- to four-family residential mortgage loans
outstanding at that date, 26.91%, or $6.7 million, were fixed-rate loans and
73.09%, or $18.2 million, were adjustable-rate loans. The Association offers
three-, five-, and seven-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-, five-, and seven-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.

         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 the
prime rate ("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, 2005, the Association had $21.4
million (net of undisbursed loan funds of $15.2 million) of residential
construction loans which amounted to 28.93%, of the Association's net loans
outstanding. The largest residential construction loan in the Association's
portfolio at September 30, 2005 was $645,500, is secured by a single family
residence under construction and is performing according to its terms.


                                       8
<PAGE>

         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, 2005, the Association had no commercial construction
loans outstanding.

         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 30 years with (i) a three-, five-,
or seven-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, 2005,
the Association's commercial real estate mortgage portfolio was $13.7 million,
or 18.50% of total loans outstanding. The largest commercial real estate loan in
the Association's portfolio at September 30, 2005 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.


                                       9
<PAGE>

         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, 2005, the
Association's equity line portfolio was $2.5 million, or 3.38% 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 30 years at generally 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 are substantially the same as the risks described
above on the Association's other forms of commercial real estate lending.

         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, 2005, the Association's total land loan portfolio
was $11.6 million or 15.67% of total loans outstanding and its multi-family loan
portfolio was $698,800 or 0.95% 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, 2005, the Association's
savings account loan portfolio totaled $88,300 or 0.12% of total loans
outstanding.


                                       10
<PAGE>

         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.

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.


                                       11
<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.

<TABLE>
<CAPTION>

                                                           At or For the Year
                                                          Ended September 30,
                                                    -------------------------------
                                                         2005               2004
                                                    --------------    -------------
                                                        (Dollars in Thousands)

<S>                                                 <C>               <C>
Nonaccrual loans                                    $          771    $      1,491
Accruing loans past due 90 days or more:
     Single family, one-to-four units                            -               -
                                                     --------------    ------------
Total non-performing loans                          $          771    $      1,491
                                                     ==============    ============
Allowance for loan losses                           $          850    $        730
                                                     ==============    ============
Real estate owned, net                              $        1,004    $          -
                                                     ==============    ============

Ratios:
     Non-accrual loans to total loans                        1.03%           1.86%
     Non-performing loans to total loans                     1.03%           1.86%
     Non-performing loans and real estate
       owned to total assets                                 1.78%           1.70%
     Allowance for loan losses to:
       Non-accrual loans                                   110.27%          48.99%
       Non-performing loans                                110.27%          48.99%
       Total loans                                           1.14%           0.91%

Contractual interest income that would have
  been recognized on nonaccrual loans               $           24    $         44
Actual interest income recognized                                -               -
                                                     --------------    ------------
Interest income not recognized                      $           24    $         44
                                                     ==============    ============
 </TABLE>


         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.


                                       12
<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 $1,867,400 of assets
classified as substandard or classified as Special Mention, Doubtful or Loss at
September 30, 2005. The assets classified at September 30, 2005 consisted of
four loans and one foreclosed property, all classified as substandard. Two of
the loans were on one-to four single family residential properties, both
subsequently brought current. The other two classified loans were single family
residential construction loans, one of which has subsequently been paid off and
the other has been brought current. The foreclosed property (real estate owned)
consists a convenience store and an adjacent tract of land ($1,003,800), in
total 3.81 acres located on a major highway outside of Wake Forest. While the
property's location is considered highly desirable, the Company decided that a
phase II environmental assessment was necessary to properly market the tract due
to the historical uses of the property. Petroleum contamination consistent with
operating a gas station and a truck maintenance facility over an extended period
of time was found on parts of the property. Environmental assessment reports are
currently being reviewed by the appropriate State agencies. Although the Company
does not currently believe the contamination will have any significant effect on
the potential development of the property, the agencies are expected to be able
to assist the Company in determining the extent of any required clean-up and
ongoing monitoring steps. At this time, the Company does not believe that the
ongoing environmental costs will materially impact the value of the property and
no loss is expected on its ultimate sale. During the current year, the Company
incurred $78,800 in environmentally related cost on this property. The
Association had $1,491,000 of assets classified as substandard or classified as
Special Mention, Doubtful or Loss at September 30, 2004.

         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, 2005, the Association's
allowance for loan losses was $850,000, or 1.14% of total loans, as compared to
$730,400 or 0.91%, at September 30, 2004. The Association had non-performing
loans of $770,850 and $1,491,000 at September 30, 2005 and September 30, 2004,
respectively. The Association provided $119,600 in additional loan loss
provisions during 2005. During the current year, the Association did not
charge-off any loans. The Association provided $90,000 in additional loan loss
provisions during 2004 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.



                                       13
<PAGE>

         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
did not report any gains or losses from the sale of REO and incurred $91,650 in
foreclosure related expenses from holding foreclosed properties. During 2004,
the Association reported gains on sale of foreclosed properties of $30,750 and
incurred $15,800 in foreclosure related expenses and losses on the sale of 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,
2005, the Association had one piece of REO totaling $1,003,800 on a convenience
store and adjacent tract of land.

         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,
                                                                  ------------------------------------
                                                                        2005                2004
                                                                  ---------------      ---------------
ALLOWANCE FOR LOAN LOSSES:                                               (Dollars in Thousands)
<S>                                                               <C>                  <C>
     Balance at beginning of year                                 $          730       $          640
     Provision for loan losses                                               120                   90
     Charge-offs                                                               -                    -
     Recoveries                                                                -                    -
                                                                   --------------       --------------
     Balance at end of year                                       $          850       $          730
                                                                   ==============       ==============
     Ratio of net charge-offs to average loans outstanding                 0.00%                0.00%
                                                                   ==============       ==============
     Accruing loans past due 90 days or more                      $            -       $            -
                                                                   ==============       ==============

ALLOWANCE FOR LOSSES ON REAL ESTATE OWNED:
     Balance at beginning of year                                 $            -       $           77
     Provision for loan losses                                                 -                    -
     Charge-offs                                                               -                  (77)
     Recoveries                                                                -                    -
                                                                   --------------       --------------
     Balance at end of year                                       $            -       $            -
                                                                   ==============       ==============
 </TABLE>


                                       14
<PAGE>


    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,
                                      ------------------------------------------------------------------------------------------
                                                        2005                                            2004
                                      -------------------------------------------     ------------------------------------------
                                                                     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  $       140          16.47 %         33.22 %   $       120          16.44 %        27.75 %
    Multi-family residential                  5           0.59            0.93               5           0.68           0.85
    Commercial real estate                  125          14.71           18.29             120          16.44          17.80
    Land                                    120          14.12           15.49             115          15.75          15.52
    Commercial construction                   -              -               -              10           1.37           0.75
    Residential construction                450          52.94           28.61             350          47.95          34.39
    Equity line mortgages                    10           1.18            3.34              10           1.37           2.83
                                     -----------   ------------    ------------     -----------   ------------    -----------
Total mortgage loans                        850         100.00           99.88             730         100.00          99.89
Savings account loans                         -              -            0.12               -              -           0.11
                                     -----------   ------------    ------------     -----------   ------------    -----------
Total allowance for loan losses     $       850         100.00 %        100.00 %   $       730         100.00 %       100.00 %
                                     ===========   ============    ============     ===========   ============    ===========
</TABLE>

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 of Atlanta.
At September 30, 2005, the Association held FHLMC stock with an amortized cost
of $8,000 and a current market value of $460,350 and Federal Home Loan Bank
stock with a cost and market value of $182,300. At September 30, 2005, the
Association held $22.3 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
                                           ---------------------------------
                                                 2005                2004
                                           --------------     --------------
                                                    (In Thousands)

Amortized cost at beginning of period      $        5,467     $      15,962
Purchases/(Maturities or Sales), net               16,354           (11,019)
Premium and discount amortization, net                  -                 -
                                            --------------     -------------
Amortized cost at end of period                    21,821             4,943
Net unrealized gain (1)                               452               524
                                            --------------     -------------
Total securities, net                      $       22,273     $       5,467
                                            ==============     =============


(1) The net unrealized gain at September 30, 2005 and 2004 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.


                                       15
<PAGE>


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

<TABLE>
<CAPTION>

                                                                 At September 30,
                                          ------------------------------------------------------------------
                                                       2005                                 2004
                                          ---------------------------------  -------------------------------
                                              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              460               8              532
                                           --------------     ------------    ------------     ------------
       Total available-for-sale                         8              460               8              532
                                           --------------     ------------    ------------     ------------
Short-term certificates of deposit                    990              990             783              783
FHLB Overnight deposits                            20,641           20,641           3,938            3,938
                                           --------------     ------------    ------------     ------------
Federal Home Loan Bank Stock                          182              182             214              214
                                           --------------     ------------    ------------     ------------
       Total investments, net (2)         $        21,821    $      22,273   $       4,943    $       5,467
                                           ==============     ============    ============     ============
</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, 2005 and 2004 on available for sale
     securities in accordance with SFAS No. 115.

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, 2004, the
Association's core deposits (which the Association considers to consist of NOW
accounts, money market deposit accounts and regular savings accounts)
constituted 28.91% 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.


                                       16
<PAGE>


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

<TABLE>
<CAPTION>

                                                        For the Year Ended September 30,
                                                    ---------------------------------------
                                                          2005                   2004
                                                    ----------------         --------------
                                                                (In Thousands)
<S>                                                <C>                      <C>
Total deposits at beginning of period              $         69,891         $       68,840
Net (decrease) before interest credited                       9,256                   (537)
Interest credited                                             1,758                  1,588
                                                    ----------------         --------------
Total deposits at end of period                    $         80,905         $       69,891
                                                    ================         ==============
</TABLE>

At September 30, 2005, the Association had $22.7 million in jumbo certificate of
deposits (accounts in amounts over $100,000) maturing as follows:

<TABLE>
<CAPTION>

                                                                              Weighted
                                                        Amount              Average Rate
                                                    --------------         --------------
Maturity Period:                                            (Dollars in Thousands)
<S>                                                <C>                            <C>

      Within three months                          $        2,940                 4.10 %
      After three but within six months                     1,454                 3.13
      After six but within twelve months                    6,785                 3.72
      After twelve months                                  11,501                 4.31
                                                    --------------
         Total                                     $       22,680                 4.03 %
                                                    ==============
</TABLE>

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

<TABLE>
<CAPTION>

                                                               At September 30,
                               -------------------------------------------------------------------------------------
                                                2005                                       2004
                               --------------------------------------     ------------------------------------------
                                              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               $     3,096         3.83%        1.25%   $      3,098        4.43%          0.85%
MMDA accounts                        19,636        24.27%        2.96%         14,155       20.25%          1.90%
NOW accounts                          2,449         3.03%        0.25%          1,929        2.76%          0.25%
Noninterest-bearing accounts          2,070         2.56%        0.00%          1,022        1.46%          0.00%
Certificate accounts                 53,654        66.32%        3.70%         49,687       71.09%          3.47%
                                 -----------  ------------                ------------  -----------
     Totals                     $    80,905       100.00%        3.22%   $     69,891      100.00%          2.88%
                                 ===========  ============                ============  ===========
</TABLE>


                                       17
<PAGE>


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

                                      September 30,
                           --------------------------------
     Maturity Period            2005              2004
----------------------     --------------   ---------------
                                  Dollars in Thousands
          2005            $            -    $      33,419
          2006                    26,911            8,573
          2007                    13,595            3,391
          2008                     3,303            2,408
          2009                     1,968            1,896
          2010                     7,877                -
                           --------------    -------------
                          $       53,654    $      49,687
                           ==============    =============

         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--Federal Banking Regulation--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, 2005, neither the Company
nor the Association had any borrowings outstanding.

PERSONNEL

         As of September 30, 2005, the Company had no employees who were
compensated through the Company.

         As of September 30, 2005, the Association had 11 employees, nine of
which 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,
2005, ten of the eleven employees had been with the Association for more than 5
years and 6 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 Association, as a federal stock savings bank, is
subject to regulation, examination and supervision by the OTS and the FDIC. The
Association 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.

         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 (the "HOLA"), 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 and regulation.


                                       18
<PAGE>

         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, 2004, and in each of the prior
12 months, and therefore is a "qualified 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 and is unable to correct that
failure for a period of time, 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.

      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.



                                       19
<PAGE>

         Tangible capital is defined, generally, as common stockholders' equity
(including retained earnings), 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, 2005, the Association met each of its capital
requirements.

         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 in its assessment area or a broader area that includes
            its assessment areas; and

      o     a service test, to evaluate the institution's delivery of services
            through its retail banking channels and the extent and
            innovativeness of its community development service.

         Transactions with Affiliates. 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. 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, 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.

         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, which the Company has done. We do not expect that
the changes made by Regulation W will have a material adverse effect on our
business.



                                       20
<PAGE>

         Loans to Insiders. The Association's authority to extend credit to its
directors, executive officers and principal 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 risk 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, 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 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.


                                       21
<PAGE>

         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; or

         o        critically undercapitalized.

         At September 30, 2005, 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 (the "SAIF") maintained by the FDIC, 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%.

         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 payments 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 the GLB Act, the FHLB of Atlanta
has adopted a capital plan, which is expected to be implemented no earlier than
December 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.


                                       22
<PAGE>

         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 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.

         Restrictions Applicable to the Company. Because the Company was
organized after May 4, 1999, under the Gramm-Leach-Bliley Act (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;


                                       23
<PAGE>

         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.

         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.


                                       24
<PAGE>

         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.

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 corporate wrongdoing. 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 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;


                                       25
<PAGE>

         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 money laundering and terrorist threats through
enhanced domestic security measures, expanded surveillance powers, and
amendments to the Bank Secrecy Act. Title III of the USA PATRIOT Act takes
measures intended to encourage information sharing among financial institutions,
bank regulatory agencies and law enforcement bodies. Further, certain provisions
of Title III impose affirmative 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.

         Among other requirements, Title III of the USA PATRIOT Act imposes the
         following obligations on 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, rules establishing minimum standards
                  for customer due diligence, identification and verification
                  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 are 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.


                                       26
<PAGE>

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.

         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 recaptured (took 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 an alternative
minimum 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.


                                       27
<PAGE>

         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 $337,850 as of
September 30, 2005. 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, 2005
                                            -----------    -----------     -------------------
                                                                             (In Thousands)
<S>                                           <C>                   <C>           <C>
             Main Office................      Owned                 1961          $327
             302 S. Brooks Street
             Wake Forest, NC  27587
</TABLE>


ITEM 3. LEGAL PROCEEDINGS

         At September 30, 2005, 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 of the Company.

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

         None.

                                    PART II

ITEM 5. MARKET FOR COMMON 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 2005 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 2005 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 Part 1, Item 1--"Description
of Business--Regulation--Limitation on Capital Distributions."

         The Association's dividend payout ratios were 23.67% and 26.36% and the
equity to asset ratios were 17.45% and 18.72% for years ended September 30, 2005
and 2004, respectively. For all of 2005 and 2004, the MHC elected to forego the
receipt of its dividends from the Company.


                                       29
<PAGE>


         The following table sets forth the aggregate information of our equity
compensation plans in effect as of September 30, 2005.

<TABLE>
<CAPTION>

                                Number of securites
                                 to be issued upon         Weighted-average       Number of securities
                                    exercise of           exercise price of      remaining available for
                               outstanding options,      outstanding options,     future issuance under
Plan Category                   warrants and rights      warrants and rights    equity compensation plans
                            -----------------------     ---------------------   --------------------------

<S>                                          <C>                      <C>                           <C>
Equity compensation
  plans approved by
  security holders                           16,802     $               12.75                       14,030

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

     Total                                   16,802     $               12.75                    (1)14,030
                            =======================     =====================   ==========================
</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 our 2005 Annual Report to Stockholders.

ITEM 7. FINANCIAL STATEMENTS

         The following financial statements are incorporated by reference to the
indicated pages of our 2005 Annual Report to Stockholders.

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

  o      Report of Independent Registered Public Accounting Firm.............16
  o      Consolidated Statements of Financial Condition,
                  September 30, 2005 and 2004................................17
  o      Consolidated Statements of Income, Years Ended
                  September 30, 2005 and 2004................................18
  o      Consolidated Statements of Stockholders' Equity,
                  Years Ended September 30, 2005 and 2004.................19-20
  o      Consolidated Statements of Cash Flows,
                  Years Ended September 30, 2005 and 2004.................21-22
  o      Notes to Consolidated Financial Statements.......................23-36


                                       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 Financial 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 Principal Executive and Financial Officer concluded that
the disclosure controls and procedures were effective to ensure that information
required to be disclosed in the reports the Company files and submits under the
Exchange Act is (i) recorded, processed, summarized and reported as and when
required and (ii) accumulated and communicated to the Company's management,
including the Company's Principal Executive and Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.

         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.

ITEM 8B. OTHER INFORMATION

           None.

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(A) OF THE ACT

         The information relating to directors and executive officers of the
Company is incorporated herein by reference to the information in the Company's
2006 Proxy Statement under the headings: "Election of Directors"; "Committees of
the Board-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 2006 Proxy Statement
under the headings: "Executive Compensation"; "Stock Options"; "Employment
Agreements"; "Directors' 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 2006 Proxy Statement under the heading "Security Ownership of
Certain 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 2006 Proxy Statement under the headings "Transactions with Certain
Related Persons".


                                       31
<PAGE>

ITEM 13. 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 Employee Stock Ownership Plan of Wake
                  Forest Federal Savings & Loan Association (Incorporated by
                  reference to Exhibit 10.4(b) of the Company's Form 10-KSB for
                  the fiscal year ended September 30, 2003 filed with the SEC on
                  December 29, 2003).

         10.4(c)  Amendments No. 2 to the Employee Stock Ownership Plan of Wake
                  Forest Federal Savings & Loan Association (Incorporated by
                  reference to Exhibit 10.4(c) of the Company's Form 10-KSB for
                  the fiscal year ended September 30, 2003 filed with the SEC on
                  December 29, 2003).

         10.4(d)  Amendment No. 3 to the Employee Stock Ownership Plan of Wake
                  Forest Federal Savings & Loan Association (Incorporated by
                  reference to Exhibit 10.4(d) of the Company's Form 10-KSB for
                  the fiscal year ended September 30, 2003 filed with the SEC on
                  December 29, 2003).

         10.4(e)  Amendment No.4 to the Employee Stock Ownership Plan of Wake
                  Forest Federal Savings & Loan Association (Incorporated by
                  reference to Exhibit 10.4(e) of the Company's Form 8-K filed
                  with the SEC on August 19, 2005.)

         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     2005 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>

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 2006 Proxy Statement under the heading "Principal Accountant
         Fees and Services".






                                       33
<PAGE>

                                   SIGNATURES

         In accordance with 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 21, 2005                 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 21, 2005
 -------------------------------------------------    --------------------------
 Robert C. White                                      Date
 President , Chief Executive Officer and Director
 (Principal Executive and Financial Officer)


 /s/ Howard L. Brown                                  December 21, 2005
 -------------------------------------------------    --------------------------
 Howard L. Brown -Chairman of the Board               Date
 and Director


 /s/  John D. Lyon                                    December 21, 2005
 --------------------------------------------         --------------------------
 John D. Lyon - Director                              Date


 /s/ Rodney M. Privette                               December 21, 2005
 -------------------------------------------------    --------------------------
 Rodney M. Privette - Director                        Date


 /s/ Anna O. Sumerlin                                 December 21, 2005
 -------------------------------------------------    --------------------------
 Anna O. Sumerlin - Director                          Date


 /s/ Harold R. Washington                             December 21, 2005
 -------------------------------------------------    --------------------------
 Harold R. Washington - Director                      Date


 /s/  R.W. Wilkinson, III                             December 21, 2005
 -------------------------------------------------    --------------------------
 R.W. Wilkinson, III - Vice-Chairman and Director     Date


 /s/ Leelan A. Woodlief                               December 21, 2005
 -------------------------------------------------    --------------------------
 Leelan A. Woodlief - Director                        Date


 /s/ William S. Wooten                                December 21, 2005
 -------------------------------------------------    --------------------------
 William S. Wooten - Director                         Date


<PAGE>

<TABLE>
<CAPTION>

                                  EXHIBIT INDEX

<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  Federal   +++
          Savings & Loan Association

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

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

10.4(e)   Amendment  No.  4 to the  Employee  Stock  Ownership  Plan of Wake  Forest  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      2005 Annual Report to Stockholders                                                    Filed herewith

14.1      Code of Ethics

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

----------------
*         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.

****      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".

+++       Incorporated by reference to the Company's Form 10-KSB for the
          fiscal year ended September 30, 2003, filed with the SEC on
          December 29, 2003.

++++      Incorporated by reference to the Company's Form 8-K filed with the
          SEC on August 19, 2005.
</TABLE>