<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, 2004

                        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
              Incorporation)                         Identification No.)

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

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

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

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

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

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

         The revenues for the issuer's fiscal year ended September 30, 2004 were
$4,946,400.

         The issuer had 1,154,676 shares of common stock outstanding as of
December 8, 2004. 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 08, 2004 was $11,171,000.

         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, 2004 are incorporated by reference into Parts I and II of
this Form 10-KSB.

         Portions of the registrant's Proxy Statement for the 2005 Annual
Meeting of Shareholders are incorporated by reference into Part III of this Form
10-KSB.



<PAGE>


                                TABLE OF CONTENTS
<TABLE>
<CAPTION>

<S>                   <C>                                                                                      <C>
PART I

         FORWARD LOOKING STATEMENTS..............................................................................3
         ITEM 2.      Description of Business...................................................................30
         ITEM 3.      Legal Proceedings.........................................................................30
         ITEM 4.      Submission of Matters to a Vote of Security Holders.......................................30

PART II

         ITEM 5.      Market for Common Equity and Related Stockholder Matters..................................30
         ITEM 6.      Management's Discussion and Analysis or Plan of Operation.................................31
         ITEM 7.      Financial Statements......................................................................31
         ITEM 8.      Changes In and Disagreements With Accountants on Accounting
                      and Financial Disclosure..................................................................32
         ITEM 8A.     Controls and Procedures...................................................................32
         ITEM 8B      Other Information.........................................................................32

PART III

         ITEM 9.      Directors, Executive Officers, Promoters and Control Persons, Compliance
                      With Section 16(a) of the Exchange Act....................................................32
         ITEM 10.     Executive Compensation....................................................................32
         ITEM 11.     Security Ownership of Certain Beneficial Owners and Management
                      and Related Stockholder Matters...........................................................32
         ITEM 12.     Certain Relationships and Related Transactions............................................32
         ITEM 13.     Exhibits..................................................................................33
         ITEM 14.     Principal Accountant Fees and Services....................................................34

</TABLE>


SIGNATURES


<PAGE>


FORWARD-LOOKING STATEMENTS

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

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

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

         o  inflation, interest rate, market and monetary fluctuations;

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

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

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

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

         o  the impact of technological changes;

         o  acquisitions;

         o  changes in consumer spending and saving habits; and

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



                                       3
<PAGE>

ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL

         Wake Forest Bancshares, Inc. is a federally-chartered stock holding
company for Wake Forest Federal Savings & Loan Association (the "Association"),
a federally-chartered stock savings and loan association which conducts business
from its one office located in Wake Forest, North Carolina. The office is
located in Wake County, North Carolina. The Company was formed on May 7, 1999
pursuant to an Agreement and Plan of Reorganization whereby the Company
exchanged its common stock for all outstanding common stock of the Association.
The Company is a majority-owned subsidiary of Wake Forest Bancorp, M.H.C., a
federal mutual holding company (the "MHC"). The Association was founded in 1922
as a building and loan association. In 1982, the Association converted from a
North Carolina chartered mutual savings and loan association to a
federally-chartered mutual savings and loan association. During fiscal year
1996, the Association converted from a federally-chartered mutual savings and
loan association to a federally-chartered stock savings and loan association.
The Association is the Company's sole subsidiary. The Association's deposits are
insured by the Savings Association Insurance Fund of the Federal Deposit
Insurance Corporation (the "FDIC") to the maximum extent permitted by law. At
September 30, 2004, the Company had total assets of $87.7 million, total
deposits of $69.9 million and total stockholders' equity of $16.4 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, 2004. 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.

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

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

MARKET AREA AND COMPETITION

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

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


                                       5
<PAGE>

         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 2004, the population is
estimated to be approximately 16,000. 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.

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

LENDING ACTIVITIES

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

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




                                       6
<PAGE>


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

<TABLE>
<CAPTION>
                                                                            At September 30,
                                                           --------------------------------------------------
                                                                     2004                       2003
                                                           ------------------------     ---------------------
                                                                            % of                      % of
                                                            Amount         Total        Amount         Total
                                                           -------         ------       -------        ------
                                                                       (Dollars in Thousands)
<S>                                                        <C>            <C>           <C>             <C>
Type of loans:
      One- to four-family residential                      $22,307        28.15%        $19,054         28.43%
      Multi-family residential                                 677         0.85             537          0.80
      Commercial real estate                                14,232        17.96          13,171         19.65
      Land                                                  12,412        15.66          14,864         22.18
      Commercial construction                                  600         0.76           2,420          3.61
      Residential construction                              43,030        54.30          28,554         42.61
      Equity line mortgages                                  2,266         2.86           1,729          2.58
      Savings Account                                           90         0.11             108          0.16
                                                           -------       ------         -------        ------
                                                            95,614       120.66%         80,437        120.03%
                                                           -------       ------         -------        ------
Less:
      Deferred loan fees                                       116         0.15%             98          0.15%
      Undisbursed portion of
        loans in process                                    15,527        19.60          12,683         18.93
      Allowance for loan losses                                730         0.91             640          0.95
                                                           -------       ------         -------        ------
                                                            16,373        20.66          13,421         20.03
                                                           -------       ------         -------        ------

           Total loans receivable, net                     $79,241       100.00%        $67,016        100.00%
                                                           =======       ======         =======        ======



</TABLE>


         Loan Maturity. The following table shows the contractual maturity of
the Association's loans at September 30, 2004. 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
$37.4 million and $45.9 million for the years ended September 30, 2004 and 2003,
respectively.

<TABLE>
<CAPTION>
                                                                   At September 30, 2004
                           -------------------------------------------------------------------------------------------------------
                           Residential Residential Commercial                                        Equity    Savings
                               1-4       Multi-       Real                Commercial  Residential     Line     Account
                             Family      family      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         $  3,166    $      -     $      -   $  2,421   $    600      $43,030     $      -   $     69   $ 49,286
                           --------    --------     --------   --------   --------      --------    --------   ---------  --------
   After one year:
      1 to 3 years            9,885           -          482      6,274          -             -           -         21     16,662
      3 to 5 years            3,269           -        2,234      1,059          -             -           -          -      6,562
      5 to 10 years             339           -          649      1,346          -             -         595          -      2,929
      10 to 20 years          2,312           -        6,665      1,312          -             -       1,671          -     11,960
      Over 20 years           3,336         677        4,202          -          -             -           -          -      8,215
                           --------    --------     --------   --------   --------      --------    --------   --------   --------
Total after one year         19,141         677       14,232      9,991          -             -       2,266         21     46,328
                           --------    --------     --------   --------   --------      --------    --------   --------   --------
Total amount due             22,307         677       14,232     12,412        600        43,030       2,266         90     95,614
Undisbursed loans                 -           -            -          -          -       (15,527)          -          -    (15,527)
                           --------    --------     --------   --------   --------      --------    --------   --------   --------
Loans outstanding          $ 22,307    $    677     $ 14,232   $ 12,412   $    600      $ 27,503    $  2,266   $     90   $ 80,087
                           ========    ========     ========   ========   ========      ========    ========   ========   ========

</TABLE>

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




                                       7
<PAGE>

         The following table sets forth the dollar amounts in each loan category
at September 30, 2004 that are contractually due after September 30, 2005, and
whether such loans have fixed interest rates or adjustable interest rates.


                                                Due After September 30, 2005
                                             ----------------------------------
                                              Fixed      Adjustable
                                              Rates         Rates        Total
                                             -------     -----------    -------
                                                   (Dollars in Thousands)
One-to-four family residential               $ 4,185       $14,956      $19,141
Multi-family residential                         677             -          677
Commercial real estate                           456        13,776       14,232
Land                                               3         9,988        9,991
Commercial construction                            -             -            -
Residential construction                           -             -            -
Equity line mortgages                              -         2,266        2,266
Savings account loans                             21             -           21
                                             -------       -------      -------
                                             $ 5,342       $40,986      $46,328
                                             =======       =======      =======


         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.

         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, 2004, the Association's total loans were $79.2
million, of which $22.3 million, or 28.15% were one-to four-family residential
mortgage loans. Of the one- to four-family residential mortgage loans
outstanding at that date, 19.28%, or $4.3 million, were fixed-rate loans and
80.72%, or $18.0 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.



                                       8
<PAGE>

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

         Construction Lending. The Association originates loans for construction
to local real estate contractors in its market area, generally with whom it has
an established relationship and to individuals for construction of one- to
four-family residences. The Association's construction loans primarily have been
made to finance the construction of one- to four-family residential properties
which will generally be owner-occupied. These loans are generally indexed to
Prime with maturities of six to nine months, and allow for extensions with Board
approval. The Association's policies provide that construction loans may be made
in amounts up to 80% of the appraised value of the property or the cost of
construction, whichever is less, for construction of one- to four-family
residences. All construction loans are subject to the limitation on
loans-to-one-borrower and the Association considers the location of the proposed
construction in order to avoid over-concentration in a single area. Prior to
making a commitment to fund a construction loan, the Association requires an
independent appraisal of the property by a state-certified appraiser if the
requested amount exceeds $125,000. The Association's Chairman of the Board
generally inspects each project at the commencement of construction and
throughout the term of the construction. Loan proceeds are disbursed in
increments as construction progresses and as inspections warrant based upon a
percentage of completion. At September 30, 2004, the Association had $27.5
million (net of undisbursed loan funds of $15.5 million) of residential
construction loans which amounted to 34.71%, of the Association's net loans
outstanding. The largest residential construction loan in the Association's
portfolio at September 30, 2004 was $848,000, is secured by a single family
residence under construction and is performing according to its terms.

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

         The Association makes construction loans to local builders on either a
pre-sold or speculative (unsold) basis. However, the Association generally
limits the number of unsold homes under construction by its builders, with the
amount dependent on the reputation of the builder, the present exposure of the
builder, the location of the property, the size of the loan and prior sales of
homes in the development. The Association estimates that approximately 60% 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, 2004, the Association had one commercial construction
loan amounting to $600,000 (net of undisbursed loan funds of $-0-) which
amounted to 0.76% of the Association's net loans outstanding. The loan is
secured by a partially completed church facility, and is performing according to
its terms.



                                       9
<PAGE>

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

         Commercial Real Estate Mortgage Lending. The Association originates
commercial real estate mortgage loans that are generally secured by properties
used for business purposes and retail facilities, such as small office
buildings, located in the Association's market area as well as a significant
number of church loans. The Association's underwriting procedures provide that
commercial real estate loans may be made in amounts up to the lesser of (i) 75%
of the lesser of the appraised value or purchase price of the property and (ii)
the Association's current loans-to-one-borrower limit. These loans are generally
originated with amortization periods of up to 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, 2004,
the Association's commercial real estate mortgage portfolio was $14.2 million,
or 17.96% of total loans outstanding. The largest commercial real estate loan in
the Association's portfolio at September 30, 2004 was $1.7 million and is
secured by a local church.

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

         Equity Lines and Commercial Lines of Credit. The Association originates
equity line loans on one- to four- residential properties and line of credit
loans on commercial real estate and residential land. The Association's
underwriting policies require that equity line loans on one to four- residential
properties be secured by real estate where the Association may or may not have
the first mortgage on the property. The equity line loans on one-to four-
residential properties may be made in amounts up to 80% of the appraised value
or adjusted tax value of the property, and take into consideration any
outstanding first mortgage liens in determining the loan-to-value ratio. Equity
line loans are originated at Prime plus 1% and adjust for changes in prime
thereafter on the first day of the month following a change in Prime. The terms
on the equity line loans on one- to four- residential properties are for a
period of 15 years. At September 30, 2004, the Association's equity line
portfolio was $2.3 million, or 2.86% 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 is substantially the same as the risks described
above on the Association's other forms of commercial real estate lending.


                                       10
<PAGE>

         Other Mortgage Lending. The Association also offers loans secured by
land and multi-family residences. Land loans generally consist of residential
building lots for which the borrower intends to ultimately construct residential
properties, but may also include tracts purchased for speculative purposes and a
minor amount of farm land. Multi-family loans generally consist of residential
properties with more than four units, typically apartment complexes, in which
the Association has a participating interest through an affordable housing
consortium. The Association does not solicit such loans which do not constitute
an active part of its business, and generally offers such loans to accommodate
its present customers or to fulfill commitments to affordable housing
consortiums. At September 30, 2004, the Association's total land loan portfolio
was $12.4 million or 15.66% of total loans outstanding and its multi-family loan
portfolio was $676,600 or 0.85% 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, 2004, the Association's
savings account loan portfolio totaled $90,150 or 0.11% of total loans
outstanding.

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

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



                                       11
<PAGE>

ASSET QUALITY

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

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

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




                                       12
<PAGE>


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

                                                          At or For the Year
                                                         Ended September 30,
                                                       ------------------------
                                                         2004             2003
                                                       ---------        -------
                                                          (Dollars in Thousands)

Nonaccrual loans                                       $   1,491        $   247
Accruing loans past due 90 days or more:
     Single family, one-to-four units                          -              -
                                                       ---------        -------
Total non-performing loans                             $   1,491        $   247
                                                       =========        =======
Allowance for loan losses                              $     730        $   640
                                                       =========        =======
Real estate owned, net                                 $       -        $   443
                                                       =========        =======

Ratios:
     Non-accrual loans to total loans                       1.86%          0.37%
     Non-performing loans to total loans                    1.86%          0.37%
     Non-performing loans and real estate
       owned to total assets                                1.70%          0.81%
     Allowance for loan losses to:
       Non-accrual loans                                   48.99%        259.11%
       Non-performing loans                                48.99%        259.11%
       Total loans                                          0.91%          0.95%

Contractual interest income that would have
  been recognized on nonaccrual loans                  $      44        $    17
Actual interest income recognized                              -              -
                                                       ---------        -------
Interest income not recognized                         $      44        $    17
                                                       =========        =======

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

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



                                       13
<PAGE>

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

         The Association's management reviews and classifies the Association's
assets quarterly and reports the results to the Association's Board of Directors
on a quarterly basis. The Association classifies assets in accordance with the
management guidelines described above. The Association had $1,491,000 of assets
classified as substandard or classified as Special Mention, Doubtful or Loss at
September 30, 2004. The only asset classified at September 30, 2004 consisted of
one commercial loan collateralized by two convenience stores and an adjacent
tract of land. The borrower filed for Chapter 11 bankruptcy after the Company
started foreclosure proceedings in the spring of 2004. However, the Bankruptcy
Court has recently released the property from the bankruptcy action and the
property is expected to be sold as a part of a foreclosure sale during the first
quarter of 2005. At this time, the Company has placed the loan on non-accrual
status but does not expect to incur a loss on its ultimate collection. The loan
has a current loan-to-value ratio of approximately 65% based upon the latest
appraisal of the collateral property. The Association had $689,850 of assets
classified as substandard or classified as Special Mention, Doubtful or Loss at
September 30, 2003.

         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, 2004, the Association's
allowance for loan losses was $730,400, or 0.91% of total loans, as compared to
$640,400 or 0.95%, at September 30, 2003. The Association had non-performing
loans of $1,491,000 and $247,200 at September 30, 2004 and September 30, 2003,
respectively. The Association provided $90,000 in additional loan loss
provisions during 2004. During the current year, the Association did not
charge-off any loans. The Association provided $215,000 in additional loan loss
provisions during 2003 and charged off $37,850 in loans during that period. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revisions as more information becomes available.
Various regulatory agencies, as an integral part of their examination process,
periodically review the Association's allowance for loan losses. These agencies
may require the Association to establish additional valuation allowances, based
on their judgments of the information available at the time of the examination.

         Real Estate Owned. Property acquired by the Association as a result of
foreclosure on a mortgage loan is classified as real estate owned and is
initially recorded at the fair value of the property at the date of acquisition,
establishing a new cost basis with any resulting write-down charged to the
allowance for loan losses. Thereafter, an allowance for losses on real estate
owned is established if the cost of a property exceeds its current fair value
less estimated sales costs. The Association obtains an appraisal on a real
estate owned property as soon as practicable after it takes possession of the
real property. The Association will generally reassess the value of real estate
owned at least quarterly thereafter. During the current year, the Association
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. During 2003, the
Association incurred foreclosure related expense and losses from the sale of REO
amounting to $60,850. 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, 2004, the Association did not have any REO properties
outstanding.



                                       14
<PAGE>

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

<TABLE>
<CAPTION>

                                                               For the Year Ended September 30,
                                                               --------------------------------
                                                                      2004         2003
                                                                      ----         -----
                                                                     (Dollars In Thousands)
<S>                                                                   <C>          <C>
ALLOWANCE FOR LOAN LOSSES:
     Balance at beginning of year                                     $ 640        $ 463
     Provision for loan losses                                           90          215
     Charge-offs                                                          -          (38)
     Recoveries                                                           -            -
                                                                      -----        -----
     Balance at end of year                                           $ 730        $ 640
                                                                      =====        =====
     Ratio of net charge-offs to average loans outstanding             0.00%        0.05%
                                                                      =====        =====

ALLOWANCE FOR LOSSES ON REAL ESTATE OWNED:
     Balance at beginning of year                                     $  77        $ 128
     Provision for loan losses                                            -            3
     Charge-offs                                                        (77)         (54)
     Recoveries                                                           -            -
                                                                      -----        -----
     Balance at end of year                                           $   -        $  77
                                                                      =====        =====

</TABLE>


         Accrued interest receivable on accruing loans past due by 90 days or
more amounted to $-0- at both September 30, 2004 and 2003.



                                       15
<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,
                                      ---------------------------------------------------------------------------------------------
                                                           2004                                             2003
                                      -------------------------------------------       -------------------------------------------
                                                                     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         $120          16.44%         27.75%               $100         15.63%           28.02%
    Multi-family residential                  5           0.68           0.85                   5          0.78             0.79
    Commercial real estate                  120          16.44          17.80                 110         17.19            19.47
    Land                                    115          15.75          15.52                 120         18.75            21.97
    Commercial construction                  10           1.37           0.75                  20          3.13             3.58
    Residential construction                350          47.95          34.39                 275         42.97            23.46
    Equity line mortgages                    10           1.37           2.83                  10          1.56             2.55
                                           ----         ------         ------                ----        ------           ------
Total mortgage loans                        730         100.00          99.89                 640        100.00            99.84
Savings account loans                         -              -           0.13                   -             -             0.16
                                           ----         ------         ------                ----        ------           ------
Total allowance for loan losses            $730         100.00%        100.02%               $640        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. At
September 30, 2004, the Association held: FHLMC stock with an amortized cost of
$8,000 and a current market value of $531,950 and Federal Home Loan Bank stock
with a cost and market value of $213,800. At September 30, 2004, the Association
held $5.5 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
                                                       ------------------------
                                                         2004            2003
                                                       --------         -------
                                                             (In Thousands)

Amortized cost at beginning of period                  $ 15,962         $ 14,718
Purchases/(Maturities or Sales), net                    (11,019)           1,244
Premium and discount amortization, net                        -                -
                                                       --------         --------
Amortized cost at end of period                           4,943           15,962
Net unrealized gain (1)                                     524              419
                                                       --------         --------
Total securities, net                                  $  5,467         $ 16,381
                                                       ========         ========


(1) The net unrealized gain at September 30, 2004 and 2003 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.


                                       16
<PAGE>

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

<TABLE>
<CAPTION>

                                                                        At September 30,
                                          ----------------------------------------------------------------------
                                                            2004                                  2003
                                                ---------------------------          ---------------------------
                                                Amortized                            Amortized
                                                   Cost          Fair Value             Cost          Fair Value
                                                ---------        ----------          ---------        ----------
                                                                          (In Thousands)
<S>                                              <C>              <C>                  <C>               <C>
Held to maturity:
     Other debt securities                       $     -          $     -              $     -           $     -
                                                 -------          -------              -------           -------
       Total held to maturity                          -                -                    -                 -
                                                 -------          -------              -------           -------
Available-for-Sale:
     Debt securities                                   -                -                    -                 -
     Equity securities (1)                             8              532                    8               427
                                                 -------          -------              -------           -------
       Total available-for-sale                        8              532                    8               427
                                                 -------          -------              -------           -------
Short-term certificates of deposit                   783              783                1,090             1,090
FHLB Overnight deposits                            3,938            3,938               14,638            14,638
                                                 -------          -------              -------           -------
Federal Home Loan Bank Stock                         214              214                  226               226
                                                 -------          -------              -------           -------
       Total investments, net (2)                $ 4,943          $ 5,467              $15,962           $16,381
                                                 =======          =======              =======           =======

</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, 2004 and 2003 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.

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



                                       17
<PAGE>


                                              For The Year Ended September 30,
                                              --------------------------------
                                                 2004                 2003
                                               --------             --------
                                                      (In Thousands)
Total deposits at beginning of period          $ 68,840             $ 76,768
Net (decrease) before interest credited            (537)              (9,942)
Interest credited                                 1,588                2,014
                                               --------             --------
Total deposits at end of period                $ 69,891             $ 68,840
                                               ========             ========


      At September 30, 2004, the Association had $19.7 million in Jumbo
certificate of deposits (accounts in amounts over $100,000) maturing as follows:

                                                                     Weighted
                                                Amount             Average Rate
                                                ------             ------------
                                                    (Dollars in Thousands)
Maturity Period:
      Within three months                       $ 2,376                2.80%
      After three but within six months           3,481                3.31
      After six but within twelve months          8,142                4.41
      After twelve months                         5,680                4.30
                                                -------
         Total                                  $19,679                3.99%
                                                =======



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

<TABLE>
<CAPTION>

                                                                    At September 30,
                                   -------------------------------------------------------------------------------------
                                                      2004                                       2003
                                   --------------------------------------     ------------------------------------------
                                                  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                     $ 3,098         4.43%       0.85%          $ 3,063            4.45%       0.40%
MMDA accounts                          14,155        20.25%       1.90%           12,877           18.71%       1.04%
NOW accounts                            1,929         2.76%       0.25%            1,584            2.30%       0.25%
Noninterest-bearing accounts            1,022         1.46%       0.00%              877            1.27%       0.00%
Certificate accounts                   49,687        71.09%       3.47%           50,439           73.27%       3.73%
                                      -------       ------                       -------          ------
     Totals                           $69,891       100.00%       2.88%          $68,840          100.00%       2.94%
                                      =======       ======                       =======          ======

</TABLE>

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

                                  September 30,
                         ------------------------------
 Maturity Period           2004                  2003
-----------------        -------               -------
                            Dollars in Thousands
    2004                $     -                $25,350
    2005                 33,419                 16,695
    2006                  8,573                  3,559
    2007                  3,391                  2,868
    2008                  2,408                  1,967
    2009                  1,896                      -
                        -------                -------
                        $49,687                $50,439
                        =======                =======



                                       18
<PAGE>


         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, 2004, neither the Company
nor the Association had any borrowings outstanding.

PERSONNEL

         As of September 30, 2004, the Company had no employees who were
compensated through the Company.

         As of September 30, 2004, the Association had 10 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,
2004, all 10 of the Association's 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. 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.

GRAMM-LEACH-BLILEY ACT

         On November 12, 1999, President William J. Clinton signed into law
landmark financial services legislation, titled the Gramm-Leach-Bliley Act ("GLB
Act"). The GLB Act repeals depression-era laws restricting affiliations among
banks, securities firms, insurance companies and other financial services
providers. The impact of the GLB Act on the Company, the MHC, and the
Association where relevant, is discussed throughout the regulation section
below.

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

FEDERAL BANKING REGULATION

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

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


                                       19
<PAGE>

         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, qualifies as a thrift lender. For purposes
of calculating compliance with the QTL test, we use the cost basis of our
investment in our Freddie Mac common stock, rather than the current market value
of the stock.

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

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

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

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

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

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

         Tangible capital is defined, generally, as common stockholders' equity
(including retained earnings), 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.


                                       20
<PAGE>

         At September 30, 2004, 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; and

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

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

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

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



                                       21
<PAGE>

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

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

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

         In addition, the OTS adopted regulations that authorize, but do not
require, the OTS to order an institution that has been given notice that it is
not satisfying these safety and soundness standards to submit a compliance plan.
If, after being notified, an institution fails to submit an acceptable plan or
fails in any material respect to implement an accepted plan, the OTS must issue
an order directing action to correct the deficiency and may issue an order
directing corrective actions and may issue an order directing other actions of
the types to which an undercapitalized association is subject under the "prompt
corrective action" provisions of federal law. If an institution fails to comply
with such an order, the OTS may seek to enforce such order in judicial
proceedings and to impose civil money penalties.

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

         The OTS may disapprove of a notice or application if:

         o  the Association would be undercapitalized following the
            distribution;

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

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

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

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

         o  well-capitalized;



                                       22
<PAGE>

         o  adequately capitalized;

         o  undercapitalized; and

         o  critically undercapitalized.

         At September 30, 2004, the Association met the criteria for being
considered "well-capitalized."

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

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

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

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

         Federal Home Loan Bank System. The Association is a member of the
Federal Home Loan Bank (the "FHLB") of Atlanta, which is one of the regional
FHLBs making up the FHLB System. Pursuant to regulations promulgated by the
Federal Housing Finance Board, as required by 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.

         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.



                                       23
<PAGE>

FEDERAL RESERVE SYSTEM

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

HOLDING COMPANY REGULATION

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

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

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

         o  conducting an insurance agency or escrow business;

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

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

         o  acting as trustee under a deed of trust;

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

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

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



                                       24
<PAGE>

         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.

         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 Home Owners' Loan Act ("HOLA") of another
            savings institution (or a holding company parent) without prior OTS
            approval;



                                       25
<PAGE>

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

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

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

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

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

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

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

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;



                                       26
<PAGE>

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

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

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

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

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

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

USA PATRIOT ACT

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

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

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

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

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

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



                                       27
<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 is now recapturing
(taking into income) over a multi-year period a portion of the balance of its
bad debt reserve as of September 30, 1988.

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

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

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



                                       28
<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.





                                       29
<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 $361,400 as of
September 30, 2004. 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.

                                                                 Net Book
                                  Leased or       Date           Value at
                                    Owned       Acquired    September 30, 2004
                                  ---------     --------    -------------------
                                                              (in thousands)
Main Office................         Owned         1961             $342
302 S. Brooks Street
Wake Forest, NC  27587


ITEM 3 LEGAL PROCEEDINGS

         At September 30, 2004, 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 2004 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 2004 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 26.36% and 29.68% and the
equity to asset ratios were 18.29% and 17.15% for years ended September 30, 2004
and 2003, respectively. For all of 2004 and for the first three quarters of
2003, the MHC elected to forego the receipt of its dividends from the Company.

         The following table sets forth the aggregate information of our equity
compensation plans in effect as of September 30, 2004.



                                       30
<PAGE>

<TABLE>
<CAPTION>
                                                                                      NUMBER OF SECURITIES
                               NUMBER OF SECURITIES                                  REMAINING AVAILABLE FOR
                                   TO BE ISSUED             WEIGHTED-AVERAGE      FUTURE ISSUANCE UNDER EQUITY
                                 UPON EXERCISE OF          EXERCISE PRICE OF           COMPENSATION PLANS
                               OUTSTANDING OPTIONS,       OUTSTANDING OPTIONS,        (EXCLUDING SECURITIES
PLAN CATEGORY                   WARRANTS AND RIGHTS       WARRANTS AND RIGHTS       REFLECTED IN COLUMN (A))
-------------                   -------------------       -------------------       ------------------------
                                        (A)                       (B)                          (C)
<S>                                        <C>                 <C>                              <C>
Equity compensation plans
   approved by security
   holders.................                28,265              $      12.75                     14,030

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


     Total.................                28,265              $      12.75                     14,030(1)
                                   ==============              ============             ==============

</TABLE>

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

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

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

         The information required for this item is incorporated herein by
reference to the information under the caption "Management's Discussion and
Analysis" in our 2004 Annual Report to Stockholders.

ITEM 7. FINANCIAL STATEMENTS

         The following financial statements are incorporated by reference to the
indicated pages of our 2004 Annual Report to Stockholders.

                                                                    Page(s) in
                                                                  Annual Report

  o  Independent Auditor's Report.........................................14
  o  Consolidated Statements of Financial Condition,
              September 30, 2004 and 2003.................................15
  o  Consolidated Statements of Income, Years Ended
              September 30, 2004 and 2003.................................16
  o  Consolidated Statements of Stockholders' Equity,
              Years Ended September 30, 2004and 2003...................17-18
  o  Consolidated Statements of Cash Flows,
              Years Ended September 30, 2004 and 2003..................19-20
  o  Notes to Consolidated Financial Statements........................21-34



                                       31
<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, in all material respects,
to ensure that information required to be disclosed in the reports the Company
files and submits under the Exchange Act is recorded, processed, summarized and
reported as and when required.

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

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
2005 Proxy Statement under the headings: "Biographical Information"; "Audit
Committee", "Section 16(a) Beneficial Ownership and Reporting Compliance" and
"Code of Ethics".

ITEM 10. EXECUTIVE COMPENSATION

         The information relating to executive compensation is incorporated
herein by reference to the information in the Company's 2005 Proxy Statement
under the headings: "Executive Compensation"; "Stock Options"; "Employment
Agreements"; "Director's Compensation"; and "Benefits".

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

         The information relating to security ownership of certain beneficial
owners and management is incorporated herein by reference to the information in
the Company's 2005 Proxy Statement under the heading "Security Ownership of
Beneficial Owners and Management".

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information relating to certain relationships and related
transactions is incorporated herein by reference to the information in the
Company's 2005 Proxy Statement under the headings "Transactions with Certain
Related Persons".



                                       32
<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).

          10.5     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     2004 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.



                                       33
<PAGE>

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

          32.1     Section 1350 Certifications.





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 2005 Proxy Statement under the heading "Principal Accountant
         Fees and Services".






                                       34
<PAGE>


                                   SIGNATURES

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

                                           WAKE FOREST BANCSHARES, INC.
                                           (Registrant)


Date: December 20, 2004                   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 20, 2004
 ---------------------------------------------------        ------------------
 Robert C. White                                            Date
 President, Chief Executive Officer and Director
 (Principal Executive and Financial Officer)


 /s/ Howard L. Brown                                        December 20, 2004
 ---------------------------------------------------        ------------------
 Howard L. Brown -Chairman of the Board                     Date
 and Director


 /s/  John D. Lyon                                          December 20, 2004
 --------------------------------------------               ------------------
 John D. Lyon - Director                                    Date


 /s/ Rodney M. Privette                                     December 20, 2004
 ---------------------------------------------------        ------------------
 Rodney M. Privette - Director                              Date


 /s/ Anna O. Sumerlin                                       December 20, 2004
 ---------------------------------------------------        ------------------
 Anna O. Sumerlin - Director                                Date





<PAGE>


 /s/ Harold R. Washington                                   December 20, 2004
 --------------------------------------------               -------------------
 Harold R. Washington - Director                            Date


 /s/  R.W. Wilkinson, III                                   December 20, 2004
 ---------------------------------------------------        -------------------
 R.W. Wilkinson, III - Vice-Chairman and Director           Date


 /s/ Leelan A. Woodlief                                     December 20, 2004
 ---------------------------------------------------        -------------------
 Leelan A. Woodlief - Director                              Date


 /s/ William S. Wooten                                      December 20, 2004
 ---------------------------------------------------        -------------------
 William S. Wooten - Director                               Date


<PAGE>


                         EXHIBIT INDEX

<TABLE>

<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

10.5         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         2004 Annual Report to Stockholders                                                    Filed herewith

14.1         Code of Ethics                                                                        Filed herewith

21.1         Subsidiaries of the Registrant                                                        ++

23.1         Independent Auditor's Consent                                                         Filed herewith

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

32.1         Section 1350 Certifications                                                           Filed herewith

</TABLE>

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

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




<PAGE>

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

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

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

+++      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.



<PAGE>

                                    CONTENTS

<TABLE>
<S>                                                                                                            <C>

SELECTED CONSOLIDATED FINANCIAL DATA                                                                                 1

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

REPORT TO STOCKHOLDERS                                                                                               2

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

MANAGEMENT'S DISCUSSION AND ANALYSIS                                                                            3 - 13

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

INDEPENDENT AUDITORS' REPORT                                                                                        14

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

CONSOLIDATED FINANCIAL STATEMENTS:

Consolidated statements of financial condition at September 30, 2004 and 2003                                       15

Consolidated statements of income for years ended September 30, 2004 and 2003                                       16

Consolidated statements of stockholders' equity for the years ended
September 30, 2004 and 2003                                                                                     17 -18

Consolidated statements of cash flows for the years ended
September 30, 2004 and 2003                                                                                    19 - 20
-----------------------------------------------------------------------------------------------------------------------

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                                     21 - 34

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

COMMON STOCK INFORMATION                                                                                            35

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

CORPORATE INFORMATION                                                                                               36

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

</TABLE>

<PAGE>



                          WAKE FOREST BANCSHARES, INC.
                      SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                                 September 30,
                                              --------------------------------------------------------------------------------
                                                     2004           2003             2002            2001            2000
                                              ----------------   ------------    -------------   -------------   -------------
Financial Condition Data:                                                       (In Thousands)
<S>                                           <C>                <C>                   <C>    <C>             <C>
Total assets                                  $        87,650    $    85,674           92,985 $        93,337 $        83,268
Investments (1)                                         5,467         16,381           15,331          16,645           9,607
Loans receivable, net                                  79,241         67,016           75,747          74,632          72,564
Deposits                                               69,891         68,840           76,767          77,221          67,874
Stockholders' equity                                   16,407         15,542           14,840          14,549          14,172


                                                                          Years Ended September 30,
                                              --------------------------------------------------------------------------------
                                                     2004           2003             2002            2001            2000
                                              ----------------   ------------    -------------   -------------   -------------
Operating Data:                                                     (In Thousands, Except Per Share Data)
Interest and dividend income                  $         4,818    $     5,325            6,445    $      7,674    $      6,797
Interest expense                                        1,942          2,325            3,436           4,359           3,326
                                                 -------------   ------------    -------------   -------------   -------------
Net interest income                                     2,876          3,000            3,009           3,315           3,471
Provision for loan losses                                  90            215              144              39              34
Noninterest income                                        129            315              350              79              50
Noninterest expense                                     1,153          1,234            1,497           1,540           1,356
                                                 -------------   ------------    -------------   -------------   -------------
Income before income taxes                              1,762          1,866            1,718           1,815           2,131
Income tax expense                                        673            715              662             676             800
                                                 -------------   ------------    -------------   -------------   -------------
Net income                                    $         1,089    $     1,151            1,056    $      1,139    $      1,331
                                                 =============   ============    =============   =============   =============

Basic earnings per share                      $          0.95           1.01     $       0.92    $       1.00    $       1.15
Diluted earnings per share                               0.94           1.00             0.92            0.99            1.15
Dividends per share                                      0.56           0.52             0.48            0.48            0.48
Dividend payout ratio                                  26.36%         29.68%           52.15%          48.42%          41.87%

Selected Other Data:
Return on average assets (3)                            1.26%          1.30%            1.11%           1.24%           1.71%
Return on average equity (3)                            6.89%          7.57%            7.24%           7.93%           9.64%
Interest rate spread (3)                                2.91%          2.94%            2.57%           2.78%           3.54%
Average equity to average assets (3)                   18.29%         17.15%           15.39%          15.68%          17.74%
Net interest margin (3)                                 3.41%          3.48%            3.24%           3.70%           4.54%
Allowance for loan losses to
  nonperforming loans (2)                              48.99%        259.11%           44.23%          31.61%           0.00%
Nonperforming loans to total loans (2)                  1.86%          0.37%            1.38%           1.35%           0.00%
</TABLE>

(1) Includes interest earning deposits and investment securities
(2) Nonperforming loans include mortgage loans delinquent more than 90 days
(3) Average balances are derived from month-end balances

                                       1
<PAGE>

                             REPORT TO STOCKHOLDERS


I am delighted to report that your Company reported earnings of $1.09 million,
or $0.94 per diluted share, for our fiscal year ended September 30, 2004. We
were particularly pleased that this year's results were accomplished even though
several obstacles created less than favorable operating conditions. For the
fourth year in a row, revenue generation was hindered by a low interest rate
environment. Because the Company maintains loan and investment portfolios which
are rate sensitive, the Federal Reserve actions to maintain market interest
rates at historically low levels have had a negative impact on our revenue
stream. In contrast, the Company's cost of funds has continued to decline at a
somewhat slower rate. While the Company's earnings are less likely to experience
volatile fluctuations, short term profits tend to be marginalized as a
protection against longer term interest rate risk. In addition, inconsistent
local economic conditions have lingered for several years now and continue to
impact operating results.

The Company declared cash dividends of $0.56 per share for 2004, after having
paid dividends of $0.52 per share during the previous year. Because recent
federal tax changes now tax our dividends at the same rate as long term capital
gains, shareholders benefit from cash dividends in a similar fashion to equities
that have relied solely upon capital appreciation. We are able to provide this
continuing benefit because the Company is profitable and is in a strong capital
position. The Company also reported an efficiency ratio of approximately 40%
during 2004, a measure that demonstrates the Company's intention to operate in a
prudent and lean manner. The Company's return on assets amounted to 1.26% during
the current year, considerably higher than most other community institutions in
North Carolina.

The Company's loan portfolio grew by 18% during the current year, with growth in
construction lending leading the way. Much of the growth is due to our
community's close proximity to Raleigh and the Research Triangle Park. As a
result, construction of new homes in the Wake Forest area has continued to
expand. Although the refinancing boom has generally run its course after three
years of low mortgage rates, housing starts during 2004 in our lending area
remained consistently strong due to a mix of new home buyers and other
homeowners trading up or down. Assuming favorable economic conditions, the
long-term fundamentals for the Wake Forest area continue to be positive and
should support continued loan growth. We also intend to remain competitive with
our deposit products to ensure that the Company has sufficient liquidity for
continued growth and profitability.

The Board of Directors and management's primary commitment is to maximize
shareholder value. In addition, we intend to continue to serve our local market
as a hometown community-oriented financial institution. We appreciate your
investment in Wake Forest Bancshares, Inc. and are grateful for the ongoing
opportunity to manage your Company in a safe and sound manner. As always, we
encourage your comments and suggestions, and truly appreciate your support and
business.

                                          Respectfully,



                                          Robert C. White
                                          President & Chief Executive Officer

                                       2
<PAGE>

WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------

                                     GENERAL

Wake Forest Bancshares, Inc. (the "Company") was formed on May 7, 1999 for the
purpose of becoming a savings and loan holding company and had no prior
operating history. The Company owns 100% of the stock of Wake Forest Federal
Savings & Loan Association ("Wake Forest Federal" or the "Association"). The
Association was founded in 1922. The Company in turn is majority owned by Wake
Forest Bancorp, M.H.C., (the "MHC") a mutual holding company.

The formation of the Company 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 which existed immediately prior to the formation of the Company.

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 principal business of the Association is accepting deposits
from the general public and using those deposits and other sources of funds
primarily to make loans secured by real estate and, to a lesser extent, other
forms of collateral located in the Association's primary market area of Wake and
Franklin counties in North Carolina.

Members of the MHC consist of depositors and certain borrowers of the
Association, who have the sole authority to elect the board of directors of the
MHC for as long as it remains in mutual form. The MHC's principal asset consists
of 635,000 shares of the Company's common stock. The MHC also is eligible to
receive its proportional share of dividends declared and paid by the Company,
but has elected to waive the receipt of its quarterly dividends since the first
quarter of the 2003 year. Such funds when received are invested in deposits with
the Association. The MHC, which by law must own in excess of 50% of the stock of
the Company, currently has an ownership interest of 55.2% of the Company.

The MHC's Board of Directors, which is currently the same as the Association's
and the Company's Board of Directors, will generally be able to control the
outcome of most matters presented to the stockholders of the Company for
resolution by vote except for certain matters related to stock compensation
plans, a vote regarding conversion of the mutual holding company to stock form,
or other matters which require an affirmative vote by the minority stockholders.
The Company and the MHC are registered as savings and loan holding companies and
are subject to regulation, examination, and supervision by the Office of Thrift
Supervision ("OTS").

The Association's results of operations depend primarily on its net interest
income, which is the difference between interest income from interest-earning
assets and interest expense on interest-bearing liabilities. The Association's
operations are also affected by non-interest income, such as fees from servicing
loans, loan sales, customer deposit account service charges, and other sources
of revenue. The Association's principal operating expenses, aside from interest
expense, consist of compensation and related benefits, federal deposit insurance
premiums, office occupancy costs, and other general and administrative expenses.

The following discussion and analysis is intended to assist readers in
understanding the results of operations and changes in financial position at and
for the years ended September 30, 2004 and 2003.

                                       3
<PAGE>

WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------

                               FINANCIAL CONDITION

Total assets increased by $2.0 million during 2004, from $85.7 million at
September 30, 2003 to $87.7 million at September 30, 2004. The increase in total
assets resulted primarily from a $1.1 million increase in customer deposits
during the year and from $801,550 in retained income from current operations.
Total investments, including short-term interest-earning deposits, decreased by
$10.9 million during 2004. The Association's investment portfolio has been
heavily weighted in short term instruments to minimize interest rate risk and to
have funds available for growth in our loan portfolio. During 2004, the
Company's portfolio of short-term investments was substantially liquidated in
order to provide funding for increased loan demand. The investment securities
portfolio, which amounted to $745,750 at September 30, 2004, contains available
for sale securities with net unrealized gains of $523,950. The net unrealized
gains are associated with the Company's investment in Federal Home Loan Mortgage
Corporation ("FHLMC") stock.

Net loans receivable increased by approximately $12.2 million during 2004 from
$67.0 million at September 30, 2003 to $79.2 million at September 30, 2004. The
Association experienced an unusually strong demand for loans during the current
year, primarily in the area of construction lending. Because the Association's
primary lending area is in close proximity to Raleigh and the Research Triangle
Park, population growth and demand for housing has spilled over into surrounding
communities such as Wake Forest. In addition to these geographic advantages, low
mortgage interest rates and signs of an improving economic outlook helped spur
growth in loans in 2004.

Customer deposits increased by $1.1 million during 2004 and totaled $69.9
million at September 30, 2004. The increase in deposits occurred primarily
because the Association began to competitively price its deposits once loan
demand emerged and excess liquidity in the form of short term interest-earning
deposits was reduced. The Association's high level of liquidity had been created
by a significant level of mortgage refinancings in the prior year.

The Company had no outstanding borrowings during 2004. The Company has borrowing
capacity through the Association's ability to borrow funds from the Federal Home
Loan Bank (the "FHLB") of Atlanta. This capacity is currently set at 12% of the
Association's total assets, subject to available collateral.

The Company and the Association are both required to meet certain capital
requirements as established by the OTS. At September 30, 2004, all capital
requirements were met. (See Note 12 to the consolidated financial statements).
The Board of Directors of the Company has approved an ongoing stock repurchase
program authorizing the Company to repurchase its outstanding common stock,
subject to regulatory approval. The repurchases are made through registered
broker-dealers from shareholders in open market purchases at the discretion of
management. The Company intends to hold the shares repurchased as treasury
shares, and may utilize such shares to fund stock benefit plans or for any other
general corporate purpose as permitted by applicable law. At September 30, 2004,
the Company had repurchased 71,391 shares of its common stock for $976,800. The
program continues until terminated by the Board of Directors.

                                       4
<PAGE>


WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------

                              RESULTS OF OPERATIONS

Returns. The Company's return on average assets was 1.26% and 1.30% and its
return on average equity was 6.89% and 7.57% for 2004 and 2003, respectively.
The decrease in the returns on average assets and average equity during 2004 was
primarily due to a slight reduction in the Company's interest rate spread and a
decrease in certain categories of non-interest income during the current year.

Net Income. The Company's net income for the years ended September 30, 2004 and
2003 was $1,088,500 and $1,151,150, respectively. As stated above, net income in
2004 was less than the earnings reported in 2003 primarily due to a slightly
lower interest rate spread during the current year combined with a decrease
during 2004 in revenue earned from the sale of loans in the secondary market.
Higher levels of loss provisions in 2003 when compared to the current year were
offset by gains received from the sale of certain investments during the prior
year.

Net Interest Income. Net interest income represents the difference between
income derived from interest-earning assets and interest expense incurred on
interest-bearing liabilities. Net interest income is affected by both (i) the
difference between the rates of interest earned on interest-earning assets and
the rates paid on interest-bearing liabilities ("interest rate spread") and (ii)
the relative amounts of interest-earning assets and interest-bearing liabilities
outstanding during the period. Net interest income decreased by $124,550 to
$2,875,750 for the year ended September 30, 2004 from $3,000,300 reported in
2003. Net interest income decreased primarily due to a decrease in the Company's
interest rate spread, which declined from 2.94% in 2003 to 2.91% in 2004, and
was only partially offset by an increase in the volume of net interest-earning
assets.

Interest Income. Total interest income decreased to $4.8 million in 2004 from
$5.3 million in 2003, a decrease of $507,450. The decline in interest income
during 2004 was attributable to a 0.45% drop in the Company's yield on interest
earning assets in 2004, partially offset by a $4.6 million increase in the
average balance of loans receivable outstanding between 2003 and 2004. The
Company's overall yield on interest earning assets was 5.72% in 2004 as compared
with 6.17% in 2003.

Interest Expense. Total interest expense decreased from $2.3 million in 2003 to
$1.9 million in 2004, a decrease of $382,900. During 2004, the Association's
cost of funds decreased from 3.23% in 2003 to 2.81% in 2004, a decrease of
0.42%. The decrease in interest expense from 2003 to 2004 was due primarily to a
decrease in the Association cost of funds, which in turn was created by a
decline in overall market rates. However, approximately one third of the
reduction in interest expense was due to a decline in the volume of
interest-bearing deposits between the current year and 2003.

Provision for Loan Losses. The Association provided $90,000 in additional loan
loss provisions during 2004. During 2003, the Association provided $215,000 in
loan loss provisions. The Association had no loan charge-offs in 2004. During
2003, the Association charged-off $37,850 in loans against the allowance for
loan losses. The provisions, which are charged to operations, and the resulting
loan loss allowances are amounts the Association's management believes will be
adequate to absorb losses that are estimated to have occurred. Loans are
charged-off against the allowance when management believes that uncollectibility
is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. During
2003, the Association incurred a greater number of delinquent accounts and
collection issues than that which occurred during 2004, and as a result,
provided for a larger loan loss provision during 2003. This evaluation is
inherently subjective as it requires estimates that are susceptible to
significant revisions as more information becomes available. In addition,
regulatory examiners may require the Association to recognize adjustments to the
allowance for loan losses based on their judgments about information available
to them at the time of their examination.

                                       5
<PAGE>


WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------

                              RESULTS OF OPERATIONS

Non-interest Income. Non-interest income amounted to $128,800 and $315,400 in
2004 and 2003, respectively. Non-interest income typically consists of service
charges and fees associated with the Association's loan and deposit accounts.
However, during 2003, the Association also sold a portion of its Freddie Mac
shares for a gain of $158,600. In addition, during 2004 and 2003, the
Association received $13,600 and $78,900, respectively, in fee income on the
origination and sale of certain long-term fixed rate mortgage loans. Secondary
market fee income declined during 2004 because the Association retained a
greater number of fixed rate residential loans for its own portfolio. The
Association also had gains on the sale of foreclosed assets amounting to $30,750
during the current year.

Non-interest Expense. Non-interest expense consists primarily of operating
expenses for compensation and related benefits, occupancy, federal insurance
premiums, OTS operating assessments, data processing charges, and costs
associated with foreclosed assets. Non-interest expenses amounted to $1,152,950
and $1,234,100 in 2004 and 2003, respectively.

Compensation and related benefits decreased from $704,250 in 2003 to $670,950 in
2004. The decrease in compensation and benefits occurred primarily because the
Company's ESOP retirement plan became fully funded during 2003. As a result,
plan cost was $45,450 greater in 2003 than during the current year.

Expenses associated with foreclosed assets decreased from $60,850 in 2003 to
$15,800 in 2004. The decrease is a direct result of lesser number of foreclosed
properties during 2004 in comparison to 2003. Occupancy expense, federal
insurance premiums, OTS operating assessments, data processing expense and other
operating expense changed nominally from 2003 to 2004. Certain administrative
expenses are allocated to the MHC as shown in Note 15 to the Consolidated
Financial Statements.

Income Taxes. The Company's effective income tax rate was 38.2% and 38.3% in
2004 and 2003, respectively. The differences in rates were due to changes in the
components of permanent tax differences.

                                  ASSET QUALITY

The Company's level of non-performing loans, defined as loans past due 90 days
or more, as a percentage of loans outstanding, was 1.86% and 0.37% at September
30, 2004 and 2003, respectively. At September 30, 2004, non-performing loans
amounted to $1,491,000 and consisted solely of one commercial loan
collateralized by two convenience stores and an adjacent tract of land. The
borrower filed for Chapter 11 bankruptcy after the Company started foreclosure
proceedings in the spring of 2004. However, the Bankruptcy Court has recently
released the property from the bankruptcy action and the property is expected to
be sold as a part of a foreclosure sale during the first quarter of 2005. At
this time, the Company does not expect to incur a loss on the ultimate
collection of the loan. The loan has been placed on non-accrual status. The loan
has a current loan-to-value ratio of approximately 65% based upon the latest
appraisal of the collateral property.

The Company had no loan charge-offs during 2004. The Company believes that it
has sufficient loan loss allowances established to cover any loss associated
with its loan portfolio. Based on management's analysis of the adequacy of its
loan loss allowances, the Association made provisions for loan losses of $90,000
and $215,000 during years ended September 30, 2004 and 2003, respectively. The
provision was higher in 2003 primarily because the Association's portfolio
experienced a greater number of collection issues and local economic conditions
were more questionable during 2003 as compared to 2004. The Company's loan loss
allowance was $730,400 and $640,400 at September 30, 2004 and 2003,
respectively. The ratio of the Company's loan loss allowance to outstanding
loans was 0.91% and 0.95% at September 30, 2004 and 2003, respectively. In
addition, at September 30, 2004, the Company did not have any outstanding
foreclosed properties.

                                       6
<PAGE>

AVERAGE BALANCES, INTEREST, YIELDS AND COSTS

The following table sets forth certain information relating to the Association's
average balance sheets and reflects the average yield on assets and average cost
of liabilities at and for the periods indicated. Such yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from month-end balances. Management does not believe that the use of
month-end balances instead of daily average balances has caused a material
difference in the information presented.

<TABLE>
<CAPTION>
                                                                                      Year Ended September 30,
                                                                            --------------------------------------------
                                                                                                2004
                                                                            --------------------------------------------
                                               At September 30, 2004
                                             --------------------------                                       Average
                                               Actual        Yield/            Average                        Yield/
Assets:                                        Balance        Cost             Balance         Interest        Cost
                                             ------------  ------------     ---------------   ------------  ------------
<S>                                       <C>                    <C>    <C>                <C>                    <C>
     Interest-earning assets:
        Interest-earning deposits            $     4,721         1.93%      $        9,939    $       115         1.16%
        Investment securities                        746         3.75%                 453             17         3.75%
        Loans receivable (1)                      79,241         6.06%              73,847          4,686         6.35%
                                             ------------                   ---------------   ------------
     Total interest-earning assets                84,708         5.83%              84,239    $     4,818         5.72%
                                                                                              ------------
     Non-interest-earning assets                   2,942                             2,151
                                             ------------                   ---------------
                     Total                   $    87,650                    $       86,390
                                             ============                   ===============

Liabilities and stockholders' equity:
     Interest-bearing liabilities:
        ESOP debt                            $         -         0.00%      $            -    $         -         0.00%
        Passbook accounts                          3,098         0.85%               3,053             15         0.49%
        NOW & MMDA accounts                       17,106         1.60%              16,200            196         1.21%
        Certificates of deposit                   49,687         3.47%              49,859          1,731         3.47%
                                             ------------                   ---------------   ------------
     Total interest-bearing liabilities           69,891         2.88%              69,112    $     1,942         2.81%
                                                                                              ------------
     Non-interest-bearing liabilities              1,352                             1,475
     Stockholders' equity                         16,407                            15,803
                                             ------------                   ---------------
                     Total                   $    87,650                    $       86,390
                                             ============                   ===============
Net interest income and
     interest rate spread (2)                                    2.95%                        $     2,876         2.91%
                                                                                              ============
Net yield on interest-earning assets (3)                         3.45%                                            3.41%
Ratio of interest-earning assets to
     interest-bearing liabilities                              121.20%                                          121.89%
</TABLE>

<TABLE>
<CAPTION>
                                                       Year Ended September 30,
                                             --------------------------------------------
                                                                 2003
                                             --------------------------------------------

                                                                               Average
                                                Average                        Yield/
Assets:                                         Balance        Interest         Cost
                                             --------------   ------------   ------------
<S>                                       <C>              <C>                     <C>
     Interest-earning assets:
        Interest-earning deposits            $      16,543    $       210          1.27%
        Investment securities                          489             22          4.50%
        Loans receivable (1)                        69,231          5,093          7.36%
                                             --------------   ------------
     Total interest-earning assets                  86,263    $     5,325          6.17%
                                                              ------------
     Non-interest-earning assets                     2,375
                                             --------------
                     Total                   $      88,638
                                             ==============

Liabilities and stockholders' equity:
     Interest-bearing liabilities:
        ESOP debt                            $           9    $         1          4.39%
        Passbook accounts                            3,358             23          0.68%
        NOW & MMDA accounts                         16,559            172          1.04%
        Certificates of deposit                     52,146          2,129          4.08%
                                             --------------   ------------
     Total interest-bearing liabilities             72,072    $     2,325          3.23%
                                                              ------------
     Non-interest-bearing liabilities                2,658
     Stockholders' equity                           13,908
                                             --------------
                     Total                   $      88,638
                                             ==============
Net interest income and
     interest rate spread (2)                                 $     3,000          2.94%
                                                              ============
Net yield on interest-earning assets (3)                                           3.48%
Ratio of interest-earning assets to
     interest-bearing liabilities                                                119.69%
</TABLE>

(1) Balance is net of deferred loan fees and loans in process. Non-accrual loans
    are included in the balances.
(2) Interest rate spread represents the difference between the average yield on
    interest-earning assets and the average cost of interest-bearing
    liabilities.
(3) Net yield on interest-earning assets represents net interest income divided
    by average interest-earning assets.

                                       7
<PAGE>
                   RATE/VOLUME ANALYSIS OF NET INTEREST INCOME

The following table analyzes the dollar amount of changes in interest income and
interest expense for major components of the Association's interest-earning
assets and interest-bearing liabilities. The table distinquishes between (1)
changes in net interest income attributable to volume (changes in volume
multiplied by the prior period's interest rate), (2) changes in net interest
income attributable to rate (changes in interest rates multiplied by the prior
period's volume), and (3) mixed changes (changes in volume multiplied by changes
in rates).


<TABLE>
<CAPTION>
                                                  Year ended September 30,                       Year ended September 30,
                                                        2004 vs. 2003                                  2003 vs. 2002
                                             Increase (Decrease) Attributable to            Increase (Decrease) Attributable to
                                         -------------------------------------------    -------------------------------------------
                                                                  Rate/                                          Rate/
Assets:                                   Volume      Rate       Volume       Net        Volume      Rate       Volume       Net
                                         ---------   --------   ---------   --------    ---------   --------   ---------   --------
<S>                                      <C>         <C>        <C>         <C>         <C>         <C>        <C>         <C>
    Interest-earning assets:
       Interest-earning deposits         $    (84)   $   (18)   $      7    $   (95)    $      5    $   (80)   $     (2)   $   (77)
       Investment securities                   (2)        (4)          1         (5)           9        (17)         (4)       (12)
       Loans receivable                       340       (699)        (48)      (407)        (561)      (518)         48     (1,031)
                                         ---------   --------   ---------   --------    ---------   --------   ---------   --------
                    Total                     254       (721)        (40)      (507)        (547)      (615)         42     (1,120)
                                         ---------   --------   ---------   --------    ---------   --------   ---------   --------

Liabilities:
    Interest-bearing liabilities:
       ESOP debt                               (1)         -           -         (1)          (3)         -           1         (2)
       Passbook savings                        (2)        (6)          -         (8)           -        (30)          -        (30)
       NOW & MMDA accounts                     (4)        28           -         24          (20)      (120)          8       (132)
       Certificate of deposit                 (93)      (318)         13       (398)        (290)      (726)         69       (947)
                                         ---------   --------   ---------   --------    ---------   --------   ---------   --------
                    Total                    (100)      (296)         13       (383)        (313)      (876)         78     (1,111)
                                         ---------   --------   ---------   --------    ---------   --------   ---------   --------

    Net interest income                  $    354    $  (425)   $    (53)   $  (124)    $   (234)   $   261    $    (36)   $    (9)
                                         =========   ========   =========   ========    =========   ========   =========   ========
</TABLE>

                                       8
<PAGE>

WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------

                         CAPITAL RESOURCES AND LIQUIDITY

The Company declared dividends of $.56 per share during 2004. Although the
Company anticipates that it will continue to declare cash dividends on a regular
basis, the Board of Directors will review its policy on the payment of dividends
on an ongoing basis, and such payment may be subject to dividends received from
the Association to the Company, future earnings, cash flows, capital needs, and
regulatory restrictions. During 2004, the MHC waived the receipt of its
quarterly dividends from the Company. The Board of Directors of the MHC will
continue to review the operating needs of the MHC and may elect to waive future
dividends.

The objective of the Company's liquidity management is to ensure the
availability of sufficient cash flows to meet all financial commitments and to
capitalize on opportunities to enhance stockholders' value. More specifically,
liquidity ensures that adequate funds are available to meet deposit withdrawals,
fund loan and capital expenditure commitments, maintain reserve requirements,
pay operating expenses, and provide funds for debt service, dividends to
stockholders, and other institutional commitments. Funds are primarily provided
through financial resources from operating activities, expansion of the deposit
base, repayments received on loans, borrowings, the sale or maturity of
investments, or the ability to raise equity capital.

During the current year, cash decreased by approximately $10.9 million, and
amounted to $5.9 million at September 30, 2004. Cash flow resulting from
internal operating activities provided increases of $1.1 million in cash during
the year ended September 30, 2004. Cash flows from investing activities utilized
$12.8 million in cash during the current year, with net loan disbursements of
$12.5 million being the primary use of cash. Because of historically low rates,
a flat yield curve on shorter term investments, and strong loan demand, the
Association was not active in the securities market in 2004.

During 2004, financing activities of the Company generated $821,500 in cash,
including net deposit increases of $1.1 million. As a result of robust loan
demand which utilized a sizable portion of the Company's liquidity during 2004,
the Association aggressively marketed its deposits in the later part of the
current year. The Association's ability to generate deposits has historically
been sufficient to fund its loan demand and provide for adequate liquidity
without the need to access other forms of credit availability. However, the
Association has a readily available source of credit through its borrowing
capacity at the FHLB of Atlanta, currently equal to 12% of total assets assuming
eligible collateral is available. Cash provided by operating and financing
activities is used to originate new loans to customers, to maintain the
Association's liquid investment portfolios, and to meet short term liquidity
requirements.

Given its current liquidity and its ability to borrow from the FHLB of Atlanta,
the Company believes that it will have sufficient funds available to meet
anticipated future loan commitments, unexpected deposit withdrawals, and other
cash requirements.

                         OFF-BALANCE SHEET TRANSACTIONS

In the normal course of business, the Association engages in a variety of
financial transactions that, under generally accepted accounting principles,
either are not recorded on the balance sheet or are recorded on the balance
sheet in amounts that differ from the full contract or notional amounts.
Primarily the Association is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit, revolving lines of credit, and the undisbursed portion of
construction loans. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amounts recognized in the
statement of financial condition. The contract or notional amounts of those
instruments reflect the extent of involvement the Association has in particular
classes of financial instruments.

The Association's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The
Association uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. At September 30, 2004,
the Association had outstanding loan commitments amounting to $5,004,000. The
undisbursed portion of construction loans amounted to $15,526,450 and unused
lines of credit amounted to $3,823,000 at September 30, 2004.

                                       9
<PAGE>

WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------

                         OFF-BALANCE SHEET TRANSACTIONS

The Association evaluates each customer's credit worthiness on a case-by-case
basis. Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The amount of collateral obtained, if deemed
necessary by the Association upon extension of credit, is based on management's
credit evaluation of the customer. Collateral held is the underlying real
estate.

                   ASSET/LIABILITY MANAGEMENT AND MARKET RISK

Interest rate risk can have a material market risk impact on the operating
results of the Company due to the potential of economic losses associated with
future changes in interest rates. These economic losses can be reflected as a
loss of future net interest income and/or loss of current fair market values of
interest sensitive financial instruments. Interest rate risk is the most
significant market risk affecting the Company.

Other types of market risk, such as foreign currency and commodity price risk,
do not arise in the normal course of the Company's business activities. In
addition, the Company does not currently engage in trading activities or use
derivative instruments to control interest rate risk. The Company's asset and
liability management objectives are to (i) improve the rate sensitivity of its
interest-earning assets in relation to interest-bearing liabilities, and (ii)
maintain an appropriate ratio of interest-sensitive assets to interest-sensitive
liabilities with comparable maturities. Management realizes certain risks are
inherent and that the goal is to minimize interest rate risk. In the absence of
other factors, the Company's overall yield on interest-earning assets will
increase as will its cost of funds on its interest-bearing liabilities when
market rates increase over an extended period of time. Conversely, the Company's
yields and cost of funds will decrease when market rates decline. The Company is
able to manage these swings to some extent by attempting to control the
maturities or repricing adjustments of its interest-earning assets and
interest-bearing liabilities over given periods of time.

The Company's "gap" is typically described as the difference between the amounts
of such assets and liabilities which reprice within a period of time, typically
one to three years. In a declining interest rate environment, the Company's
interest earning assets tend to reprice prior to its interest-bearing
liabilities over a short period, creating an unfavorable impact on the Company's
net interest income. Conversely, an increase in general market rates will tend
to positively affect the Company's net interest income over a short period.

In order to minimize the potential effects of adverse material and prolonged
increases or decreases in market interest rates on the Company's operations,
management has implemented an asset/liability program designed to improve the
Company's interest rate gap. The program primarily emphasizes the origination of
balloon and other short term loans, or loans with rates which float with Prime
such as construction, commercial real estate and home equity loans. The Company
generally originates a limited number of long-term fixed rate loans for its own
portfolio and will also originate such loans for sale in the secondary market.
In addition, the program emphasizes investing in short or intermediate term
investment securities, and the solicitation of checking or transaction deposit
accounts which are less sensitive to changes in interest rates and can be
repriced rapidly. The Board of Directors is responsible for reviewing the
Company's asset and liability policies. On a quarterly basis, the Board reviews
interest rate risk and trends. Management of the Company is responsible for
administering the policies established by the Board with respect to asset and
liability goals and strategies.

The following Market Risk Analysis table reflects maturities of interest rate
sensitive assets and liabilities over the next five years.

                                       10
<PAGE>

WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                         WAKE FOREST BANCSHARES, INC.
                                                             MARKET RISK ANALYSIS


                                                            EXPECTED MATURITY DATE
                                ---------------------------------------------------------------------------------------------------

                                                           YEAR ENDED SEPTEMBER 30,
                                ---------------------------------------------------------------------------------------------------

                                                            (DOLLARS IN THOUSANDS)
                                  2005        2006       2007        2008        2009       THEREAFTER      TOTAL       FAIR VALUE
                                --------    --------   --------    --------    --------    -----------    ---------    ------------
<S>                              <C>          <C>        <C>         <C>         <C>          <C>          <C>            <C>
Assets:
     Loans-fixed:
       Balance                   $   90       $  44      $   -       $   -       $  38        $ 4,919      $ 5,091        $ 5,070
       Interest rate              4.09%       9.08%      0.00%       0.00%       9.23%          6.25%        6.26%              -

     Loans-variable (1):
       Balance                   54,167       5,754      8,034       2,564       1,886          1,745       74,150         74,411
       Interest rate              5.71%       7.86%      6.80%       6.97%       5.85%          6.14%        6.05%              -

     Investments (2):
       Balance                    5,467           -          -           -           -              -        5,467          5,647
       Interest rate              1.20%           -          -           -           -              -        1.20%              -

Liabilities:
     Deposits (3):
       Balance                   20,205           -          -           -           -              -       20,205         20,205
       Interest rate              1.49%           -          -           -           -              -        1.49%              -

     Deposits-certificates:
       Balance                   33,419       8,573      3,391       2,408       1,896              -       49,687         50,207
       Interest rate              3.30%       3.39%      4.52%       3.59%       4.05%              -        3.44%              -
</TABLE>

(1) Maturities of variable rate loans are based on contractual maturity except
    home equity loans and commercial lines of credit which are based on the next
    repricing date
(2) Includes interest bearing deposits and investment securities
(3) Includes passbook accounts, NOW accounts and money market accounts

                                       11
<PAGE>

WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------

                          FUTURE REPORTING REQUIREMENTS

On March 9, 2004, the SEC Staff issued Staff Accounting Bulletin No. 105,
Application of Accounting Principles to Loan Commitments ("SAB 105"). SAB 105
clarifies existing accounting practices relating to the valuation of issued loan
commitments, including interest rate lock commitments, subject to SFAS No. 149
and Derivative Implementation Group Issue C13, Scope Exceptions: When a Loan
Commitment is included in the Scope of Statement 133. Furthermore, SAB 105
disallows the inclusion of the values of a servicing component and other
internally developed intangible assets in the initial and subsequent interest
rate lock commitments valuation. The provisions of SAB 105 were effective for
loan commitments entered into after March 31, 2004. The adoption of SAB 105 did
not have a material impact on the consolidated financial statements

In March 2004, the Emerging Issues Task Force ("EITF") released EITF Issue
03-01, The Meaning of Other-Than-Temporary Impairment and its Application to
Certain Investments. The Issue provides guidance for determining whether an
investment is other-than-temporarily impaired and requires certain disclosures
with respect to these investments. The recognition and measurement guidance for
other-than-temporary impairment has been delayed by the issuance of FASB Staff
Position EITF 03-1-1 on September 30, 2004. The adoption of Issue 03-1 did not
result in any other-than-temporary impairment.

In December 2003, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 03-3, "Accounting for Loans or Certain Debt
Securities Acquired in a Transfer." The SOP addresses accounting for differences
between contractual cash flows and cash flows expected to be collected from an
investor's initial investment in loans or debt securities acquired in a transfer
if those differences relate to a deterioration of credit quality. The SOP also
prohibits companies from "carrying over" or creating a valuation allowance in
the initial accounting for loans acquired that meet the scope criteria of the
SOP. The SOP is effective for loans acquired in fiscal years beginning after
December 15, 2004. The adoption of this SOP is not expected to have a material
impact on the Company's financial position or results of operations.

                   CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company's discussion and analysis of its financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the
Company to make estimates and judgments regarding uncertainties that affect the
reported amounts of assets, liabilities, revenues and expenses. On an ongoing
basis, the Company evaluates its estimates which are based upon historical
experience and on other assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions.

The Company's significant accounting policies are described in Note 1 to the
consolidated financial statements. The Company considers the following
accounting policies to be most critical in their potential effect on its
financial position or results of operations:

Allowance for Loan Losses:

The most critical estimate concerns the Company's allowance for loan losses. The
Company records provisions for loan losses based upon known problem loans and
estimated deficiencies in the existing loan portfolio. The Company's methodology
for assessing the appropriations of the allowance for loan losses consists of
two key components, which are a specific allowance for identified problem or
impaired loans and a formula allowance for the remainder of the portfolio.

                                       12
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------

                   CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

The adequacy of the allowance is also reviewed by management based upon its
evaluation of then-existing economic and business conditions affecting the key
lending areas of the Company and other conditions, such as new loan products,
collateral values, loan concentrations, changes in the mix and volume of the
loan portfolio; trends in portfolio credit quality, including delinquency and
charge-off rates; and current economic conditions that may affect a borrower's
ability to repay. Although management believes it has established and maintained
the allowance for loan losses at appropriate levels, future adjustments may be
necessary if economic, real estate and other conditions differ substantially
from the current operating environment.

Interest Income Recognition:

Interest on loans is included in income as earned based upon interest rates
applied to unpaid principal. Interest is not accrued on loans 90 days or more
past due unless the loans are adequately secured and in the process of
collection. Interest is not accrued on other loans when management believes
collection is doubtful. All loans considered impaired are non-accruing. Interest
on non-accruing loans is recognized as payments are received when the ultimate
collectibility of interest is no longer considered doubtful. When a loan is
placed on non-accrual status, all interest previously accrued is reversed
against current-period interest income.

                     IMPACT OF INFLATION AND CHANGING PRICES

The consolidated financial statements and accompanying footnotes have been
prepared in accordance with accounting principles generally accepted in the
United States of America, which require the measurement of financial position
and operating results in terms of historical dollars without consideration for
changes in the relative purchasing power of money over time due to inflation.
The assets and liabilities of the Company are primarily monetary in nature and
changes in interest rates have a greater impact on the Company's performance
than do the effects of inflation. However, the rate of inflation can tend to
impact overall market rates, and to that extent, changes in inflation may have a
direct impact on the Company's interest rate spread and its operations.

                SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report to Stockholders contains certain forward-looking statements
regarding estimated future revenue and expense levels and other business of the
Company. Such statements are subject to certain risks and uncertainties
including changes in general and local market conditions, legislative and
regulatory conditions and an adverse interest rate environment. Undue reliance
should not be placed on this information. These estimates are based on the
current expectations of management, which may change in the future due to a
large number of potential events, including unanticipated future developments.
The Company and the Association do not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company or the Association.

                                       13
<PAGE>

                                     [LOGO]

                               DIXON HUGHES PLLC
                   Certified Public Accountants and Advisors


                          INDEPENDENT AUDITORS' REPORT




To the Board of Directors and Stockholders
Wake Forest Bancshares, Inc.
Wake Forest, North Carolina


We have audited the accompanying consolidated statements of financial condition
of Wake Forest Bancshares, Inc. and Subsidiary as of September 30, 2004 and 2003
and the related consolidated statements of income, stockholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Wake Forest
Bancshares, Inc. and Subsidiary as of September 30, 2004 and 2003, and the
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.

/s/ Dixon Hughes PLLC

Sanford, North Carolina
October 22, 2004

                                       14
<PAGE>

WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 2004 AND 2003
------------------------------------------------------------------------------

<TABLE>
<CAPTION>
ASSETS                                                                              2004                  2003
                                                                              -----------------     -----------------
<S>                                                                           <C>                   <C>
Cash:
  Interest-earning deposits                                                   $      4,721,050      $     15,728,550
  Noninterest-earning deposits                                                       1,130,200             1,013,650
                                                                              -----------------     -----------------
                                                                                     5,851,250            16,742,200
                                                                              -----------------     -----------------
Investment securities (Note 2):
  Available for sale, at market value                                                  531,950               426,850
  FHLB stock, at cost                                                                  213,800               225,900
Loans receivable, net of allowance for loan losses
  of $730,400 in 2004 and $640,400 in 2003 (Note 3)                                 79,241,350            67,015,550
Accrued interest receivable                                                            121,550                93,050
Property and equipment, net (Note 4)                                                   361,400               386,950
Foreclosed assets, net (Note 5)                                                              -               442,650
Bank owned life insurance (Note 6)                                                   1,021,850                     -
Deferred income taxes (Note 11)                                                        223,200               205,650
Prepaid expenses and other assets                                                       83,350               135,300
                                                                              -----------------     -----------------
          Total assets                                                        $     87,649,700      $     85,674,100
                                                                              =================     =================

LIABILITIES AND EQUITY
Liabilities:
  Deposits (Note 7)                                                           $     69,891,450      $     68,839,950
  Accrued interest on deposits                                                          14,850                17,800
  Accounts payable and accrued expenses                                                623,400               620,050
  Dividends payable                                                                     72,050                71,450
  Redeemable common stock held by the ESOP, net of
    unearned ESOP shares (Note 10)                                                     641,250               582,950
                                                                              -----------------     -----------------
          Total liabilities                                                         71,243,000            70,132,200
                                                                              -----------------     -----------------
Commitments and contingencies (Note 14)
Stockholders' Equity (Note 12):
  Preferred stock, authorized 1,000,000 shares, none issued                                  -                     -
  Common stock, $.01 par value, authorized 5,000,000 shares;
    issued 1,221,183 shares in 2004 and 1,216,612 in 2003                               12,200                12,150
  Additional paid-in-capital                                                         5,257,650             5,199,450
  Accumulated other comprehensive income                                               324,900               259,700
  Retained earnings, substantially restricted (Note 12)                             11,788,750            11,045,500
  Common stock in treasury, at cost (71,391 shares in 2004
    and 71,316 shares in 2003)                                                        (976,800)             (974,900)
                                                                              -----------------     -----------------
          Total stockholders' equity                                                16,406,700            15,541,900
                                                                              -----------------     -----------------
                                                                              $     87,649,700      $     85,674,100
                                                                              =================     =================
</TABLE>

See Notes to Consolidated Financial Statements.

                                       15
<PAGE>

WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2004 AND 2003

<TABLE>
<CAPTION>

                                                                                    2004                  2003
                                                                              -----------------     -----------------
<S>                                                                           <C>                   <C>
Interest and dividend income:
  Loans                                                                       $      4,685,050      $      5,092,450
  Investment securities                                                                 17,150                22,200
  Interest-bearing deposits                                                            115,400               210,400
                                                                              -----------------     -----------------
                                                                                     4,817,600             5,325,050
                                                                              -----------------     -----------------
Interest expense:
  Deposits (Note 7)                                                                  1,941,850             2,324,300
  Borrowings                                                                                 -                   450
                                                                              -----------------     -----------------
                                                                                     1,941,850             2,324,750
                                                                              -----------------     -----------------

Net interest income before provision for loan losses                                 2,875,750             3,000,300
Provision for loan losses (Note 3)                                                     (90,000)             (215,000)
                                                                              -----------------     -----------------
Net interest income after provision for loan losses                                  2,785,750             2,785,300
                                                                              -----------------     -----------------

Noninterest income:
  Service fees and other income                                                         84,450                77,900
  Gain on sale of mortgage loans                                                        13,600                78,900
  Gain on sale of foreclosed assets                                                     30,750                     -
  Gain on sale of investment securities                                                      -               158,600
                                                                              -----------------     -----------------
                                                                                       128,800               315,400
                                                                              -----------------     -----------------
Noninterest expense:
  Compensation and benefits (Notes 8, 9, and 10)                                       670,950               704,250
  Occupancy                                                                             43,800                45,800
  Federal insurance premiums and operating assessments                                  39,850                42,350
  Data processing and outside service fees                                             117,250               113,700
  Foreclosed assets                                                                     15,800                60,850
  Other operating expense                                                              265,300               267,150
                                                                              -----------------     -----------------
                                                                                     1,152,950             1,234,100
                                                                              -----------------     -----------------

Income before income taxes                                                           1,761,600             1,866,600
                                                                              -----------------     -----------------
Income taxes (Note 11):
  Current                                                                              730,600               806,200
  Deferred                                                                             (57,500)              (90,750)
                                                                              -----------------     -----------------
                                                                                       673,100               715,450
                                                                              -----------------     -----------------
          Net income                                                          $      1,088,500      $      1,151,150
                                                                              =================     =================

Basic earnings per share                                                      $           0.95      $           1.01
Diluted earnings per share                                                    $           0.94      $           1.00
Dividends paid per share                                                      $           0.56      $           0.52
</TABLE>

See Notes to Consolidated Financial Statements.

                                       16
<PAGE>

WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2004 AND 2003

<TABLE>
<CAPTION>
                                                           Shares of                               Additional
                                                             Common               Common             Paid in
                                                             Stock                Stock              Capital
                                                        -----------------    -----------------   ----------------

<S>                                                            <C>           <C>                       <C>
Balance at September 30, 2002                                  1,149,140     $         12,150    $     5,062,900
Comprehensive income:
  Net income for 2002                                                                       -                  -
  Net change in unrealized gain on securities                                               -                  -
     Total comprehensive income
Contributions to ESOP (Note 10)                                                             -             16,000
Market value adjustment for redeemable
  common stock held by ESOP                                                                 -            120,550
Cash dividends ($0.52 per share)                                                            -                  -
Exercise of stock options
Acquisition of 3,844 shares of common
  stock for the treasury                                          (3,844)                   -                  -
                                                        -----------------    -----------------   ----------------
Balance at September 30, 2003                                  1,145,296               12,150          5,199,450
Comprehensive income:
  Net income for 2004                                                                       -                  -
  Net change in unrealized gain on securities                                               -                  -
     Total comprehensive income
Market value adjustment for redeemable
  common stock held by ESOP                                                                 -
Cash dividends ($0.56 per share)                                                            -                  -
Exercise of stock options                                          4,571                   50             58,200
Acquisition of 75 shares of common
  stock for the treasury                                             (75)                   -                  -
                                                        -----------------    -----------------   ----------------
Balance at September 30, 2004                                  1,149,792     $         12,200    $     5,257,650
                                                        =================    =================   ================
</TABLE>

See Notes to Consolidated Financial Statements.

                                       17
<PAGE>

WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2004 AND 2003


<TABLE>
<CAPTION>
         Accumulated
            Other                                         Treasury
        Comprehensive              Retained                Stock
            Income                 Earnings               Acquired                 Total
     ---------------------    -------------------    -------------------     -------------------

<S>                           <C>                    <C>                     <C>
     $            379,800     $       10,298,850     $         (913,900)     $       14,839,800

                        -              1,151,150                      -               1,151,150
                 (120,100)                     -                      -                (120,100)
                                                                             -------------------
                                                                                      1,031,050
                                                                             -------------------
                        -                      -                      -                  16,000

                        -                (62,850)                     -                  57,700
                        -               (341,650)                     -                (341,650)


                        -                      -                (61,000)                (61,000)
     ---------------------    -------------------    -------------------     -------------------
                  259,700             11,045,500               (974,900)             15,541,900

                        -              1,088,500                      -               1,088,500
                   65,200                      -                      -                  65,200
                                                                             -------------------
                                                                                      1,153,700
                                                                             -------------------

                        -                (58,300)                     -                 (58,300)
                        -               (286,950)                     -                (286,950)
                                                                                         58,250

                        -                      -                 (1,900)                 (1,900)
     ---------------------    -------------------    -------------------     -------------------
     $            324,900     $       11,788,750     $         (976,800)     $       16,406,700
     =====================    ===================    ===================     ===================
</TABLE>

See Notes to Consolidated Financial Statements.

                                       18
<PAGE>

WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2004 AND 2003

<TABLE>
<CAPTION>

                                                                                   2004                   2003
                                                                             ------------------     -----------------
<S>                                                                          <C>                    <C>
CASH FLOWS FROM OPERATING ACTIVITIES

Net income                                                                   $       1,088,500      $      1,151,150
Adjustments to reconcile net income to net
 cash provided by operating activities:
   Depreciation                                                                         25,250                26,800
   Provision for loan losses                                                            90,000               215,000
   Provision for loss on foreclosed assets                                                   -                 2,500
   Amortization of unearned ESOP shares                                                      -                29,450
   Gain on sale of investment securities                                                     -              (158,600)
   Gain on sale of foreclosed assets, net                                              (30,750)               (6,450)
   ESOP compensation expense credited to
     paid-in-capital                                                                         -                16,000
   Deferred income taxes                                                               (57,450)              (90,750)
   Increase in cash surrender value of life insurance                                  (21,850)                    -
Loans orignated for sale in the secondary market                                      (775,800)           (3,989,450)
Proceeds from loans sold in the secondary market                                       730,000             3,929,450
Changes in assets and liabilities:
  (Increase) decrease in:
    Accrued interest receivable                                                        (28,500)              (15,700)
    Prepaid expenses and other assets                                                   97,750               (39,600)
Increase (decrease) in:
    Accounts payable and accrued expenses                                                  400                38,250
                                                                             ------------------     -----------------
          Net cash provided by operating activities                                  1,117,550             1,108,050
                                                                             ------------------     -----------------

CASH FLOWS FROM INVESTING ACTIVITIES

Principal collected on loans                                                        37,420,100            45,852,050
Mortgage loans purchased                                                              (190,000)             (100,000)
Loans originated                                                                   (49,742,000)          (38,549,000)
Proceeds from sale of foreclosed assets                                                682,450             1,299,650
Capital additions to foreclosed assets                                                 (12,950)               (1,700)
Proceeds from sale of available for sale investment securities                               -               161,550
Purchase of bank owned life insurance contracts                                     (1,000,000)                    -
Redemption of FHLB of Atlanta stock                                                     12,100               104,500
Proceeds from disposal of property and equipment                                         2,300                     -
Purchases of property and equipment                                                     (2,000)              (10,050)
                                                                             ------------------     -----------------
          Net cash provided by (used in) investing activities                      (12,830,000)            8,757,000
                                                                             ------------------     -----------------
</TABLE>

See Notes to Consolidated Financial Statements.

                                       19
<PAGE>

WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2004 AND 2003


<TABLE>
<CAPTION>
                                                                                  2004                  2003
                                                                            ------------------    ------------------
<S>                                                                         <C>                   <C>
CASH FLOWS FROM FINANCING ACTIVITIES

Cash dividends paid                                                         $        (286,350)    $        (408,100)
Principal payments on ESOP note payable                                                     -               (29,450)
Proceeds from stock options exercised                                                  58,250                     -
Purchase of treasury stock                                                             (1,900)              (61,000)
Net increase (decrease) in deposits                                                 1,051,500            (7,927,550)
                                                                            ------------------    ------------------
Net cash provided by (used in) financing activities                                   821,500            (8,426,100)
                                                                            ------------------    ------------------

          Net increase (decrease) in cash                                         (10,890,950)            1,438,950
                                                                            ------------------    ------------------

Cash:
  Beginning                                                                        16,742,200            15,303,250
                                                                            ------------------    ------------------
  Ending                                                                    $       5,851,250     $      16,742,200
                                                                            ==================    ==================

Supplemental Disclosures of Cash Flow Information
  Cash payments for:
     Interest                                                               $       1,944,800     $       2,331,300
     Income taxes                                                           $         654,750     $         831,400

Supplemental Schedule of Noncash Investing
 and Financing Activities:
  Fair value of ESOP shares in excess of unearned
    ESOP shares (charged) credited to retained earnings                     $         (58,300)    $         (62,850)
  Change in unrealized gain (loss) on available for sale
     securities, net of tax effect                                          $          65,200     $        (120,100)
  Loans receivable transferred to foreclosed assets                         $         196,100     $       1,313,800
</TABLE>

                                       20
<PAGE>

WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1.  NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Wake Forest Bancshares, Inc. (the "Company") is located in Wake Forest, North
Carolina and is the parent stock holding company of Wake Forest Federal Savings
& Loan Association (the "Association" or "Wake Forest Federal"), its only
subsidiary. The Company was formed on May 7, 1999 solely for the purpose of
becoming a savings and loan holding company and had no prior operating history.
The Company conducts no business other than holding all of the 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 Association's principal activities consist of obtaining
savings deposits and providing mortgage credit to customers in its primary
market area, the counties of Wake and Franklin, North Carolina. The Company's
and the Association's primary regulator is the Office of Thrift Supervision
(OTS) and its deposits are insured by the Savings Association Insurance Fund
(SAIF) of the Federal Deposit Insurance Corporation (FDIC).

The Company is majority owned by Wake Forest Bancorp, M.H.C., (the "MHC") a
mutual holding company. Members of the MHC consist of depositors and certain
borrowers of the Association, who have the sole authority to elect the board of
directors of the MHC for as long as it remains in mutual form. The MHC's
principal assets consist of 635,000 shares of the Company's common stock and
deposits at the Association for accumulated dividends paid on those shares. The
MHC, which by law must own in excess of 50% of the stock of the Company,
currently has an ownership interest of 55.2% of the Company. The mutual holding
company is registered as a savings and loan holding company and is subject to
regulation, examination, and supervision by the OTS.

A summary of the Company's significant accounting policies follows:

Basis of financial statement presentation: The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts or revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Consolidation: The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Wake Forest Federal. All significant
inter-company accounts and transactions have been eliminated in consolidation.

Cash and cash equivalents: For purposes of reporting cash flows, the Company
considers all interest-bearing deposits with maturities of less than three
months at acquisition and non-interest-bearing deposits to be cash and cash
equivalents. At times, the Association maintains deposits in correspondent banks
in amounts that may be in excess of the FDIC insurance limit.

Investment securities: The Company carries its investments at fair market value
or amortized cost depending on its classification of such securities.
Classification of securities and the Company's accounting policies are as
follows:

   Securities held to maturity: Securities classified as held to maturity are
   those debt securities the Company has both the intent and ability to hold to
   maturity regardless of changes in market conditions, liquidity needs or
   changes in general economic conditions. These securities are carried at
   amortized cost. The Company currently has no securities which are classified
   as held to maturity.

   Securities available for sale: Securities classified as available for sale
   are those debt securities that the Company intends to hold for an indefinite
   period of time but not necessarily to maturity and equity securities not
   classified as held for trading. Any decision to sell a security classified as
   available for sale would be based on various factors, including significant
   movements in interest rates, changes in the maturity mix of its securities,
   liquidity needs and other significant factors. Securities available for sale
   are carried at fair value. Unrealized gains and losses are reported as a
   separate component of equity, net of related tax effects. Realized gains and
   losses are included in earnings.

   Securities held for trading: Trading securities are held in anticipation of
   short-term market gains. Such securities are carried at fair value with
   realized and unrealized gains and losses included in earnings. The Company
   currently has no securities which are classified as trading.

                                       21
<PAGE>

WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1.  NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Loans receivable and Fees: Loans receivable are stated at unpaid principal
balances, less the allowance for loan losses and net deferred loan origination
fees. The Association's loan portfolio consists principally of mortgage loans
collateralized by first trust deeds on single family residences, other
residential property, commercial property and land. The Association receives
fees for originating mortgage loans. The Association defers all loan fees less
certain direct costs as an adjustment to yield with subsequent amortization into
income over the life of the related loan.

Allowance for loan losses: The allowance for loan losses is established as
losses are estimated to have occurred through a provision for loan losses
charged to earnings. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance. The allowance for
loan losses is evaluated on a regular basis by management and is based upon
management's periodic review of the collectibility of the loans in light of
historical experience, the nature and volume of the loan portfolio, adverse
situations that may affect the borrower's ability to repay, estimated value of
any underlying collateral and prevailing economic conditions. This evaluation is
inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available. In addition,
regulatory examiners may require the Association to recognize adjustments to the
allowance for loan losses based on their judgments about information available
to them at the time of their examination.

A loan is considered impaired when, based on current information and events, it
is probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. An allowance is recorded if the present value of the loan's future
cash flows, discounted using the loan's effective interest rate, is less than
the carrying value of the loan. An impaired loan can also be valued at its fair
value in the market place or on the basis of its underlying collateral if the
loan is primarily collateral dependent. If foreclosure is imminent, and the loan
is collateral dependent, the loan is valued based upon the fair value of the
underlying collateral.

Interest income: The Association does not record interest on loans delinquent 90
days or more unless in the opinion of management, collectibility is assured. If
collectibility is not certain, the Association establishes a reserve for
uncollected interest. Interest collected while the loan is in such status is
credited to income in the period received. If the loan is brought to a status in
which it is no longer delinquent 90 days, the reserve for uncollected interest
is reversed and interest income is recognized. The Association accounts for
interest on impaired loans in a similar fashion. Such interest when ultimately
collected is credited to income in the period received.

Property, equipment and depreciation: Property and equipment are stated at cost
less accumulated depreciation. Depreciation is computed primarily by use of the
straight-line method over depreciable lives of 3-7 years for furniture and
equipment and up to 40 years for buildings and improvements.

Presold mortgages in process of settlement: The Association originates certain
residential mortgage loans that have been pre-approved by secondary investors.
The terms of the loans are set by the secondary investors and are transferred to
them at par within days of the Association initially funding the loan. The
Association receives origination fees from borrowers and servicing release
premiums from the investors. Between the initial funding of the loans by the
Association and the subsequent reimbursement by the investors, the Association
carries the loans on its balance sheet at cost.

Foreclosed assets: Foreclosed assets acquired through, or in lieu of, loan
foreclosure are initially recorded at fair value at the date of foreclosure
establishing a new cost basis. After foreclosure, valuations are periodically
performed by management and the real estate is carried at the lower of cost or
fair value minus costs to sell. Revenue and expenses from holding the properties
and additions or recoveries to the valuation allowance are included in earnings.

Income taxes: Deferred income taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences and
deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by valuation
allowances if in the opinion of management it is more likely than not that some
portion or all of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment.

                                       22
<PAGE>

WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1.  NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Earnings per share: The Company provides for a dual presentation of basic and
diluted earnings per share (EPS) with a reconciliation of the numerator and
denominator of the EPS computations. Basic earnings per share amounts are based
on the weighted average shares of common stock outstanding. Diluted earnings per
share assume the conversion, exercise or issuance of all potential common stock
instruments such as options, warrants and convertible securities, unless the
effect is to reduce a loss or increase earnings per share. No adjustments were
required to net income for any period presented in the computation of diluted
earnings per share. The basic and diluted weighted average shares outstanding
for 2004 and 2003 are as follows:

<TABLE>
<CAPTION>
                                                                    2004           2003
                                                                ------------   ------------
<S>                                                               <C>            <C>
Weighted average outstanding shares used for basic EPS            1,146,432      1,144,765
Plus incremental shares from assumed issuances
     pursuant to stock options and stock award plans                 14,780          8,699
                                                                ------------   ------------
Weighted average outstanding shares used for diluted EPS          1,161,212      1,153,464
                                                                ============   ============
</TABLE>

Off-balance-sheet risk and credit risk: The Association is a party to financial
instruments with off-balance-sheet risk such as commitments to extend credit.
Management assesses the risk related to these instruments for potential loss.
The Association lends primarily on one-to-four family residential properties
throughout its primary lending area, Wake and Franklin counties of North
Carolina.


Stock compensation plans: In 1995, the Financial Accounting Standards Board
(FASB) issued Standard No. 123, Accounting For Stock-Based Compensation, which
requires disclosures concerning the fair value of options and encourages
accounting recognition for options using the fair value method. The Company has
elected to apply the disclosure-only provisions of the Statement.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure (Statement 148). Statement 148 amends
SFAS No. 123, Accounting for Stock-Based Compensation (Statement 123), to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of Statement 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. Statement 148 is effective for
financial statements for fiscal years ending after December 15, 2002. The
Company continues to account for its stock-based compensation in accordance with
APB 25 and has adopted the disclosure provisions of Statement 148 effective for
all periods presented herein. Accordingly, no compensation cost has been
recorded and none would have been required in 2004 or 2003 because the five year
period over which the options vested and would have been expensed under SFAS No.
123 expired.

Fair value of financial instruments: Estimated fair values have been determined
by the Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required to develop the
estimates of fair value. Accordingly, the estimates for the fair value of the
Company's financial instruments are not necessarily indicative of the amounts
the Company could realize in a current market exchange. The use of different
market assumptions or estimation methodologies may have a material effect on the
estimated fair value amounts. The fair value estimates are based on pertinent
information available to management as of September 30, 2004. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date, and
therefore, current estimates of fair value may differ significantly from the
amounts presented herein. The following methods and assumptions were used by the
Company in estimating its fair value disclosures for financial instruments:

   Cash and accrued interest receivable: The carrying amounts reported in the
   consolidated statements of financial condition approximate these assets' fair
   values.

   Investment securities: The fair values of investment securities are
   determined based on quoted market values. For the Association's investment in
   Federal Home Loan Bank stock, no ready market exists and it has no quoted
   market value. For disclosure purposes, such stock is assumed to have a fair
   value which is equal to its cost.

                                       23


<PAGE>

WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

NOTE 1.  NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

   Loans receivable: The fair value for all loans, except short-term
   construction loans, home equity loans and prime-based commercial real estate
   loans, has been estimated by discounting projected future cash flows using
   the current rate at which loans with similar maturities would be made to
   borrowers with similar credit ratings. Certain prepayment assumptions were
   made to the Association's portfolio of long-term fixed rate mortgage loans.
   The fair value of construction loans, home equity loans, and prime-based
   commercial real estate loans are assumed to be equal to their recorded
   amounts because such loans have relatively short terms.

   Bank owned life insurance. Bank owned life insurance is not a marketable
   instrument and its fair value is considered to equal to its redeemable value,
   or its cash surrender value.

   Deposits: The fair value of deposits with no stated maturities is estimated
   to be equal to the amount payable on demand. The fair value of certificates
   of deposit is based upon the discounted value of future contractual cash
   flows. The discount rate is estimated using rates offered for deposits of
   similar remaining maturities.

   Off-balance-sheet commitments: Because the Association's commitments, which
   consist entirely of loan commitments, are either short-term in nature or
   subject to immediate repricing, no fair value has been assigned to these
   off-balance-sheet items.

   Accrued Interest Payable and Dividends Payable: The fair value of accrued
   interest payable and dividends payable is assumed to equal to its recorded
   amount because of the short term nature of the liability.

NOTE 2.  INVESTMENT SECURITIES

The amortized cost, estimated market value and gross unrealized gains and losses
of the Association's investment securities at September 30, 2004 and 2003 are as
follows:

<TABLE>
<CAPTION>
                                                                                       2004
                                                      ----------------------------------------------------------------------
                                                                             Gross             Gross           Estimated
                                                        Amortized         Unrealized        Unrealized           Market
                                                           Cost              Gains            Losses             Value
                                                      ---------------    --------------    --------------    ---------------
<S>                                                   <C>                <C>               <C>               <C>
Available for sale securities:
  FHLMC stock                                         $        8,000     $     523,950     $           -     $      531,950
Nonmarketable equity securities:
  Federal Home Loan Bank stock                               213,800                 -                 -            213,800
                                                      ---------------    --------------    --------------    ---------------
                                                      $      221,800     $     523,950     $           -     $      745,750
                                                      ===============    ==============    ==============    ===============

                                                                                       2003
                                                      ----------------------------------------------------------------------
                                                                             Gross             Gross           Estimated
                                                        Amortized         Unrealized        Unrealized           Market
                                                           Cost              Gains            Losses             Value
                                                      ---------------    --------------    --------------    ---------------
Available for sale securities:
  FHLMC stock                                         $        8,000     $     418,850     $           -     $      426,850
Nonmarketable equity securities:
  Federal Home Loan Bank stock                               225,900                 -                 -            225,900
                                                      ---------------    --------------    --------------    ---------------
                                                      $      233,900     $     418,850     $           -     $      652,750
                                                      ===============    ==============    ==============    ===============
</TABLE>


During 2003, FHLMC shares with a cost basis of $2,950 were sold, resulting in
proceeds of $161,550 and a realized gain of $158,600.

                                       24
<PAGE>

WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

NOTE 2.  INVESTMENT SECURITIES (CONTINUED)

The change during 2004 and 2003 in accumulated other comprehensive income which
consists solely of net unrealized gains and losses associated with available for
sale securities is as follows:

<TABLE>
<CAPTION>
                                                                                              2004                2003
                                                                                         ----------------    ---------------
<S>                                                                                      <C>                 <C>
Accumulated other comprehensive income, beginning of year                                $       259,700     $      379,800
  Change in unrealized gains, net of tax effect of $39,950 in 2004
     and $13,350 in 2003                                                                          65,200            (21,750)
  Reclassification adjustment for gains realized in income                                             -           (158,600)
  Tax effect of gains realized in income                                                               -             60,250
                                                                                         ----------------    ---------------
Accumulated other comprehensive income, end of year                                      $       324,900     $      259,700
                                                                                         ================    ===============
</TABLE>


The Association, as a member of the Federal Home Loan Bank (FHLB) system,
maintains an investment in capital stock of the FHLB of Atlanta. No ready market
exists for the bank stock and its market value is equal to its cost. During 2004
and 2003, FHLB stock with a cost basis of $12,100 and $104,500, respectively,
was redeemed at par by the FHLB of Atlanta.

NOTE 3. LOANS RECEIVABLE


Loans receivable consist of the following:

<TABLE>
<CAPTION>

First mortgage loans:                                                                       2004                  2003
                                                                                      -----------------     -----------------
<S>                                                                                   <C>                   <C>
Single family, one-to-four units                                                      $     22,306,950      $     19,053,800
Multifamily, residential                                                                       676,600               536,850
Commercial real estate                                                                      14,232,400            13,171,700
Land                                                                                        12,411,850            14,864,600
Residential construction                                                                    43,030,000            28,553,750
Commercial construction                                                                        600,000             2,419,700
                                                                                      -----------------     -----------------
                                                                                            93,257,800            78,600,400
Equity line mortgages                                                                        2,265,850             1,728,500
Loans on savings accounts                                                                       90,150               107,850
                                                                                      -----------------     -----------------
                                                                                            95,613,800            80,436,750
                                                                                      -----------------     -----------------
Undisbursed portion of loans in process                                                    (15,526,450)          (12,682,650)
Allowance for loan losses                                                                     (730,400)             (640,400)
Deferred loan fees                                                                            (115,600)              (98,150)
                                                                                      -----------------     -----------------
                                                                                           (16,372,450)          (13,421,200)
                                                                                      -----------------     -----------------
                                                                                      $     79,241,350      $     67,015,550
                                                                                      =================     =================
Weighted average yield on loans receivable                                                       6.06%                 6.15%
                                                                                      =================     =================
</TABLE>

The change in the Association's allowance for loan losses is as follows for the
years ended September 30, 2004 and 2003:

<TABLE>
<CAPTION>
                                                                                             2004                 2003
                                                                                       -----------------    -----------------
<S>                                                                                    <C>                  <C>
Balance, beginning of year                                                             $        640,400     $        463,250
Provision for loan loss                                                                          90,000              215,000
Charge-offs                                                                                           -              (37,850)
                                                                                       -----------------    -----------------
Balance, end of year                                                                   $        730,400     $        640,400
                                                                                       =================    =================
</TABLE>

                                       25
<PAGE>

WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------


NOTE 3.  LOANS RECEIVABLE (CONTINUED)

The Association does not accrue interest on loans past due 90 days or more if,
in the opinion of management, collectibility is in doubt. Such interest is
removed from income through the establishment of a reserve for uncollected
interest. At September 30, 2004 and 2003, reserves for uncollected interest
totaling $44,200 and $17,300 were established on loans amounting to $1,491,000
and $247,150, respectively. There were no accruing loans past due more than 90
days at September 30, 2004 and 2003. Interest income that would have been
recorded in 2004 and 2003 if non-accrual loans had been current was $44,200 and
$17,300, respectively. The amount of interest income recognized on these loans
in 2004 and 2003 was $37,700 and $2,350, respectively.

The Association had $-0- and $38,150 in loans outstanding at September 30, 2004
and 2003, respectively, which it considered impaired. Valuation allowances
related to these impaired loans amounted to $-0- and $5,000 at September 30,
2004 and 2003, respectively. The average investment in impaired loans in 2004
and 2003 was $82,000 and $365,000, respectively. Interest income recognized on
impaired loans on a cash basis during 2004 and 2003 was $-0- and $30,900,
respectively.

Shareholders of the Company with 10% or more ownership and officers and
directors, including their families and companies of which they are principal
owners, are considered to be related parties. These related parties were loan
customers of, and had other transactions with the Association in the ordinary
course of business. In management's opinion, these loans and transactions were
on the same terms as those for comparable loans and transactions with
non-related parties during the years ended September 30, 2004 and 2003.

Aggregate loan transactions with related parties during the years ended
September 30, 2004 and 2003 were as follows:

<TABLE>
<CAPTION>
                                                                                  2004                 2003
                                                                            -----------------    -----------------
<S>                                                                         <C>                  <C>
Beginning balance                                                           $         73,900     $         74,300
New loans                                                                             28,000              218,000
Reductions                                                                            (5,550)            (218,400)
                                                                            -----------------    -----------------
Ending balance                                                              $         96,350     $         73,900
                                                                            =================    =================
Maximum balance during the year                                             $        101,900     $        242,300
                                                                            =================    =================
</TABLE>


NOTE 4.  PROPERTY AND EQUIPMENT

Property and equipment at September 30, 2004 and 2003 are summarized as follows:

<TABLE>
<CAPTION>
                                                                                   2004                 2003
                                                                             -----------------    -----------------
<S>                                                                          <C>                  <C>
Land                                                                         $         20,950     $         20,950
Office buildings and improvements                                                     608,800              608,800
Furniture and fixtures                                                                206,100              211,100
                                                                             -----------------    -----------------
                                                                                      835,850              840,850
Less accumulated depreciation                                                        (474,450)            (453,900)
                                                                             -----------------    -----------------
                                                                             $        361,400     $        386,950
                                                                             =================    =================
</TABLE>

NOTE 5.  FORECLOSED ASSETS

Changes in the allowance for loss on foreclosed assets is as follows for the
years ended September 30, 2004 and 2003:

<TABLE>
<CAPTION>
                                                                                   2004                  2003
                                                                             -----------------     -----------------
<S>                                                                          <C>                   <C>
Balance, beginning of year                                                   $         76,500      $        128,000
Provision for loss on foreclosed assets                                                     0                 2,500
Charge-offs                                                                           (76,500)              (54,000)
                                                                             -----------------     -----------------
Balance, end of year                                                         $              -      $         76,500
                                                                             =================     =================
</TABLE>

                                       26
<PAGE>

WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------


NOTE 5.  FORECLOSED ASSETS (CONTINUED)

In addition to the provisions described above, the Company incurred $15,800 and
$58,350 in expense associated with holding foreclosed assets during 2004 and
2003, respectively. The Company reported a net gain (after adjusting for
write-downs) of $27,250 and $6,450 from the disposal of foreclosed assets during
2004 and 2003, respectively.

NOTE 6.  BANK OWNED LIFE INSURANCE

The Company has entered into Life Insurance Endorsement Method Split Dollar
Agreements with certain employees of the Association. Under the agreements, upon
death of the employee, the Company first recovers the cash surrender value of
the contract and then shares the remaining death benefits from the insurance
contracts, which are written with two different carriers, with the designated
beneficiaries of the employees. The death benefit to the employees is limited to
$25,000 each. The Company, as owner of the policies, retains an interest in the
life insurance proceeds and a 100% interest in the cash surrender value of the
policies. The Company paid an initial single premium of $1.0 million which is
accounted for as cash surrender value and reported as an "other asset" in the
Company's consolidated statement of financial condition. Increases in the
surrender value of the policies are accounted for as "other non-interest
income." For 2004, the increase amounted to $21,850.

NOTE 7.  DEPOSITS

Deposits at September 30, 2004 and 2003 consist of the following:

<TABLE>
<CAPTION>
                                                                                        2004                 2003
                                                                                 -------------------  -------------------
<S>                                                                              <C>                  <C>
Passbook accounts, weighted average rate of 0.85%
  (0.40% in 2003)                                                                $        3,098,250   $        3,063,150
MMDA accounts, weighted average rate of 1.90%
  (1.04% in 2003)                                                                        14,155,750           12,877,000
NOW accounts, weighted average rate of 0.25%
  (0.25% in 2003)                                                                         1,928,700            1,584,350
Certificate of deposit accounts, weighted average rate of 3.47%
  (3.73% in 2003)                                                                        49,686,850           50,438,950
Noninterest-bearing accounts                                                              1,021,900              876,500
                                                                                 -------------------  -------------------
                                                                                 $       69,891,450   $       68,839,950
                                                                                 ===================  ===================
Weighted average cost of deposits                                                             2.88%                2.94%
                                                                                 ===================  ===================
</TABLE>

Certificate of deposit accounts by maturity at September 30, 2004 are summarized
as follows:

                 Maturity Period:
                         2005                   $      33,419,000
                         2006                           8,573,250
                         2007                           3,390,800
                         2008                           2,407,500
                         2009                           1,896,300
                                                ------------------
                                                $      49,686,850
                                                ==================


                                       27
<PAGE>

WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

NOTE 7.  DEPOSITS (CONTINUED)

The aggregate amount of certificate of deposit accounts at September 30, 2004
with a minimum denomination of $100,000 by maturity are summarized as follows:

Maturity Period:
  Within three months                                    $        2,376,300
  After three months but within six months                        3,480,950
  After six months but within twelve months                       8,141,500
  After twelve months                                             5,680,400
                                                         -------------------
                                                         $       19,679,150
                                                         ===================

Eligible deposits are insured up to $100,000 by the Savings Association
Insurance Fund (SAIF), which is administered by the FDIC.

NOTE 8.  EMPLOYEES AND DIRECTORS BENEFIT PLANS

The Association has a 401k plan which covers substantially all employees. The
Association matches employee contributions up to 7.5% and pays administrative
costs of the Plan. Plan expenses amounted to $1,750 and $1,650 during 2004 and
2003, respectively.

The Association has a non-qualified noncontributory retirement plan covering its
directors. Retirement plan expense is computed based on the discounted present
value of expected future payments over the expected service years for the
directors. Under the plan, directors will receive upon retirement, monthly
payments for ten years in amounts not to exceed $5,000 annually. Other
stipulations and limitations based on years of service, death and disability,
change of control, and early termination apply. Expense associated with the plan
amounted to $2,400 in both 2004 and 2003.

The Association has also entered into employment agreements with two key
executives. The agreements provide for a three year term, but upon each
anniversary, the agreements automatically extend so that the terms shall always
be three years, unless either party gives notice that the agreement will not be
renewed. Performance reviews by a committee of the Board will be conducted
annually and the agreements can be terminated by the Association at anytime for
cause as defined in the agreements. The agreements provide for a base salary
plus performance bonus to be determined annually. In the event of termination
other than for cause, the employees are entitled to a lump sum cash payment in
an amount equal to the present value of the base salary, bonus payments, and
other benefits as described and determined in the agreements.

NOTE 9.  STOCK OPTION PLAN

The Company has a stock option plan for the benefit of its officers, directors,
and key employees. Options totaling 54,000 at a exercise price of $12.75 were
granted on January 22, 1997. No options have been granted since that date. The
options became exercisable at the rate of 20% annually for years during periods
of service as an employee, officer, or director, and expire after ten years.
Accelerated vesting may occur in certain circumstances as disclosed in the plan
documents. Options are exercisable at the fair value on the date of grant. A
summary of the changes in the Company's options during the years ended September
30, 2004 and 2003 is presented below:

                                                          2004           2003
                                                     -----------   ------------
Stock options outstanding at beginning of the year       37,336         37,336
Granted                                                       -              -
Exercised                                                (4,571)             -
Terminated                                                    -              -
                                                     -----------   ------------
Stock options outstanding at end of the year             32,765         37,336
                                                     ===========   ============
Stock options exercisable at end of the year             32,765         37,336
                                                     ===========   ============

                                       28
<PAGE>

WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

NOTE 10.  EMPLOYEE STOCK OPTION PLAN (ESOP)

The Association has an ESOP to benefit substantially all employees. As a part of
the Association's initial public offering in April 1996, the ESOP purchased
41,200 shares of common stock with the proceeds from a loan received from a
third party financial institution. The note required quarterly principal
payments of $14,714 plus interest at the third party institution's prime lending
rate until its maturity in March, 2003. The Association made quarterly
contributions to the ESOP in amounts sufficient to allow the ESOP to make its
scheduled principal and interest payments on the note. The unallocated ESOP
shares were pledged as collateral while the debt was outstanding. As the debt
was repaid, shares were released from collateral and allocated to active
employees, based on the proportion of debt service paid in the year. Dividends
on unallocated shares were not reported as dividends in the financial
statements. The Association made cash contributions to the ESOP sufficient to
amortize the debt, but recorded expense based upon the fair value of the shares
allocated to plan participants each year. The difference between the cash
contributions and the amount expensed was credited or charged to additional
paid-in capital. Retirement expense associated with the ESOP was $-0- and
$47,050 for the years ended September 30, 2004 and 2003, respectively.

The ESOP has a put option which requires that the Company repurchase its common
stock from eligible participants in the ESOP who elect to receive cash in
exchange for their common stock. The Company is required to reflect as a
liability the maximum possible cash obligation to redeem the shares, which is
the fair value of such shares. The initial purchase of common stock by the ESOP
was treated as a reduction in stockholder's equity and as a liability for the
put option. The liability for the put option has been reduced to the extent of
the unearned ESOP shares at the end of each fiscal year end. The liability for
the put option at September 30, 2004 was $641,250 based upon the market price of
the Company's shares at that time. The liability for the put option will
fluctuate based upon the fair value of the shares with the resulting increase or
decrease reflected as change to retained earnings.

Shares of the Company held by the ESOP at September 30, 2004 and 2003 are as
follows:

                                                2004              2003
                                           ---------------   ---------------
Shares held by the ESOP                            41,200            41,200
Shares released for allocation                    (41,200)          (38,257)
                                           ---------------   ---------------
Unreleased shares                                       -             2,943
                                           ===============   ===============
Fair value of unreleased shares            $            -    $       45,600
                                           ===============   ===============

NOTE 11.  INCOME TAXES

At September 30, 2004 and 2003, retained earnings contain $1,434,000 in tax
related bad debt reserves for which no deferred income taxes have been provided
because the Association does not intend to use the reserves for purposes other
than to absorb losses. The balance represents the Association's bad debt
reserves at September 30, 1988, and the unrecorded deferred income taxes amount
to approximately $545,000. If amounts which qualified as bad debt deductions are
used for purposes other than to absorb losses or adjustments arising from the
carryback of net operating losses, income taxes may be imposed at the then
existing rates. The Association also must recapture its tax bad debt reserves
which have accumulated since 1988 (the "base year") amounting to approximately
$189,000. The tax associated with the recaptured reserves is approximately
$72,000 and was paid out over a six year period that ended with the current
fiscal year. Deferred income taxes have been established for the taxes
associated with the recaptured reserves.

Income tax expense differs from the federal statutory rate of 34% as follows:

                                                            2004         2003
                                                          --------     --------
    Statutory federal income tax rate                       34.00 %      34.00 %
    Increase (decrease) in income taxes resulting from:
      State income taxes, net of federal benefit             4.70         4.69
      Other                                                 (0.49)       (0.36)
                                                          --------     --------
    Effective tax rate                                      38.21 %      38.33 %
                                                          ========     ========

                                       29
<PAGE>

WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

NOTE 11.  INCOME TAXES (CONTINUED)

Deferred income taxes consist of the following components as of September 30,
2004 and 2003:

                                                  2004             2003
                                             -------------    -------------
Deferred tax assets:
  Loan loss allowances                       $    277,550     $    243,350
  Health insurance accrual                         85,700           83,600
  Retirement plan accrual                          67,000           66,100
  Other                                            16,800           13,050
                                             -------------    -------------
                                                  447,050          406,100
                                             -------------    -------------
Deferred tax liabilities:
  Tax bad debt reserves                                 -           12,000
  Excess accumulated tax depreciation              24,750           29,300
  Unrealized net appreciation, investments        199,100          159,150
                                             -------------    -------------
                                                  223,850          200,450
                                             -------------    -------------
                                             $    223,200     $    205,650
                                             =============    =============

NOTE 12.  CAPITAL

Concurrent with the reorganization in 1996, the Association established a
liquidation account equal to its net worth as reflected in its statement of
financial condition used in its final offering circular. The liquidation account
is maintained for the benefit of eligible deposit account holders and
supplemental eligible deposit account holders who continue to maintain their
deposit accounts in the Association after the reorganization. Only in the event
of a complete liquidation will eligible deposit account holders and supplemental
eligible deposit account holders be entitled to receive a liquidation
distribution from the liquidation account adjusted for transactions since the
reorganization. Dividends paid by the Association to the Company subsequent to
the reorganization cannot be paid from this liquidation account.

Subject to applicable law, the Boards of Directors of the Company and the
Association may each provide for the payment of dividends. Future declarations
of cash dividends, if any, by the Company may depend upon dividend payments by
the Association to the Company. Subject to regulations promulgated by the OTS,
the Association will not be permitted to pay dividends on its common stock if
its net worth would be reduced below the amount required for the liquidation
account or its minimum regulatory capital requirements.

In addition, as an institution which is considered well capitalized under the
OTS's Prompt Corrective Action regulations, the Association may pay a cash
dividend to the Company, with prior notification to the OTS, if the total amount
of all capital distributions (including the proposed distribution) for the
applicable calendar year does not exceed the Association's net income for the
year plus retained net income (net income minus capital distributions) for the
preceding two years. However, the OTS retains the right to deny any capital
distribution if it raises safety and soundness concerns.

The Company and the Association are subject to the capital requirements
established by the OTS. Under the OTS prompt corrective action regulations, the
Company and the Association are considered well capitalized if their ratio of
total capital to risk-weighted assets is at least 10%, their ratio of core
capital (Tier 1) to risk-weighted assets is at least 6.0%, and their ratio of
core capital (Tier 1) to total average assets is at least 5.0%. Both the Company
and the Association met all of the above requirements and are considered well
capitalized.

                                       30
<PAGE>

WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

NOTE 12.  CAPITAL (CONTINUED)

The Company's capital requirements and ratios are presented below:

<TABLE>
<CAPTION>
                                                                   MINIMUM REQUIREMENTS TO BE:
                                               --------------------------------------------------------------------------
In Thousands                                            ACTUAL           ADEQUATELY CAPITALIZED      WELL CAPITALIZED
                                               --------------------------------------------------------------------------
                                                  Amount       Ratio       Amount       Ratio       Amount      Ratio
                                               --------------------------------------------------------------------------
<S>                                            <C>             <C>         <C>          <C>         <C>         <C>
2004
Total Capital to Risk Weighted Assets              $ 17,048      25.94%      $ 5,258    8.00%        $ 6,573      10.00%
Tier 1 Capital to Risk Weighted Assets             $ 16,082      24.47%      $ 2,629    4.00%        $ 3,944       6.00%
Tier 1 Capital to Average Assets                   $ 16,082      18.46%      $ 3,485    4.00%        $ 4,356       5.00%

2003
Total Capital to Risk Weighted Assets              $ 16,111      26.74%      $ 4,821    8.00%        $ 6,026      10.00%
Tier 1 Capital to Risk Weighted Assets             $ 15,282      25.36%      $ 2,410    4.00%        $ 3,615       6.00%
Tier 1 Capital to Average Assets                   $ 15,282      17.93%      $ 3,410    4.00%        $ 4,263       5.00%

</TABLE>

The Company has an ongoing stock repurchase program authorizing the Company to
repurchase up to an additional $228,350 of its outstanding common stock. The
repurchases are made through registered broker-dealers from shareholders in open
market purchases at the discretion of management. The Company intends to hold
the shares repurchased as treasury shares, and may utilize such shares to fund
stock benefit plans or for any other general corporate purpose as permitted by
applicable law. At September 30, 2004, the Company had repurchased 71,391 shares
of its common stock. The program continues until terminated by the Board of
Directors.

NOTE 13.  CONCENTRATION OF CREDIT RISK AND OFF-BALANCE-SHEET RISK

The Association is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and the
undisbursed portion of construction loans. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amounts
recognized in the statement of financial condition. The contract or notional
amounts of those instruments reflect the extent of involvement the Association
has in particular classes of financial instruments. The Association's exposure
to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit is represented by the
contractual notional amount of those instruments.

The Association uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. At
September 30, 2004, the Association had outstanding loan commitments amounting
to $5,004,000. The undisbursed portion of construction loans amounted to
$15,526,450 and unused lines of credit amounted to $3,823,000 at September 30,
2004.

The Association evaluates each customer's credit worthiness on a case-by-case
basis. Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The amount of collateral obtained, if deemed
necessary by the Association upon extension of credit, is based on management's
credit evaluation of the customer. Collateral held is the underlying real
estate.

                                       31
<PAGE>

WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

NOTE 14.  FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at September 30, 2004 and 2003. See Note 1
for a description of the Company's accounting policies and the limitations of
its disclosures in reporting on the fair value of its financial instruments.

<TABLE>
<CAPTION>
                                                                             September 30,
                                             -------------------------------------------------------------------------------
                                                             2004                                      2003
                                             --------------------------------------    -------------------------------------
                                                 Carrying               Fair               Carrying              Fair
                                                  Amount               Value                Amount              Value
                                             -----------------    -----------------    -----------------   -----------------
<S>                                          <C>                  <C>                  <C>                 <C>
Financial assets:
 Cash and cash equivalents                   $      5,851,250     $      5,851,250     $     16,742,200    $     16,742,200
 Investment securities                                531,950              531,950              426,850             426,850
 FHLB stock                                           213,800              213,800              225,900             225,900
 Loans receivable                                  79,241,350           79,481,050           67,015,550          67,144,050
 Bank owned life insurance                          1,021,850            1,021,850                    -                   -
 Accrued interest receivable                          121,550              121,550               93,050              93,050
Financial liabilities:
 Deposits                                          69,891,450           70,412,200           68,839,950          70,148,300
Accrued interest payable                               14,850               14,850               17,800              17,800
Dividends payable                                      72,050               72,050               71,450              71,450

</TABLE>

NOTE 15.  MUTUAL HOLDING COMPANY FINANCIAL DATA

The MHC owns approximately 55% of the Company's common stock. Members of the MHC
consist of depositors and certain borrowers of the Association, who have the
sole authority to elect the board of directors of the MHC. The MHC is registered
as a savings and loan holding company and is subject to regulation, examination,
and supervision by the OTS. The following is a summary of the condensed
financial statements of Wake Forest Bancorp, M.H.C. as of and for the periods
indicated:

                            Condensed Balance Sheets
                          September 30, 2004 and 2003
<TABLE>
<CAPTION>
                                                                                           2004                 2003
                                                                                     -----------------    -----------------
<S>                                                                                  <C>                  <C>
Assets:
 Cash and cash equivalents                                                           $      1,251,050     $      1,352,050
 Accrued dividends receivable, subsidiary                                                           -                    -
 Investment in Wake Forest Bancshares, Inc.                                                 6,894,500            6,293,650
                                                                                     -----------------    -----------------
                                 Total assets                                        $      8,145,550     $      7,645,700
                                                                                     =================    =================
Liabilities:
 Accounts payable and accrued expenses                                               $         19,150     $         11,300
                                                                                     -----------------    -----------------
Equity:
 Capitalization by Wake Forest Federal                                                        106,350              106,350
 Equity in Wake Forest Bancshares, Inc.                                                     3,854,700            3,854,700
 Retained earnings                                                                          4,165,350            3,673,350
                                                                                     -----------------    -----------------
                               Total equity                                                 8,126,400            7,634,400
                                                                                     -----------------    -----------------
                               Total liabilities and equity                          $      8,145,550     $      7,645,700
                                                                                     =================    =================
</TABLE>

                                       32
<PAGE>

WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

NOTE 15.  MUTUAL HOLDING COMPANY FINANCIAL DATA (CONTINUED)

                     Condensed Statements of Income
             For the Years Ended September 30, 2004 and 2003

<TABLE>
<CAPTION>
Revenues:                                                                          2004                 2003
                                                                             -----------------    -----------------
<S>                                                                          <C>                  <C>
  Interest income                                                            $         27,050     $         26,900
  Equity in earnings of subsidiary                                                    600,850              637,300
                                                                             -----------------    -----------------
                             Total income                                             627,900              664,200
                                                                             -----------------    -----------------
Expenses:
  Accounting and tax expense                                                           18,650               19,550
  Attorney Fees                                                                        14,950               24,000
  Director's fees                                                                      81,250               77,200
  Other                                                                                21,050               19,000
                                                                             -----------------    -----------------
                            Total expense                                             135,900              139,750
                                                                             -----------------    -----------------
                            Net income                                       $        492,000     $        524,450
                                                                             =================    =================
</TABLE>


                   Condensed Statements of Cash Flows
             For the Years Ended September 30, 2004 and 2003
<TABLE>
<CAPTION>
Cash Flows from Operating Activities:                                              2004                 2003
                                                                             -----------------    -----------------
<S>                                                                          <C>                  <C>
 Net income                                                                  $        492,000     $        524,450
 Cash dividends                                                                             -              152,400
  Equity in earnings of Wake Forest Federal                                          (600,850)            (637,300)
  Increase (decrease) in accounts payable                                               7,850               (4,900)
                                                                             -----------------    -----------------
          Net cash provided by operating activities                                  (101,000)              34,650
Cash and cash equivalents- beginning                                                1,352,050            1,317,400
                                                                             -----------------    -----------------
Cash and cash equivalents- ending                                            $      1,251,050     $      1,352,050
                                                                             =================    =================
</TABLE>

NOTE 16.  PARENT COMPANY ONLY FINANCIAL DATA

The condensed financial statements of Wake Forest Bancshares, Inc. for the
periods indicated follows:

                        Condensed Balance Sheets
                       September 30, 2004 and 2003
<TABLE>
<CAPTION>
Assets:                                                                            2004                 2003
                                                                             -----------------    -----------------
<S>                                                                          <C>                  <C>
 Cash and cash equivalents                                                   $        228,350     $        173,000
 Accrued dividends receivable, Wake Forest Federal                                     72,050               71,450
 Investment in Wake Forest Federal                                                 16,176,400           15,368,350
 Other assets                                                                           1,950                  550
                                                                             -----------------    -----------------
          Total assets:                                                      $     16,478,750     $     15,613,350
                                                                             =================    =================
Liabilities and Equity:
 Accrued dividends payable                                                   $         72,050     $         71,450
                                                                             -----------------    -----------------
 Common stock                                                                          12,200               12,150
 Additional paid-in capital                                                        13,171,300           13,458,350
 Accumulated other comprehensive income                                               324,900              259,700
 Retained earnings                                                                  3,875,100            2,786,600
 Treasury stock acquired                                                             (976,800)            (974,900)
                                                                             -----------------    -----------------
          Total equity                                                             16,406,700           15,541,900
                                                                             -----------------    -----------------
          Total liabilities and equity                                       $     16,478,750     $     15,613,350
                                                                             =================    =================
</TABLE>

                                       33
<PAGE>

WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

NOTE 16.  PARENT COMPANY ONLY FINANCIAL DATA (CONTINUED)

                     Condensed Statements of Income
             For the Years Ended September 30, 2004 and 2003

<TABLE>
<CAPTION>
                                                                                   2004                 2003
                                                                             -----------------    -----------------
<S>                                                                          <C>                  <C>
Interest income                                                              $          2,550     $          2,350
Equity in earnings of Wake Forest Federal                                           1,088,100            1,150,950
Other expense                                                                          (2,150)              (2,150)
                                                                             -----------------    -----------------
                           Net income                                        $      1,088,500     $      1,151,150
                                                                             =================    =================
</TABLE>

                    Condensed Statement of Cash Flows
             For the Years Ended September 30, 2004 and 2003

<TABLE>
<CAPTION>
Cash Flows from Operating Activities:                                              2004                 2003
                                                                             -----------------    -----------------
<S>                                                                          <C>                  <C>
 Net income                                                                  $      1,088,500     $      1,151,150
  Equity in earnings of Wake Forest Federal                                        (1,088,100)          (1,150,950)
  Dividends received from Wake Forest Federal                                         286,350              341,650
  (Increase) decrease in accrued dividends receivable                                    (600)              66,450
  (Increase) decrease in other assets                                                  (1,400)               2,550
                                                                             -----------------    -----------------
          Net cash provided by operating activities                                   284,750              410,850
                                                                             -----------------    -----------------
Cash Flows from Financing Activities:
Treasury stock acquired                                                                (1,900)             (61,000)
 Proceeds from exercise of stock options                                               58,250                    -
 Increase (decrease) in accrued dividends payable                                         600              (66,450)
 Dividends paid                                                                      (286,350)            (341,650)
                                                                             -----------------    -----------------
          Net cash provided from financing activities                                (229,400)            (469,100)
                                                                             -----------------    -----------------
Decrease in cash                                                                       55,350              (58,250)
Cash and cash equivalents- beginning                                                  173,000              231,250
                                                                             -----------------    -----------------
Cash and cash equivalents- ending                                            $        228,350     $        173,000
                                                                             =================    =================
</TABLE>

                                       34
<PAGE>

                          WAKE FOREST BANCSHARES, INC.
                            COMMON STOCK INFORMATION

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


The Company's stock (previously as Wake Forest Federal Savings & Loan
Association) began trading on April 3, 1996. There are 1,149,792 shares of
common stock outstanding (net of treasury shares) of which approximately 41%
were held by individual stockholders at September 30, 2004. The MHC and the ESOP
hold approximately 59%. The Company's stock is not actively traded, although the
stock is quoted on the OTC Electronic Bulletin Board under the symbol "WAKE."
The table below reflects the stock trading and dividend payment frequency of the
Company's stock for the years ended September 30, 2004 and 2003, based upon
information provided to management of the Company by certain securities firms
effecting transactions in the Company's stock on an agency basis.

                                                        Stock Price
                                             ---------------------------------
                               Dividends          High              Low
                              ------------   ---------------  ----------------
2004
First Quarter                   $    0.14    $       21.000     $      20.000
Second Quarter                       0.14            25.000            21.000
Third Quarter                        0.14            25.000            20.250
Fourth Quarter                       0.14            22.000            19.000

2003
First Quarter                   $    0.12    $       16.000   $        15.000
Second Quarter                       0.12            16.750            15.100
Third Quarter                        0.14            18.500            16.000
Fourth Quarter                       0.14            20.000            17.300




                                       35
<PAGE>

                          WAKE FOREST BANCSHARES, INC.
                              CORPORATE INFORMATION

<TABLE>
<CAPTION>
<S>                                         <C>                                   <C>

                                               OFFICERS
                                               --------

Robert C. White                             Susan S. Carter                        Billy B. Faulkner
President, Chief Executive Officer          Vice President and                     Vice President, Secretary
 & Chief Financial Officer                  Assistant Treasurer                      & Treasurer


                                               DIRECTORS
                                               ---------

Howard Brown                                Rodney M. Privette                     R. W. Wilkinson III
Chairman of the Board                       Owner of Insurance Agency              Vice Chairman of the Board
Former Owner of                                                                    Former Managing Officer
Oil Distribution Company                    Paul Brixhoff                          of Wake Forest Federal
                                            Former Owner of Auto Supply
John D. Lyon                                Company                                Anna O. Sumerlin
Real Estate Investor                                                               Former CEO of the Company
                                            William S. Wooten
                                            Dentist
Harold R. Washington                                                               Leelan A. Woodlief
Former Owner of                             Robert C. White                        Owner of Farm Supply
Automobile Distributorship                  CEO of the Company                     Company



STOCK TRANSFER AGENT                        SPECIAL LEGAL COUNSEL                  INDEPENDENT AUDITORS
--------------------                        ---------------------                  --------------------

Mellon Investor Services LLC                Thacher Proffitt & Wood LLP            Dixon Hughes PLLC
PO Box 3315                                 1700 Pennsylvania Ave. N.W.            408 Summit Drive
S. Hackensack, NJ  07606                    Washington, DC  20006                  Sanford, NC  27331

                                            CORPORATE OFFICE
                                            ----------------
                                            302 S. Brooks St.
                                            Wake Forest, N.C.  27587

</TABLE>

                                 ANNUAL MEETING

The 2005 annual meeting of stockholders of Wake Forest Bancshares, Inc. will be
held at 2:00 pm on Tuesday, February 22, 2005 at the Wake Forest Police and
Justice Center at 401 Elm Avenue, Wake Forest, N.C.

                                   FORM 10-KSB

A COPY OF THE ANNUAL REPORT ON FORM 10-KSB AS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION WILL BE FURNISHED WITHOUT CHARGE TO STOCKHOLDERS UPON
WRITTEN REQUEST TO WAKE FOREST BANCSHARES, INC., PO BOX 1167, WAKE FOREST, N.C.
27588.

                                       36