WAKE FOREST BANCSHARES, INC.

		December 31,				September 30,
		2007				2007
		(Unaudited)				*
ASSETS
Cash and short-term cash investments		$	18,600,700			$	21,670,500
Bank certificates of deposit			6,831,000				4,158,000
Investment securities:
Available for sale, at estimated market value			1,812,950				1,999,900
FHLB stock			191,400				191,400
Loans receivable, net of loan loss allowances of $1,227,550 at December 31, 2007 and $1,187,550 at September 30, 2007			77,571,300				76,172,100
Accrued interest receivable			226,900				265,350
Foreclosed assets, net			1,113,750				1,003,800
Property and equipment, net			365,750				357,350
Bank owned life insurance			1,152,400				1,141,350
Deferred income taxes, net			483,050				390,650
Prepaid expenses and other assets			67,150				47,300
Total Assets		$	108,416,350			$	107,397,700
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits		$	86,378,200			$	85,659,150
Accrued interest on deposits			78,050				64,750
Accrued expenses and other liabilities			855,600				924,950
Accrued income taxes			214,850				—
Dividends payable			105,000				99,750
Redeemable common stock held by the ESOP net of unearned ESOP shares			451,950				465,550
Total Liabilities			88,083,650				87,214,150
Stockholders’ equity:
Preferred stock, authorized 1,000,000 shares, none issued			—				—
Common stock, par value $ .01, authorized 5,000,000 shares, issued 1,253,948 shares at December 31, 2007 and at September 30, 2007			12,550				12,550
Additional paid-in capital			5,779,500				5,779,500
Accumulated other comprehensive income			189,050				305,000
Retained earnings, substantially restricted			15,830,200				15,555,950
Less: Common stock in treasury, at cost			(1,478,600	)			(1,469,450	)
Total stockholders’ equity			20,332,700				20,183,550
Total liabilities and stockholders’ equity		$	108,416,350			$	107,397,700

See Notes to Consolidated Financial Statements.

*		Derived from Audited Consolidated Financial statements.

WAKE FOREST BANCSHARES, INC.

		2007				2006
Interest and dividend income:
Loans		$	1,529,100			$	1,629,950
Investment securities			24,300				7,000
Short-term cash investments			297,300				334,400
Total interest income			1,850,700				1,971,350
Interest expense:
Interest on deposits			950,100				894,000
Total interest expense			950,100				894,000
Net interest income before provision for loan losses			900,600				1,077,350
Provision for loan losses			(40,000	)			(55,000	)
Net interest income after provision for loan losses			860,600				1,022,350
Noninterest income:
Service charges and fees			17,250				16,200
Other			11,350				10,900
			28,600				27,100
Noninterest expense:
Compensation and benefits			189,650				207,300
Occupancy			11,650				13,700
Federal insurance and operating assessments			12,100				11,450
Data processing			27,100				26,100
REO provisions and expense			4,800				30,050
Other operating expense			75,400				91,150
			320,700				379,750
Income before income taxes			568,500				669,700
Income taxes			202,850				238,150
Net income		$	365,650			$	431,550
Basic earnings per share		$	0.32			$	0.37
Diluted earnings per share		$	0.32			$	0.37
Dividends per share		$	0.20			$	0.19

See Notes to Consolidated Financial Statements.

WAKE FOREST BANCSHARES, INC.

		2007				2006
Net income		$	365,650			$	431,550
Other comprehensive gain (loss), net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period			(115,950	)			7,900
Less: reclassification adjustments for gains (losses) included in net income			—				—
Other comprehensive income (loss)			(115,950	)			7,900
Comprehensive income		$	249,700			$	439,450

See Notes to Consolidated Financial Statements.

WAKE FOREST BANCSHARES, INC.

		2007				2006
Net income		$	365,650			$	431,550
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			11,400				14,750
Provision for loan losses			40,000				55,000
Deferred income taxes			(21,400	)			(29,150	)
Increase in cash surrender value of life insurance			(11,050	)			(10,350	)
Changes in assets and liabilities:
Prepaid expenses and other assets			(19,850	)			5,950
Accrued interest receivable			38,450				(8,700	)
Accrued interest on deposits			13,300				30,250
Accrued income taxes			214,850				206,500
Accrued expenses and other liabilities			(69,350	)			43,500
Net cash provided by operating activities			562,000				739,300
Cash Flows From Investing Activities:
Net (increase) decrease in loans receivable			(1,549,150	)			1,623,150
Net (increase) decrease in bank certificates of deposit			(2,673,000	)			—
Purchase of property and equipment			(19,800	)			—
Net cash provided by (used in) investing activities			(4,241,950	)			1,623,150
Cash Flows From Financing Activities:
Net increase (decrease) in deposits			719,050				1,369,050
Proceeds from exercise of stock options			—				29,500
Additions to paid in capital from tax effect from exercise of of stock options			—				11,000
Repurchase of common stock for the Treasury			(9,150	)			(24,000	)
Dividends paid			(99,750	)			(88,700	)
Net cash provided by financing activities			610,150				1,296,850
Net increase (decrease) in cash and cash equivalents			(3,069,800	)			3,659,300
Cash and cash equivalents:
Beginning			21,670,500				23,818,900
Ending		$	18,600,700			$	27,478,200
Supplemental Disclosure of Cash Flow Information:
Cash payments of interest		$	936,800			$	863,750
Cash payment of income taxes		$	5,000			$	40,000
Supplemental Disclosure of Noncash transactions:
Transfer of loans to foreclosed assets		$	109,950			$	—
Incr. (decr.) in ESOP put option charged to retained earnings		$	(13,600	)		$	(11,050	)
Incr. (decr.) in unrealized gain on investment securities, net of tax		$	(115,950	)		$	7,900

See Notes to Consolidated Financial Statements.

Wake Forest Bancshares, Inc.

Note 1. Nature of Business

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 and Loan Association (the “Association” or “Wake Forest Federal”), its only subsidiary. 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 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 Federal Deposit Insurance Corporation (FDIC).

Note 2. Organizational Structure

The Company is majority owned by the 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. Initially, the MHC’s principal assets consisted of 635,000 shares of the Association’s common stock (now converted to the Company’s common stock) and $100,000 in cash received from the Association as initial capital. Prior to 2003 (see Note 4), the MHC received its proportional share of dividends declared and paid by the Association (now the Company), and such funds 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 54.8% 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.

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 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 Board of Directors of the Association 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.

Note 3. Basis of Presentation

The accompanying unaudited consolidated financial statements (except for the consolidated statement of financial condition at September 30, 2007, which is derived from audited consolidated financial statements) have been prepared in accordance with generally accepted accounting principles for interim financial information and Regulation S-B. Accordingly, they do not include all of the information required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (none of which were other than normal recurring accruals) necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. The results of operations for the three month period ended December 31, 2007 are not necessarily indicative of the results of operations that may be expected for the Company’s fiscal year ending September 30, 2008. The accounting policies followed are as set forth in Note 1 of the Notes to Consolidated Financial Statements in the Company’s September 30, 2007 Annual Report to Stockholders.

Note 4. Dividends Declared

On December 17, 2007, the Board of Directors of the Company declared a dividend of $0.20 a share for stockholders of record as of December 31, 2007 and payable on January 10, 2008. The dividends declared were accrued and reported as dividends payable in the December 31, 2007 Consolidated Statement of Financial Condition. Wake Forest Bancorp, Inc., the mutual holding company, waived the receipt of the dividend declared by the Company this quarter.

Wake Forest Bancshares, Inc.
Notes to Consolidated Financial Statements

Note 5. Earnings Per Share

Basic earnings per share amounts are based on the weighted average shares of common stock outstanding. Diluted earnings per share assumes 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. This presentation has been adopted for all periods presented. There were no adjustments required to net income for any period in the computation of diluted earnings per share. The reconciliation of weighted average shares outstanding for the computation of basic and diluted earnings per share for the three month periods ended December 31, 2007 and 2006 is presented below.

For the Three Months Ended December 31			2007				2006
Weighted average shares outstanding for Basic EPS			1,159,988				1,157,548
Plus incremental shares from assumed issuances of shares pursuant to stock option and stock award plans			—				2,206
Weighted average shares outstanding for diluted EPS			1,159,988				1,159,754

Note 6. Future Reporting Requirements

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN No. 48”). FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN No. 48 prescribes a recognition threshold and measurement approach for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. FIN No. 48 establishes a two-step process for evaluation of tax positions. The first step is recognition, under which the enterprise determines whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The enterprise is required to presume the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information. The second step is measurement, under which a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The cumulative effect of adopting FIN No. 48 is required to be reported as an adjustment to the opening balance of retained earnings (or other appropriate components of equity) for that fiscal year. FIN No. 48 is effective for the Company’s current fiscal year and its adoption had no impact on Company’s consolidated financial statements.

Wake Forest Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

and Results of Operations

Forward Looking Statements

Information set forth below contains various forward-looking statements within the meaning of Section 27A of the Securities and Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which statements represent the Company’s judgment concerning the future and are subject to risks and uncertainties that could cause the Company’s actual operating results to differ materially. Such forward-looking statements can be identified by the use of forward-looking terminology, such as “may”, “will”, “expect”, “anticipate”, “estimate”, “believe”, or “continue”, or the negative thereof or other variations thereof or comparable terminology. The Company cautions that such forward-looking statements are further qualified by important factors that could cause the Company’s actual operating results to differ materially from those in the forward-looking statements, as well as the factors set forth in the Company’s periodic reports and other filings with the SEC.

Comparison of Financial Condition at September 30, 2007 and December 31, 2007

Total assets increased by $1.0 million to $108.4 million at December 31, 2007 from $107.4 million at September 30, 2007. The increase in total assets during the quarter ended December 31, 2007 was funded primarily from an increase in deposits of approximately $719,000 and cash generated from internal operating activities during the same quarter. Due to adequate levels of current liquidity, deposits were priced to meet competition and retain certain accounts but not to aggressively attract additional funds. The Company attempts to maintain a certain level of liquidity to fund loan growth and to provide a cushion for its construction loan commitments.

Net loans receivable increased by $1.4 million to $77.6 million at December 31, 2007 from $76.2 million at September 30, 2007. The increase was distributed across the various categories of loans within the Company’s portfolio. The Company’s primary lending area remains relatively healthy but home sales have declined in recent months when compared to the same periods a year earlier and both re-sales and newly constructed homes remain on the market for longer periods of time. New home starts are considerably less this quarter when compared to the same quarter a year ago. The Company’s local real estate market has experienced significant growth over the last five years, primarily due to an influx of newcomers from outside the area. Although the Company’s markets have not experienced a drop in home prices like many areas of the country, local real estate markets are impacted by newcomers unable to purchase homes here until they are able to sell residences elsewhere. Population growth and employment expansion across a wide spectrum of the local economic base combined with moderate interest rate levels will ultimately determine whether consistent loan demand can be sustained. Assuming local economic conditions continue to improve, management believes that the long-term fundamentals of its lending markets provide potential for future loan growth. However, there can be no assurances that such loan demand can or will materialize in the future.

Investment securities decreased by $186,950 to $2.0 million at December 31, 2007 from $2.2 million at September 30, 2007. The decrease is attributable to a $203,000 unrealized loss in the Company’s investment in FHLMC stock. The Company has held its FHLMC investment for many years and considers it to be a long term investment. The Company has very little cost basis in the stock and retains an approximately $270,000 unrealized gain in the stock at December 31, 2007. The FHLMC stock has recently declined due to the issues surrounding sub-prime lending and the market for mortgage-backed securities. The Company also has an investment of $1.5 million in FHLB bonds. The Company generally maintains higher levels of short term liquidity in order to minimize interest rate risk, to fund construction loan commitments, and due to the relatively minor differential in current investment rates available on extended maturities. As a result, the Company has not been actively involved in the buying and selling securities but has been purchasing FDIC insured bank certificates of deposit generally with maturities up to one year to protect against downward interest rate risk. The Company’s portfolio of bank certificates of deposit amounted to $6.8 million at December 31, 2007. These bank certificates of deposit investments are typically acquired at interest rates of 1.00% to 1.50% higher than most debt securities currently available for terms much longer than a year. At December 31, 2007, the Company’s investment portfolio, which consisted of FHLB stock, FHLMC stock, and FHLB bonds had approximately $305,000 in net unrealized gains.

Wake Forest Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations

Comparison of Financial Condition at September 30, 2007 and December 31, 2007 (Continued)

The Company had no borrowings outstanding during the period because its current level of liquidity was sufficient to fund loan originations and provide for other cash requirements. The Company has recorded a liability of $451,950 at December 31, 2007 for the ESOP put option which represents the potential liability owed to participants based on the current market value of the Company’s stock if all participants were to request the balance of their account from the Company in cash instead of stock.

The Company has an ongoing stock repurchase program authorizing management to repurchase shares 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 purposes permitted by applicable law. At December 31, 2007 the Company had repurchased 94,455 shares of its common stock. The program continues until completed or terminated by the Board of Directors.

Retained earnings increased by $274,250 to $15.8 million at December 31, 2007 from $15.5 million at September 30, 2007. The increase is primarily attributable to the Company’s earnings of $365,650 during the quarter ended December 31, 2007, reduced by $105,000 in dividends declared during the period and a $13,600 credit to retained earnings to reflect the change in the fair value of the ESOP shares subject to the put option. At December 31, 2007 the Company’s capital amounted to $20.3 million, which as a percentage of total assets was 18.75%. The Company and the Association are both required to meet certain capital requirements as established by the OTS. At December 31, 2007, all capital requirements were met.

Asset Quality

The Company’s level of non-performing loans, consisting of loans past due 90 days or more, amounted to $799,200 or 1.01% as a percentage of loans outstanding at December 31, 2007. Non-performing loans amounted to $595,650 or 0.77% as a percentage of loans outstanding at September 30, 2007. At December 31, 2007, non-performing loans were comprised of six residential construction loans, four of which were to the same borrower. The Company is currently foreclosing on all six of the non-performing loans. At this time, all but one of these non-performing loans are considered to be impaired and the Company has set aside a total of $67,500 in allocated loss reserves to cover assumed losses on the ultimate disposition of the loans.

Non-performing assets also includes real estate acquired through foreclosure. At December 31, 2007, non-performing assets also included a foreclosed commercial property ($1,003,800) which consisted of a convenience store and an adjacent tract of land, in total 3.81 acres located on a major highway outside of Wake Forest, North Carolina. While the commercial property’s location is considered highly desirable, the Company decided that an environmental assessment was necessary to properly market the tract due to the historical uses of the property. As a result, site assessment reports were filed with various state environmental agencies. Petroleum contamination and other trace elements consistent with operating a gas station and a truck maintenance facility over an extended period of time were found on parts of the property. The Company has obtained brownfields status for the site which should make the tract more attractive to prospective developers of the property. In addition, the Company obtained Trust Fund status for the site which will allow certain environmental cost to be reimbursed. Although the Company does not currently believe the contamination will have a significant detrimental effect on the potential development of the property, the agencies are assisting the Company in determining the extent of any required clean-up and ongoing monitoring steps that will be required. The Company has set aside $150,000 at December 31, 2007 for such testing and clean-up activities. At this time, the Company does not believe that the ongoing environmental costs will materially impact the value of the property. At December 31, 2007, the Company had entered into a contract to sale the property which would result in very little gain or loss. The contract is in the due diligence phase and the Company is not assured of its ultimate sale.

Wake Forest Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations

Asset Quality (Continued):

The Company had no loan charge-offs during the current quarter. The Company’s loan loss allowance amounted to $1,227,550 at December 31, 2007 and management believes that it has sufficient allowances established to cover losses associated with its loan portfolio. The allowance for loan losses is established based upon probable losses that are estimated to have occurred through a provision for loan losses charged to earnings.

During the past five years, the Association’s loan portfolio has gradually trended towards a greater concentration of residential construction and land loans, which generally involve a greater degree of credit risk and collection issues. As a result, the Company has provided relatively higher levels of loan loss provisions and resulting allowances during this period than what has historically been considered necessary. The allowance for loan losses is evaluated on a regular basis by management.

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 appropriateness of the allowance for loan losses consists of two key components which are a specific allowance for identified problem or impaired loans under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 114, “Accounting by Creditors for Impairment of a Loan”, and a formula allowance for the remainder of the portfolio under the provisions of SFAS No. 5, “Accounting for Contingencies.” Because the Company only originates loans secured by real estate, specific problem loans are graded using the standard regulatory classifications and are evaluated for impairment under SFAS No. 114 based upon the collateral’s fair value less estimated cost of disposal.

All other loans with unidentified impairment issues are pooled and segmented by major loan types (single-family residential properties, construction loans, commercial real estate, land, etc.). Loan loss rates for these categories are then generated by capturing historical loan losses net of recoveries over a five and ten year period, with added weight given to the more recent five year period. Qualitative factors that may affect loan collectibility such as geographical and lending concentrations, local economic conditions, and delinquency trends are also considered in determining the Company’s best estimate of the range of credit losses. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. 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 values and other conditions differ substantially from the current operating environment. 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.

Comparison of Operating Results for the Three Months Ended December 31, 2007 and 2006

General. Net income for the three month period ended December 31, 2007 was $365,650 ($0.32 per diluted share) as compared to $431,550 ($0.37 per diluted share) earned during the same quarter in 2006. As discussed below, changes in net interest income between the comparable periods was primarily responsible for the change in net income during the quarter ended December 31, 2007, as compared to the same period one year earlier.

Interest income. Interest income decreased by $120,650 from $1,971,350 for the three months ended December 31, 2006 to $1,850,700 for the three months ended December 31, 2007. The decrease in interest income during the current quarter resulted from a 0.41% decrease in the average yield on interest-earning assets offset partially by a $2.6 million increase in the average balance of interest-earning assets outstanding between the quarters. The Company’s yield on interest earning assets was 6.86% for the quarter ended December 31, 2007 and 7.27% for the quarter ended December 31, 2006. The change in yield occurred primarily due to fluctuations in market rates outstanding during the periods. A significant amount of the Company’s interest earning assets adjust in tandem with changes to Prime, which decreased by one percent from December 31, 2006 to December 31, 2007.

Wake Forest Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations

Comparison of Operating Results for the Three Months Ended December 31, 2007 and 2006 (Continued)

Interest Expense. Interest expense increased by $56,100 from $894,000 the three months ended December 31, 2006 to $950,100 for the three months ended December 31, 2007. The primary reason for the increased interest expense was a 11 basis point increase in the Company’s cost of funds during the current quarter as compared to the same quarter a year earlier and a $1.6 million increase in the average balance of outstanding deposits between the quarters. The Company’s cost of funds was 4.35% for the quarter ended December 31, 2007 and 4.24% for the quarter ended December 31, 2006. The change in the Company’s cost of funds occurred primarily due to fluctuations in market rates between the periods. The increase in the average balance of interest-bearing liabilities occurred primarily due to the competitive pricing of deposits by the Company in order to maintain an acceptable level of liquidity to meet loan demand, construction loan commitments, and other cash requirements.

Net interest income. Net interest income decreased by $176,750 from $1,077,350 for the three months ended December 31, 2006 to $900,600 for the three months ended December 31, 2007. As explained above, the decrease in net interest income resulted primarily from fluctuations in both the yields on interest-earning assets and the cost of funds on interest-bearing liabilities between the periods as well as increases in the level of interest earning assets and interest-bearing liabilities from the quarter ended December 31, 2006 to the most recent quarter ended December 31, 2007. The Company’s interest rate margin was 3.43% for the current quarter as compared to 4.21% for the quarter ended December 31, 2006.

Provision for loan losses. The Company provided $40,000 and $55,000 in loan loss provisions during the current quarter and the same quarter a year earlier, respectively. Provisions, which are charged to operations, and the resulting loan loss allowances are amounts the Company’s management believes will be adequate to absorb losses that are estimated to have occurred in the portfolio. Loans are charged off against the allowance when management believes that uncollectibility is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The Association’s loan portfolio has gradually trended towards a greater concentration of builder construction loans, land, and land development loans which generally involve a greater degree of credit risk and collection issues. Also, many of these types of loans involve lending relationships which are larger than what the Company has traditionally maintained. As a result, the Company has provided relatively higher levels of loan loss provisions and resulting allowances during current periods than what has historically been considered necessary. In addition, the Company has experienced an increased level of delinquent loans during recent reporting periods as compared to what has historically occurred. The increased delinquencies have impacted the level of loan loss provisions considered necessary. None of the provisions provided during the reported periods occurred due to the impairment of specific loans as required by SFAS No. 114.

Non-interest income. The Company’s non-interest income is primarily comprised on various fees and service charges on customer accounts, income from bank owned life insurance products, as well as security gains and fees earned from secondary market origination and sales. The Company did not have any investment sales during any of the periods being reported upon. In addition, the Company has primarily originated residential mortgage loans for its own portfolio over the periods being reported upon and therefore very little secondary marketing income has been generated over those same periods.

Wake Forest Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations

Comparison of Operating Results for the Three Months Ended December 31, 2007 and 2006 (Continued)

Non-interest expense. Non-interest expense decreased by $59,050 to $320,700 for the three month period ended December 31, 2007 from $379,750 for the comparable quarter in 2006. Compensation and benefits decreased by $17,650 during the quarter as compared to the same quarter a year earlier due to the accrual of a lesser amount of employee bonuses. REO provisions and expense associated with environmental assessment activities for the Company’s foreclosed tract on highway 98 outside of Wake Forest, North Carolina were approximately $30,000 lower during the current quarter versus the same quarter a year earlier. The lower REO expense was primarily due to a greater amount of assessment activities during the quarter ended December 31, 2006 as compared to the most recent quarter. Other operating expense decreased by $15,750 from $91,150 for the quarter ended December 31, 2006 to $75,400 for the current quarter. The decrease in other operating expense occurred primarily because the Company had expensed higher amounts of costs associated with its computer system conversion and upgrade last year as compared to current quarter. Also, the Company experienced higher levels of expense during the quarter ended December 31, 2006 associated with accruals established for attendance of statewide conventions by directors and executive officers. No other category of non-interest expense changed significantly between the two quarters.

Capital Resources and Liquidity:

The term “liquidity” generally refers to an organization’s ability to generate adequate amounts of funds to meet its needs for cash. More specifically for financial institutions, 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, borrowings, through the sale or maturity of investments, the ability to raise equity capital, or maintenance of shorter term interest-earning deposits.

During the three month period ended December 31, 2007, cash and cash equivalents, a significant source of liquidity, decreased by approximately $397,000. Net principal increases in loans amounting to $1.5 million, offset by an increase in deposits of $719,050 and proceeds from the Company’s internal operations totaling $562,000 contributed to the net utilization of cash during the quarter. Given its excess liquidity and its ability to borrow from the Federal Home Loan Bank 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 December 31, 2007, the Association had outstanding loan commitments amounting to approximately $1.2 million. The undisbursed portion of construction loans amounted to $11.5 million and unused lines of credit amounted to $3.8 million at December 31, 2007.

Wake Forest Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations

Critical Accounting Policies and Estimates

The accounting policies followed are as set forth in Note 1 of the Notes to Financial Statements in the Company’s 2007 Annual Report on Form 10-KSB. The Company has not experienced any material change in its critical accounting policies since September 30, 2007. 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 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.

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 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.

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.

Wake Forest Bancshares, Inc.
December 31, 2007

Item 3. Controls and Procedures

Management, including the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(f) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief 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.

Wake Forest Bancshares, Inc.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is not engaged in any material legal proceedings at the present time. Occasionally, the Association is a party to legal proceedings within the normal course of business wherein it enforces its security interest in loans made by it, and other matters of a similar nature.

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

None

Item 3. Defaults Upon Senior Securities

None

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

None

Item 5. Other Information

None

Item 6. Exhibits

	a)		Exhibit 31 Certification of Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	b)		Exhibit 32 Certification of Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Wake Forest Bancshares, Inc.
Dated February 12, 2008		By:		s/s Robert C. White
				Robert C. White
				Chief Executive Officer and