UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K

[X]      Annual  Report  Pursuant  to  Section  13 or  15(d)  of the  Securities
         Exchange Act of 1934 For the Fiscal Year Ended March 31, 2006

                                       OR

[_]      Transition  Report  Pursuant  to Section 13 or 15(d) of the  Securities
         Exchange Act of 1934

         For the transition period from _______________ to _____________________

                           Commission File No. 0-23433

                         WAYNE SAVINGS BANCSHARES, INC.
                         ------------------------------
             (Exact name of registrant as specified in its charter)

                   Delaware                                   31-1557791
                   --------                                   ----------
        (State or other jurisdiction of                    (I.R.S. Employer
        incorporation or organization)                  Identification Number)

    151 North Market Street, Wooster, Ohio                       44691
    --------------------------------------                       -----
   (Address of Principal Executive Offices)                    Zip Code

                                 (330) 264-5767
                                 --------------
                        (Registrant's telephone number)

Securities Registered Pursuant to Section 12(b) of the Act:   None
Securities Registered Pursuant to Section 12(g) of the Act:

                     Common Stock, par value $.10 per share
                     --------------------------------------
                                (Title of Class)

         Indicate  by check  mark if the  Registrant  is a  well-known  seasoned
issuer, as defined in Rule 405 of the Securities Act. YES [_] NO [X]

         Indicate  by  check  mark if the  Registrant  is not  required  to file
reports pursuant to Section 13 or Section 15(d) of the Act. YES [_] NO [X]

         Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934 during the  preceding  twelve  months (or for such shorter  period that the
Registrant  was required to file such  reports) and (2) has been subject to such
requirements for the past 90 days. YES [X] NO [_]

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  Registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [ ]

         Indicate by check mark whether the  Registrant  is a large  accelerated
filer,  an accelerated  filer,  or a  non-accelerated  filer.  See definition of
"accelerated  filer and large  accelerated  filer" in Rule 12b-2 of the Exchange
Act. (Check one.)

Large accelerated filer [_]   Accelerated filer [_]   Non-accelerated filer [X]

         Indicate by check mark  whether  the  Registrant  is shell  company (as
defined in Rule 12b-2 of the Exchange Act). YES [_]NO [X]

         As of June 12, 2006, there were 3,954,874 issued and outstanding shares
of the Registrant's Common Stock.

         The aggregate  market value of the voting and non-voting  common equity
held by non-affiliates of the Registrant, computed by reference to the last sale
price  on  June  8,  2006,  as  reported  on the  Nasdaq  National  Market,  was
approximately $60.1 million.



                               Wayne Savings Bancshares, Inc.
                                         Form 10-K
                             For the Year Ended March 31, 2006


                                                                                    

PART I.
Item 1.     Business.......................................................................1
Item 1A.    Risk Factors..................................................................30
Item 1B.    Unresolved Staff Comments.....................................................31
Item 2.     Properties....................................................................32
Item 3.     Legal Proceedings.............................................................33
Item 4.     Submission of Matters to a Vote of Security Holders...........................33

PART II.
Item 5.     Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities............................................33
Item 6.     Selected Financial Data.......................................................35
Item 7.     Management's Discussion and Analysis of Financial Condition and Results
                of Operations.............................................................37
Item 7A.    Quantitative and Qualitative Disclosures About Market Risk....................47
Item 8.     Financial Statements and Supplementary Data...................................49
Item 9.     Change in and Disagreements with Accountants on Accounting and
                Financial Disclosure......................................................87
Item9A.     Controls and Procedures.......................................................87
Item 9B.    Other Information.............................................................87

PART III.
Item 10.    Directors and Executive Officers of the Registrant............................87
Item 11.    Executive Compensation........................................................87
Item 12.    Security Ownership of Certain Beneficial Owners and Management and
                Related Stockholder Matters...............................................87
Item 13.    Certain Relationships and Related Transactions................................87
Item 14.    Principal Accountant Fees and Services........................................88

PART IV.
Item 15.    Exhibits and Financial Statement Schedules....................................88





                                     PART I
                                     ------

ITEM 1.  Business
- -----------------

General

         Wayne Savings Bancshares, Inc.

         Wayne Savings  Bancshares,  Inc. (the "Company"),  is a unitary holding
company for Wayne  Savings  Community  Bank (the "Bank").  The only  significant
asset of the Company is its  investment  in the Bank. A plan of  conversion  and
reorganization  was approved by the stockholders of the Company,  the depositors
of Wayne Savings Community Bank and the Office of Thrift Supervision  ("OTS") in
fiscal 2003, and the related stock offering was completed on January 8, 2003. As
of that date 1,350,699 shares of common stock of the Company owned by the M.H.C.
were  retired and the Company sold  2,040,816  shares of common stock for $10.00
per share.  After  consideration  of funding the employee  stock  ownership plan
("ESOP") with $1.6 million and related  expenses of $1.9  million,  net proceeds
from the stock  offering  amounted to $17.1  million.  An  additional  1,847,820
shares were issued to existing  shareholders based on an exchange rate of 1.5109
new shares of common stock for each existing share, resulting in 3,888,795 total
new shares  outstanding.  At March 31,  2006,  the Company  had total  assets of
$403.7 million,  total deposits of $332.6 million,  and stockholders'  equity of
$35.5 million. On June 1, 2004, the Company acquired Stebbins Bancshares,  Inc.,
and its national bank subsidiary,  Stebbins National Bank of Creston,  Ohio. The
acquisition of Stebbins  National Bank  increased the Bank's  branches to eleven
full-service  locations.  The Company's principal office is located at 151 North
Market Street,  Wooster, Ohio, and its telephone number at that address is (330)
264-5767.

         Wayne Savings Community Bank

         The  Bank is an  Ohio-chartered  stock  savings  and  loan  association
headquartered  in Wooster,  Ohio. The Bank's deposits are insured by the Federal
Deposit  Insurance  Corporation  ("FDIC").  The Bank  has  been a member  of the
Federal Home Loan Bank ("FHLB") System since 1937.

         The  Bank  is  a   community-oriented   savings  institution   offering
traditional  financial  services  to its local  community.  The  Bank's  primary
lending and deposit gathering area includes Wayne, Holmes,  Ashland,  Medina and
Stark counties,  where it operates eleven full-service  offices. This contiguous
five-county  area is located in northeast  Ohio, and is an active  manufacturing
and agricultural  market.  The Bank's principal  business  activities consist of
originating  one- to  four-family  residential  real estate loans,  multi-family
residential,  commercial and  non-residential  real estate loans.  The Bank also
originates consumer loans, and to a lesser extent,  construction loans. The Bank
also invests in mortgage-backed securities and currently maintains a significant
portion of its assets in liquid  investments,  such as United States  Government
securities, federal funds, and deposits in other financial institutions.

         During the most recent five fiscal  years,  the Company has  rebalanced
the loan  portfolio  by placing an  increased  emphasis on  nonresidential  real
estate and  commercial  business  loans.  Nonresidential  real estate  loans and
commercial  loans  have  increased  from  $12.4  million,  or  4.82% of the loan
portfolio  and $3.1 million,  or 1.22% of the total loan  portfolio at March 31,
2002 to $50.8  million,  or 21.25%,  and $21.6 million,  or 9.02%,  at March 31,
2006. Correspondingly, one- to four-family residential loans have decreased from
$220.1  million,  or 85.36% of the total  loan  portfolio  at March 31,  2002 to
$149.1 million,  or 62.4%, at March 31, 2006.  Nonresidential  real estate loans
and commercial  loans  generally carry higher yields and shorter terms than one-
to four-family loans. The increased  emphasis on nonresidential  real estate and
commercial  business loans have  diversified  the loan  portfolio,  expanded the
Company's product offerings and broadened the Company's customer base.

                                       1


         The Bank's  principal  executive  office is located at 151 North Market
Street,  Wooster,  Ohio,  and its  telephone  number  at that  address  is (330)
264-5767.

Market Area/Local Economy

         The Bank,  headquartered in Wooster,  Ohio, operates in Wayne, Ashland,
Medina, Holmes and Stark Counties in northeast Ohio. Wooster, Ohio is located in
Wayne County and is approximately midway between Cleveland and Columbus, Ohio.

         Wayne County is  characterized by a diverse economic base, which is not
dependent  on any  particular  industry.  It is one of the leading  agricultural
counties in the state. Since 1892, Wooster has been the headquarters of the Ohio
Agricultural  Research and Development Center, the agricultural  research arm of
The Ohio State  University.  In addition,  Wayne County is also the home base of
such  nationally  known  companies  like  J.M.   Smucker  Company,   Worthington
Industries/The  Gertsenslager Company, and the Wooster Brush Company. It is also
the home of many industrial plants,  including Packaging Corporation of America,
International Paper Company, Morton Salt, and FritoLay, Inc. The City of Wooster
has benefited from the commitment of the world renowned Cleveland Clinic as they
have established new state of the art medical  facilities.  Wayne County is also
known for its  excellence  in  education.  The College of Wooster was founded in
1866  and  serves  1,800  students  during  the  school  season.  Other  quality
educational opportunities are offered by the Agricultural Technical Institute of
Ohio State University,  and Wayne College,  a branch of The University of Akron.
Wayne Savings  operates four  full-service  offices in Wooster,  one stand-alone
drive-thru facility and one full-service office in both Rittman and Creston.

         Ashland County,  which is located due west of Wayne County,  also has a
diverse economic base. In addition to its agricultural  segment,  Ashland County
has   manufacturing   plants   producing   rubber   and   plastics,   machinery,
transportation equipment,  chemicals,  apparel, and other items. Ashland is also
the home of Ashland  University.  The City of Ashland is the county seat and the
location of two of the Bank's branch offices.

         Medina County,  located just north of Wayne County,  is the center of a
fertile agricultural region.  Farming remains the largest industry in the county
in  terms  of  dollar  value  of  goods  produced.   However,   over  100  small
manufacturing firms also operate in the county. The City of Medina is located in
the  center  of the  Cleveland-Akron-Lorain  Standard  Consolidated  Statistical
Marketing Area. Medina is located  approximately 30 miles south of Cleveland and
15 miles west of Akron. Due to its proximity to Akron and Cleveland,  a majority
of  Medina  County's  labor  force is  employed  in these two  cities.  The Bank
operates  one  full-service  office in Medina  County,  which is  located in the
Village of Lodi.

         Holmes County,  located  directly  south of Wayne County,  has a mostly
rural  economy.  The  local  economy  depends  mostly  upon  agriculture,  light
manufacturing,  fabrics,  and wood products.  Because of the scenic beauty and a
large  Amish  settlement,   revenues  from  tourism  are  becoming  increasingly
significant.   The  county  is  also  noted  for  its  many  fine  cheese-making
operations.  A large  number of Holmes  County  residents  are employed in Wayne
County.  The City of  Millersburg  is the county seat and the location of one of
the Bank's branch offices.

         Stark County,  located directly east of Wayne County,  is characterized
by a diverse economy and over 1,500 different  products are  manufactured in the
county.  Stark County also has a strong  agricultural  base, and ranks fourth in
Ohio in the production of dairy  products.  The major  employers in North Canton
are the Hoover  Company,  Diebold  Incorporated  (a major  manufacturer  of bank
security  products and  automated  teller  machines)  and the Timken  Company (a
world-wide manufacturer of tapered roller bearings and specialty steels). Maytag
Corp.,  the parent of the Hoover  Company,  was acquired by Whirlpool  Corp. The
future of the Hoover  Company in North Canton is uncertain.  Timken has also had
plants   close,   resulting  in

                                       2


job losses in the North Canton  region of  approximately  30%. The Bank does not
have a material  concentration of loans in the North Canton market area. Jackson
Township is the home to the Belden Village Shopping Center, while Plain Township
is a  residential  and  agricultural  area  with a few  widely  scattered  light
industries. North Canton is the location of one of the Bank's branches.

Lending Activities

         General.  Historically,  the principal  lending activity of the Company
has been the  origination  of fixed and adjustable  rate mortgage  ("ARM") loans
collateralized  by one- to  four-family  residential  properties  located in its
market area.  The Company  originates  ARM loans for retention in its portfolio,
and fixed rate  loans that are  eligible  for resale in the  secondary  mortgage
market. The Company also originates loans  collateralized by non-residential and
multi-family  residential real estate, as well as commercial business loans. The
Company also originates consumer loans to broaden services offered to customers.

         The  Company  has  sought  to make  its  interest-earning  assets  more
interest rate sensitive by originating adjustable rate loans, such as ARM loans,
home equity loans,  and medium-term  consumer loans.  The Company also purchases
mortgage-backed securities generally with estimated remaining average lives of 5
years or less. At March 31, 2006,  approximately $70.9 million, or 24.4%, of the
Company's  total  loans and  mortgage-backed  securities  consisted  of loans or
securities with adjustable interest rates.

         The Company continues to actively  originate fixed rate mortgage loans,
generally  with 15 to 30  year  terms  to  maturity,  collateralized  by one- to
our-family  residential  properties.  One- to four-family fixed rate residential
mortgage loans generally are originated and underwritten  according to standards
that allow the Company to resell such loans in the secondary mortgage market for
purposes of managing interest rate risk and liquidity.  Since November 2005, the
Company has decided to retain all one- to  four-family,  fixed rate  residential
mortgage  loan  originations  with  terms of 15 and 30 years  in an  attempt  to
stabilize this sector of the loan portfolio.  The Company  retains  servicing on
its sold mortgage  loans and realizes  monthly  service fee income.  The Company
also originates interim  construction  loans on one- to four-family  residential
properties.

         The Company has  continued  developing  the  commercial  business  loan
program.  The purpose of this program is to increase the Company's interest rate
sensitive assets, increase interest income and diversify both the loan portfolio
and the Company's  customer base. The Company has three  experienced  commercial
lenders to help in this effort.  The Company targets small local businesses with
loan amounts in the $50,000 - $1.0 million  range with a majority of loans under
$500,000.  Commercial  loans  increased  to $21.6  million at March 31,  2006 as
compared to $14.1  million at March 31, 2005 and $3.1 million at March 31, 2002.
Further,  the Company has placed an increased  emphasis on  nonresidential  real
estate loan  products over the last five years.  Nonresidential  real estate and
land loans increased from $12.4 million, or 4.8%, of the total loan portfolio at
March 31, 2002 to $50.8 million,  or 21.2%, of the total loan portfolio at March
31, 2006.

                                       3


         Analysis of Loan Portfolio.  Set forth below are selected data relating
to the  composition of the Company's loan  portfolio,  including  loans held for
sale, by type of loan as of the dates indicated.




                                                                              At March 31,
                                       --------------------------------------------------------------------------------------------
                                             2006              2005               2004               2003                2002
                                       ---------------   ----------------   ----------------   ------------------   ---------------
Mortgage loans:                            $       %        $        %         $         %        $          %         $        %
                                       -------- ------   --------  ------   --------  ------   --------  --------   -------- ------
                                                                                               
                                                                         (Dollars in thousands)
   One- to four-family
     residential(1)..................  $149,134  62.40%  $157,658   72.60%  $171,736   81.97%  $200,764     86.41%  $220,145  85.36%
   Residential construction loans....     4,675   1.96      4,053    1.87      2,914    1.39      3,548      1.53      8,728   3.38
   Multi-family residential..........     7,930   3.32      7,872    3.63      6,800    3.25      8,512      3.66      7,368   2.86
   Non-residential real
     estate/land(2)..................    50,778  21.25     29,187   13.44     18,439    8.80     12,067      5.19     12,423   4.82
                                       -------- ------   --------  ------   --------  ------   --------  --------   -------- ------
        Total mortgage loans.........   212,517  88.93    198,770   91.54    199,889   95.41    224,891     96.79    248,664  96.42
Other loans:
   Consumer loans(3).................     4,901   2.05      4,306    1.98      3,156    1.51      3,892      1.67      6,096   2.36
   Commercial business loans.........    21,550   9.02     14,075    6.48      6,471    3.08      3,571      1.54      3,134   1.22
                                       -------- ------   --------  ------   --------  ------   --------  --------   -------- ------
        Total other loans............    26,451  11.07     18,381    8.46      9,627    4.59      7,463      3.21      9,230   3.58
                                       -------- ------   --------  ------   --------  ------   --------  --------   -------- ------
   Total loans before net items......   238,968 100.00%   217,151  100.00%   209,516  100.00%   232,354    100.00%   257,894 100.00%
                                                ======             ======             ======             ========            ======
Less:
   Loans in process..................     1,729             1,638              2,579              2,244                4,616
   Deferred loan origination fees....       443               512                679              1,059                1,376
   Allowance for loan losses.........     1,484             1,374                815                678                  730
                                       --------          --------           --------           --------             --------
        Total loans receivable, net..  $235,312          $213,627           $205,443           $228,373             $251,172
                                       ========          ========           ========           ========             ========
   Mortgage-backed securities, net(4)  $ 55,731          $ 60,352           $ 88,428           $ 76,002             $ 17,326
                                       ========          ========           ========           ========             ========


(1)  Includes equity loans  collateralized  by second mortgages in the aggregate
     amount of $20.9 million,  $20.3 million,  $20.3 million, $21.2 million, and
     $18.9  million  as  of  March  31,  2006,   2005,   2004,  2003  and  2002,
     respectively.  Such loans have been  underwritten on substantially the same
     basis as the Company's first mortgage loans.
(2)  Includes  land loans of  $674,000,  $1.4  million,  $575,000,  $813,000 and
     $736,000 as of March 31, 2006, 2005, 2004, 2003 and 2002, respectively.
(3)  Includes  second  mortgage  loans  of  $783,000,  $1.4  million,  $535,000,
     $859,000 and $1.2 million as of March 31, 2006,  2005, 2004, 2003 and 2002,
     respectively.
(4)  Includes mortgage-backed securities designated as available for sale.

                                       4


         Loan and  Mortgage-Backed  Securities  Maturity and Repricing Schedule.
The  following  table  sets  forth  certain  information  as of March 31,  2006,
regarding the dollar amount of loans and mortgage-backed  securities maturing in
the Company's  portfolio based on their  contractual  terms to maturity.  Demand
loans, loans having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as due in one year or less. Adjustable and floating rate
loans  and  mortgage-backed  securities  are  included  in the  period  in which
interest  rates are next  scheduled to adjust  rather than in which they mature,
and fixed rate loans and  mortgage-backed  securities are included in the period
in which the final  contractual  repayment  is due.  Fixed rate  mortgage-backed
securities  are  assumed to mature in the period in which the final  contractual
payment is due on the underlying mortgage.



                                                         One        Three         Five         Ten         Beyond
                                          Within       Through     Through       Through     Through       Twenty
                                         One Year    Three Years  Five Years    Ten Years  Twenty Years     Years        Total
                                        -----------  -----------  -----------  ----------- ------------  -----------  -----------
                                                                                                 
                                                                              (In Thousands)

Mortgage loans:
  One- to four-family residential:
    Adjustable .......................  $    30,781  $     9,647  $     1,947  $       195  $        --  $        --  $    42,570
    Fixed ............................        2,783          956        1,078       11,291       32,125       58,331      106,564
  Construction:(1)
    Adjustable .......................           --           --           --           --           --           --           --
    Fixed ............................          473           --           --           --          509        1,964        2,946
  Multi-family residential,
   nonresidential and land:
    Adjustable .......................        3,962       11,128       10,438        6,634           --           --       32,162
    Fixed ............................        2,161        8,711        3,505        3,448        8,721           --       26,546
Other Loans:
  Commercial business loans ..........       17,883        1,276        1,511          172          587          121       21,550
  Consumer ...........................        1,271        1,336        1,987          303            4           --        4,901
                                        -----------  -----------  -----------  -----------  -----------  -----------  -----------
Total loans ..........................  $    59,314  $    33,054  $    20,466  $    22,043  $    41,946  $    60,416  $   237,239
                                        ===========  ===========  ===========  ===========  ===========  ===========  ===========

Mortgage-backed securities(2) ........  $     9,018  $     2,615  $     1,527  $    13,242  $    19,675  $    10,155  $    56,232
                                        ===========  ===========  ===========  ===========  ===========  ===========  ===========


- -----------------------------
(1)  Amounts  shown are net of loans in process of $1.7 million in  construction
     loans.
(2)  Includes  mortgage-backed  securities  available for sale. Does not include
     premiums of  $514,000,  discounts  of  $287,000  and  unrealized  losses of
     $728,000.

                                       5


         The following  table sets forth at March 31, 2006, the dollar amount of
all fixed rate and adjustable rate loans and mortgage-backed securities maturing
or repricing after March 31, 2007.

                                                            Fixed    Adjustable
                                                              (In Thousands)
Mortgage loans:
  One- to four-family residential ......................   $103,781   $ 11,789
  Construction (1) .....................................      2,473         --
  Multi-family residential, non-residential and land (1)     24,385     28,200
  Consumer .............................................      3,630         --
  Commercial business ..................................      2,436      1,231
                                                           --------   --------
         Total loans ...................................   $136,705   $ 41,220
                                                           ========   ========

Mortgage-backed securities(2) ..........................   $ 45,164   $  2,050
                                                           ========   ========

- -----------------
(1)  Net of loans in process of $1.7 million in residential construction loans.
(2)  Includes mortgage-backed securities available for sale, which totaled $53.9
     million  as of March 31,  2006.  Does not  include  premiums  of  $514,000,
     discounts of $287,000 and unrealized losses of $728,000.

         One- to  Four-Family  Residential  Real  Estate  Loans.  The  Company's
primary  lending  activity  consists of the  origination of one- to four-family,
owner-occupied,   residential  mortgage  loans  on  properties  located  in  the
Company's  market  area.  The  Company  generally  does  not  originate  one- to
four-family  residential loans secured by properties outside of its market area.
At March 31, 2006, the Company had $149.1  million,  or 62.4%, of its total loan
portfolio invested in one- to four-family residential mortgage loans.

         The  Company's   fixed  rate  loans   generally  are   originated   and
underwritten according to standards that permit resale in the secondary mortgage
market. Whether the Company can or will sell fixed rate loans into the secondary
market,  however,  depends  on a  number  of  factors  including  the  Company's
portfolio mix, gap and liquidity positions, and market conditions. Moreover, the
Company  is more  likely to  retain  fixed  rate  loans if its  one-year  gap is
positive.  The Company's  fixed rate  mortgage  loans are amortized on a monthly
basis  with  principal  and  interest  due  each  month.   One-  to  four-family
residential real estate loans often remain outstanding for significantly shorter
periods than their  contractual  terms because borrowers may refinance or prepay
loans at their option. The Company's one- to four-family  residential  portfolio
has declined $8.5 million,  or 5.4%, from March 31, 2005 to March 31, 2006. This
reduction was due mainly to the low interest  rate  environment  which  prompted
many  mortgage  customers to refinance  their loans,  coupled with  management's
intent to increase the commercial loan portfolio. The Company's secondary market
activities  have been  limited  to sales of $6.1  million,  $6.0  million,  $6.2
million,  $4.0 million and $27.4  million,  for the fiscal years ended March 31,
2006, 2005, 2004, 2003 and 2002, respectively.  Such sales generally constituted
current period originations.  In the third quarter of fiscal 2006, the Company's
management  temporarily  halted  sales of loans to  stabilize  balances  in this
segment of the loan portfolio.  There were no loans  identified as available for
sale as of March 31, 2006, 2005, 2004, 2003, or 2002.

         The Company currently offers one- to four-family  residential  mortgage
loans with terms typically  ranging from 15 to 30 years,  and with adjustable or
fixed interest rates. Originations of fixed rate mortgage loans versus ARM loans
are monitored on an ongoing basis and are affected significantly by the level of
market  interest rates,  customer  preference,  the Company's  interest rate gap
position,  and loan products offered by the Company's  competitors.  Despite the
Company's emphasis on ARM loans, the low interest rate environment over the last
few years has resulted in customer  preference for fixed rate mortgage loans. As
a result,  during the year ended March 31, 2006,  the  Company's  ARM  portfolio
decreased by $3.5 million, or 7.6%.

                                       6


         The Company offers one ARM loan product.  The Treasury ARM loan adjusts
annually with interest rate adjustment limitations of 2% per year and with a cap
of 3% or 5% on total rate  increases or decreases over the life of the loan. The
index on the  Treasury  ARM loan is the weekly  average  yield on U.S.  Treasury
securities,  adjusted to a constant maturity of one year plus a margin. However,
these  loans  are  underwritten  at the  fully-indexed  interest  rate.  One- to
four-family  residential  ARM loans  totaled  $42.6  million,  or 17.8%,  of the
Company's total loan portfolio at March 31, 2006.

         The primary purpose of offering ARM loans is to make the Company's loan
portfolio more interest rate sensitive.  However,  as the interest income earned
on ARM loans varies with prevailing  interest rates, such loans do not offer the
Company  predictable cash flows as would long-term,  fixed rate loans. ARM loans
carry increased credit risk associated with potentially  higher monthly payments
by  borrowers  as  general  market  interest  rates  increase.  It is  possible,
therefore,  that during periods of rising interest rates, the risk of default on
ARM loans may increase  due to the upward  adjustment  of interest  costs to the
borrower. Management believes that the Company's credit risk associated with its
ARM loans is reduced  because  the Company has either a 3% or 5% cap on interest
rate increases during the life of its ARM loans.

         The Company  also offers home equity  loans and equity  lines of credit
collateralized by a second mortgage on the borrower's  principal  residence.  In
underwriting  these home equity  loans,  the Company  requires  that the maximum
loan-to-value  ratios,  including the  principal  balances of both the first and
second mortgage loans,  not exceed 85%. The home equity loan portfolio  consists
of  adjustable  rate  loans  which use the prime rate as  published  in The Wall
Street  Journal as interest rate  indices.  Home equity loans include fixed term
adjustable  rate loans,  as well as lines of credit.  As of March 31, 2006,  the
Company's equity loan portfolio totaled $20.9 million,  or 13.6%, of its one- to
four-family mortgage loan portfolio.

         The Company's  one- to  four-family  residential  first  mortgage loans
customarily include due-on-sale clauses, which are provisions giving the Company
the right to declare a loan  immediately  due and  payable  in the event,  among
other things,  that the borrower  sells or otherwise  disposes of the underlying
real  property  serving as  security  for the loan.  Due-on-sale  clauses are an
important means of adjusting the rates on the Company's fixed rate mortgage loan
portfolio.

         Regulations  limit  the  amount  that a  savings  association  may lend
relative  to the  appraised  value of the real  estate  securing  the  loan,  as
determined  by an  appraisal  at the  time of loan  origination.  The  Company's
lending  policies limit the maximum  loan-to-value  ratio on both fixed rate and
ARM  loans  without  private  mortgage  insurance  to 80% of the  lesser  of the
appraised value or the purchase price of the property to serve as collateral for
the loan. However,  the Company makes one- to four-family real estate loans with
loan-to-value  ratios in excess of 80%.  For 15 year  fixed  rate ARM loans with
loan-to-value  ratios of 80.01% to 85%, 85.01% to 90%, 90.01% to 95%, and 95.01%
to 97%, the Company  requires the first 6%, 12%, 25% and 30%,  respectively,  of
the loan to be  covered by private  mortgage  insurance.  For 30 year fixed rate
loans with  loan-to-value  ratios of 80.01% to 85%, 85.01% to 90%, and 90.01% to
97%, the Company requires the first 12%, 25%, and 30%, respectively, of the loan
to be covered by private  mortgage  insurance.  The  Company  requires  fire and
casualty  insurance,  as well as title  insurance  regarding good title,  on all
properties  securing real estate loans made by the Company and flood  insurance,
where applicable.

         Multi-Family   Residential   Real  Estate   Loans.   Loans  secured  by
multi-family real estate constituted approximately $7.9 million, or 3.3%, of the
Company's  total loan  portfolio at March 31, 2006.  The Company's  multi-family
real estate  loans are secured by  multi-family  residences,  such as  apartment
buildings.  At March 31, 2006,  most of the  Company's  multi-family  loans were
secured by properties  located  within the  Company's  market area. At March 31,
2006,  the Company's  multi-family  real estate loans had an average  balance of
$496,000,  and the largest multi-family real estate loan had a principal balance
of $3.2  million.  Multi-family  real estate  loans  currently  are offered with
adjustable interest rates or short term balloon maturities, although in the past
the Company originated fixed rate long-term  multi-family real estate loans. The
terms of each multi-family loan are negotiated on a case by case basis, although
such loans typically have

                                       7


adjustable  interest  rates tied to a market  index,  and amortize over 15 to 25
years.  The  Company  currently  does not  emphasize  multi-family  real  estate
construction loans.

         Loans secured by multi-family  real estate generally  involve a greater
degree of credit risk than one-to-  four-family  residential  mortgage loans and
carry larger loan balances.  This  increased  credit risk is a result of several
factors,  including the  concentration of principal in a limited number of loans
and borrowers,  the effects of general  economic  conditions on income producing
properties,  and the increased  difficulty of evaluating  and  monitoring  these
types of loans. Furthermore, the repayment of loans secured by multi-family real
estate is typically dependent upon the successful  operation of the related real
estate  property.  If the cash flow from the project is reduced,  the borrower's
ability to repay the loan may be impaired.

         Non-Residential   Real  Estate  and  Land  Loans.   Loans   secured  by
non-residential  real estate constituted  approximately $50.1 million, or 21.0%,
of the  Company's  total  loan  portfolio  at  March  31,  2006.  The  Company's
non-residential  real  estate  loans are secured by  improved  property  such as
offices,  small business facilities,  and other  non-residential  buildings.  At
March 31, 2006,  most of the  Company's  non-residential  real estate loans were
secured by properties  located  within the  Company's  market area. At March 31,
2006, the Company's non-residential loans had an average balance of $241,000 and
the largest  non-residential  real  estate loan had a principal  balance of $2.3
million.  The terms of each non-residential real estate loan are negotiated on a
case by case basis. Non-residential real estate loans are currently offered with
adjustable interest rates or short term balloon maturities, although in the past
the  Company has  originated  fixed rate long term  non-residential  real estate
loans.  Non-residential  real estate loans  originated by the Company  generally
amortize  over  15 to  25  years.  The  Company  currently  does  not  emphasize
non-residential real estate construction loans.

         Nonresidential  real estate  loans have  significantly  increased  from
$12.4  million or 4.82% of the total loan  portfolio  at March 31, 2002 to $50.8
million or 21.25% of the total loan  portfolio  at March 31,  2006.  The Company
intends to further  diversify its loan  portfolio and its increased  emphasis on
nonresidential real estate lending.

         Loans  secured  by  non-residential  real  estate  generally  involve a
greater degree of risk than one-to- four-family  residential  mortgage loans and
carry larger loan balances.  This  increased  credit risk is a result of several
factors,  including the  concentration of principal in a limited number of loans
and borrowers,  the effects of general  economic  conditions on income producing
properties,  and the increased  difficulty of evaluating  and  monitoring  these
types of loans.  Furthermore,  the repayment of loans secured by non-residential
real estate is typically dependent upon the successful  operation of the related
real  estate  project.  If the  cash  flow  from the  project  is  reduced,  the
borrower's ability to repay the loan may be impaired.

         The Company also  originates a limited  number of land loans secured by
individual  improved and unimproved  lots for future  residential  construction.
Land  loans are  generally  offered  with a fixed rate and with terms of up to 5
years. Land loans totaled $674,000 at March 31, 2006.

         Residential  Construction  Loans.  To  a  lesser  extent,  the  Company
originates loans to finance the construction of one- to four-family  residential
property. At March 31, 2006, the Company had $4.7 million, or 2.0%, of its total
loan  portfolio  invested  in interim  construction  loans.  The  Company  makes
construction  loans to private  individuals  and to builders.  Loan proceeds are
disbursed in increments as construction  progresses and as inspections  warrant.
Construction  loans are typically  structured as permanent  one- to  four-family
loans originated by the Company with a 12-month construction phase. Accordingly,
upon completion of the construction  phase,  there is no change in interest rate
or term to maturity of the original  construction  loan,  nor is a new permanent
loan originated.

         Commercial  Business  Loans.  Commercial  business  loans totaled $21.6
million,  or 9.0% of the Company's  total loan portfolio at March 31, 2006. This
represents  net growth of $7.5  million  which  equates

                                       8


to a 53.1%  increase as percentage  of total loans  compared to $14.1 million at
March 31,  2005.  The Company has three  experienced  commercial  lenders and is
developing an additional commercial lender internally.  The Company has plans to
continue commercial lending growth as market conditions permit.

         Commercial    loans    carry   a   higher    degree    of   risk   than
one-to-four-residential  loans.  Such  lending  typically  involves  large  loan
balances  concentrated in a single  borrower or groups of related  borrowers for
rental or business  properties.  In addition,  the payment  experience  on loans
secured by income-producing  properties is typically dependent on the success of
the operation of the related  project and thus is typically  affected by adverse
conditions in the real estate market and in the economy. The Company makes loans
generally  in the $100,000 to  $1,000,000  range with the majority of them being
under  $500,000.  Commercial  loans  are  generally  underwritten  based  on the
borrower's  ability to pay and assets such as buildings,  land and equipment are
taken as additional loan collateral.  Each loan is evaluated for a level of risk
and assigned a rating from "1" (the highest  rating) to "7" (the lowest rating).
All loans originated to date have been rated 4 or higher.

         Consumer Loans.  Ohio savings  associations are authorized to invest in
secured and unsecured consumer loans in an aggregate amount which, when combined
with  investments in commercial  paper and corporate debt  securities,  does not
exceed 20% of an  association's  assets.  In addition,  an Ohio  association  is
permitted to invest up to 5% of its assets in loans for educational purposes.

         As of March 31, 2006,  consumer loans totaled $4.9 million, or 2.1%, of
the  Company's  total loan  portfolio.  The  principal  types of consumer  loans
offered by the  Company  are second  mortgage  loans,  fixed rate auto and truck
loans,  education loans, credit card loans,  unsecured personal loans, and loans
secured by deposit  accounts.  Consumer  loans are offered  primarily on a fixed
rate basis with maturities generally of less than ten years.

         The  Company's  second  mortgage  consumer  loans  are  secured  by the
borrower's principal residence with a maximum loan-to-value ratio, including the
principal  balances of both the first and second mortgage loans, of 80% or less.
Such loans are  offered on a fixed rate basis with terms of up to ten years.  At
March 31, 2006,  second  mortgage  loans  totaled  $783,000,  or .5%, of one- to
four-family mortgages.

         The underwriting  standards  employed by the Company for consumer loans
include a determination  of the applicant's  credit history and an assessment of
the  applicant's  ability  to meet  existing  obligations  and  payments  on the
proposed loan. The quality and stability of the  applicant's  monthly income are
determined by analyzing the gross monthly  income from primary  employment,  and
additionally  from any  verifiable  secondary  income.  Creditworthiness  of the
applicant  is  of  primary  consideration.   However,   where  applicable,   the
underwriting  process also includes a comparison of the value of the  collateral
in relation to the proposed loan amount.

         Consumer  loans entail greater  credit risk than  residential  mortgage
loans,  particularly in the case of consumer loans that are unsecured or secured
by assets that depreciate rapidly, such as automobiles, mobile homes, boats, and
recreational  vehicles.  In such cases,  repossessed  collateral for a defaulted
consumer  loan  may  not  provide  an  adequate  source  of  repayment  for  the
outstanding  loan and the remaining  deficiency  often does not warrant  further
substantial  collection  efforts  against the borrower.  In particular,  amounts
realizable on the sale of repossessed  automobiles may be significantly  reduced
based  upon the  condition  of the  automobiles  and the lack of demand for used
automobiles.  The Company  adds a general  provision  on a regular  basis to its
consumer loan loss allowance,  based on, among other factors,  general  economic
conditions  and prior  loss  experience.  See  "--Delinquencies  and  Classified
Assets--Non-Performing  and Impaired Assets," and  "--Classification  of Assets"
for information regarding the Company's loan loss experience and reserve policy.

                                       9


         Mortgage-Backed Securities. The Company also invests in mortgage-backed
securities  generally  issued or guaranteed  by the United States  Government or
agencies  thereof.  Investments  in  mortgage-backed  securities are made either
directly or by exchanging  mortgage  loans in the  Company's  portfolio for such
securities.    These   securities   consist   primarily   of   adjustable   rate
mortgage-backed securities issued or guaranteed by the Federal National Mortgage
Association ("FNMA"),  Federal Home Loan Mortgage Corporation ("FHLMC"), and the
Government  National  Mortgage  Association   ("GNMA").   Total  mortgage-backed
securities,  including  those  designated as available for sale,  decreased from
$60.4 million at March 31, 2005 to $55.7 million at March 31, 2006 primarily due
to repayments.

         The  Company's  objectives in investing in  mortgage-backed  securities
vary from time to time depending upon market interest rates, local mortgage loan
demand,  and the Company's  level of liquidity.  Mortgage-backed  securities are
more  liquid  than whole  loans and can be readily  sold in  response  to market
conditions and changes in interest rates.  Mortgage-backed  securities purchased
by the Company also have lower credit risk  because  principal  and interest are
either  insured  or  guaranteed  by the United  States  Government  or  agencies
thereof.

         Loan  Originations,  Solicitation,  Processing,  and Commitments.  Loan
originations  are derived  from a number of sources  such as real estate  broker
referrals,  existing  customers,  borrowers,  builders,  attorneys  and  walk-in
customers.  The Company has also  entered into a number of  participation  loans
with high quality lead  lenders.  The  participations  are outside the Company's
normal  lending area and diversify  the loan  portfolio.  Upon  receiving a loan
application,  the Company obtains a credit report and employment verification to
verify specific information relating to the applicant's employment,  income, and
credit standing. In the case of a real estate loan, an appraiser approved by the
Company  appraises  the real estate  intended to secure the  proposed  loan.  An
underwriter in the Company's loan department  checks the loan  application  file
for accuracy and completeness,  and verifies the information  provided.  One- to
four-family and multi-family residential,  and commercial real estate loans, for
up to $150,000,  may be approved by the manager of the mortgage loan department,
loans  between  $150,000  and $300,000  must be approved by the Chief  Executive
Officer  and  loans in  excess  of  $300,000  must be  approved  by the Board of
Directors.  The Loan Committee  meets once a week to review and verify that loan
officer approvals of loans are made within the scope of management's  authority.
All approvals  subsequently are ratified monthly by the full Board of Directors.
Fire  and  casualty  insurance  is  required  at the  time  the loan is made and
throughout the term of the loan.  After the loan is approved,  a loan commitment
letter is promptly  issued to the borrower.  At March 31, 2006,  the Company had
commitments to originate $1.6 million of loans.

         If the loan is approved,  the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral,  and required
insurance  coverage.  The  borrower  must  provide  proof of fire  and  casualty
insurance  on the  property  serving  as  collateral,  which  insurance  must be
maintained  during the full term of the loan.  A title search of the property is
required on all loans secured by real property.

                                       10


         Origination, Purchase and Sale of Loans and Mortgage-Backed Securities.
The table  below  shows  the  Company's  loan  origination,  purchase  and sales
activity for the periods indicated.




                                                                     At March 31,
                                                          -----------------------------------
                                                             2006        2005          2004
                                                          ---------    ---------    ---------
                                                                               
                                                                     (In Thousands)

Total loans receivable, net at beginning of year ......   $ 213,627    $ 205,443    $ 228,373
Loans originated:
   One- to four-family residential(1) .................      19,929       20,312       53,116
   Multi-family residential(2) ........................         128           18          421
   Non-residential real estate/land ...................      30,989       11,237        1,147
   Consumer loans .....................................       3,613        1,932        1,318
   Commercial loans ...................................       8,456       22,696       15,859
                                                          ---------    ---------    ---------
      Total loans originated ..........................      63,115       56,195       71,861
Loans sold:
   Whole loans ........................................      (6,065)      (6,726)      (6,198)
                                                          ---------    ---------    ---------
      Total loans sold ................................      (6,065)      (6,726)      (6,198)

Mortgage loans transferred to REO .....................        (412)        (268)        (279)
Loan repayments .......................................     (34,980)     (52,517)     (89,107)
Other loan activity, net(3) ...........................          27       11,500          793
                                                          ---------    ---------    ---------
      Total loans receivable, net at end of year ......   $ 235,312    $ 213,627    $ 205,443
                                                          =========    =========    =========

Mortgage-backed securities at beginning of year .......   $  60,352    $  88,428    $  76,002
Mortgage-backed securities purchased ..................      22,361        8,018       55,526
Principal repayments and other activity ...............     (26,982)     (36,094)     (43,100)
                                                          ---------    ---------    ---------
      Mortgage-backed securities at end of year .......   $  55,731    $  60,352    $  88,428
                                                          =========    =========    =========


- -------------------
(1)  Includes  loans  to  finance  the   construction  of  one-  to  four-family
     residential  properties,  and loans  originated  for sale in the  secondary
     market.
(2)  Includes  loans  to  finance  the  sale of  real  estate  acquired  through
     foreclosure.
(3)  For  fiscal  2005,   includes  other  activity   related  to  the  Stebbins
     acquisition.

         Loan Origination Fees and Other Income.  In addition to interest earned
on loans,  the Company  generally  receives loan  origination  fees. The Company
accounts for loan  origination  fees in accordance  with  Statement of Financial
Accounting  Standards  ("SFAS") No. 91 "Accounting for  Non-refundable  Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases." To the extent that loans are  originated  or acquired for the Company's
portfolio, SFAS No. 91 requires that the Company defer loan origination fees and
costs and amortize  such amounts as an  adjustment of yield over the life of the
loan by use of the level yield method. SFAS No. 91 reduces the amount of revenue
recognized by many financial  institutions at the time such loans are originated
or  acquired.  Fees  deferred  under  SFAS No.  91 are  recognized  into  income
immediately  upon prepayment or the sale of the related loan. At March 31, 2006,
the Company had $443,000 of deferred loan  origination  fees.  Loan  origination
fees are volatile sources of income.  Such fees vary with the volume and type of
loans and commitments made and purchased,  principal repayments, and competitive
conditions in the mortgage markets,  which in turn respond to the demand for and
availability of money.

         The Company receives other fees, service charges, and other income that
consist primarily of deposit transaction account service charges,  late charges,
credit card fees, and income from REO  operations.  The Company  recognized fees
and service  charges of $1.3  million,  $1.3 million and $1.5  million,  for the
fiscal years ended March 31, 2006, 2005 and 2004, respectively.

                                       11


         Loans to One  Borrower.  Savings  associations  are subject to the same
limits as those  applicable to national banks,  which under current  regulations
restrict  loans to one borrower to an amount equal to 15% of unimpaired  capital
and unimpaired  surplus on an unsecured basis, and an additional amount equal to
10% of  unimpaired  capital  and  unimpaired  surplus  if the loan is secured by
readily marketable collateral (generally, financial instruments and bullion, but
not real estate).  At March 31, 2006,  the Company's  largest  concentration  of
loans  to  one  borrower  totaled  $3.2  million.  All  of  the  loans  in  this
concentration  were current at March 31, 2006. The Company had no loans at March
31, 2006, which exceeded the loans to one borrower regulations.

Delinquencies and Classified Assets

         Delinquencies.  The Company's collection procedures provide that when a
loan is 15 days past due, a computer-generated late charge notice is sent to the
borrower requesting payment,  plus a late charge. This notice is followed with a
letter again  requesting  payment when the payment  becomes 20 days past due. If
delinquency continues, at 30 days another collection letter is sent and personal
contact efforts are attempted,  either in person or by telephone,  to strengthen
the collection  process and obtain reasons for the  delinquency.  Also, plans to
arrange a repayment  plan are made. If a loan becomes 60 days past due, the loan
becomes subject to possible legal action if suitable  arrangements to repay have
not been made. In addition,  the borrower is given  information  which  provides
access  to  consumer  counseling  services,   to  the  extent  required  by  HUD
regulations.  When a loan continues in a delinquent  status for 90 days or more,
and a repayment schedule has not been made or kept by the borrower,  a notice of
intent  to  foreclose  is  sent to the  borrower,  giving  30  days to cure  the
delinquency. If not cured, foreclosure proceedings are initiated.

         Non-Performing  and  Impaired  Assets.  Loans are reviewed on a regular
basis and are placed on a non-accrual status when, in the opinion of management,
the collection of additional interest is doubtful.  Mortgage loans are placed on
non-accrual  status  generally  when either  principal or interest is 90 days or
more past due and  management  considers  the interest  uncollectible.  Interest
accrued and unpaid at the time a loan is placed on non-accrual status is charged
against interest income.

         Under the  provisions  of SFAS No. 114,  "Accounting  by Creditors  for
Impairment  of a Loan," a loan is defined  as  impaired  when,  based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due under the contractual  terms of the loan agreement.  In applying
the  provisions  of SFAS No.  114,  the  Bank  considers  investment  in one- to
four-family  residential loans and consumer  installment loans to be homogeneous
and therefore excluded from separate identification for impairment. With respect
to the Bank's investment in multi-family  commercial and  nonresidential  loans,
and the evaluation of impairment  thereof,  such loans are collateral  dependent
and, as a result,  are carried as a practical  expedient at the lower of cost or
fair value.

         At March 31, 2006, the Company had non-performing loans of $772,000 and
a ratio of  non-performing  and impaired  loans to loans  receivable of .33%. At
March 31, 2005, the Company had non-performing  loans of $906,000 and a ratio of
non-performing  and impaired loans to loans receivable of 0.42%. For both fiscal
2006 and 2005, the  nonperforming  loans consisted mainly of one- to four-family
residential  mortgage loans. The Company  generally does not recognize losses on
one- to four-family  residential  mortgage loans primarily because the loan will
generally  be a  maximum  85% LTV  ratio  on  these  mortgages  without  further
insurance. In the opinion of management, all non-performing loans are adequately
collateralized  as of March  31,  2006  and no  significant  unreserved  loss is
anticipated.

         Real estate  acquired by the Company as a result of  foreclosure  or by
deed in lieu of foreclosure ("REO") is deemed REO until such time as it is sold.
When REO is  acquired,  it is  recorded  at the  lower of the  unpaid  principal
balance of the related loan or its fair value,  less estimated selling expenses.
Valuations are periodically performed by management,  and any subsequent decline
in fair value is charged to operations.

                                       12


         The following  table sets forth  information  regarding our non-accrual
and  impaired  loans  and real  estate  acquired  by  foreclosure  at the  dates
indicated. For all the dates indicated, we did not have any material loans which
had been restructured pursuant to SFAS No. 15.



                                                                     At March 31,
                                                    ----------------------------------------------
                                                     2006      2005      2004      2003      2002
                                                    ------    ------    ------    ------    ------
                                                                              
                                                               (Dollars In Thousands)
Non-accrual loans:
 Mortgage loans:
    One- to four-family residential .............   $  725    $  895    $  714    $  664    $  616
    All other mortgage loans ....................       --        --        24       430     1,070
 Non-mortgage loans:
    Commercial business loans ...................       47        --        --     1,380     1,416
    Consumer ....................................       --        11         9         6        25
                                                    ------    ------    ------    ------    ------
Total non-accrual loans .........................      772       906       747     2,480     3,127
Accruing loans 90 days or more delinquent .......       --        --        --        15        38
                                                    ------    ------    ------    ------    ------
Total non-performing loans ......................      772       906       747     2,495     3,165
Loans deemed impaired (1) .......................       --        --        --        --       645
                                                    ------    ------    ------    ------    ------
Total non-performing and impaired loans .........      772       906       747     2,495     3,810
Total real estate owned (2) .....................      156        35       100        --        19
                                                    ------    ------    ------    ------    ------
Total non-performing and impaired assets ........   $  928    $  941    $  847    $2,495    $3,829
                                                    ======    ======    ======    ======    ======

Total non-performing and impaired loans to net
  loans receivable ..............................     0.33%     0.42%     0.36%     1.09%     1.52%
                                                    ======    ======    ======    ======    ======
Total non-performing and impaired loans to total
   assets .......................................     0.19%     0.22%     0.20%     0.66%     1.14%
                                                    ======    ======    ======    ======    ======
Total non-performing and impaired assets to total
   assets .......................................     0.23%     0.23%     0.23%     0.66%     1.14%
                                                    ======    ======    ======    ======    ======


- --------------------------------
(1)  Includes loans deemed impaired that are currently performing.
(2)  Represents the net book value of property  acquired by the Company  through
     foreclosure or deed in lieu of foreclosure.  These  properties are recorded
     at the lower of the  loan's  unpaid  principal  balance  or fair value less
     estimated selling expenses.

         During the year ended March 31,  2006,  2005 and 2004,  gross  interest
income of  $44,000,  $40,000  and  $37,000  would  have been  recorded  on loans
currently  accounted  for on a  non-accrual  basis if the loans had been current
throughout the period.  Interest income  recognized on non-accrual loans totaled
$44,000,  $45,000 and $23,000 for the years ended March 31, 2006, 2005 and 2004,
respectively.  The Company did not record  interest income on impaired loans for
fiscal 2006 or 2005. The Company  recognized  interest  income on impaired loans
using the cash method of accounting of approximately $249,000 for the year ended
March 31, 2004.

         The following table sets forth  information  with respect to loans past
due 60-89 days and 90 days or more in our portfolio at the dates indicated.

                                                     At March 31,
                                      ------------------------------------------
                                       2006     2005     2004     2003     2002
                                      ------   ------   ------   ------   ------
                                                    (In Thousands)

Loans past due 60-89 days ..........  $  626   $1,084   $  669   $  723   $  431
Loans past due 90 days or more .....     772      906      747    2,495    3,165
                                      ------   ------   ------   ------   ------
   Total past due 60 days or more ..  $1,398   $1,990   $1,416   $3,218   $3,596
                                      ======   ======   ======   ======   ======

         Classification  of  Assets.   Federal   regulations   provide  for  the
classification  of loans and other  assets  such as debt and  equity  securities
considered by the OTS to be of lesser quality as  "substandard,"  "doubtful," or
"loss"  assets.  An  asset is  considered  "substandard"  if it is  inadequately
protected by the current net worth and paying  capacity of the obligor or of the
collateral pledged, if any.  "Substandard" assets include those characterized by
the "distinct possibility" that the savings 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

                                       13


Classification of Assets.  (continued)

continuance  as assets without the  establishment  of a specific loss reserve is
not  warranted.  Assets  that do not  expose  the  savings  institution  to risk
sufficient to warrant  classification in one of the  aforementioned  categories,
but which  possess  some  weaknesses,  are  required to be  designated  "special
mention" by management.

         When  a  savings  institution   classifies  problem  assets  as  either
substandard or doubtful, it is required to establish general allowances for loan
losses in an amount deemed prudent by management.  General allowances  represent
loss  allowances  that 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 a savings  institution
classifies  problem  assets as  "loss," it is  required  either to  establish  a
specific  allowance  for  losses  equal to 100% of the  amount of the  assets so
classified, or to charge off such amount. A savings institution's  determination
as to  the  classification  of its  assets  and  the  amount  of  its  valuation
allowances is subject to review by the OTS, which can order the establishment of
additional  general or specific loss allowances.  The Company  regularly reviews
the problem  loans in its  portfolio  to  determine  whether  any loans  require
classification in accordance with applicable regulations.

         The following  table sets forth the  aggregate  amount of the Company's
classified assets at the dates indicated.
                                                At March 31,
                                 ------------------------------------------
                                  2006     2005     2004     2003     2002
                                 ------   ------   ------   ------   ------
                                           (Dollars in Thousands)
Substandard assets(1) ........   $1,119   $2,767   $  839   $2,481   $3,303
Doubtful assets ..............       --       --       --       --       --
Loss assets ..................       --       --       --       --      105
                                 ------   ------   ------   ------   ------
   Total classified assets ...   $1,119   $2,767   $  839   $2,481   $3,408
                                 ======   ======   ======   ======   ======
- ----------------
(1) Includes REO.

         Allowance for Loan Losses.  In determining  the amount of the allowance
for loan  losses at any  point in time,  management  and the Board of  Directors
apply a systematic  process  focusing on the risk of loss in the loan portfolio.
First,  delinquent  non-residential,   multi-family  and  commercial  loans  are
evaluated individually for potential impairment in their carrying value. Second,
management  applies historic loss experience to the individual loan types in the
portfolio.  In addition to the historic loss percentage,  management  employs an
additional  risk  percentage  tailored to the  perception of overall risk in the
economy.  However,  the analysis of the  allowance  for loan losses  requires an
element of judgment and is subject to the  possibility  that the  allowance  may
need to be increased, with the corresponding reduction in earnings.

         During  the fiscal  years  ended  March 31,  2006,  2005 and 2004,  the
Company added $211,000,  $430,000 and $173,000,  respectively,  to the provision
for loan losses.  The Company's  allowance for loan losses totaled $1.5 million,
$1.4  million  and  $815,000  at March 31,  2006,  2005 and 2004,  respectively.
Management  decreased  the  provision for loan losses by $219,000 in fiscal 2006
mainly due to the Company's decrease in non-accrual loans and classified assets,
coupled with the absence of the additional provisioning related to the Stebbin's
acquisition  in fiscal 2005.  These positive  factors were  partially  offset by
provisioning  related to the Company's  portfolio  growth in fiscal 2006.  While
management  believes  that the  Company's  current  allowance for loan losses is
adequate,  there can be no assurance  that the allowance for loan losses will be
adequate  to cover  losses  that may in fact be  realized  in the future or that
additional  provisions  for loan  losses  will not be  required.  To the best of
management's  knowledge,  all  known  losses  as of March  31,  2006  have  been
recorded.

                                       14


         Analysis of the  Allowance For Loan Losses.  The  following  table sets
forth the analysis of the allowance for loan losses for the periods indicated.




                                                                At or for the Year Ended March 31,
                                                 -----------------------------------------------------------------
                                                    2006          2005          2004          2003          2002
                                                 ---------     ---------     ---------     ---------     ---------
                                                                                            
                                                                           (In Thousands)

Loans receivable, net ........................   $ 235,312     $ 213,627     $ 205,443     $ 228,373     $ 251,172
                                                 =========     =========     =========     =========     =========
Average loans receivable, net ................     222,944       212,785       214,174       242,120       253,058
                                                 =========     =========     =========     =========     =========
Allowance balance (at beginning of
period) ......................................       1,374           815           678           730           655
Provision for losses .........................         211           430           173            91           134
Stebbins acquisition .........................          --           230            --            --            --
Charge-offs:
   Mortgage loans:
     One- to four-family .....................         (73)          (28)           --           (20)           --
     Residential construction ................          --            --            --            --            --
     Multi-family residential ................          --            --            --            --            --
     Non-residential real estate and land ....          --            --            --           (84)           --
   Other loans:
     Consumer ................................         (75)          (44)          (65)          (54)          (63)
     Commercial ..............................         (10)          (54)           --            --            --
                                                 ---------     ---------     ---------     ---------     ---------
         Gross charge-offs ...................        (158)         (126)          (65)         (158)          (63)
                                                 ---------     ---------     ---------     ---------     ---------
Recoveries:
   Mortgage loans:
     One- to four-family .....................          14            --            --            --            --
     Residential construction ................          --            --            --            --            --
     Multi-family residential ................          --            --            --            --            --
     Non-residential real estate and land ....          --            --            --            --            --
   Other loans:
     Consumer ................................          35            25            29            15             4
     Commercial ..............................           8            --            --            --            --
                                                 ---------     ---------     ---------     ---------     ---------
         Gross recoveries ....................          57            25            29            15             4
                                                 ---------     ---------     ---------     ---------     ---------
         Net charge-offs .....................        (101)         (101)          (36)         (143)          (59)
                                                 ---------     ---------     ---------     ---------     ---------

Allowance for loan losses balance (at
   end of period) (1) ........................   $   1,484     $   1,374     $     815     $     678     $     730
                                                 =========     =========     =========     =========     =========
Allowance for loan losses as a percent
   of loans receivable, net at end of
   period ....................................        0.63%         0.64%         0.40%         0.30%         0.29%
                                                 =========     =========     =========     =========     =========
Net loans charged off as a percent of
   average loans receivable, net .............        0.05%         0.05%         0.02%         0.06%         0.02%
                                                 =========     =========     =========     =========     =========
Ratio of allowance for loan losses to
   total non-performing  assets at end of
   period ....................................      159.91%       146.01%        96.22%        27.17%        19.07%
                                                 =========     =========     =========     =========     =========
Ratio of  allowance for loan losses to
   non-performing loans at end of period .....      192.23%       151.66%       109.10%        27.17%        19.16%
                                                 =========     =========     =========     =========     =========


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

(1)  At March 31,  2002,  a specific  allowance  of $105,000  was reserved for a
     nonresidential  loan that met the  definition of impaired  pursuant to SFAS
     No. 114.

                                       15


         Allocation of Allowance for Loan Losses. The following table sets forth
the  allocation  of allowance  for loan losses by loan  category for the periods
indicated.  Management  believes that the allowance can be allocated by category
only on an approximate basis. The allocation of the allowance by category is not
necessarily  indicative  of future  losses and does not  restrict the use of the
allowance to absorb losses in any category.




                                                                             At March 31,
                                      -------------------------------------------------------------------------------------------
                                            2006              2005               2004               2003               2002
                                      ---------------    ---------------    ---------------    ---------------    ---------------
                                                % of               % of              % of                % of               % of
                                              Loans in           Loans in           Loans in           Loans in           Loans in
                                                Each               Each               Each               Each               Each
                                              Category           Category           Category           Category           Category
                                              to Total           to Total           to Total           to Total           to Total
                                      Amount   Loans     Amount   Loans     Amount   Loans     Amount   Loans     Amount   Loans
                                      ------   ------    ------   ------    ------   ------    ------   ------    ------   ------
                                                                                              
                                                                        (Dollars in Thousands)
Mortgage loans:
  One- to four-family .............   $   97     62.4%   $   99     72.6%   $  100     82.0%   $  162     86.4%   $  126     85.4%
  Residential construction ........       --      2.0        --      1.9        --      1.4        --      1.5        --      3.4
  Multi-family residential ........       --      3.3        --      3.6        --      3.2         7      3.7        47      2.8
  Non-residential real estate
  and land ........................      505     21.3       545     13.4       196      8.8        55      5.2       207      4.8
Other loans:
  Consumer ........................       40      2.0        37      2.0        20      1.5       119      1.7        28      2.4
  Commercial ......................      842      9.0       693      6.5       499      3.1       335      1.5       322      1.2
                                      ------   ------    ------   ------    ------   ------    ------   ------    ------   ------
Total allowance for loan losses ...   $1,484    100.0%   $1,374    100.0%   $  815    100.0%   $  678    100.0%   $  730    100.0%
                                      ======   ======    ======   ======    ======   ======    ======   ======    ======   ======


                                       16


Investment Activities

         The   Company's   investment   portfolio  is  comprised  of  investment
securities,  corporate  bonds and notes  and  state and local  obligations.  The
carrying value of the Company's  investment  securities totaled $73.3 million at
March 31, 2006,  compared to $72.9 million at March 31, 2005. The Company's cash
and cash equivalents,  consisting of cash and due from banks, federal funds sold
and  interest  bearing  deposits  due from  other  financial  institutions  with
original  maturities of three months or less, totaled $14.1 million at March 31,
2006 compared to $29.9  million at March 31, 2005, a decrease of $15.8  million,
or 52.8% as the  Company  was able to repay  $7.3  million  of short  term  FHLB
advances with excess federal funds sold.

         Liquidity  levels may be  increased  or  decreased  depending  upon the
yields on  investment  alternatives  and upon  management's  judgment  as to the
attractiveness  of the yields then available in relation to other  opportunities
and its  expectation of the level of yield that will be available in the future,
as well as management's  projections as to the short term demand for funds to be
used in the Company's loan origination and other activities.

         Investment Portfolio. The following table sets forth the carrying value
of the Company's investment  securities  portfolio,  short-term  investments and
FHLB stock, at the dates indicated.




                                                                          At March 31,
                                               ---------------------------------------------------------------
                                                       2006                  2005                 2004
                                               -------------------   -------------------   -------------------
                                               Carrying    Market    Carrying    Market    Carrying    Market
                                                Value      Value      Value      Value      Value      Value
                                               --------   --------   --------   --------   --------   --------
                                                                                    
                                                                          (In Thousands)
Investment securities:

Corporate bonds and notes ..................   $  6,016   $  5,999   $ 11,086   $ 11,156   $ 11,714   $ 12,418
U.S. Government and agency obligations .....     55,802     55,803     51,239     51,246     15,189     15,262
Municipal obligations ......................     11,489     11,499     10,531     10,543      4,679      4,696
                                               --------   --------   --------   --------   --------   --------
       Total investment securities .........     73,307     73,301     72,856     72,945     31,582     32,376
Other Investments:
Interest-bearing deposits in other financial
  institutions .............................     11,171     11,171      6,366      6,366      6,721      6,721
Federal funds sold .........................         --         --     19,400     19,400      9,875      9,875
Federal Home Loan Bank stock ...............      4,623      4,623      4,386      4,386      4,205      4,205
                                               --------   --------   --------   --------   --------   --------
       Total investments ...................   $ 89,101   $ 89,095   $103,008   $103,097   $ 52,383   $ 53,177
                                               ========   ========   ========   ========   ========   ========


                                       17


         Investment  Portfolio  Maturities.  The following  table sets forth the
scheduled maturities,  carrying values, market values and average yields for the
Company's investment securities at March 31, 2006. The Company does not hold any
investment securities with maturities in excess of 30 years.




                                                                                At March 31, 2006
                                               ----------------------------------------------------------------------------------
                                                One Year or Less     One to Five Years   Five to Ten Years    More than Ten Years
                                               ------------------   ------------------   ------------------   -------------------
                                               Carrying   Average   Carrying   Average   Carrying   Average    Carrying   Average
                                                 Value     Yield      Value     Yield      Value     Yield      Value      Yield
                                               --------   -------   --------   -------   --------   -------    -------   -------
                                                                                                    
                                                                              (Dollars in Thousands)

Investment Securities:
  Corporate bonds and notes .................   $ 4,992      6.39%   $ 1,024      7.62%   $    --        -%    $    --        -%
  U.S. Government and agency obligations ....    17,475      3.31     29,668      3.66      7,348      5.42      1,311      5.09
  Municipal obligations .....................        --        --      1,145      4.90      1,992      5.67      8,352      6.62
                                                -------   -------    -------   -------    -------   -------    -------   -------
    Total investment securities .............   $22,467      3.99%   $31,837      3.83%   $ 9,340      5.43%   $ 9,663      6.41%
                                                =======   =======    =======   =======    =======   =======    =======   =======



                                                      At March 31, 2006
                                            -----------------------------------
                                                       Total Investment
                                                         Securities
                                            -----------------------------------
                                            Average                     Weighted
                                              Life   Carrying   Market  Average
                                            In Years   Value    Value    Yield
                                            --------  -------  -------  -------
                                                    (Dollars in Thousands)

Investment Securities:
  Corporate bonds and notes ...............      .72  $ 6,016  $ 5,999     6.60%
  U.S. Government and agency obligations ..     2.55   55,802   55,803     3.82
  Municipal obligations ...................    13.16   11,489   11,499     6.25
                                             -------  -------  -------  -------
  Total investment securities .............     4.03  $73,307  $73,301     4.42%
                                             =======  =======  =======  =======


                                       18


Sources of Funds

         General.  Deposits  are the  major  source of the  Company's  funds for
lending and other  investment  purposes.  In addition to  deposits,  the Company
derives  funds  from  the   amortization,   prepayment  or  sale  of  loans  and
mortgage-backed  securities,  the sale or  maturity  of  investment  securities,
operations  and, if needed,  advances from the Federal Home Loan Bank  ("FHLB").
Scheduled  loan principal  repayments  are a relatively  stable source of funds,
while  deposit  inflows  and  outflows  and  loan   prepayments  are  influenced
significantly by general interest rates and market conditions. Borrowings may be
used on a short-term  basis to compensate for reductions in the  availability of
funds  from  other  sources  or on a longer  term  basis  for  general  business
purposes.  The Company had $32.8  million of advances from the FHLB at March 31,
2006.

         Deposits.  Consumer and commercial  deposits are attracted  principally
from within the Company's  market area through the offering of a broad selection
of deposit instruments  including NOW accounts,  passbook savings,  money market
deposit,  term  certificate  accounts,  commercial  repurchase  agreements,  and
individual retirement accounts. The Company accepts deposits of $100,000 or more
and offers  negotiated  interest rates on such deposits.  Deposit  account terms
vary according to the minimum balance required,  the period of time during which
the funds must remain on deposit,  and the interest  rate,  among other factors.
The Company  regularly  evaluates  its  internal  cost of funds,  surveys  rates
offered by competing institutions,  reviews the Company's cash flow requirements
for lending and  liquidity,  and executes rate changes when deemed  appropriate.
The Company does not obtain funds  through  brokers,  nor does it solicit  funds
outside its market area.

         Deposit  Portfolio.  Savings  and other  deposits  in the Company as of
March 31, 2006, were comprised of the following:




  Weighted                                                                                             Percentage
   Average                                                                  Minimum                     of Total
Interest Rate        Minimum Term        Checking and Savings Deposits       Amount       Balances      Deposits
- -------------        ------------        -----------------------------       ------       --------      --------
                                                                                           
                                                                                       (In Thousands)

     0.33%               None             NOW accounts                     $    100      $  56,791         17.08%
     0.58                None             Savings accounts                       25         61,339         18.44
     2.09                None             Money market investor               2,500         20,656          6.21
     3.76                None             Commercial repurchase agreements     none          5,704          1.72


                                            Certificates of Deposit
                                            -----------------------

     4.05            12 months or less    Fixed term, fixed rate                500         61,814         18.59
     2.38            12 to 24 months      Fixed term, fixed rate                500         19,181          5.76
     3.41            25 to 36 months      Fixed term, fixed rate                500         18,541          5.58
     4.44            36 months or more    Fixed term, fixed rate                500         53,641         16.13
     4.34            Negotiable           Jumbo certificates                100,000         34,903         10.49
                                                                                         ---------        ------
                                                                                         $ 332,570         100.00%
                                                                                         =========        ======


                                       19


         The  following  table sets forth the change in dollar amount of savings
deposits in the various types of savings accounts offered by the Company between
the dates indicated.




                                  Balance at                         Balance at                         Balance at
                                   March 31, Percent of   Increase    March 31, Percent of   Increase    March 31, Percent of
                                     2006     Deposits   (Decrease)     2005     Deposits   (Decrease)     2004     Deposits
                                   --------   --------    --------    --------   --------    --------    --------   --------
                                                                                               
                                                                    (Dollars in Thousands)

NOW accounts ...................   $ 56,791      17.08%   $  3,731    $ 53,060      16.55%   $ 10,381    $ 42,679      14.63%
Savings accounts ...............     61,339      18.44     (20,845)     82,184      25.64          91      82,093      28.13
Money market investor ..........     20,656       6.21       2,559      18,097       5.65       6,204      11,893       4.08
Commercial repurchase agreements      5,704       1.72       5,704          --         --          --          --         --
Certificates of deposit(1)
Original maturities of:
  12 months or less ............     61,814      18.59      19,331      42,483      13.25      26,642      15,841       5.42
  12 to 24 months ..............     19,181       5.76      (5,257)     24,438       7.62     (19,107)     43,545      14.92
  25 to 36 months ..............     18,541       5.58       2,502      16,039       5.00      (1,821)     17,860       6.12
  36 months or more ............     53,641      16.13         458      53,183      16.59      10,402      42,781      14.66
Negotiated jumbo ...............     34,903      10.49       3,801      31,102       9.70      (4,036)     35,138      12.04
                                   --------   --------    --------    --------   --------    --------    --------   --------
     Total .....................   $332,570     100.00%   $ 11,984    $320,586     100.00%   $ 28,756    $291,830     100.00%
                                   ========   ========    ========    ========   ========    ========    ========   ========


- ------------------------------
     (1)  Certain  Individual  Retirement  Accounts ("IRAs") are included in the
          respective  certificate  balances.  IRAs totaled $34.7 million,  $34.1
          million  and  $32.8  million,  as of March  31,  2006,  2005 and 2004,
          respectively.

         The following  table sets forth the average  dollar amount and weighted
average  rate of savings  deposits  in the  various  types of  savings  accounts
offered by the Company.




                                                                    Years Ended March 31,
                            -----------------------------------------------------------------------------------------------------
                                         2006                              2005                               2004
                            -------------------------------    -------------------------------    -------------------------------
                                       Percent     Weighted               Percent     Weighted               Percent     Weighted
                            Average       of       Average     Average      of        Average     Average      of        Average
                            Balance    Deposits      Rate      Balance    Deposits      Rate      Balance    Deposits      Rate
                            --------   --------    --------    --------   --------    --------    --------   --------    --------
                                                                                                   
                                                                    (Dollars in Thousands)

Noninterest-bearing
  demand deposits .......   $ 12,843       3.96%       0.00%   $  9,849       3.14%       0.00%   $  9,321       3.15%       0.00%
NOW accounts ............     46,451      14.30        0.40      35,913      11.45         .53      34,190      11.54         .43
Savings accounts ........     62,582      19.27        0.73      82,817      26.41         .79      81,034      27.35         .85
Money market investor ...     19,055       5.87        1.77      14,238       4.54        1.36      13,217       4.46         .92
Commercial repurchase
  agreements ............      5,335       1.64        2.84          --         --          --          --         --          --
Certificates of deposit .    178,505      54.96        3.54     170,794      54.46        2.96     158,482      53.50        3.12
                            --------   --------    --------    --------   --------    --------    --------   --------    --------
     Total deposits .....   $324,771     100.00%       2.22%   $313,611     100.00%       1.81%   $296,244     100.00%       1.99%
                            ========   ========    ========    ========   ========    ========    ========   ========    ========


                                       20


         The  following  table  sets  forth the  certificates  of deposit in the
Company classified by rates as of the dates indicated:

                                               At March 31,
                                      ------------------------------
                                        2006       2005       2004
                                      --------   --------   --------
                                          (Dollars in Thousands)

1.05- 2.00% .......................   $  9,256   $ 39,272   $ 59,687
2.01- 4.00% .......................     66,103     82,548     48,536
4.01- 6.00% .......................    112,721     45,294     46,565
6.01- 6.75% .......................         --        131        377
                                      --------   --------   --------
     Total ........................   $188,080   $167,245   $155,165
                                      ========   ========   ========

         The   following   table  sets  forth  the  amount  and   maturities  of
certificates of deposit at March 31, 2006.

                                                 Amount Due
                            ----------------------------------------------------
                            Less Than    1-2        2-3       After
                            One Year    Years      Years     3 Years     Total
                            --------   --------   --------   --------   --------
Rate                                           (In Thousands)
- ----

1.05- 2.00% .............   $  9,256   $     --   $     --   $     --   $  9,256
2.01- 4.00% .............     38,763     19,655      6,368      1,317     66,103
4.01- 6.00% .............     81,947     14,799      5,071     10,904    112,721
                            --------   --------   --------   --------   --------
     Total ..............   $129,966   $ 34,454   $ 11,439   $ 12,221   $188,080
                            ========   ========   ========   ========   ========

         The following table indicates the amount of the Company's  certificates
of deposit of $100,000 or more by time remaining  until maturity as of March 31,
2006.

                        Maturity Period               Certificates of Deposit
                        ---------------               -----------------------
                                                          (In Thousands)

Three months or less..................................          $ 9,814
Over three months through six months..................            9,902
Over six months through twelve months.................           18,525
Over twelve months....................................           12,175
                                                                -------
     Total............................................          $50,416
                                                                =======

Borrowings

         Savings  deposits  are the  primary  source of funds for the  Company's
lending and investment  activities and for its general  business  purposes.  The
Bank may rely upon advances from the FHLB and the Federal  Reserve Bank discount
window  to  supplement  their  supply  of  lendable  funds  and to meet  deposit
withdrawal requirements.  Advances from the FHLB typically are collateralized by
stock in the FHLB and a portion of first  mortgage  loans  held by the Bank.  At
March 31, 2006, the Company had $32.8 million in advances outstanding.

         The FHLB  functions  as a central  reserve  bank  providing  credit for
member savings  associations and financial  institutions.  As members, the Banks
are required to own capital  stock in the FHLB and are  authorized  to apply for
advances  on the  security of such stock and certain  home  mortgages  and other
assets  (principally,  securities that are obligations of, or guaranteed by, the
United States) provided certain standards related to creditworthiness  have been
met.  Advances  are made  pursuant to several  different  programs.  Each credit
program has its own  interest  rate and range of  maturities.  Depending  on the
program,  limitations  on the  amount of  advances  are based  either on a fixed
percentage of a member  institution's  net worth or on the FHLB's  assessment of
the  institution's  creditworthiness.   Although  advances  may  be  used  on  a
short-term basis for cash management needs, FHLB advances have not been, nor are
they expected to be, a significant long-term funding source for the Company.

                                       21


                                            Year Ended March 31,
                                     --------------------------------
                                       2006        2005        2004
                                     --------    --------    --------
                                          (Dollars in thousands)

Federal Home Loan Bank advances:
   Maximum month-end balance .....   $ 39,000    $ 40,000    $ 30,000
   Balance at end of period ......     32,750      40,000      30,000
   Average balance ...............     28,424      26,076      30,000

Weighted average interest rate on:
   Balance at end of period ......       4.19%       3.59%       4.15%
   Average balance for period ....       3.81        3.96        4.16

Competition

         The Company encounters strong  competition both in attracting  deposits
and in originating real estate and other loans. Its most direct  competition for
deposits has come historically from commercial  banks,  brokerage houses,  other
savings  associations,  and credit  unions in its market  area,  and the Company
expects  continued strong  competition  from such financial  institutions in the
foreseeable  future.  The  Company's  market area  includes  branches of several
commercial  banks that are  substantially  larger  than the  Company in terms of
state-wide  deposits.  The Company competes for savings by offering depositors a
high level of  personal  service  and  expertise  together  with a wide range of
financial services.

         The competition for real estate and other loans comes  principally from
commercial banks,  mortgage banking companies,  and other savings  associations.
This  competition  for loans has  increased  substantially  in recent years as a
result of the large number of  institutions  competing in the  Company's  market
area as well as the  increased  efforts by commercial  banks to expand  mortgage
loan originations.

         The Company competes for loans primarily through the interest rates and
loan fees it charges  and the  efficiency  and  quality of  services it provides
borrowers,  real estate brokers,  and builders.  Factors that affect competition
include general and local economic conditions, current interest rate levels, and
volatility of the mortgage markets.

Subsidiaries

         At March 31, 2006,  the Company did not have any direct  unconsolidated
subsidiaries.

Total Employees

         The Company had 102 full-time  employees and 38 part-time  employees at
March  31,  2006.  None of  these  employees  are  represented  by a  collective
bargaining  agent,  and the Company  believes that it enjoys good relations with
its personnel.

                                       22


Regulation

         As a state-chartered,  FDIC insured institution, the Bank is subject to
examination,   supervision  and  extensive  regulation  by  the  OTS,  the  Ohio
Department of Commerce,  Division of Financial  Institutions  ("ODFI") , and the
FDIC. The Bank is a member of, and owns stock in, the FHLB of Cincinnati,  which
is one of the twelve  regional banks in the Federal Home Loan Bank System.  This
regulation and supervision  establishes a comprehensive  framework of activities
in which an institution can engage and is intended  primarily for the protection
of the insurance fund and  depositors.  The OTS and ODFI  regularly  examine the
Bank  and  prepare  reports  for the  consideration  of the  Company's  Board of
Directors on any  deficiencies  that they may find in the Company's  operations.
The FDIC also  examines the Bank in its role as the  administrator  of the SAIF.
The Bank's relationship with its depositors and borrowers also is regulated to a
great  extent by both federal and state laws  especially  in such matters as the
ownership of savings  accounts  and the form and content of the Bank's  mortgage
documents.  Any change in such  regulation,  whether by the FDIC,  OTS, ODFI, or
Congress,  could have a material  adverse  impact on the  Company,  the Bank and
their operations.

Federal Regulation of Savings Institutions

         Business  Activities.   The  activities  of  savings  associations  are
governed by the Home  Owners'  Loan Act, as amended (the "HOLA") and, in certain
respects,  the Federal  Deposit  Insurance  Act (the "FDI Act").  These  federal
statutes, among other things, (1) limit the types of loans a savings association
may make,  (2) prohibit the  acquisition  of any corporate debt security that is
not rated in one of the four  highest  rating  categories,  and (3) restrict the
aggregate  amount of loans secured by  non-residential  real estate  property to
400% of  capital.  The  description  of  statutory  provisions  and  regulations
applicable  to savings  associations  set forth  herein does not purport to be a
complete  description of such statutes and  regulations  and their effect on the
Company or the Bank.

         Loans  to One  Borrower.  Under  the  HOLA,  savings  institutions  are
generally  subject  to the  national  bank  limits  on  loans  to one  borrower.
Generally, savings institutions may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of the  institution's  unimpaired
capital  and  surplus.  An  additional  amount  may  be  lent,  equal  to 10% of
unimpaired  capital and surplus,  if such loan is secured by  readily-marketable
collateral,  which is defined to include  certain  securities  and bullion,  but
generally does not include real estate. See "--Lending  Activities--Loans to One
Borrower."

         Qualified Thrift Lender Test. The HOLA requires savings associations to
meet a qualified  thrift  lender  ("QTL")  test.  Under the QTL test,  a savings
association  is  required to  maintain  at least 65% of its  "portfolio  assets"
(total assets less (i) specified  liquid assets up to 20% of total assets,  (ii)
intangibles, including goodwill, and (iii) the value of property used to conduct
business)  in certain  "qualified  thrift  investments,"  primarily  residential
mortgages and related investments, including certain mortgage-backed and related
securities on a monthly basis in 9 out of every 12 months.

         A savings  association that fails the QTL test must either convert to a
bank charter or operate under certain  restrictions.  As of March 31, 2006,  the
Company maintained 91.7% of its portfolio assets in qualified thrift investments
and, therefore, met the QTL test.

         Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions,  such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to stockholders
of another  institution  in a cash-out  merger and other  distributions  charged
against capital.  A  "well-capitalized"  institution can, after prior notice but
without the approval of the OTS,  make capital  distributions  during a calendar
year in an amount up to 100% of its net income  during the calendar  year,  plus
its retained net income for the  preceding  two years.  As of March 31, 2006 the
Bank was a "well-capitalized" institution.

                                       23


         Community  Reinvestment.  Under  the  Community  Reinvestment  Act (the
"CRA"),  as  implemented  by  OTS  regulations,  a  savings  institution  has  a
continuing  and  affirmative  obligation,  consistent  with its  safe and  sound
operation, 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  financial  institutions,  nor  does it limit an
institution's  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 a savings
institution,  to assess the institution's  record of meeting the credit needs of
its community and to take such record into account in its  evaluation of certain
applications by such institution. The CRA also requires all institutions to make
public  disclosure of their CRA ratings.  The Company  received a "satisfactory"
CRA  rating  under  the  current  CRA  regulations  in its most  recent  federal
examination by the OTS.

         Transactions with Related Parties. The Company's authority to engage in
transactions  with  related  parties or  "affiliates"  (i.e.,  any company  that
controls or is under common control with an institution,  including the Bank and
any non-savings institution  subsidiaries) or to make loans to certain insiders,
is limited by Sections 23A and 23B of the Federal  Reserve Act ("FRA").  Section
23A limits the aggregate amount of transactions with any individual affiliate to
10% of the capital and  surplus of the savings  institution  and also limits the
aggregate  amount of  transactions  with all  affiliates  to 20% of the  savings
institution's  capital and surplus.  Certain  transactions  with  affiliates are
required to be secured by  collateral  in an amount and of a type  described  in
Section 23A and the purchase of low quality assets from  affiliates is generally
prohibited.  Section 23B provides  that certain  transactions  with  affiliates,
including loans and asset purchases,  must be on terms and under  circumstances,
including  credit  standards,  that  are  substantially  the same or at least as
favorable to the  institution  as those  prevailing  at the time for  comparable
transactions with non-affiliated  companies.  In addition,  savings institutions
are prohibited  from lending to any affiliate that is engaged in activities that
are not  permissible for bank holding  companies and no savings  institution may
purchase the securities of any affiliate other than a subsidiary.

         Enforcement.  Under  the  FDI  Act,  the OTS  has  primary  enforcement
responsibility  over  savings  institutions  and  has  the  authority  to  bring
enforcement  action  against  all   "institution-related   parties,"   including
stockholders,  and any attorneys,  appraisers and  accountants  who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution.  Formal enforcement action may range from the issuance of a
capital  directive  or cease and  desist  order to removal  of  officers  and/or
directors of the institutions, receivership,  conservatorship or the termination
of deposit  insurance.  Civil  penalties  cover a wide range of  violations  and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day.  Criminal
penalties  for  most  financial  institution  crimes  include  fines of up to $1
million and imprisonment for up to 30 years. Under the FDI Act, the FDIC has the
authority to recommend to the Director of OTS that  enforcement  action be taken
with respect to a particular savings institution.  If action is not taken by the
Director,   the  FDIC  has   authority  to  take  such  action   under   certain
circumstances.

                                       24


         Standards for Safety and Soundness.  The federal banking  agencies have
adopted a final regulation and Interagency  Guidelines Prescribing Standards for
Safety and  Soundness  ("Guidelines")  to  implement  the  safety and  soundness
standards  required  under the FDI Act. The  Guidelines set forth the safety and
soundness  standards  that the federal  banking  agencies  use to  identify  and
address  problems at insured  depository  institutions  before  capital  becomes
impaired.  The standards set forth in the Guidelines  address internal  controls
and  information  systems;  internal  audit system;  credit  underwriting;  loan
documentation; interest rate risk exposure; asset growth; and compensation, fees
and benefits.  The agencies also adopted a proposed  rule which  proposes  asset
quality  and  earnings  standards  which,  if  adopted,  would  be  added to the
Guidelines.  If the  appropriate  federal  banking  agency  determines  that  an
institution fails to meet any standard prescribed by the Guidelines,  the agency
may  require  the  institution  to submit to the  agency an  acceptable  plan to
achieve  compliance  with the  standard,  as required by the FDI Act.  The final
regulations establish deadlines for the submission and review of such safety and
soundness compliance plans.

         Capital  Requirements.  The OTS  capital  regulations  require  savings
institutions to meet three capital standards:  a 1.5% tangible capital standard,
a 4.0% leverage  ratio (or core capital  ratio) and an 8.0%  risk-based  capital
standard.  Core  capital is defined as common  stockholders'  equity  (including
retained earnings), certain non-cumulative perpetual preferred stock and related
surplus, minority interests in equity accounts of consolidated subsidiaries less
intangibles  other than  certain  qualifying  supervisory  goodwill  and certain
mortgage servicing rights. The OTS regulations also require that, in meeting the
tangible ratio,  leverage and risk-based  capital  standards,  institutions must
deduct  investments  in and loans to  subsidiaries  engaged  in  activities  not
permissible for a national bank.

         The risk-based capital standard for savings  institutions  requires the
maintenance of Tier 2 (core) and total capital (which is defined as core capital
and   supplementary   capital)  to  risk  weighted  assets  of  4.0%  and  8.0%,
respectively.  In determining the amount of  risk-weighted  assets,  all assets,
including certain  off-balance sheet assets,  are multiplied by a risk-weight of
0% to 100%, as assigned by the OTS capital regulation based on the risks the OTS
believes  are  inherent in the type of asset.  The  components  of Tier 1 (core)
capital are equivalent to those discussed  earlier under the 4.0% leverage ratio
standard.  The components of supplementary  capital currently include cumulative
preferred stock,  long-term  perpetual  preferred stock,  mandatory  convertible
securities, subordinated debt and intermediate preferred stock and allowance for
loan and  lease  losses.  Allowance  for loan and  lease  losses  includable  in
supplementary  capital is limited to a maximum of 1.25%.  Overall, the amount of
supplementary  capital  included as part of total capital  cannot exceed 100% of
core capital.

Prompt Corrective Regulatory Action

         Under the OTS Prompt Corrective Action regulations, the OTS is required
to take certain supervisory actions against undercapitalized  institutions,  the
severity  of which  depends  upon the  institution's  degree of  capitalization.
Generally,  a savings institution that has total risk-based capital of less than
8.0% or a leverage  ratio or a Tier 1 core capital  ratio that is less than 4.0%
is considered to be  undercapitalized.  A savings institution that has the total
risk-based  capital less than 6.0%, a Tier 1 core  risk-based  capital  ratio of
less than 3.0% or a leverage  ratio that is less than 3.0% is  considered  to be
"significantly  undercapitalized"  and a savings institution that has a tangible
capital to assets  ratio equal to or less than 2.0% is deemed to be  "critically
undercapitalized."  Subject to a narrow  exception,  the  banking  regulator  is
required  to  appoint a  receiver  or  conservator  for an  institution  that is
"critically  undercapitalized."  The  regulation  also  provides  that a capital
restoration  plan  must be  filed  with  the OTS  within  45 days of the date an
institution  receives  notice  that  it  is  "undercapitalized,"  "significantly
undercapitalized"  or  "critically   undercapitalized."  In  addition,  numerous
mandatory supervisory actions become immediately  applicable to the institution,
including,  but not limited to, restrictions on growth,  investment  activities,
capital distributions,  and affiliate transactions.  The OTS could also take any
one of a number of discretionary supervisory actions,  including the issuance of
a capital  directive  and the  replacement  of  senior  executive  officers  and
directors.

                                       25


Insurance of Accounts and Regulation by the FDIC

         The Bank is a member of the FDIC. Deposits are insured up to applicable
limits by the FDIC and such  insurance is backed by the full faith and credit of
the U.S. Government. As insurer, the FDIC imposes deposit insurance premiums and
is  authorized  to  conduct   examinations  of  and  to  require   reporting  by
FDIC-insured  institutions.  It also may prohibit any  FDIC-insured  institution
from engaging in any activity the FDIC determines by regulation or order to pose
a  serious  risk to the  FDIC.  The FDIC  also  has the  authority  to  initiate
enforcement actions against savings and loan associations,  after giving the OTS
an opportunity to take such action,  and may terminate the deposit  insurance if
it  determines  that the  institution  has  engaged or is  engaging in unsafe or
unsound  practices,  or is in an unsafe or unsound  condition.  Currently,  FDIC
deposit  insurance  rates  generally  range from zero  basis  points to 27 basis
points,  depending  on  the  assessment  risk  classification  assigned  to  the
depository institution.

         The FDIC may terminate the deposit insurance of any insured  depository
institution,  including  the Bank,  if it  determines  after a hearing  that the
institution has engaged or is engaging in unsafe or unsound practices,  is in an
unsafe  or  unsound  condition  to  continue  operations,  or has  violated  any
applicable law, regulation,  order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance  temporarily  during the hearing
process for the permanent  termination of insurance,  if the  institution has no
tangible  capital.  If insurance of accounts is terminated,  the accounts at the
institution at the time of the termination,  less subsequent withdrawals,  shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the deposit insurance of the Bank.

Federal Home Loan Bank System

         The Bank is a member of the FHLB System,  which consists of 12 regional
FHLBs.  The FHLB  provides  a  central  credit  facility  primarily  for  member
institutions. The Bank, as a member of the FHLB, is required to acquire and hold
shares of  capital  stock in that FHLB in an amount at least  equal to 1% of the
aggregate principal amount of its unpaid residential  mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances  (borrowings)
from the  FHLB,  whichever  is  greater.  The Bank was in  compliance  with this
requirement with an investment in  FHLB-Cincinnati  stock, at March 31, 2006, of
$4.6 million.

         The 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  dividends  that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their  members.  FHLB  dividends were 5.0% for the fiscal year ended
March 31, 2006. In the likely event that  dividends are reduced,  or interest on
future FHLB-Cincinnati  advances is increased, the Company's net interest income
will decline.

Ohio Regulation

         As a savings and loan association organized under the laws of the State
of Ohio,  the Bank is subject to regulation by the Ohio  Department of Commerce,
Division of Financial Institutions ("ODFI").  Regulation by the ODFI affects the
Bank's internal organization as well as its savings, mortgage lending, and other
investment  activities.  Periodic examinations by the ODFI are usually conducted
on a joint basis with the OTS. Ohio law requires that the Bank maintain  federal
deposit insurance as a condition of doing business.

                                       26


         Under Ohio law, an Ohio association may buy any obligation representing
a loan that would be a legal loan if originated by the Bank,  subject to various
requirements  including:  loans secured by liens on income-producing real estate
may not exceed 20% of an association's assets; consumer loans, commercial paper,
and corporate  debt  securities may not exceed 20% of an  association's  assets;
loans for commercial,  corporate,  business,  or  agricultural  purposes may not
exceed 30% of an association's assets,  provided that an association's  required
reserve must increase proportionately;  certain other types of loans may be made
for  lesser  percentages  of  the  association's   assets;   and,  with  certain
limitations  and  exceptions,  certain  additional  loans  may be made if not in
excess of 3% of the association's total assets. In addition,  no association may
make real estate acquisition and development loans for primarily residential use
to one borrower in excess of 2% of assets.  The total  investments in commercial
paper or  corporate  debt of any  issuer  cannot  exceed 1% of an  association's
assets, with certain exceptions.

         Ohio law authorizes Ohio-chartered associations to, among other things:
(i)  invest up to 15% of assets in the  capital  stock,  obligations,  and other
securities  of service  corporations  organized  under the laws of Ohio,  and an
additional  20% of net worth may be invested in loans to majority  owned service
corporations;  (ii) invest up to 10% of assets in corporate  equity  securities,
bonds, debentures, notes, or other evidence of indebtedness; (iii) exceed limits
otherwise  applicable to certain types of investments (other than investments in
service  corporations)  by and between 3% and 10% of assets,  depending upon the
level of the  institution's  permanent stock,  general  reserves,  surplus,  and
undivided  profits;  and  (iv)  invest  up to 15% of  assets  in  any  loans  or
investments  not otherwise  specifically  authorized or  prohibited,  subject to
authorization by the institution's board of directors.

         An Ohio  association  may  invest in such real  property  or  interests
therein as its board of directors  deems necessary or convenient for the conduct
of the  business of the  association,  but the amount so invested may not exceed
the  net  worth  of  the  association  at  the  time  the  investment  is  made.
Additionally,  an association may invest an amount equal to 10% of its assets in
any other real estate.  This limitation does not apply,  however, to real estate
acquired  by  foreclosure,  conveyance  in lieu of  foreclosure,  or other legal
proceedings in relation to loan security interests.

         Notwithstanding   the  above  powers  authorized  under  Ohio  law  and
regulation, a state-chartered savings association,  such as the Bank, is subject
to certain limitations on its permitted activities and investments under federal
law, which may restrict the ability of an  Ohio-chartered  association to engage
in activities and make investments otherwise authorized under Ohio law.

         Ohio has adopted statutory limitations on the acquisition of control of
an Ohio savings and loan  association  by requiring the written  approval of the
ODFI prior to the  acquisition  by any person or company,  as defined  under the
Ohio Revised  Code, of a controlling  interest in an Ohio  association.  Control
exists,  for purposes of Ohio law, when any person or company,  either directly,
indirectly, or acting in concert with one or more other persons or companies (a)
acquires  15%  of  any  class  of  voting  stock,  irrevocable  proxies,  or any
combination  thereof,  (b) directs the election of a majority of directors,  (c)
becomes  the  general  partner  of the  savings  and loan  association,  (d) has
influence over the management and policies of the savings and loan  association,
(e) has the ability to direct  shareholder votes, or (f) anything else deemed to
be control by the ODFI. The ODFI's written permission is required when the total
amount of control  held by the  acquiror  was less than or equal to 25%  control
before the acquisition and more than 25% control after the acquisition,  or when
the total  amount of control  held by the  acquiror was less than 50% before the
acquisition  and more than 50% after the  acquisition.  Ohio law also prescribes
other  situations  in which the ODFI must be  notified of the  acquisition  even
though  prior  approval  is not  required.  Any person or  company,  which would
include a  director,  will not be deemed to be in control by virtue of an annual
solicitation  of  proxies  voted  as  directed  by a  majority  of the  board of
directors.

                                       27


         Under  certain  circumstances,   interstate  mergers  and  acquisitions
involving associations  incorporated under Ohio law are permitted by Ohio law. A
savings  and loan  association  or savings  and loan  holding  company  with its
principal  place of  business  in another  state may  acquire a savings and loan
association or savings and loan holding company  incorporated  under Ohio law if
the laws of such other state permit an Ohio savings and loan  association  or an
Ohio  holding  company   reciprocal  rights.   Additionally,   recently  enacted
legislation  permits  interstate  branching  by  savings  and loan  associations
incorporated under Ohio law.

         Ohio law requires prior written approval of the Ohio  Superintendent of
Savings and Loans of a merger of an Ohio  association  with another  savings and
loan association or a holding company affiliate.

Holding Company Regulation

         Holding Company  Acquisitions.  The Company is a registered savings and
loan  holding  company  within the  meaning  of  Section 10 of the HOLA,  and is
subject  to OTS  examination  and  supervision  as  well  as  certain  reporting
requirements.  Federal  law  generally  prohibits  a  savings  and loan  holding
company,  without prior OTS approval, from acquiring the ownership or control of
any other savings  institution or savings and loan holding  company,  or all, or
substantially  all, of the assets or more than 5% of the voting shares  thereof.
These provisions also prohibit, among other things, any director or officer of a
savings and loan holding  company,  or any  individual who owns or controls more
than 25% of the voting shares of such holding company, from acquiring control of
any savings  institution  not a  subsidiary  of such  savings  and loan  holding
company, unless the acquisition is approved by the OTS.

         Holding Company  Activities.  The Company operates as a unitary savings
and loan holding  company.  The  activities  of the Company and its  non-savings
institution subsidiaries are restricted to activities traditionally permitted to
multiple savings and loan holding  companies and to financial  holding companies
under newly added  provisions of the Bank Holding Company Act.  Multiple savings
and loan holding companies may:

         o  furnish or perform  management  services  for a savings  association
            subsidiary of a savings and loan holding company;

         o  hold,  manage or liquidate  assets owned or acquired  from a savings
            association subsidiary of a savings and loan holding company;

         o  hold or manage properties used or occupied by a savings  association
            subsidiary of a savings and loan holding company;

         o  engage in activities determined by the Federal Reserve to be closely
            related to banking and a proper incident thereto; and

         o  engage in  services  and  activities  previously  determined  by the
            Federal Home Loan Bank Board by regulation to be  permissible  for a
            multiple savings and loan holding company as of March 5, 1987.

         The activities financial holding companies may engage in include:

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

         o  insuring,  guaranteeing or indemnifying  others,  issuing annuities,
            and  acting  as  principal,  agent or  broker  for  purposes  of the
            foregoing;

                                       28


         o  providing  financial,  investment  or  economic  advisory  services,
            including advising an investment company;

         o  issuing or selling interests in pooled assets that a bank could hold
            directly;

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

         o  merchant banking activities.

         If the OTS  determines  that there is reasonable  cause to believe that
the  continuation  by  a  savings  and  loan  holding  company  of  an  activity
constitutes  a serious risk to the financial  safety,  soundness or stability of
its subsidiary  savings  institution,  the OTS may impose such  restrictions  as
deemed necessary to address such risk. These  restrictions  include limiting the
following:

         o  the payment of dividends by the savings institution;
         o  transactions between the savings institution and its affiliates; and
         o  any  activities  of the  savings  institution  that  might  create a
            serious  risk that the  liabilities  of the holding  company and its
            affiliates may be imposed on the savings institution.

         Federal  Securities Laws. The Company  registered its common stock with
the  Securities  and Exchange  Commission  under Section 12(g) of the Securities
Exchange  Act of 1934.  The  Company is  subject  to the proxy and tender  offer
rules,  insider trading  reporting  requirements and  restrictions,  and certain
other requirements under the Exchange Act.

         Sarbanes-Oxley   Act  of   2002.   The   Sarbanes-Oxley   Act  of  2002
("Sarbanes-Oxley  Act")  implemented  legislative  reforms  intended  to address
corporate  and  accounting  fraud.  In  addition  to  the  establishment  of  an
accounting  oversight  board  which  enforces  auditing,   quality  control  and
independence  standards,  the  Sarbanes-Oxley  Act  restricts  provision of both
auditing  and  consulting  services  by  accounting  firms.  To  ensure  auditor
independence,  any non-audit services being provided to an audit client requires
pre-approval by the company's audit committee  members.  In addition,  the audit
partners  must be rotated.  The  Sarbanes-Oxley  Act  requires  chief  executive
officers and chief financial  officers,  or their equivalent,  to certify to the
accuracy of periodic  reports filed with the SEC,  subject to civil and criminal
penalties if they knowingly or willfully violate this certification requirement.
In  addition,  under the  Sarbanes-Oxley  Act,  counsel  are  required to report
evidence of a material violation of the securities laws or a breach of fiduciary
duty by a company to its chief  executive  officer or its chief  legal  officer,
and, if such officer does not appropriately  respond, to report such evidence to
the audit committee or other similar  committee of the board of directors or the
board itself.

         Longer  prison  terms now apply to  corporate  executives  who  violate
federal  securities  laws, the period during which certain types of suits can be
brought against a company or its officers has been extended,  and bonuses issued
to top executives prior to restatement of a company's  financial  statements are
now subject to disgorgement if such restatement was due to corporate misconduct.
Executives  are also  prohibited  from insider  trading during  retirement  plan
"blackout" periods, and loans to company executives are restricted. In addition,
a provision  directs that civil  penalties  levied by the SEC as a result of any
judicial or administrative action under the Sarbanes-Oxley Act be deposited to a
fund for the benefit of harmed  investors.  The Federal  Accounts  for  Investor
Restitution  ("FAIR")  provision  also  requires  the SEC to develop  methods of
improving  collection  rates.  The  legislation  accelerates  the time frame for
disclosures by public companies,  as they must immediately disclose any material
changes in their  financial  condition or  operations.  Directors  and executive
officers  must also  provide  information  for most  changes in  ownership  in a
company's securities within two business days of the change.

         The  Sarbanes-Oxley  Act also  increases the oversight of, and codifies
certain  requirements  relating to audit  committees of public companies and how
they interact  with the company's  "registered  public  accounting  firm." Audit
Committee members must be independent and are barred from accepting  consulting,

                                       29


advisory or other compensatory fees from the issuer. In addition, companies must
disclose  whether at least one member of the committee is a "financial  expert,"
as  such  term  is  defined  by  the  SEC,  and  if  not,  why  not.  Under  the
Sarbanes-Oxley  Act, a registered  public  accounting  firm is  prohibited  from
performing  statutorily  mandated audit services for a company if such company's
chief executive officer, chief financial officer, comptroller,  chief accounting
officer or any person serving in equivalent  positions has been employed by such
firm and  participated  in the audit of such company during the one-year  period
preceding the audit initiation date. The  Sarbanes-Oxley  Act also prohibits any
officer  or  director  of a  company  or any other  person  acting  under  their
direction from taking any action to fraudulently influence,  coerce,  manipulate
or mislead any independent  public or certified  accountant engaged in the audit
of the company's financial statements for the purpose of rendering the financial
statement's materially misleading.  The Sarbanes-Oxley Act also required the SEC
to  prescribe  rules  requiring  inclusion  of an  internal  control  report and
assessment   by  management   in  the  annual   report  to   stockholders.   The
Sarbanes-Oxley  Act requires the registered  public  accounting firm that issues
the  audit  report to attest to and  report on  management's  assessment  of the
company's internal controls.  In addition,  the Sarbanes-Oxley Act requires that
each financial  report required to be prepared in accordance with, or reconciled
to, generally accepted accounting  principles and filed with the SEC reflect all
material  correcting  adjustments  that are  identified  by a registered  public
accounting firm in accordance with generally accepted accounting  principles and
the rules and regulations of the SEC.

Federal and State Taxation

         Federal  Taxation.  Income taxes are  accounted for under the asset and
liability  method which  requires  recognition of deferred tax  liabilities  and
assets  for the  expected  future  tax  consequences  of  events  that have been
included in the financial statements or tax returns.  Under this method deferred
tax  liabilities and assets are determined  based on the difference  between the
financial  statement and tax bases of assets and  liabilities  using enacted tax
rates in effect for the year in which the differences are expected to reverse.

         The  Federal  tax  bad  debt   reserve   method   available  to  thrift
institutions  was  repealed in 1996 for tax years  beginning  after  1995.  As a
result,  the  Company was  required  to change  from the  reserve  method to the
specific  charge-off  method to compute its bad debt  deduction.  The  recapture
amount  resulting from the change in a thrift's method of accounting for its bad
debt reserves was taken into taxable income ratably (on a  straight-line  basis)
over a six-year period.

         Retained  earnings  as of March 31,  2006  include  approximately  $2.7
million  for which no  provision  for  Federal  income tax has been  made.  This
reserve (base year and  supplemental)  is frozen/not  forgiven as certain events
could  trigger  a  recapture  such  as  stock  redemption  or  distributions  to
shareholders in excess of current or accumulated earnings and profits.

         The Company's  federal  income tax returns  through March 31, 2003 have
been closed by statute or examination.

         Ohio  Taxation.  The Bank files Ohio  franchise  tax returns.  For Ohio
franchise tax purposes, savings institutions are currently taxed at a rate equal
to 1.3% of taxable net worth. The Bank is not currently under audit with respect
to its Ohio franchise tax returns.

         Delaware Taxation.  As a Delaware holding company not earning income in
Delaware,  the  Company  is exempt  from  Delaware  corporate  income tax but is
required to file an annual  report with and pay an annual  franchise  tax to the
State of Delaware. The tax is imposed as a percentage of the capital base of the
Company with an annual maximum of $165,000.  The Company paid Delaware franchise
taxes of $33,000 in fiscal 2006.

                                       30


ITEM 1A.    Risk Factors
- ------------------------

         Except for the historical  information  contained  herein,  the matters
discussed in this Form 10-K include certain  forward-looking  statements  within
the  meaning  of  Section  27A of the  Securities  Act  and  Section  21E of the
Securities  Exchange Act of 1934,  as amended (the  "Exchange  Act"),  which are
intended to be covered by the safe harbors  created  thereby.  Those  statements
include, but may not be limited to, all statements regarding the intent,  belief
and  expectations  of  the  Company  and  its  management,  such  as  statements
concerning the Company's future profitability.  Investors are cautioned that all
forward-looking  statements involve risks and uncertainties  including,  without
limitation, factors detailed from time to time in the Company's filings with the
SEC.  Although  the  Company  believes  that  the  assumptions   underlying  the
forward-looking   statements  contained  herein  are  reasonable,   any  of  the
assumptions could be inaccurate.  Therefore,  there can be no assurance that the
forward-looking statements included in this Form 10-K will prove to be accurate,
and in light of the significant  uncertainties  inherent in the  forward-looking
Statements  included  herein,  the inclusion of such  information  should not be
regarded  as a  presentation  by  the  Company  or any  other  person  that  the
objectives and plans of the Company will be achieved.  The Company  encounters a
number of risks in the  conduct  of its  business.  A  discussion  of such risks
follows.

         The Company's  results of  operations  are  significantly  dependent on
economic conditions and related  uncertainties.  Commercial banking is affected,
directly and indirectly,  by domestic and  international  economic and political
conditions and by governmental monetary and fiscal policies.  Conditions such as
inflation, recession, unemployment, volatile interest rates, real estate values,
government monetary policy,  international  conflicts, the actions of terrorists
and other  factors  beyond our  control  may  adversely  affect  our  results of
operations. Changes in interest rates, in particular, could adversely affect our
net  interest  income  and  have  a  number  of  other  adverse  effects  on our
operations,  as discussed in the  immediately  succeeding  risk factor.  Adverse
economic  conditions  also could  result in an increase  in loan  delinquencies,
foreclosures  and  nonperforming  assets  and a  decrease  in the  value  of the
property  or other  collateral  which  secures  our  loans,  all of which  could
adversely  affect our results of operations.  We are  particularly  sensitive to
changes in economic  conditions  and related  uncertainties  in  Northeast  Ohio
because we derive  substantially  all of our loans,  deposits and other business
from this area.  Accordingly,  we remain  subject to the risks  associated  with
prolonged declines in national or local economies.

         Changes in interest  rates could have a material  adverse effect on our
operations.  The  operations  of  financial  institutions  such as the  Bank are
dependent  to a large  extent on net interest  income,  which is the  difference
between the interest income earned on interest  earning assets such as loans and
investment  securities  and  the  interest  expense  paid  on  interest  bearing
liabilities  such as deposits and  borrowings.  Changes in the general  level of
interest  rates can affect our net interest  income by affecting the  difference
between the weighted average yield earned on our interest earning assets and the
weighted average rate paid on our interest bearing liabilities, or interest rate
spread, and the average life of our interest earning assets and interest bearing
liabilities.  Changes in interest rates also can affect our ability to originate
loans;  the value of our  interest  earning  assets;  our  ability to obtain and
retain deposits in competition with other available investment alternatives; and
the  ability of our  borrowers  to repay  adjustable  or  variable  rate  loans.
Interest  rates are highly  sensitive to many  factors,  including  governmental
monetary policies,  domestic and international economic and political conditions
and other  factors  beyond our control.  Although we believe that the  estimated
maturities  of our  interest  earning  assets  currently  are well  balanced  in
relation to the estimated  maturities of our interest bearing liabilities (which
involves  various  estimates as to how changes in the general  level of interest
rates will impact these assets and liabilities),  there can be no assurance that
our profitability  would not be adversely  affected during any period of changes
in interest rates.

         There  are  increased  risks  involved  with  commercial  real  estate,
construction,  commercial business and consumer lending activities.  Our lending
activities include loans secured by existing commercial real estate.  Commercial
real estate  lending  generally is considered to involve a higher degree of risk
than single-family  residential  lending due to a variety of factors,  including
generally  larger loan  balances,

                                       31


the  dependency  on  successful  completion  or  operation  of the  project  for
repayment,  the difficulties in estimating loan terms which often do not require
full amortization of the loan over its term and, instead,  provide for a balloon
payment at stated  maturity.  Our lending  activities  also  include  commercial
business loans to small- to medium-sized businesses, which generally are secured
by various  equipment,  machinery and other corporate assets, and a wide variety
of consumer loans,  including home equity and second mortgage loans,  automobile
loans,  deposit account secured loans and unsecured loans.  Although  commercial
business  loans and  consumer  loans  generally  have  shorter  terms and higher
interest  rates than  mortgage  loans,  they  generally  involve  more risk than
mortgage loans because of the nature of, or in certain cases the absence of, the
collateral which secures such loans.

         Our allowance for losses on loans may not be adequate to cover probable
losses.  We have  established  an allowance  for loan losses which we believe is
adequate  to offset  probable  losses  on our  existing  loans.  There can be no
assurance  that any future  declines in real estate market  conditions,  general
economic  conditions  or changes in  regulatory  policies will not require us to
increase our allowance for loan losses, which would adversely affect our results
of operations.

         Growth  Strategy.  The Company has  pursued and  continues  to pursue a
strategy of growth.  The success of the  Company's  growth  strategy will depend
largely  upon its  ability to manage its credit risk and control its costs while
providing  competitive  products and services.  This growth strategy may present
special  risks,  such as the risk that the Company will not  efficiently  handle
growth  with its  present  operations,  the risk of  dilution  of book value and
earnings per share as a result of an acquisition, the risk that earnings will be
adversely  affected by the  start-up  costs  associated  with  establishing  new
products and services, the risk that the Company will not be able to attract and
retain qualified personnel needed for expanded operations, and the risk that its
internal monitoring and control systems may prove inadequate.

         Control by Management; Anti-Takeover Provisions. The Board of directors
beneficially own in the aggregate  approximately  6.0% of the outstanding shares
of Common  Stock of the  Company  at March 31,  2006.  In  addition  to Ohio and
federal laws and regulations  governing changes in control of insured depository
institutions,  the Company's  Articles of Incorporation  and Code of Regulations
contain certain  provisions that may delay or make more difficult an acquisition
of control of the Company.  For example, the Company's Articles of Incorporation
do not  exempt  the  Company  from  the  provisions  of  Ohio's  "control  share
acquisition"  and "merger  moratorium"  statutes.  Assuming  that the  principal
stockholders  continue to retain the number of the outstanding  voting shares of
the Company  that they  presently  own and the law of Delaware  requires,  as it
presently does, at least two-thirds  majority vote of the outstanding  shares to
approve a merger or other consolidation, unless the articles of incorporation of
the  constituent  companies  provide  for a lower  approval  percentage  for the
transaction,  which  the  Company's  articles  do not  provide,  such  ownership
position  could be expected to deter any  prospective  acquirer  from seeking to
acquire  ownership or control of the  Company,  and the  principal  stockholders
would be able to defeat any acquisition  proposal that requires  approval of the
Company's  stockholders,  if the  principal  stockholders  chose  to do  so.  In
addition, the principal stockholders may make a private sale of shares of common
stock of the Company  that they own,  including  to a person  seeking to acquire
ownership  or  control  of the  Company.  The  Company  has  500,000  shares  of
authorized but unissued preferred stock, par value $ .10 per share, which may be
issued in the  future  with  such  rights,  privileges  and  preferences  as are
determined by the Board of Directors of the Company.

         Limited  Trading  Market;  Shares  Eligible for Future  Sale;  Possible
Volatility of Stock Price. The Common Stock is traded on the Nasdaq Market under
the symbol  "WAYN."  During the 12 months ended May 15, 2006, the average weekly
trading volume in the Common Stock has been  approximately  498 shares per week.
There can be no assurance given as to the liquidity of the market for the Common
Stock or the price at which any sales may occur,  which price will depend  upon,
among other things,  the number of holders  thereof,  the interest of securities
dealers in maintaining a market in the Common Stock and other

                                       32


factors beyond the control of the Company.  The market price of the Common Stock
could be  adversely  affected by the sale of  additional  shares of Common Stock
owned by the Company's  current  shareholders.  The principal  shareholders  are
permitted to sell certain limited amounts of Common Stock without  registration,
pursuant to Rule 144 under the  Securities  Act. The market price for the Common
Stock could be subject to significant  fluctuations in response to variations in
quarterly and yearly operating  results,  general trends in the banking industry
and other factors. In addition, the stock market can experience price and volume
fluctuations  that  may  be  unrelated  or  disproportionate  to  the  operating
performance of affected companies. These broad fluctuations may adversely affect
the market price of the Common Stock.

         Dependence  on  Management.  The Company's  success  depends to a great
extent on its senior  management,  including its Chairman,  Russell L. Harpster;
President, Phillip E. Becker and Chief Financial Officer, H. Stewart Fitz Gibbon
III and Operations Officer, Bryan C. Fehr. The loss of their individual services
could have a material  adverse impact on the Company's  financial  stability and
its operations.  In addition,  the Company's future  performance  depends on its
ability to attract and retain key personnel and skilled employees,  particularly
at the senior  management  level.  The  Company's  financial  stability  and its
operations  could be  adversely  affected  if, for any  reason,  one or more key
executive officers ceased to be active in the Company's management.

         Competition.  Banking  institutions  operate  in a  highly  competitive
environment.  The Company competes with other commercial  banks,  credit unions,
savings institutions,  finance companies,  mortgage companies, mutual funds, and
other financial institutions, many of which have substantially greater financial
resources  than the Company.  Certain of these  competitors  offer  products and
services  that are not offered by the Company  and certain  competitors  are not
subject to the same extensive laws and regulations as the Company. Additionally,
consolidation of the financial  services  industry in Ohio and in the Midwest in
recent  years  has  increased  the level of  competition.  Recent  and  proposed
regulatory  changes may further  intensify  competition in the Company's  market
area.

         Holding Company  Structure;  Government  Regulations and Policies.  The
Company is a financial holding company, which is substantially  dependent on the
profitability  of its  subsidiaries  and the upstream  payment of dividends from
Wayne Savings  Community  Bank to the Company.  Under state and federal  banking
law,  the payment of  dividends  by the Company are subject to capital  adequacy
requirements.  The  inability  of the Company to  generate  profits and pay such
dividends  to the  Company,  or  regulator  restrictions  on the payment of such
dividends  to the Company  even if earned,  would have an adverse  effect on the
financial  condition  and results of operations of the Company and the Company's
ability to pay dividends to the shareholders.

ITEM 1B.    Unresolved Staff Comments
- -------------------------------------

         Not applicable.

                                       33


ITEM 2.     Properties
- ----------------------

         The Company  conducts  its  business  through its main  banking  office
located in Wooster,  Ohio,  and its ten  additional  full service branch offices
located in its market area. The following table sets forth information about its
offices as of March 31, 2006.

                                                  Original Year
                                      Leased or     Leased or     Year of Lease
Location                                Owned       Acquired       Expiration
- --------------------------------      --------    -------------   -------------

North Market Street Office
151 N. Market Street
Wooster, Ohio                           Owned         1902            N/A

Cleveland Point Financial Center
1908 Cleveland Road                     Owned         1978            N/A
Wooster, Ohio

Madison South Office
2024 Millersburg Road                   Owned         1999            N/A
Wooster, Ohio

Northside Office
543 Riffel Road                        Leased         1999            2019
Wooster, Ohio

Millersburg Office
90 N. Clay Street                       Owned         1964            N/A
Millersburg, Ohio

Claremont Avenue Office
233 Claremont Avenue                    Owned         1968            N/A
Ashland, Ohio

Buehlers-Sugarbush Office
1055 Sugarbush Drive                   Leased         2001            2021
Ashland, Ohio

Rittman Office
237 North Main Street                   Owned         1972            N/A
Rittman, Ohio

Lodi Office
303 Highland Drive                      Owned         1980            N/A
Lodi, Ohio

Village Office
1265 S. Main Street                     Owned         1998            N/A
North Canton, Ohio

Stebbins Office
121 N. Main Street
Creston, Ohio                           Owned         2005            N/A

         The Company's  accounting and  recordkeeping  activities are maintained
through an in-house data processing system.

                                       34


ITEM 3.     Legal Proceedings
- -----------------------------

         The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business which, in
the aggregate, involve amounts which are believed by management to be immaterial
to the financial condition and operations of the Company.

ITEM 4.     Submission of Matters to a Vote of Security Holders
- ---------------------------------------------------------------

         During the fourth  quarter of the fiscal year  covered by this  report,
the Registrant did not submit any matters to the vote of security holders.

                                     PART II

ITEM 5.     Market for Registrant's  Common Equity, Related  Stockholder Matters
- --------------------------------------------------------------------------------
            and Issuer Purchases of Equity Securities
            -----------------------------------------

         The Company's  common stock trades on the Nasdaq  National Market using
the symbol  "WAYN."  The  following  table  sets forth the high and low  trading
prices of the  Company's  common stock during the two most recent  fiscal years,
together with the cash dividends declared.

                                                                          Cash
Fiscal Year Ended                                                       dividend
March 31, 2006                    High                  Low             declared

First quarter                   $16.43               $13.91               $.120
Second quarter                  $16.50               $14.75               $.120
Third quarter                   $16.00               $13.83               $.120
Fourth quarter                  $16.50               $15.01               $.120

                                                                          Cash
Fiscal Year Ended                                                       dividend
March 31, 2005                    High                  Low             declared

First quarter                   $21.00               $14.82               $.120
Second quarter                  $16.79               $15.36               $.120
Third quarter                   $16.88               $15.92               $.120
Fourth quarter                  $16.40               $15.35               $.120

                                       35


         As of April 5, 2006, the Company had 1,522  shareholders  of record and
3,339,552 shares of common stock  outstanding.  This does not reflect the number
of persons whose stock is in nominee or "street name" accounts through brokers.

         Payment of dividends  on the common  stock is subject to  determination
and  declaration by the Board of Directors and depends upon a number of factors,
including  capital  requirements,  regulatory  limitations  on  the  payment  of
dividends,  the Company's  results of operations  and financial  condition,  tax
considerations,  and general economic conditions. No assurance can be given that
dividends  will be declared or, if declared,  what the amount of dividends  will
be, or whether such dividends, once declared, will continue.

         The  Company's  primary  source of funds with which to pay dividends is
cash and cash  equivalents  held at the holding company level and dividends from
the Bank.  The Bank's  ability to pay dividends to the Company is limited by OTS
regulations,  and the Bank is required to obtain OTS nonobjection to the payment
of dividends to the Company. In determining whether to object to such dividends,
the OTS considers whether (i) the Bank would be  undercapitalized  following the
dividend,  (ii) the dividend raises safety and soundness concerns,  or (iii) the
dividend violates any regulatory prohibition or policy.

         In addition to the foregoing,  earnings of the Company  appropriated to
bad debt reserves and deducted for federal income tax purposes are not available
for payment of cash dividends or other  distributions  to  stockholders  without
payment of taxes at the  then-current  tax rate by the  Company on the amount of
earnings removed from the reserves for such  distributions.  The Company intends
to make full use of this  favorable tax treatment and does not  contemplate  any
distribution that would create federal tax liability.

         The following  table sets forth  information  with respect to purchases
made by or on behalf of the  Company  of shares of common  stock of the  Company
during the indicated periods.




                                                      Total Number of
                                                    Shares Purchased as     Maximum Number of
                        Total Number     Average      Part of Publicly    Shares that May Yet Be
                         of Shares     Price Paid    Announced Plans or    Purchased Under the
      Period             Purchased     per Share         Programs          Plans or Programs(1)
- --------------------   -------------   ----------   -------------------   ---------------------
                                                                        
January 1-31, 2006           --            --               --                  140,105

February 1-28, 2006          --            --               --                  140,105

March 1-31, 2006             --            --               --                  140,105

     Total                   --            --               --                  140,105



- ------------
(1)    A  repurchase  program  for  185,491  shares,  or  5%  of  the  Company's
       outstanding  shares,  was  publicly  announced  on  September 2, 2004 and
       expired on August 26, 2005. As of March 31, 2005,  84,761 shares had been
       repurchased  under that program.  On June 6, 2005, the Company  announced
       the completion of the  repurchase  program and the  authorization  by the
       Board of Directors of a new program for the repurchase of 352,433 shares,
       or 10% of the Company's outstanding shares over any period.

                                       36


Equity Compensation Plan Information

         The following  table sets forth  information  as of March 31, 2006 with
respect to compensation  plans under which equity  securities of the Company are
authorized for issuance.




                                                               Number of Shares Remaining
                          Number of shares to be issued            Weighted-Average             Available for Future Issuance
                        Upon the exercise of outstanding           Exercise Price of           (Excluding Shares reflected in
Plan Category             Options, Warrants and Rights            Outstanding Options                 the First Column)
- -------------             ----------------------------            -------------------                 -----------------
                                                                                                     
Equity Compensation
Plans Approved by
Security Holders                     179,148                            $13.92                                --

Equity Compensation
Plans Not Approved by
Security Holders                       --                                 --                                  --
                                       --                                 --                                  --
                                     -------                            ------                              -----
                                     179,148                            $13.92                                --
                                     =======                            ======                              =====


ITEM 6.     Selected Financial Data
- -----------------------------------

         The following table set forth certain consolidated  financial and other
data of  Wayne  Savings  Bancshares,  Inc.,  at the  dates  and  for  the  years
indicated.  The consolidated  financial statements as of and for the years ended
March 31,  2003 and  March  31,  2002,  inclusive,  are  those of Wayne  Savings
Bancshares,  Inc.  prior to the  reorganization  and  change in  corporate  form
discussed in the Notes to the  Consolidated  Financial  Statements and elsewhere
herein.  For  additional  information  about the  Company,  reference is made to
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations" and the Consolidated Financial Statements of the Company.




                                                                       At March 31,
                                                  2006         2005        2004        2003       2002
                                                                               
                                                                      (In thousands)
Selected Financial Condition Data:
Total assets..............................    $403,679     $403,633    $369,007    $378,991   $334,843
Loans receivable, net (1).................     235,312      213,627     205,443     228,373    251,172
Mortgage-backed securities (2)............      55,731       60,352      88,428      76,002     17,326
Investment securities.....................      73,307       72,856      31,582      35,841     22,286
Cash and cash equivalents (3).............      14,123       29,942      19,887      17,496     27,883
Deposits..................................     332,570      320,586     291,830     300,931    300,957
Stockholders' equity......................      35,516       40,199      43,561      44,663     26,047



- --------------------------------
(1)  Includes loans held for sale.
(2)  Includes mortgage-backed securities available for sale.
(3)  Includes  cash  and due  from  banks,  interest-bearing  deposits  in other
     financial institutions, and federal funds sold.

                                       37





                                                           Year Ended March 31,
                                             2006       2005        2004       2003       2002
                                                                            
                                                 (In thousands, except for share amounts)
Selected Operating Data:
Interest income ........................   $ 19,688   $ 17,632    $ 18,216   $ 20,023   $ 21,309
Interest expense .......................      8,280      6,716       7,147      9,169     12,348
                                           --------   --------    --------   --------   --------
     Net interest income ...............     11,408     10,916      11,069     10,854      8,961
Provision for losses on  loans .........        211        430         173         91        134
                                           --------   --------    --------   --------   --------
     Net interest income after provision
      for losses on loans ..............     11,197     10,486      10,896     10,763      8,827
Other income ...........................      1,777      1,684       1,933      1,643      1,657
General, administrative and other
  expense (1) ..........................     10,899     11,874       8,971      8,417      7,722
                                           --------   --------    --------   --------   --------
Earnings before income taxes ...........      2,075        296       3,858      3,989      2,762
Federal income taxes (benefits) ........        435        (85)      1,154      1,217        939
                                           --------   --------    --------   --------   --------

NET EARNINGS ...........................   $  1,640   $    381    $  2,704   $  2,772   $  1,823
                                           ========   ========    ========   ========   ========

Basic earnings per share (2) ...........   $   0.50   $   0.11    $   0.72   $   0.71   $   0.47
                                           ========   ========    ========   ========   ========
Diluted earnings per share (2) .........   $   0.50   $   0.11    $   0.72   $   0.71   $   0.47
                                           ========   ========    ========   ========   ========
Cash dividends declared
  per common share (3) .................   $   0.48   $   0.48    $   0.47   $   0.45   $   0.45
                                           ========   ========    ========   ========   ========


- ------------------
(1)  In 2005, general, administrative and other expense includes $1.4 million of
     costs related to  accelerating  the Company's  Management  Recognition  and
     Stock Option Plans.
(2)  All per share  amounts  have been  restated to give effect to the 1.5109 to
     1.00  share  exchange  ratio  provided  for  in  the  Company's  conversion
     offering.
(3)  During the fiscal year ended March 31, 2003, the M.H.C. waived its right to
     receive all dividends.  During fiscal 2002 the M.H.C. waived  approximately
     $.44 of the $.45 per share dividends paid on common stock.



                                                         At or For the Year Ended March 31,
                                                     2006      2005      2004      2003      2002
                                                                              

Key Operating Ratios and Other Data:
Return on average assets (net earnings divided
  by average total assets) .....................     0.42%     0.10%     0.73%     0.78%     0.56%

Return on average equity (net earnings
  divided by average equity) ...................     4.42      0.90      6.09      8.80      7.12

Average equity to average assets ...............     9.47     10.93     11.95      8.92      7.93

Equity to assets at year end ...................     8.80      9.96     11.80     11.78      7.78

Interest rate spread (difference between average
  yield on interest-earning assets and average
  cost of interest-bearing liabilities) ........     3.02      2.89      2.97      3.09      2.77

Net interest margin (net interest income
  as a percentage of average interest-
  earning assets) ..............................     3.10      3.02      3.14      3.24      2.93

General, administrative and other expense
  to average assets (1) ........................     2.78      2.72      2.41      2.38      2.39

Nonperforming and impaired loans
  to loans receivable, net .....................     0.33      0.42      0.36      1.09      1.52

Nonperforming and impaired assets
  to total assets ..............................     0.23      0.23      0.23      0.66      1.14



                                       38



Average interest-earning assets to average
  interest-bearing liabilities .................   104.09    106.49    108.12    105.40    103.98

Allowance for loan losses to nonperforming
  and impaired loans ...........................   192.23    151.66    109.10     27.17     19.16

Allowance for loan losses to nonperforming
  and impaired assets ..........................   159.91    146.01     96.22     27.17     19.07

Net interest income after provision for losses
  on loans, to general, administrative and
  other expense (1) ............................   102.73    100.13    121.46    127.87    114.31

Number of full-service offices .................    11        11        10        10        10

Dividend payout ratio ..........................    98.60    455.91     66.83     38.35     46.74



- ----------------
(1) In calculating this ratio,  general,  administrative  and other expense does
   not  include  provisions  for  losses  or gains  on the  sale of real  estate
   acquired  through  foreclosure.  For fiscal 2005, this ratio does not include
   expense relating to acceleration of the Company's Management Recognition Plan
   and Stock Option Plan.


ITEM 7.     Management's Discussion and Analysis of Financial Condition and
- ---------------------------------------------------------------------------
            Results of Operations
            ---------------------

General

The consolidated financial statements include Wayne Savings Bancshares, Inc. and
its  wholly-owned   subsidiary,   Wayne  Savings  Community  Bank.  Intercompany
transactions  and  balances  are  eliminated  in  the   consolidated   financial
statements.

The Company's net earnings are primarily  dependent on its net interest  income,
which  is  the  difference   between   interest   income  earned  on  its  loan,
mortgage-backed  securities  and  investment  portfolios,  and its cost of funds
consisting  of interest  paid on deposits  and  borrowings.  The  Company's  net
earnings also are affected by its provision for losses on loans,  as well as the
amount of other income,  including trust fees and service charges,  and general,
administrative  and other  expense,  such as  salaries  and  employee  benefits,
deposit  insurance  premiums,  occupancy and equipment  costs, and income taxes.
Earnings of the Company also are affected  significantly by general economic and
competitive   conditions,   particularly   changes  in  market  interest  rates,
government policies and actions of regulatory authorities.

Business Strategy

The  Company's  current  business  strategy  is to  operate a  well-capitalized,
profitable and  community-oriented  bank dedicated to providing  quality service
and products to its customers. The Company has sought to implement this strategy
in recent years by: (1) closely  monitoring the needs of customers and providing
personal,  quality  customer  service;  (2) continuing the origination of a wide
array of loan products in the Company's market area; (3) managing  interest rate
risk exposure by better matching asset and liability  maturities and rates;  (4)
increasing fee income,  including the establishment of a trust  department;  (5)
managing  asset  quality;  (6)  maintaining  a strong retail  deposit base;  (7)
maintaining  capital in excess of regulatory  requirements;  and (8) emphasizing
the commercial  loan program to add high quality,  higher yielding assets to the
Company's loan portfolio.

                                       39


Discussion of Financial Condition Changes from March 31, 2005 to March 31, 2006

In  addition to the  historical  information  contained  herein,  the  following
discussion   contains   forward-looking   statements   that  involve  risks  and
uncertainties.  Economic  circumstances,  the Company's  operations,  and actual
results  could differ  significantly  from those  discussed  in  forward-looking
statements.  Some  of the  factors  that  could  cause  or  contribute  to  such
differences  are  discussed  herein but also include  changes in the economy and
interest  rates  in the  nation  and the  Company's  general  market  area.  The
forward-looking  statements  contained  herein include,  but are not limited to,
those with respect to the following matters:  (1) management's  determination of
the amount and  adequacy of the  allowance  for loan  losses;  (2) the effect of
changes in interest rates; (3) management's  opinion as to the effects of recent
accounting  pronouncements on the Company's  consolidated  financial statements;
and (4)  management's  opinion as to the Bank's  ability to maintain  regulatory
capital at current levels.  The Company  considers the allowance for loan losses
and  related  loss  provision  to be a critical  accounting  policy.  A detailed
discussion  as to the  application  of such policy is set forth on the following
pages.

At March 31, 2006, total assets of $403.7 million remained  virtually  unchanged
from the $403.6 million total at March 31, 2005.

Liquid  assets,  consisting of cash,  interest-bearing  deposits and  investment
securities,  decreased by $15.4 million, or 14.9%, to $87.4 million at March 31,
2006  mainly  due to a  reduction  in  federal  funds  sold  of  $19.4  million.
Mortgage-backed  securities decreased by $4.6 million, or 7.7%, to $55.7 million
as  these  adjustable  rate  securities  continued  to  experience   significant
principal  repayments due to borrowers  refinancing  to fixed-rate  loans in the
current rising interest rate  environment.  Principal  repayments were partially
offset by purchases of mortgage-backed securities totaling $22.4 million.

During the fiscal year ended March 31, 2006,  loans  receivable  increased $21.7
million,  or 10.2%,  as the Bank  originated and retained $63.1 million of loans
and received payments of $35.0 million. Rather than reinvest funds from sales of
and repayments on loans in long-term,  fixed rate and lower yielding residential
loans during this period of rising interest rates, the lending division has been
able to originate  shorter-term  adjustable rate commercial  loans.  The Company
believes that investing in shorter-term  and  adjustable-rate  commercial  loans
positions the Company  favorably in the current interest rate  environment.  The
composition  of the loan  portfolio  continued to evolve  during the fiscal year
ending  March 31,  2006,  as  exemplified  by a net  decrease of $7.9 million in
residential  and  construction  mortgage  loans,  which were more than offset by
increases  in  nonresidential  real  estate  loans  of $21.6  million  and a net
increase in commercial loans of $7.5 million.

At March 31, 2006, the allowance for loan losses  totaled $1.5 million,  or .63%
of loans,  compared  to $1.4  million,  or .64% of loans at March 31,  2005.  In
determining  the amount of loan loss  analysis at any point of time,  management
and the board apply a systematic  process of focusing on the risk of loss in the
portfolio.  First, delinquent nonresidential,  multi-family and commercial loans
are evaluated for potential impairment in carrying value. At March 31, 2006, all
delinquent  nonresidential,  multi-family  and  commercial  loans were viewed as
well-secured,  with no material loss anticipated. The second step in determining
the allowance for loan loss entails the  application of historic loss experience
to  individual  loan types in the  portfolio.  In addition to the historic  loss
percentage,  management  employs an additional risk  percentage  tailored to the
Board's and management's perception of the overall risk in the economy. Finally,
to provide  additional  assurance  regarding the validity of the commercial loan
risk rating system,  management engages a third party loan reviewer who provides
independent  validation of the Bank's loan grading process. Due primarily to the
growth of the  nonresidential  real estate and the  commercial  loan  portfolio,
management charged $211,000 to the provision during fiscal 2006.

                                       40


Discussion of Financial  Condition Changes from March 31, 2005 to March 31, 2006
(continued)

Deposits at March 31, 2006, totaled $332.6 million, an increase of $12.0 million
from  $320.6  million  at  March  31,  2005,  generally  reflecting  the  Bank's
competitive  deposit  pricing  in all  market  areas.  Certificates  of  deposit
increased by $20.8 million,  newly implemented  commercial repurchase agreements
increased  by $5.7  million,  NOW  accounts  increased by $3.7 million and money
market  investor  accounts  increased  by $2.6  million.  These  increases  were
partially offset by a reduction of $20.8 million in savings deposits.

Borrowings  totaled  $32.8  million  at March 31,  2006 as  compared  with $40.0
million at March 31, 2005. The Company was able to repay short-term Federal Home
Loan Bank advances  during the fiscal year by utilizing the increase in deposits
and cash flows from the loan and securities portfolios.

Stockholders'  equity  totaled $35.5  million,  a decrease of $4.7  million,  or
11.6%,  during the year ending  March 31,  2006,  due  primarily to purchases of
treasury  stock  totaling $5.0 million,  dividends  totaling $1.6 million and an
increase in the  unrealized  loss on available for sale  securities of $219,000.
These  amounts  were  partially  offset by $1.6  million in net earnings for the
fiscal  year ended  March 31,  2006 and from  stock  option  exercises  totaling
$365,000.

Comparison of Operating Results for the Years Ended March 31, 2006 and 2005

General
- -------

The Company  has  continued  to maintain  its  strategy to  aggressively  manage
interest rate risk. This strategy  negatively  affected earnings for fiscal 2005
and 2004,  with  earnings  benefits  beginning to appear the last half of fiscal
2006.  Management  believes  that the  investment  of excess funds  primarily in
shorter  term  assets will  continue  to help the Company in the current  rising
interest rate environment.

Net  earnings  totaled  $1.6  million for fiscal year ended March 31,  2006,  an
increase of $1.3 million  when  compared to the net earnings of $381,000 for the
fiscal year ended March 31, 2005.  The  increase in net  earnings was  primarily
attributable  to an increase  net  interest  income of  $492,000,  a decrease in
provision for loan losses of $219,000 and a decrease in general,  administrative
and other  expense  of  $975,000,  or 8.2%.  The growth in pretax  earnings  was
partially offset by an increase in federal income taxes of $520,000.

Interest Income
- ---------------

Interest income increased $2.1 million or 11.7%, to $19.7 million for the fiscal
year ended March 31, 2006,  compared to the same period in 2005.  This  increase
was mainly due to an increase in the weighted-average  yield on interest-earning
assets to 5.36% from 4.87% for the fiscal  year ended  March 31,  2005,  coupled
with an increase in the weighted  average balance of $5.9 million,  or 1.6%. The
yield increase is primarily due to the Federal Reserve raising the federal funds
rate 2.0% over the past year.  These rate increases have  beneficially  affected
the yields earned on the Company's  investment  securities and  interest-bearing
deposits.  The Company has  purposefully  invested  excess funds in shorter-term
securities  and adjustable  rate loans rather than  long-term  fixed rate loans.
Although such strategy can  sacrifice  short-term  income,  it  strengthens  the
Company's  interest rate position and allows the Company to profitably  redeploy
such assets in a rising rate environment.

Interest  income on loans  increased  $1.2 million,  or 9.3%, for the year ended
March 31, 2006,  compared to the same period in 2005,  due  primarily to a $10.2
million,  or 4.8%, increase in the  weighted-average  balance of loans year over
year,  coupled with a 26 basis point  increase in the weighted  average yield on
loans  outstanding.  The increase in the  weighted-average  balance of loans was
primarily due to the emphasis on nonresidential and commercial loans.

                                       41


Comparison  of  Operating  Results  for the Years  Ended March 31, 2006 and 2005
(continued)

Interest Income (continued)
- ---------------------------

Interest  income on  mortgage-backed  securities  decreased  $159,000,  or 7.1%,
during  fiscal  2006,  compared to the same period in 2005,  due  primarily to a
decrease of $18.3  million,  or 25.1%,  in the  weighted-average  balance caused
mainly by continued principal prepayments.  The decrease in the weighted average
balance was offset by an increase of 74 basis points to a weighted average yield
of 3.83% as  compared  to 3.09%,  from the  comparable  2005  period,  generally
reflecting   upward  interest  rate  adjustments  in  the  current  rising  rate
environment.


Interest  income on investment  securities  increased by $1.0 million,  or 49.4%
during  the 2006  period  compared  to the same  period in 2005,  reflecting  an
increase in the weighted  average  balance of $24.1 million,  or 46.1%, to $76.2
million from $52.2 million  during the comparable  2005 period,  coupled with an
increase in the average  yield of 8 basis  points to 4.01%.  The increase in the
weighted-average   volume  reflects  the  Company's  strategy  of  investing  in
short-term  investment  securities  in  the  current  increasing  interest  rate
environment.  This strategy  provides the Company with  flexibility to use funds
from securities  sales and repayments to originate loans such as  nonresidential
and commercial loans with higher yields and in some instances shorter terms.

Interest income on  interest-bearing  deposits increased by $6,000, or 1.4%, for
the fiscal  year ended  March 31,  2006,  due  primarily  to an  increase in the
average yield of 137 basis points to 3.20%,  partially  offset by a reduction in
the weighted average balance during fiscal 2006 of $10.1 million, or 42.2%.

Interest Expense
- ----------------

Interest  expense for the fiscal year ended March 31, 2006 totaled $8.3 million,
an increase of $1.6 million , or 23.3%,  from  interest  expense for fiscal year
ended March 31, 2005. The increase in interest expense resulted from an increase
in the  average  cost of funds of 36 basis  points  to 2.34%  for  fiscal  2006,
coupled with an increase of $13.5  million,  or 4.0%,  in the  weighted  average
balance of deposits and borrowings outstanding in fiscal 2006.

Interest  expense on deposits  totaled $7.2 million for fiscal 2006, an increase
of $1.5  million,  or 26.6%,  compared to fiscal  2005.  The increase in deposit
costs  resulted  from an  increase  of 41 basis  points in the  average  cost of
deposits to 2.22% for fiscal 2006,  coupled with a 2006  increase in the average
balance  outstanding of $11.2 million, or 3.6%. As noted earlier, a shift in the
composition  of  deposits  from  lower  cost  savings  deposits  to higher  cost
certificates of deposits contributed to the increase in the cost of deposits.

Interest expense on borrowings totaled $1.1 million for the year ended March 31,
2006, an increase of $51,000, or 4.9%, from the 2005 period, due primarily to an
increase in the weighted  average  balance of $2.3 million,  or 9.0%,  which was
partially  offset by rate  reduction  of 15 basis points to 3.81% for the fiscal
year ended March 31, 2006 as a result of the repayment of higher rate advances.

Net Interest Income
- -------------------

Net interest  income  totaled  $11.4 million for the fiscal year ended March 31,
2006,  an increase of $492,000,  or 4.5%,  from the amount for fiscal 2005.  The
average  interest rate spread  increased to 3.02% for fiscal 2006 from 2.89% for
fiscal  2005.  The net interest  margin  increased to 3.10% for fiscal 2006 from
3.02% for the fiscal year ended March 31, 2005.

                                       42


Comparison  of  Operating  Results  for the Years  Ended March 31, 2006 and 2005
(continued)

Provision for Losses on Loans
- -----------------------------

The  Company  recorded a provision  for losses on loans  totaling  $211,000  and
$430,000  for the fiscal years ended March 31, 2006 and 2005,  respectively.  To
the best of  management's  knowledge,  all known and  inherent  losses  that are
probable and which can be  reasonably  estimated  have been recorded as of March
31, 2006.

Other Income
- ------------

Other income,  consisting  primarily of an increase in cash  surrender  value of
life  insurance,  gains on sale of loans,  service fees,  and charges on deposit
accounts  increased by $93,000,  or 5.5%, to $1.8 million for fiscal 2006,  from
$1.7 million for the year ended March 31, 2005. The increase resulted  primarily
from an increase  in cash  surrender  value of life  insurance  of $123,000  and
$74,000 in other service fees,  charges and other  operating  income,  partially
offset by a reduction of $104,000 in gain on sale of loans.  The decline in gain
on sale of loans is primarily  due to a  significant  reduction  in  origination
volume,  amplified by management's decision during fiscal 2006 to retain certain
fixed rate mortgage loans to facilitate growth in the portfolio.

General, Administrative and Other Expense
- -----------------------------------------

General,  administrative  and other expense  decreased by $975,000,  or 8.2%, to
$10.9 million for the fiscal year ended March 31, 2006, compared to fiscal 2005.
The decrease in general,  administrative  and other  expense is primarily due to
the absence of the $1.4 million in accelerated expense related to the management
recognition and stock option plan recognized in 2005. Employee  compensation and
benefits decreased by $848,000, or 11.7%. Net of the aforementioned  accelerated
expense  of  the  management   recognition  and  stock  option  plan,   employee
compensation  and  benefits  increased  $554,000  due  primarily  to $421,000 in
retirement  expense  recognized  due to the death of the former Chief  Executive
Officer and retirement of the Chief  Operations  Officer and normal merit salary
increases.  An increase of $68,000,  or 3.7%, in occupancy and equipment expense
was  primarily due to increased  data line costs  related to the online  banking
program,  coupled  with an  increase  of  depreciation  expense.  A decrease  of
$48,000, or 8.3%, in franchise taxes was due to the reduction in equity from the
repurchase  of  treasury  stock.  The  increase in other  operating  expense was
primarily  attributable  to  increased  professional  costs  related  to routine
compliance  matters,  the new online banking  program,  and  additional  service
charges related to the trust department.

Federal Income Taxes
- --------------------

The federal  income tax expense was  $435,000 for the year ended March 31, 2006,
reflecting  an increase of  $520,000 in federal  income tax expense  from fiscal
2005. The increase  resulted  primarily from a $1.8 million  increase in pre-tax
earnings.  The difference in the effective tax rate or rate of benefits from the
34% statutory rate is mainly due to the  beneficial  effects of income from cash
surrender value of life insurance and other tax-exempt obligations.

Comparison of Operating Results for the Years Ended March 31, 2005 and 2004

General
- -------

Fiscal 2005 was a year of strategic  transition  for the Company.  The Company's
primary  competitor  was  acquired by a major  regional  bank  holding  company,
positioning Wayne Savings as the largest independent  community bank in the five
county market areas.

                                       43


Comparison  of  Operating  Results  for the Years  Ended March 31, 2005 and 2004
(continued)

General (continued)
- -------

Management had long perceived the market area preference for local ownership and
decision-making.  In  recognition  of this fact,  management  believed  that the
Company had a unique  opportunity to expand its product lines,  particularly  in
the areas of commercial  lending and trust services.  Management also recognized
that  expansion of such product  lines would  initially  place  pressures on the
Company's  operating  costs. As a result,  management  undertook a review of the
Company's  ability  to expand  its  product  lines in view of its  current  cost
structure.

Such review  culminated  in the  conclusion  that several of its benefit  plans,
specifically  the previous grants under the Management  Recognition Plan and the
Stock  Ownership  Plan  reflected  compensation  awards  which were more closely
aligned with past versus future managerial performance. Moreover, in view of the
mandatory  expensing of stock options  pursuant to SFAS No.  123(R),  management
concluded that the approximate $300,000 in annual pre-tax savings resulting from
accelerating  the  expense  of the Stock  Option  Plan was a  prudent  method of
expanding the Company's  product  lines  without  placing undue  pressure on the
Company's future cost structure.

Due in large part to these  decisions,  net  earnings  totaled  $381,000 for the
fiscal year ended March 31, 2005, a decrease of $2.3  million,  or 85.9%,  below
the net earnings of $2.7  million for the fiscal year ended March 31, 2004.  The
decline in net earnings was  primarily  attributable  to an increase in general,
administrative  and other expense of $2.9 million,  or 32.4%, an increase in the
provision for losses on loans of $257,000, or 148.6%, a decrease in other income
of $249,000,  or 12.9%,  and a decrease in net interest  income of $153,000,  or
1.4%.  These earnings  reductions were partially offset by a decrease in federal
income tax expense of $1.2 million.

Interest Income
- ---------------

Interest income for the fiscal year ended March 31, 2005, decreased $584,000, or
3.2%,  to $17.6  million.  This  decrease  was the  result  of a 29 basis  point
reduction in the yield  earned on interest  earning  assets to 4.87%,  partially
offset by an increase in the weighted-average balance of interest-earning assets
totaling $9.0 million,  or 2.6%, to $361.7  million for the year ended March 31,
2005.

Interest  income on loans  declined $1.1 million,  or 7.8%,  for the fiscal year
ended  March 31,  2005,  due  primarily  to a decrease  in the  weighted-average
balance of loans  outstanding of $1.4 million,  or 0.6%,  compared to the fiscal
2004,  coupled with a 47 basis point decrease in the  weighted-average  yield on
loans to 6.06% for fiscal 2005.

Interest income on mortgage-backed  securities  decreased $235,000 during fiscal
2005,   due  primarily  to  a  $13.5   million,   or  15.7%,   decrease  in  the
weighted-average  balance outstanding from the 2004 period,  which was partially
offset by an increase in the average yield of 22 basis points to 3.09%.

Interest income on investments  increased by $553,000,  or 37.0%,  reflecting an
increase in the weighted-average  balance of $17.5 million, or 50.6%,  partially
offset by a decrease in the  weighted-average  yield of 39 basis points to 3.93%
from 4.32% during fiscal 2004.

Interest income on interest-bearing deposits and other increased by $182,000, or
71.7%,  reflecting an increase in the weighted-average  balance of $6.4 million,
or 36.6%,  coupled  with an increase in the  weighted-average  yield of 38 basis
points to 1.83% from 1.45% during fiscal 2004.

                                       44


Comparison  of  Operating  Results  for the Years  Ended March 31, 2005 and 2004
(continued)

Interest Income (continued)
- ---------------

The decrease in the average balance of loans and  mortgage-backed  securities as
well as the increase in the average balance of investments and  interest-bearing
deposits is consistent with the Company's aforementioned strategy to shorten the
average  maturity  of the  Company's  interest-earning  assets.  The Company has
invested  a  significant  portion  of the  funds  from  payments  on  loans  and
mortgage-backed  securities in short term investment  securities and other short
term investment vehicles.

Interest Expense
- ----------------

Interest  expense for fiscal 2005 totaled $6.7 million,  a decrease of $431,000,
or 6.0%,  from interest  expense of $7.1 million for the fiscal year ended March
31, 2004.  The decrease  resulted from a 21 basis point  decrease in the average
cost of funds to 1.98% for fiscal  2005,  offset by an  increase  in the average
balance of deposits and borrowings  outstanding  of $13.4  million,  or 4.1%, to
$339.7 million for fiscal 2005.

Interest expense on deposits totaled $5.7 million for fiscal 2005, a decrease of
$215,000,  or 3.6%,  from fiscal 2004, as a result of an 18 basis point decrease
in the  average  cost of  deposits  to 1.81%  for the 2005  period  offset by an
increase in the average balance outstanding of $17.4 million, or 5.9%, to $313.6
million for fiscal 2005.

Interest  expense on  borrowings  totaled $1.0 million for the fiscal year ended
March 31, 2005,  a decrease of $216,000  from fiscal  2004,  primarily  due to a
reduction  in the average  balance of  borrowings  of $3.9 million to an average
balance of $26.1  million for fiscal 2005 from $30.0  million for the year ended
March 31, 2004,  coupled with a decrease in the average  cost of  borrowings  to
3.96% from an average cost of 4.16% for fiscal 2004.

Net Interest Income
- -------------------

Net interest  income  totaled  $10.9 million for the fiscal year ended March 31,
2005, a decrease of $153,000,  or 1.4%,  from fiscal 2004. The average  interest
rate spread  decreased to 2.89% for the year ended March 31, 2005 from 2.97% for
fiscal  2004.  The net interest  margin  decreased to 3.02% for fiscal 2005 from
3.14% for fiscal 2004.

Provision for Losses on Loans
- -----------------------------

The  Company  recorded a provision  for losses on loans  totaling  $430,000  and
$173,000 for the fiscal years ended March 31, 2005 and 2004, respectively.  As a
result of the increased  commercial  loan volume,  the  acquisition of Stebbins'
loan  portfolio  and an  enhancement  of the  Company's  loan rating  standards,
management  increased  the provision for loan losses by $257,000 in fiscal 2005.
To the best of  management's  knowledge,  all known and inherent losses that are
probable and which can be reasonably estimated were recorded at March 31, 2005.

Other Income
- ------------

Other income,  consisting  primarily of an increase in cash  surrender  value of
life  insurance,  gains on sale of loans,  service fees,  and charges on deposit
accounts, decreased by $249,000, or 12.9%, to $1.7 million for fiscal 2005, from
$1.9 million for the year ended March 31, 2004. The decrease resulted  primarily
from a  decrease  of  $256,000  in  merchant  fee  income  due to a  significant
reduction in volume.

                                       45


Comparison  of  Operating  Results  for the Years  Ended March 31, 2005 and 2004
(continued)

General, Administrative and Other Expense
- -----------------------------------------

General,  administrative and other expense increased by $2.9 million,  or 32.4%,
to $11.9  million for the year ended March 31, 2005  compared to the fiscal year
ended March 31, 2004.  Approximately $1.4 million of this increase resulted from
management's  decision to accelerate  the vesting and  attendant  expense of the
Management Recognition and Stock Option Plans.

The increase in employee  compensation  and benefits of $2.0 million,  or 39.4%,
was primarily  attributable to the  acceleration  of benefit plan costs,  normal
merit increases and additional staff needed for operating in a heavily regulated
industry.  An increase of $355,000, or 23.9%, in occupancy and equipment expense
was  primarily  due to a data  conversion  and  operations  costs related to the
Stebbins acquisition.  An increase of $214,000, or 59.0%, in franchise taxes was
due to the  increase in equity from the fiscal  2003  conversion  to stock form.
Similarly, the increase in other operating expense was primarily attributable to
increased costs related to the Stebbins acquisition.

Federal Income Taxes
- --------------------

The federal  income tax  benefit was $85,000 for the year ended March 31,  2005,
reflecting a decrease of $1.2 million in federal  income tax expense from fiscal
2004. The reduction resulted primarily from a $3.6 million,  or 92.3%,  decrease
in  pre-tax  earnings.  The  difference  in the  effective  tax  rate or rate of
benefits from the 34% statutory rate is mainly due to the beneficial  effects of
income  from  cash  surrender  value  of life  insurance  and  other  tax-exempt
obligations.

                                       46



                                                    AVERAGE BALANCE SHEET

===================================================================================================================


The  following  tables set forth certain  information  relating to the Company's
average  balance sheet and reflects the average yield on assets and average cost
of liabilities 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.


                                                         2006                        2005                          2004

                                             Average            Average   Average           Average    Average             Average
                                             Balance   Interest   Rate    Balance  Interest   Rate     Balance   Interest    Rate
                                                                                                  
                                                                               (Dollars in thousands)
Interest-earning assets:
  Loans receivable, net (1)                  $222,944  $14,096    6.32%  $212,785  $ 12,898    6.06%  $214,174   $ 13,982    6.53%
  Mortgage-backed securities (2)               54,629    2,091    3.83     72,911     2,250    3.09     86,440      2,485    2.87
  Investment securities                        76,246    3,059    4.01     52,172     2,048    3.93     34,640      1,495    4.32
  Interest-earning deposits (3)                13,808      442    3.20     23,871       436    1.83     17,478        254    1.45
                                             --------  -------  ------   --------  --------  ------   --------   --------  ------
     Total interest-earning assets            367,627   19,688    5.36    361,739    17,632    4.87    352,732     18,216    5.16

Non-interest-earning assets                    24,736                      23,475                       18,853
                                             --------                    --------                     --------

     Total assets                            $392,363                    $385,214                     $371,585
                                             ========                    ========                     ========

Interest-bearing liabilities:
  Deposits                                   $324,771    7,197    2.22   $313,611     5,684    1.81   $296,244      5,899    1.99
  Borrowings                                   28,424    1,083    3.81     26,076     1,032    3.96     30,000      1,248    4.16
                                             --------  -------  ------   --------  --------  ------   --------   --------  ------
     Total interest-bearing liabilities       353,195    8,280    2.34    339,687     6,716    1.98    326,244      7,147    2.19
                                                      --------                     --------  ------              --------  ------

Non-interest-bearing liabilities                2,025                       3,410                          923
                                             --------                    --------                     --------

     Total liabilities                        355,220                     343,097                      327,167

Stockholders' equity                           37,143                      42,117                       44,418
                                             --------                    --------                     --------

     Total liabilities and stockholders'
        equity                               $392,363                    $385,214                     $371,585
                                             ========                    ========                     ========

Net interest income                                    $11,408                     $ 10,916                      $ 11,069
                                                       =======                     ========                      ========

Interest rate spread (4)                                          3.02%                        2.89%                         2.97%
                                                                ======                       ======                        ======

Net yield on interest-earning assets (5)                          3.10%                        3.02%                         3.14%
                                                                ======                       ======                        ======

Ratio of average interest-earning assets to
  average interest-bearing liabilities                          104.09%                      106.49%                       108.12%
                                                                ======                       ======                        ======


(1)  Includes non-accrual loan balances.
(2)  Includes mortgage-backed securities designated as available for sale.
(3)  Includes  federal  funds  sold  and  interest-bearing   deposits  in  other
     financial institutions.
(4)  Interest rate spread represents the difference between the average yield on
     interest-earning   assets  and  the   average   cost  of   interest-bearing
     liabilities.
(5)  Net yield on  interest-earning  assets  represents net interest income as a
     percentage of average interest-earning assets.

                                       47


Rate/Volume Analysis.

The table below sets forth  certain  information  regarding  changes in interest
income and interest expense of the Company for the periods  indicated.  For each
category   of   interest-earning   assets  and   interest-bearing   liabilities,
information is provided on changes attributable to (i) changes in average volume
(changes in average  volume  multiplied  by old rate);  and (ii) changes in rate
(change in rate  multiplied  by old  average  volume).  Changes  in  rate-volume
(changes in rate multiplied by the change in average volume) have been allocated
proportionately between changes in rate and changes in volume.




                                                                   Year ended March 31,
                                                       2006 vs. 2005                    2005 vs. 2004
                                                  Increase                          Increase
                                                 (decrease)         Total          (decrease)        Total
                                                   due to         increase           due to        increase
                                              Volume      Rate   (decrease)    Volume      Rate   (decrease)
                                                                                      
                                                                       (In thousands)
Interest income attributable to:
  Loans receivable                           $   629    $   569    $ 1,198    $   (90)   $  (994)   $(1,084)
  Mortgage-backed securities                    (633)       474       (159)      (408)       173       (235)
  Investment securities                          965         46      1,011        698       (145)       553
  Interest-bearing deposits                     (316)       322          6        108         74        182
                                             -------    -------    -------    -------    -------    -------
     Total interest-earning  assets              645      1,411      2,056        308       (892)      (584)

Interest expense attributable to:
  Deposits                                       208      1,305      1,513        334       (549)      (215)
  Borrowings                                      91        (40)        51       (157)       (59)      (216)
                                             -------    -------    -------    -------    -------    -------
     Total interest-bearing liabilities          299      1,265      1,564        177       (608)      (431)
                                             -------    -------    -------    -------    -------    -------

Increase (decrease) in net interest income   $   346    $   146    $   492    $   131    $  (284)   $  (153)
                                             =======    =======    =======    =======    =======    =======


Liquidity and Capital Resources

The Bank's primary  sources of funds are deposits,  principal and prepayments on
loans and mortgage-backed  securities,  maturities of investment  securities and
other short-term  investments,  and earnings and funds provided from operations.
While scheduled principal repayments on loans and mortgage-backed securities are
a relatively predictable source of funds, deposit flows and loan prepayments are
greatly influenced by the general level of interest rates,  economic  conditions
and competition.  The Bank manages the pricing of deposits to maintain a desired
level of deposits and cost of funds. In addition,  the Bank invests excess funds
in federal funds and other  short-term  interest-earning  assets,  which provide
liquidity  to meet  lending  requirements.  Federal  funds sold and other liquid
assets outstanding at March 31, 2006, 2005 and 2004, amounted to $143.2 million,
$163.2 million and $139.9  million,  respectively.  For  additional  information
about  cash  flows  from  the  Company's  operating,   financing  and  investing
activities,  see the  Statements  of Cash  Flows  included  in the  Consolidated
Financial Statements.

A major portion of the Bank's liquidity  consists of cash and cash  equivalents,
which are a product of their operating,  investing and financing activities. The
primary  sources of cash are net  earnings,  principal  repayments  on loans and
mortgage-backed  securities,  proceeds  from advances from the Federal Home Loan
Bank ("FHLB"), and sales of mortgage-backed securities.  Liquidity management is
both a daily and long-term function of business management. If the Bank requires
funds  beyond its ability to generate  funds  internally,  borrowing  agreements
exist with the Federal Home Loan Bank,  which  provide an  additional  source of
funds. At March 31, 2006, the Company had $32.8 million in outstanding  advances
from the FHLB. At March 31, 2006, management believes the Company has additional
borrowing capacity from the FHLB totaling $168.6 million.

                                       48


Contractual Obligations

The following table  summarizes the Company's  contractual  obligations at March
31, 2006.



                                                                 Payments due by period
                                                   Less                             More
                                                   than        1-3        3-5       than
                                                  1 year      years      years     5 years     Total
                                                                               
                                                                     (In thousands)

Contractual obligations:
  Operating lease obligations                    $     85   $    172   $    115   $      7   $    379
  Advances from the Federal Home Loan Bank         15,250      7,500      5,000      5,000     32,750
  Certificates of deposit                         129,966     45,893     11,641        580    188,080

Amount of commitments expiring per period:
  Commitments to originate loans:
    Letters of credit                                 913         --         --         --        913
    Credit card/overdraft lines of credit             318         --         --         --        318
    Home equity/commercial lines of credit         28,989         --         --         --     28,989
    One- to four-family and multi-family loans      3,372         --         --         --      3,372
                                                 --------   --------   --------   --------   --------

         Total contractual obligations           $178,893   $ 53,565   $ 16,756   $  5,587   $254,801
                                                 ========   ========   ========   ========   ========


Impact of Inflation and Changing Prices

The  consolidated  financial  statements  of  the  Company  and  notes  thereto,
presented  elsewhere  herein,  have been prepared in accordance  with U.S. GAAP,
which requires the  measurement of financial  position and operating  results in
terms of historical  dollars,  without  considering  the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected  in the  increased  cost  of the  Company's  operations.  Unlike  most
industrial  companies,  nearly all the assets and liabilities of the Company are
monetary.  As a result,  interest  rates have a greater  impact on the Company's
performance than do the effect of general levels of inflation. Interest rates do
not  necessarily  move in the same direction or to the same extent as the prices
of goods and services.

ITEM 7A.    Quantitative and Qualitative Disclosures About Market Risk
- ----------------------------------------------------------------------

Asset and Liability Management-Interest Rate Sensitivity Analysis

The Bank, like other financial institutions, is subject to interest rate risk to
the  extent  that  interest-earning  assets  reprice  at a  different  time than
interest-bearing  liabilities.  As part of their  effort to  monitor  and manage
interest rate risk, the Bank uses the "net portfolio value" ("NPV")  methodology
adopted by the OTS as part of its interest  rate  sensitivity  regulations.  The
application  of NPV  methodology  illustrates  certain  aspects  of  the  Bank's
interest rate risk.

Generally,  NPV is the  discounted  present  value  of  the  difference  between
incoming cash flows on interest-earning and other assets and outgoing cash flows
on  interest-bearing  and other liabilities.  The application of the methodology
attempts to quantify  interest  rate risk as the change in the NPV,  which would
result from a theoretical change in market interest rates.

Presented  below,  as of March 31,  2006 and 2005,  is an analysis of the Bank's
interest rate risk as measured by changes in NPV for instantaneous and sustained
100, 200 and 300 basis point (1 basis point equals .01%) increases and a 100 and
200 basis point decrease in market interest rates.  Due to the current  interest
rate  environment,  the changes in NPV are not  estimated  for a decrease of 300
basis points.

                                       49


Asset and Liability Management-Interest Rate Sensitivity Analysis (continued)

As with any method of measuring  interest rate risk,  certain  shortcomings  are
inherent  in  the  NPV  approach.  For  example,  although  certain  assets  and
liabilities may have similar maturities or periods of repricing,  they may react
in different  degrees to changes in market  interest  rates.  Also, the interest
rates on certain  types of assets and  liabilities  may  fluctuate in advance of
changes in market  interest  rates,  while interest rates on other types may lag
behind  changes in market rates.  Further,  in the event of a change in interest
rates, expected rates of prepayment on loans and mortgage-backed  securities and
early  withdrawal  levels from  certificates  of deposit  would  likely  deviate
significantly from those assumed in making the risk calculations.




                                                    As of March 31, 2006
                                                                                            Net Portfolio Value
     Change in                             Net Portfolio Value                               as % of PV of Assets
  Interest Rates
  (Basis Points)          $ Amount            $ Change            % Change                 NPV Ratio       Change
                                                                                          
                                  (In thousands)

      +300 bp             $30,755            $(12,524)              (29)%                    8.25%         (261)bp
      +200 bp              34,937              (8,342)              (19)                     9.17          (169)
      +100 bp              39,412              (3,867)               (9)                    10.10           (76)
         0 bp              43,279                  --                --                     10.86            --
      -100 bp              45,021               1,742                 4                     11.09            23
      -200 bp              43,649                 370                 1                     10.63           (23)


                                                    As of March 31, 2005
                                                                                            Net Portfolio Value
     Change in                             Net Portfolio Value                              as % of PV of Assets(4)
  Interest Rates
  (Basis Points)          $ Amount            $ Change            % Change                 NPV Ratio       Change
                                                                                          
                                  (In thousands)

      +300 bp             $42,370            $(11,927)              (22)%                   11.66%         (250)bp
      +200 bp              48,174              (4,097)               (8)                    12.96          (120)
      +100 bp              52,785              (1,512)               (3)                    13.92           (24)
         0 bp              54,297                  --                --                     14.16            --
      -100 bp              52,271              (2,026)               (4)                    13.60           (56)


The Company's policy in recent years had been to reduce its exposure to interest
rate risk  generally by better  matching  the  maturities  of its interest  rate
sensitive  assets and  liabilities  and by originating  adjustable rate mortgage
("ARM")  loans and other  adjustable  rate or  short-term  loans,  as well as by
purchasing  short-term  investments  and  mortgage-backed  securities.  However,
particularly in the rising short-term  interest rate environment which currently
exists,  borrowers typically prefer fixed rate loans to ARM loans.  Accordingly,
ARM loan  originations  were very limited during the fiscal year ended March 31,
2006.  The Company  has sought to lengthen  the  maturities  of its  deposits by
promoting longer-term  certificates;  however, the Company was not successful in
lengthening the maturities of its deposits in the interest rate environment that
existed throughout fiscal 2006.

The  Company  has an  Asset-Liability  Management  Committee  (ALCO),  which  is
responsible for reviewing the Company's  asset-liability policies. The Committee
meets and reports  monthly to the Board of Directors on interest  rate risks and
trends, as well as liquidity and capital ratios and  requirements.  The Bank has
operated within the framework of its prescribed  asset/liability risk ranges for
each of the last three years.

                                       50


ITEM 8.     Financial Statements and Supplementary Data
- -------------------------------------------------------


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Board of Directors
Wayne Savings Bancshares, Inc.

We have audited the accompanying  consolidated statements of financial condition
of Wayne Savings Bancshares, Inc. as of March 31, 2006 and 2005, and the related
consolidated statements of earnings,  comprehensive income, stockholders' equity
and cash flows for each of the three years in the period  ended March 31,  2006.
These consolidated  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.  The Company is not  required to
have,  nor were we  engaged to perform  an audit of its  internal  control  over
financial reporting.  Our audit included  consideration of internal control over
financial  reporting  as  a  basis  for  designing  audit  procedures  that  are
appropriate  in the  circumstances,  but not for the  purpose of  expressing  an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting.  Accordingly,  we express  no such  opinion.  An audit also  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial   statements,   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 consolidated  financial position of Wayne
Savings  Bancshares,  Inc. as of March 31, 2006 and 2005,  and the  consolidated
results of its  operations and its cash flows for each of the three years in the
period ended March 31, 2006, in conformity with accounting  principles generally
accepted in the United States of America.

As more  fully  explained  in Note  A-9,  the  Company  changed  its  method  of
accounting for stock-based  compensation expense in fiscal 2005 pursuant to SFAS
No. 123(R), "Share-Based Payment."

/s/ Grant Thornton LLP


Cincinnati, Ohio
June 5, 2006

                                       51




                                     WAYNE SAVINGS BANCSHARES, INC.

                             CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                                        March 31, 2006 and 2005
                               (Dollars in thousands, except share data)


         ASSETS                                                                      2006         2005
                                                                                           

Cash and due from banks                                                         $   2,952    $   4,176
Federal funds sold                                                                     --       19,400
Interest-earning deposits in other financial institutions                          11,171        6,366
                                                                                ---------    ---------
         Cash and cash equivalents                                                 14,123       29,942

Investment securities available for sale - at market                               67,505       60,844
Investment securities held to maturity - at amortized cost, approximate
  market value of $5,796 and $12,101 at March 31, 2006 and 2005, respectively       5,802       12,012
Mortgage-backed securities available for sale - at market                          53,932       57,724
Mortgage-backed securities held to maturity - at amortized cost, approximate
  market value of $1,805 and $2,647 at March 31, 2006 and 2005, respectively        1,799        2,628
Loans receivable - net                                                            235,312      213,627
Office premises and equipment - net                                                 8,557        8,922
Real estate acquired through foreclosure                                              156           35
Federal Home Loan Bank stock - at cost                                              4,623        4,386
Cash surrender value of life insurance                                              5,811        6,581
Accrued interest receivable on loans                                                1,075          933
Accrued interest receivable on mortgage-backed securities                             250          268
Accrued interest receivable on investments and interest-bearing deposits              700          708
Prepaid expenses and other assets                                                   1,526        1,707
Goodwill and other intangible assets                                                2,508        2,614
Prepaid federal income taxes                                                           --          702
                                                                                ---------    ---------

         Total assets                                                           $ 403,679    $ 403,633
                                                                                =========    =========

         LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits                                                                        $ 332,570    $ 320,586
Advances from the Federal Home Loan Bank                                           32,750       40,000
Advances by borrowers for taxes and insurance                                         521          481
Accrued interest payable                                                              263          198
Accounts payable on mortgage loans serviced for others                                225          231
Other liabilities                                                                   1,118        1,305
Accrued federal income tax                                                             51           --
Deferred federal income taxes                                                         665          633
                                                                                ---------    ---------
         Total liabilities                                                        368,163      363,434

Commitments                                                                            --           --

Stockholders' equity
  Preferred stock (500,000 shares of $.10 par value authorized - no
  preferred stock issued as of March 31, 2006 or 2005)                                 --           --
  Common stock (9,000,000 shares of $.10 par value authorized;
    3,934,874 and 3,907,318 shares issued at both March 31, 2006 and 2005)            393          391
  Additional paid-in capital                                                       35,604       35,133
  Retained earnings - substantially restricted                                     11,394       11,371
  Less required contributions for shares acquired by Employee Stock
    Ownership Plan                                                                 (1,239)      (1,304)
  Less 595,322 and 282,261 shares of treasury stock at March 31, 2006
    and 2005, respectively - at cost                                               (9,625)      (4,600)
  Accumulated comprehensive loss                                                   (1,011)        (792)
                                                                                ---------    ---------
         Total stockholders' equity                                                35,516       40,199
                                                                                ---------    ---------

         Total liabilities and stockholders' equity                             $ 403,679    $ 403,633
                                                                                =========    =========


The accompanying notes are an integral part of these statements.

                                                  52




                                WAYNE SAVINGS BANCSHARES, INC.

                              CONSOLIDATED STATEMENTS OF EARNINGS

                       For the years ended March 31, 2006, 2005 and 2004
                        (Dollars in thousands, except per share data)

                                                                 2006        2005        2004
                                                                               
Interest income
  Loans                                                       $ 14,096   $ 12,898    $ 13,982
  Mortgage-backed securities                                     2,091      2,250       2,485
  Investment securities                                          3,059      2,048       1,495
  Interest-bearing deposits and other                              442        436         254
                                                              --------   --------    --------
         Total interest income                                  19,688     17,632      18,216

Interest expense
  Deposits                                                       7,197      5,684       5,899
  Borrowings                                                     1,083      1,032       1,248
                                                              --------   --------    --------
         Total interest expense                                  8,280      6,716       7,147
                                                              --------   --------    --------

         Net interest income                                    11,408     10,916      11,069

Provision for losses on loans                                      211        430         173
                                                              --------   --------    --------

         Net interest income after provision for
           losses on loans                                      11,197     10,486      10,896

Other income
  Gain on sale of mortgage-backed and investment securities         --         --          16
  Gain on sale of loans                                             67        171         148
  Increase in cash surrender value of life insurance               383        260         260
  Service fees, charges and other operating                      1,327      1,253       1,509
                                                              --------   --------    --------
         Total other income                                      1,777      1,684       1,933

General, administrative and other expense
  Employee compensation and benefits                             6,382      7,230       5,187
  Occupancy and equipment                                        1,907      1,839       1,484
  Federal deposit insurance premiums                                43         45          47
  Franchise taxes                                                  529        577         363
  Amortization of core deposit intangible and other                106         87          --
  Other operating                                                1,932      2,096       1,890
                                                              --------   --------    --------
         Total general, administrative and other expense        10,899     11,874       8,971
                                                              --------   --------    --------

         Earnings before income taxes                            2,075        296       3,858

Federal income taxes (benefits)
  Current                                                          290        171         524
  Deferred                                                         145       (256)        630
                                                              --------   --------    --------
         Total federal income taxes (benefits)                     435        (85)      1,154
                                                              --------   --------    --------

         NET EARNINGS                                         $  1,640   $    381    $  2,704
                                                              ========   ========    ========

         Basic earnings per share                             $    .50   $    .11    $    .72
                                                              ========   ========    ========

         Diluted earnings per share                           $    .50   $    .11    $    .72
                                                              ========   ========    ========


The accompanying notes are an integral part of these statements.

                                              53




                                  WAYNE SAVINGS BANCSHARES, INC.

                         CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

                        For the years ended March 31, 2006, 2005 and 2004
                                          (In thousands)


                                                                      2006       2005       2004
                                                                                

Net earnings                                                       $ 1,640    $   381    $ 2,704

Other comprehensive income (loss), net of tax:
  Unrealized holding gains (losses) on securities during the
    year, net of taxes (benefits) of $(113), $(655) and $183          (219)    (1,271)       367

Reclassification adjustment for realized gains included in
  earnings, net of taxes of $5 for the year ended March 31, 2004        --         --        (11)

Minimum pension liability adjustment, net of taxes of
  $142 for fiscal 2004                                                  --         --        275
                                                                   -------    -------    -------

Comprehensive income (loss)                                        $ 1,421    $  (890)   $ 3,335
                                                                   =======    =======    =======

Accumulated comprehensive income (loss)                            $(1,011)   $  (792)   $   479
                                                                   =======    =======    =======


The accompanying notes are an integral part of these statements.

                                               54




                                                   WAYNE SAVINGS BANCSHARES, INC.

                                           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                          For the years ended March 31, 2006, 2005 and 2004
                                           (Dollars in thousands, except per share data)

                                                                                                                 Other
                                                                                                                 compre-    Total
                                                            Additional             Shares    Shares   Treasury   hensive    stock-
                                                   Common    paid-in  Retained   acquired   acquired   stock -   income    holders'
                                                   stock     capital  earnings    by ESOP    by MRP    at cost   (loss)     equity
                                                                                                   
Balance at March 31, 2003                         $    389  $ 34,208  $ 11,830   $ (1,612)  $     --  $     --  $   (152)  $ 44,663

Shares purchased for MRP                                --        --        --         --     (1,142)       --        --     (1,142)
Stock options exercised                                  2        59        --         --         --        --        --         61
Amortization of stock benefit plans                     --        98        --        156         --        --        --        254
Net earnings for the year ended March 31, 2004          --        --     2,704         --         --        --        --      2,704
Dividends declared of $.47 per share                    --        --    (1,807)        --         --        --        --     (1,807)
Minimum pension liability adjustment,
  net of related tax effects                            --        --        --         --         --        --       275        275
Purchase of treasury shares at cost                     --        --        --         --         --    (1,803)       --     (1,803)
Unrealized gains on securities designated as
  available for sale, net of related tax effects        --        --        --         --         --        --       356        356
                                                  --------  --------  --------   --------   --------  --------  --------   --------

Balance at March 31, 2004                              391    34,365    12,727     (1,456)    (1,142)   (1,803)      479     43,561

Amortization of expense related to ESOP                 --       104        --        152         --        --        --        256
Acceleration of Management Recognition and
  Stock Option Plan expense                             --       664        --         --      1,142        --        --      1,806
Net earnings for the year ended March 31, 2005          --        --       381         --         --        --        --        381
Dividends declared of $.48 per share                    --        --    (1,737)        --         --        --        --     (1,737)
Purchase of treasury shares at cost                     --        --        --         --         --    (2,797)       --     (2,797)
Unrealized losses on securities designated as
  available for sale, net of related tax benefits       --        --        --         --         --        --    (1,271)    (1,271)
                                                  --------  --------  --------   --------   --------  --------  --------   --------

Balance at March 31, 2005
                                                       391    35,133    11,371     (1,304)        --    (4,600)     (792)    40,199
Stock options exercised                                  2       363        --         --         --        --        --        365
Amortization of expense related to ESOP                 --       108        --         65         --        --        --        173
Net earnings for the year ended March 31, 2006          --        --     1,640         --         --        --        --      1,640
Dividends declared of $.48 per share                    --        --    (1,617)        --         --        --        --     (1,617)
Purchase of treasury shares at cost                     --        --        --         --         --    (5,025)       --     (5,025)
Unrealized losses on securities designated as
  available for sale, net of related tax benefits       --        --        --         --         --        --      (219)      (219)
                                                  --------  --------  --------   --------   --------  --------  --------   --------

Balance at March 31, 2006                         $    393  $ 35,604  $ 11,394   $ (1,239)  $     --  $ (9,625) $ (1,011)  $ 35,516
                                                  ========  ========  ========   ========   ========  ========  ========   ========


The accompanying notes are an integral part of these statements.

                                                                 55




                                          WAYNE SAVINGS BANCSHARES, INC.

                                       CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 For the years ended March 31, 2006, 2005 and 2004
                                                  (In thousands)

                                                                                     2006        2005        2004
                                                                                                   
Cash flows provided by (used in) operating activities:
  Net earnings for the year                                                      $  1,640    $    381    $  2,704
  Adjustments to reconcile net earnings to net cash
  provided by operating activities:
    Amortization of premiums and discounts on loans,
      investments and mortgage-backed securities, net                                (622)      1,244       1,409
    Amortization of deferred loan origination fees                                   (110)       (220)       (512)
    Depreciation and amortization                                                     645         601         507
    Amortization of expense related to ESOP                                           173         256         254
    Acceleration of Management Recognition and Stock Option Plan expense               --       1,806          --
    Gain on sale of loans                                                             (13)       (117)        (87)
    Gain on sale of mortgage-backed and investment securities                          --          --         (16)
    Proceeds from sale of loans in the secondary market                             6,078       6,843       6,285
    Loan origination for sale in the secondary market                              (6,065)     (6,017)     (6,203)
    Provision for losses on loans                                                     211         430         173
    Amortization of core deposit intangible and other                                 106          87          --
    Federal Home Loan Bank stock dividends                                           (237)       (181)       (164)
    Increase (decrease) in cash due to changes in:
      Accrued interest receivable on loans                                           (142)         72         147
      Accrued interest receivable on mortgage-backed securities                        18         (44)        (20)
      Accrued interest receivable on investments and interest-bearing deposits          8        (390)         (5)
      Prepaid expenses and other assets                                               182         186      (1,017)
      Accrued interest payable                                                         65          (5)        (49)
      Accounts payable and other liabilities                                         (193)        (99)       (267)
      Federal income taxes
        Current                                                                       753        (564)       (288)
        Deferred                                                                      145        (256)        630
                                                                                 --------    --------    --------
         Net cash flows provided by operating activities                            2,642       4,013       3,481

Cash flows provided by (used in) investing activities:
  Purchase of investment securities held to maturity                                   --         (93)         --
  Purchase of investment securities designated as available for sale              (11,850)    (35,547)    (22,067)
  Proceeds from maturity of investment securities held to maturity                  6,240       2,175       4,735
  Proceeds from maturity of investment securities designated
    as available for sale                                                           5,188       2,516      22,088
  Purchase of mortgage-backed securities designated as available for sale         (22,361)     (8,018)    (55,526)
  Principal repayments on mortgage-backed securities held to maturity                 818       1,825       5,255
  Principal repayments on mortgage-backed securities designated as
    available for sale                                                             23,564      33,122      31,908
  Proceeds from sale of mortgage-backed securities                                  2,860          --       4,373
  Loan principal repayments                                                        34,980      52,517      89,107
  Loan disbursements                                                              (57,050)    (50,178)    (65,658)
  Purchase of office premises and equipment                                          (280)       (421)       (431)
  Purchase of bank-owned life insurance                                                --          --        (940)
  Increase in cash surrender value of life insurance                                 (405)       (260)       (260)
  Proceeds from life insurance                                                      1,175          --          --
  Proceeds from sale of real estate acquired through foreclosure                      163         311         172
  Net cash used in the acquisition of Stebbins Bancshares, Inc.                        --      (1,314)         --
                                                                                 --------    --------    --------
         Net cash provided by (used in) investing activities                      (16,958)     (3,365)     12,756
                                                                                 --------    --------    --------

         Net cash flows provided by (used in) operating and investing
           activities balance carried forward                                     (14,316)        648      16,237
                                                                                 --------    --------    --------



                                                        56




                                      WAYNE SAVINGS BANCSHARES, INC.

                            CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                            For the years ended March 31, 2006, 2005 and 2004
                                              (In thousands)

                                                                            2006        2005        2004
                                                                                          

         Net cash flows provided by (used in) operating and investing
           activities balance brought forward                           $(14,316)   $    648    $ 16,237

Cash flows provided by (used in) financing activities:
  Net increase (decrease) in deposits                                     11,984       3,946      (9,101)
  Proceeds from Federal Home Loan Bank advances                           80,275      15,000          --
  Repayments on Federal Home Loan Bank advances                          (87,525)     (5,000)         --
  Advances by borrowers for taxes and insurance                               40          (5)        (95)
  Dividends paid on common stock                                          (1,617)     (1,737)     (1,786)
  Tax benefits related to stock benefit plans                                 80          --          20
  Proceeds from exercise of stock options                                    285          --          61
  Shares acquired by Management Recognition Plan                              --          --      (1,142)
  Purchase of treasury shares - at cost                                   (5,025)     (2,797)     (1,803)
                                                                        --------    --------    --------
         Net cash flows provided by (used in)
           financing activities                                           (1,503)      9,407     (13,846)
                                                                        --------    --------    --------

Net increase (decrease) in cash and cash equivalents                     (15,819)     10,055       2,391

Cash and cash equivalents at beginning of year                            29,942      19,887      17,496
                                                                        --------    --------    --------

Cash and cash equivalents at end of year                                $ 14,123    $ 29,942    $ 19,887
                                                                        ========    ========    ========


Supplemental disclosure of cash flow information:
  Cash paid during the year for:
    Federal income taxes                                                $    325    $    568    $    630
                                                                        ========    ========    ========

    Interest on deposits and borrowings                                 $  8,215    $  6,728    $  7,196
                                                                        ========    ========    ========


Supplemental disclosure of noncash investing activities:
  Transfers from loans to real estate acquired through
    foreclosure                                                         $    412    $    268    $    279
                                                                        ========    ========    ========

  Unrealized gains (losses) on securities designated as available
    for sale, net of related tax effects                                $   (219)   $ (1,271)   $    356
                                                                        ========    ========    ========

  Minimum pension liability adjustment, net of related tax effects      $     --    $     --    $    275
                                                                        ========    ========    ========

  Recognition of mortgage servicing rights in accordance
    with SFAS No. 140                                                   $     54    $     54    $     61
                                                                        ========    ========    ========

  Dividends payable                                                     $    401    $    428    $    446
                                                                        ========    ========    ========

Stebbins acquisition, net of cash and cash equivalents acquired:
  Assets
    Securities                                                                      $ 11,787
    Loans, net                                                                        12,225
    Other                                                                                 60
    Goodwill and other intangibles                                                     2,701
  Liabilities assumed
    Deposits                                                                         (24,810)
    Other liabilities                                                                   (649)
                                                                                    --------

         Net cash and cash equivalents paid at acquisition                          $  1,314
                                                                                    ========


The accompanying notes are an integral part of these statements.

                                                   57


                         WAYNE SAVINGS BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          March 31, 2006, 2005 and 2004


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The consolidated  financial  statements include Wayne Savings  Bancshares,  Inc.
(the  "Company") and its wholly owned  subsidiary  Wayne Savings  Community Bank
("Wayne  Savings" or the "Bank").  During fiscal 2004,  the  Company's  Board of
Directors approved a business  combination,  which was completed in fiscal 2005,
whereby  Stebbins  Bancshares,  Inc., the parent of Stebbins  National Bank, was
merged into Wayne  Savings  Bancshares,  Inc. and Stebbins  National Bank merged
with and into  Wayne  Savings  Community  Bank.  The  business  combination  was
accounted for using the purchase  method of accounting.  Accordingly,  the March
31, 2005  consolidated  financial  statements  herein  include  the  accounts of
Stebbins  Bancshares  from the June 1, 2004  acquisition  date through March 31,
2005. Intercompany  transactions and balances are eliminated in the consolidated
financial statements.  In addition to the Bank, the Company owns a 49% ownership
interest in Oak Tree Title, Inc., a title insurance agency. The Company accounts
for this investment using the equity method.

The Bank  conducts a general  banking  business  in north  central  Ohio,  which
consists of attracting deposits from the general public and applying those funds
to the  origination  of  loans  for  residential,  consumer  and  nonresidential
purposes.  The  Bank's  profitability  is  significantly  dependent  on its  net
interest income,  which is the difference between interest income generated from
interest-earning  assets (i.e.  loans and  investments) and the interest expense
paid on  interest-bearing  liabilities  (i.e.  customer  deposits  and  borrowed
funds).   Net   interest   income  is  affected  by  the   relative   amount  of
interest-earning  assets  and  interest-bearing  liabilities  and  the  interest
received or paid on these balances. The level of interest rates paid or received
by the  Bank  can be  significantly  influenced  by a  number  of  environmental
factors,  such as governmental monetary policy, that are outside of management's
control.

The financial  information presented herein has been prepared in accordance with
accounting  principles generally accepted in the United States of America ("U.S.
GAAP") and general accounting  practices within the financial services industry.
In preparing  financial  statements in accordance with U.S. GAAP,  management is
required to make estimates and assumptions  that affect the reported  amounts of
assets and liabilities  and the disclosure of contingent  assets and liabilities
at the date of the  financial  statements  and revenues and expenses  during the
reporting period. Actual results could differ from such estimates.

The following is a summary of the  Company's  significant  accounting  policies,
which  with the  exception  of the  policy  described  in Note  A-9,  have  been
consistently   applied  in  the  preparation  of  the   accompanying   financial
statements.

1. Investment Securities and Mortgage-Backed Securities
   ----------------------------------------------------

The Company accounts for investment and mortgage-backed securities in accordance
with Statement of Financial  Accounting  Standards  ("SFAS") No. 115 "Accounting
for Certain  Investments in Debt and Equity  Securities."  SFAS No. 115 requires
that investments be categorized as  held-to-maturity,  trading, or available for
sale.  Securities classified as held-to-maturity are carried at cost only if the
Company  has the  positive  intent  and  ability  to hold  these  securities  to
maturity. Trading securities and securities designated as available for sale are
carried at fair value with  resulting  unrealized  gains or losses  recorded  to
operations or stockholders'  equity,  respectively.  Realized gains or losses on
sales of securities are recognized using the specific identification method.

                                       58


                         WAYNE SAVINGS BANCSHARES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          March 31, 2006, 2005 and 2004


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2. Loans Receivable
   ----------------

Loans held in portfolio are stated at the principal amount outstanding, adjusted
for deferred loan origination fees, the allowance for loan losses,  and premiums
and  discounts on loans  purchased  and sold.  Premiums  and  discounts on loans
purchased and sold are  amortized and accreted to operations  using the interest
method over the average life of the underlying loans.

Interest is accrued as earned unless the collectibility of the loan is in doubt.
Uncollectible  interest on loans that are contractually past due is charged off,
or an allowance is established based on management's  periodic  evaluation.  The
allowance is  established  by a charge to interest  income equal to all interest
previously  accrued,  and income is  subsequently  recognized only to the extent
that cash payments are received until, in management's  judgment, the borrower's
ability to make periodic interest and principal payments has returned to normal,
in which case the loan is returned to accrual status.

The Bank recognizes rights to service mortgage loans for others pursuant to SFAS
No.  140  "Accounting  for  Transfers  and  Servicing  of  Financial  Assets and
Extinguishments of Liabilities." In accordance with SFAS No. 140, an institution
that  acquires  mortgage   servicing  rights  through  either  the  purchase  or
origination  of  mortgage  loans and sells  those  loans with  servicing  rights
retained must  allocate some of the cost of the loans to the mortgage  servicing
rights.

The Bank  recognized  $54,000,  $54,000 and $61,000 of pre-tax gains on sales of
loans related to capitalized  mortgage  servicing rights during the fiscal years
ended March 31, 2006, 2005 and 2004, respectively.

SFAS No. 140 requires that capitalized mortgage servicing rights be assessed for
impairment.  Impairment is measured based on fair value. The mortgage  servicing
rights  recorded by the Bank,  calculated in accordance  with the  provisions of
SFAS No.  140,  were  segregated  into pools for  valuation  purposes,  using as
pooling  criteria the loan term and coupon rate.  Once pooled,  each grouping of
loans was  evaluated on a  discounted  earnings  basis to determine  the present
value of future  earnings  that a purchaser  could  expect to realize  from each
portfolio.  Earnings were  projected  from a variety of sources  including  loan
servicing  fees,  interest  earned on float,  net  interest  earned on  escrows,
miscellaneous income and costs to service the loans. The present value of future
earnings is the "economic" value for the pool, i.e., the net realizable  present
value to an acquirer of the acquired servicing.

The Bank recorded  amortization  related to mortgage  servicing  rights totaling
approximately $28,000,  $61,000 and $164,000 for the years ended March 31, 2006,
2005 and 2004,  respectively.  At March 31, 2006 and 2005, the carrying value of
the Bank's mortgage  servicing rights,  which  approximated fair value,  totaled
$311,000 and $285,000, respectively.

Loans held for sale are  carried at the lower of cost or market,  determined  in
the aggregate.  In computing cost,  deferred loan  origination fees are deducted
from the principal balances of the related loans. There were no loans identified
as held for sale at either March 31, 2006 or March 31, 2005.

                                       59


                         WAYNE SAVINGS BANCSHARES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          March 31, 2006, 2005 and 2004


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

3. Loan Origination Fees
   ---------------------

The Bank  accounts  for loan  origination  fees in  accordance  with SFAS No. 91
"Accounting for  Nonrefundable  Fees and Costs  Associated  with  Originating or
Acquiring Loans and Initial Direct Costs of Leases."  Pursuant to the provisions
of SFAS No. 91,  origination  fees  received from loans,  net of certain  direct
origination  costs,  are  deferred and  amortized  to interest  income using the
level-yield method, giving effect to actual loan prepayments. Additionally, SFAS
No. 91 generally  limits  deferred  loan  origination  costs to the direct costs
attributable  to the origination of a loan, i.e.  principally  actual  personnel
costs.  Fees received for loan  commitments  that are expected to be drawn upon,
based on the Bank's  experience  with  similar  commitments,  are  deferred  and
amortized over the life of the loan using the level-yield method. Fees for other
loan commitments are deferred and amortized over the loan commitment period on a
straight-line basis.

4. Allowance for Loan Losses
   -------------------------

It is the Bank's  policy to provide  valuation  allowances  for losses  inherent
within  the  loan  portfolio  that  are  both  probable  and  can be  reasonably
estimated.  When  the  collection  of a  loan  becomes  doubtful,  or  otherwise
troubled, the Bank records a charge-off equal to the difference between the fair
value of the  property  securing  the loan and the  loan's  carrying  value.  In
providing valuation allowances, costs of holding real estate, including the cost
of capital,  are considered.  Major loans (including  development  projects) and
major lending areas are reviewed periodically to determine potential problems at
an early date. The allowance for loan losses is increased by charges to earnings
and decreased by charge-offs (net of recoveries).

The  Bank  accounts  for  impaired  loans  in  accordance  with  SFAS  No.  114,
"Accounting by Creditors for Impairment of a Loan." This Statement requires that
impaired loans be measured based upon the present value of expected  future cash
flows discounted at the loan's effective interest rate or, as an alternative, at
the loan's observable market price or fair value of the collateral.

A loan is  defined  under  SFAS No.  114 as  impaired  when,  based  on  current
information and events, it is probable that a creditor will be unable to collect
all amounts due according to the  contractual  terms of the loan  agreement.  In
applying the provisions of SFAS No. 114, the Bank  considers  investment in one-
to  four-family   residential  loans  and  consumer   installment  loans  to  be
homogeneous and therefore  excluded from separate  identification for evaluation
of impairment. With respect to the Bank's investment in multi-family, commercial
and nonresidential  loans, and the evaluation of impairment thereof,  such loans
are collateral  dependent and, as a result, are carried as a practical expedient
at the lower of cost or fair value of collateral.

It is the  Bank's  policy to charge  off  unsecured  credits  that are more than
ninety days delinquent.  Similarly, collateral dependent loans are evaluated for
impairment  at the time it becomes  possible  that the Bank will not collect all
contractual  amounts due.  Generally,  this analysis is performed  before a loan
becomes ninety days delinquent.

                                       60


                         WAYNE SAVINGS BANCSHARES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          March 31, 2006, 2005 and 2004


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

4. Allowance for Loan Losses (continued)
   -------------------------

Information  with  respect to loans  defined as  impaired  under SFAS No. 114 is
summarized below:

                                                              March 31,
                                                       2006     2005     2004
Investment in impaired loans                           $ --     $ --     $ --
Impaired loans with no measurement of loss               --       --       --
Impaired loans with measurement of loss                  --       --       --
Allocated allowance for loan losses                      --       --       --
Average impaired loans                                   --       --      900
Charge-off of principal related to impaired loans        --       --       --

During the time a loan is deemed  impaired,  the Bank  records  interest  income
using the cash method of accounting.  There was no interest  income  recorded on
impaired  loans in fiscal  2006 or 2005.  Interest  income  recorded on impaired
loans using the cash  recovery  method  totaled  approximately  $249,000 for the
fiscal year ended March 31, 2004.

5. Office Premises and Equipment
   -----------------------------

Office premises and equipment are carried at cost and include expenditures which
extend the useful  lives of  existing  assets.  Maintenance,  repairs  and minor
renewals are expensed as incurred.  For financial  reporting,  depreciation  and
amortization  are provided on the  straight-line  method over the shorter of the
remaining useful lives of the assets, or the lease term,  estimated to be twenty
to  fifty-five  years  for  buildings  and  improvements,  five to ten years for
furniture and  equipment,  ten to twenty years for leasehold  improvements,  and
forty  years  for safe  deposit  boxes.  An  accelerated  method is used for tax
reporting purposes.

6. Real Estate Acquired Through Foreclosure
   ----------------------------------------

Real estate acquired  through  foreclosure is carried at the lower of the loan's
unpaid principal balance (cost) or fair value less estimated selling expenses at
the date of  acquisition.  Real  estate  loss  provisions  are  recorded  if the
properties' fair value  subsequently  declines below the value determined at the
recording  date. In determining  the lower of cost or fair value at acquisition,
costs relating to development and improvement of property are capitalized. Costs
relating to holding  real estate  acquired  through  foreclosure,  net of rental
income, are charged against earnings as incurred.

7. Federal Income Taxes
   --------------------

The  Company  accounts  for  federal  income  taxes  pursuant  to SFAS  No.  109
"Accounting  for Income Taxes." In accordance  with SFAS No. 109, a deferred tax
liability or deferred  tax asset is computed by applying  the current  statutory
tax rates to net taxable or  deductible  temporary  differences  between the tax
basis  of an  asset  or  liability  and its  reported  amount  in the  financial
statements  that will  result in net  taxable  or  deductible  amounts in future
periods.  Deferred tax assets are recorded only to the extent that the amount of
net deductible temporary differences or carryforward  attributes may be utilized
against  current period  earnings,  carried back against prior years'  earnings,
offset against taxable temporary

                                       61


                         WAYNE SAVINGS BANCSHARES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          March 31, 2006, 2005 and 2004


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

7. Federal Income Taxes (continued)
   --------------------

differences   reversing  in  future  periods,  or  utilized  to  the  extent  of
management's  estimate  of future  taxable  income.  A  valuation  allowance  is
provided for deferred tax assets to the extent that the value of net  deductible
temporary differences and carryforward attributes exceeds management's estimates
of taxes payable on future taxable income. Deferred tax liabilities are provided
on the total amount of net temporary differences taxable in the future.

The Company's  principal  temporary  differences between pretax financial income
and taxable income result primarily from the different methods of accounting for
deferred loan origination fees, Federal Home Loan Bank stock dividends,  certain
components of retirement  expense,  general loan loss allowances,  percentage of
earnings  bad  debt  deductions  and  mortgage  servicing  rights.  A  temporary
difference  is  also  recognized  for   depreciation   expense   computed  using
accelerated methods for federal income tax purposes.

8. Earnings Per Share
   ------------------

Basic  earnings  per common  share is computed  based upon the  weighted-average
number of common  shares  outstanding  during the year,  reduced by  unallocated
shares in the Employee Stock Ownership Plan ("ESOP") totaling  118,717,  129,109
and 145,209  shares for the fiscal  years ended March 31,  2006,  2005 and 2004.
Diluted  earnings per common share  include the dilutive  effects of  additional
potential common shares issuable under the Company's Stock Option Plan. For each
of the years presented,  there were no shares excluded from the diluted earnings
per share  calculation  because  the related  options  were  anti-dilutive.  The
computations are as follows:




                                                            2006        2005        2004
                                                                      
Weighted-average common shares outstanding (basic)     3,296,674   3,571,736   3,738,686

Dilutive effect of assumed exercise of stock options      17,222      31,354      12,499
                                                       ---------   ---------   ---------

Weighted-average common shares outstanding (diluted)   3,313,896   3,603,090   3,751,185
                                                       =========   =========   =========


9. Stock Option and Benefit Plans
   ------------------------------

The  Company  has a 1993  incentive  Stock  Option  Plan that  provided  for the
issuance of 196,390 adjusted shares of common stock. In fiscal 2004, the Company
adopted a new Stock  Option  Plan that  provided  for the  issuance  of  204,081
options of authorized common stock.

                                       62


                         WAYNE SAVINGS BANCSHARES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          March 31, 2006, 2005 and 2004


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

9. Stock Option and Benefit Plans (continued)
   ------------------------------

In the fourth quarter of fiscal 2005, the Company adopted the provisions of SFAS
No. 123(R),  "Share Based  Payment." SFAS No.123(R)  requires the recognition of
compensation  related  to stock  option  awards  based on the fair  value of the
option award on the grant date.  Compensation  cost is then  recognized over the
vesting period.  Subsequent to adoption of SFAS No. 123(R), the Company modified
163,265  stock option awards under the 2003 Stock Option Plan,  eliminating  the
reload options contained therein and immediately vesting these shares.  Pursuant
to SFAS No. 123(R),  the modification  represents a new grant.  Accordingly,  in
accordance  with the  modified  prospective  application  method  under SFAS No.
123(R), the Company recognized compensation costs representing the fair value of
the  option  awards  at the  date of  modification.  This  change  in  measuring
compensation cost,  integrated with the incremental  expense of accelerating the
Management  Recognition  Plan  resulted  in pre-tax  charge of  $664,000  and an
after-tax  charge to earnings of $450,000,  or $.12 per diluted  share in fiscal
2005.  During  fiscal  2006,  the Company  recognized  tax benefits on exercised
options totaling $80,000.

The  Company  accounted  for its stock  option  plans in  fiscal  2004 and prior
pursuant to SFAS No. 123 "Accounting for Stock Based  Compensation,"  which also
provided for a fair value-based  method for measuring  compensation  cost at the
grant date based on the fair value of the award at the grant date.  Compensation
was then recognized over the service  period,  generally  defined as the vesting
period. Alternatively,  SFAS No. 123 permitted companies to continue the account
for stock  options  using APB Opinion No. 25,  "Accounting  for Stock  Issued to
Employees."  Entities  that  continued  to account for stock  options  using APB
Opinion No. 25 were required to make pro forma  disclosures  of net earnings and
earnings per share, as if the fair value-based  method of accounting  defined in
SFAS No. 123 had been applied.  Wayne Savings had continued to account for stock
option expense pursuant to APB Opinion No. 25.

In accordance with APB Opinion No. 25, no compensation  cost has been recognized
for the plans in fiscal 2004.  Had  compensation  cost for the  Company's  stock
option  plans been  determined  based on the fair  value at the grant  dates for
awards under the plans  consistent  with the accounting  method utilized in SFAS
No.  123(R),  the  Company's net earnings and earnings per share would have been
reported in the manner presented below:

                                                                            2004

Net earnings                                                          $   2,704
  Stock-based compensation, net of tax                                     (106)
                                                                      ---------
  Pro-forma net earnings                                              $   2,598
                                                                      =========

Earnings per share
  Basic                                                               $     .72
  Stock-based compensation, net of tax                                     (.03)
                                                                      ---------
  Pro-forma earnings per share                                        $     .69
                                                                      =========

  Diluted                                                             $     .72
  Stock-based compensation, net of tax                                     (.03)
                                                                      ---------
  Pro-forma earnings per share                                        $     .69
                                                                      =========

                                       63


                         WAYNE SAVINGS BANCSHARES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          March 31, 2006, 2005 and 2004


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

9. Stock Option and Benefit Plans (continued)
   ------------------------------

The following information applies to options outstanding at March 31, 2006:

Number outstanding                                                       179,148
Range of exercise prices                                         $11.67 - $13.95
Weighted-average exercise price                                           $13.92
Weighted-average remaining contractual life                                 8.00

At March 31,  2006,  all of the stock  options  are  subject to  exercise at the
discretion  of the grantees  with 2,567  options  expiring in fiscal  2013,  and
176,581 options expiring in fiscal 2014.

A summary  of the status of the  Company's  stock  option  plans as of March 31,
2006,  2005 and 2004,  and  changes  during the years  ending on those  dates is
presented below:



                                           2006                    2005                   2004
                                               Exercise                Exercise                Exercise
                                    Shares       price      Shares       price      Shares       price
                                                                             
Outstanding at beginning of year    214,204    $  13.84     214,204    $  13.84      28,666    $   6.26
Granted                                  --          --     163,265       13.95     204,081       13.95
Exercised                           (27,556)      13.32          --          --     (18,543)       3.31
Forfeited                            (7,500)     (13.95)   (163,265)     (13.95)         --          --
                                   --------    --------    --------    --------    --------    --------

Outstanding at end of year          179,148    $  13.92     214,204    $  13.84     214,204    $  13.84
                                   ========    ========    ========    ========    ========    ========

Options exercisable at year-end     179,148    $  13.92     214,204    $  13.84      10,123    $  11.67
                                   ========    ========    ========    ========    ========    ========

Fair value of options granted                  $     --                $   4.07                $   3.93
                                               ========                ========                ========


The fair value of each option grant was estimated on the date of grant using the
Black-Scholes  option pricing  model.  The following  assumptions  were used for
grants in each of the respective years:

                                                                2005       2004

Dividend yield                                                   4.5%       3.3%
Expected volatility                                             27.3       28.8
Expected life in years                                             9         10

                                       64


                         WAYNE SAVINGS BANCSHARES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          March 31, 2006, 2005 and 2004


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

9. Stock Option and Benefit Plans (continued)
   ------------------------------

In  connection  with  conversion  to  stock  form,  the  Company  implemented  a
Management Recognition Plan and an ESOP. The Management Recognition Plan granted
share awards to certain members of management and the directorate.  The value of
such awards totaled $1.1 million at acquisition and was originally  scheduled to
vest over a five year period. The Company recognized scheduled expense under the
plan of  $231,000  and  $173,000 in fiscal 2005 and 2004,  and  accelerated  the
vesting of the remaining awards in fiscal 2005.

Additionally, the Company initiated an ESOP in fiscal 2003 that provided for the
purchase of 163,265  shares in the Company's  conversion  offering.  The Company
recognized  expense under the ESOP of $161,000,  $256,000 and $206,000 in fiscal
2006, 2005 and 2004, allocating 11,358, 15,695 and 14,645 shares,  respectively.
At March 31,2006, 118,717 ESOP shares remain unallocated.

10. Cash and Cash Equivalents
    -------------------------

For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks, federal funds sold, and interest-bearing deposits due from other
financial institutions with original maturities of less than three months.

11. Fair Value of Financial Instruments
    -----------------------------------

SFAS No. 107, "Disclosures about Fair Value of Financial  Instruments," requires
disclosure  of  the  fair  value  of  financial  instruments,  both  assets  and
liabilities  whether  or  not  recognized  in  the  consolidated  statements  of
financial  condition,  for which it is practicable  to estimate that value.  For
financial instruments where quoted market prices are not available,  fair values
are based on estimates using present value and other valuation methods.

The methods used are greatly affected by the assumptions applied,  including the
discount  rate and  estimates of future cash flows.  Therefore,  the fair values
presented  may not  represent  amounts that could be realized in an exchange for
certain financial instruments.

The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments at March 31, 2006 and 2005:

         Cash  and cash  equivalents:  The  carrying  amounts  presented  in the
         ---------------------------
         consolidated  statements  of  financial  condition  for  cash  and cash
         equivalents are deemed to approximate fair value.

                                       65


                         WAYNE SAVINGS BANCSHARES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          March 31, 2006, 2005 and 2004


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

11. Fair Value of Financial Instruments (continued)
    -----------------------------------

         Investment   and   mortgage-backed   securities:   For  investment  and
         -----------------------------------------------
         mortgage-backed  securities,  fair  value is deemed to equal the quoted
         market price.

         Loans   receivable:   The  loan  portfolio  has  been  segregated  into
         ------------------
         categories  with similar  characteristics,  such as one- to four-family
         residential,  multi-family  residential and nonresidential real estate,
         and  commercial.  These loan  categories  were further  delineated into
         fixed-rate and adjustable-rate loans. The fair values for the resultant
         loan categories were computed via discounted cash flow analysis,  using
         current  interest  rates  offered  for  loans  with  similar  terms  to
         borrowers of similar credit quality.  For loans on deposit accounts and
         consumer and other loans, fair values were deemed to equal the historic
         carrying values. The historical  carrying amount of accrued interest on
         loans is deemed to approximate fair value.

         Federal  Home Loan Bank stock:  The  carrying  amount  presented in the
         -----------------------------
         consolidated statements of financial condition is deemed to approximate
         fair value.

         Deposits:  The fair value of NOW accounts,  passbook and club accounts,
         --------
         money market deposits,  commercial  repurchase accounts and advances by
         borrowers is deemed to approximate  the amount payable on demand.  Fair
         values for fixed-rate certificates of deposit have been estimated using
         a discounted cash flow  calculation  using the interest rates currently
         offered for deposits of similar remaining maturities.

         Advances from Federal Home Loan Bank:  The fair value of these advances
         ------------------------------------
         is estimated using the rates currently  offered for similar advances of
         similar remaining maturities or, when available, quoted market prices.

         Commitments to extend credit: For fixed-rate and  adjustable-rate  loan
         ----------------------------
         commitments,  the fair value estimate  considers the difference between
         current levels of interest rates and committed rates. At March 31, 2006
         and 2005, the fair value of loan commitments was not material.

                                       66


                         WAYNE SAVINGS BANCSHARES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          March 31, 2006, 2005 and 2004


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

11. Fair Value of Financial Instruments (continued)
    -----------------------------------

Based on the  foregoing  methods and  assumptions,  the carrying  value and fair
value of the Company's financial instruments at March 31 are as follows:

                                             2006                  2005
                                    Carrying       Fair   Carrying       Fair
                                       value      value      value      value
                                                  (In thousands)
Financial assets
  Cash and cash equivalents         $ 14,123   $ 14,123   $ 29,942   $ 29,942
  Investment securities               73,307     73,301     72,856     72,945
  Mortgage-backed securities          55,731     55,737     60,352     60,371
  Loans receivable                   235,312    232,733    213,627    214,238
  Federal Home Loan Bank stock         4,623      4,623      4,386      4,386
                                    --------   --------   --------   --------

                                    $383,096   $380,517   $381,163   $381,882
                                    ========   ========   ========   ========

Financial liabilities
  Deposits                          $332,570   $319,617   $320,586   $318,534
  Advances from the Federal Home
    Loan Bank                         32,750     32,225     40,000     39,533
  Advances by borrowers for taxes
    and insurance                        521        521        481        481
                                    --------   --------   --------   --------

                                    $365,841   $352,363   $361,067   $358,548
                                    ========   ========   ========   ========

12. Investment in Federal Home Loan Bank Stock
    ------------------------------------------

The Company is required as a condition  of  membership  in the Federal Home Loan
Bank of Cincinnati  (FHLB) to maintain an  investment in FHLB common stock.  The
stock  is  redeemable  at par and,  therefore,  its  cost is  equivalent  to its
redemption  value.  The Company's  ability to redeem FHLB shares is dependent on
the redemption practices of the FHLB of Cincinnati.  At March 31, 2006, the FHLB
of  Cincinnati  placed no  restrictions  on  redemption of shares in excess of a
member's required investment in the stock.

13. Advertising
    -----------

Advertising costs are expensed when incurred.  The Company's advertising expense
totaled  $146,000,  $163,000  and  $132,000 for the fiscal years ended March 31,
2006, 2005 and 2004, respectively.

                                       67


                         WAYNE SAVINGS BANCSHARES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          March 31, 2006, 2005 and 2004


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

14. Goodwill and Other Intangible Assets
    ------------------------------------

In  connection  with the  Stebbins  acquisition  in  fiscal  2005,  the  Company
initially  recorded  goodwill and other intangible assets totaling $2.7 million.
The composition of these assets at March 31, 2006 and 2005 is as follows:

                                                                 March 31,
                                                            2006            2005
                                                               (In thousands)

Goodwill                                                  $1,719          $1,719
Core deposit intangible, net                                 789             895
                                                          ------          ------

Total                                                     $2,508          $2,614
                                                          ======          ======

The  Company  recorded  amortization  relative  to the core  deposit  intangible
totaling  $106,000  and  $87,000  for the fiscal  years ended March 31, 2006 and
2005. Such  amortization is derived using the interest method over a twelve year
estimated  useful  life.  Pursuant to SFAS No.  142,  the Company is required to
annually test goodwill and other intangible assets for impairment. The Company's
testing of  goodwill  and other  intangible  assets in the  current  fiscal year
indicated there was no impairment in the carrying value of these assets.

During  fiscal 2006,  the Company  reclassified  goodwill  and other  intangible
assets as a separate financial statement line item, giving effect therein to the
tax effects related to the acquisition.

15. Reclassifications
    -----------------

Certain  prior year amounts have been  reclassified  to conform to the March 31,
2006 consolidated financial statement presentation.

                                       68


                         WAYNE SAVINGS BANCSHARES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          March 31, 2006, 2005 and 2004


NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES

Carrying  values and estimated fair values of investment  securities at March 31
are summarized as follows:



                                                         March 31, 2006
                                                         Gross        Gross    Estimated
                                        Amortized   unrealized   unrealized         fair
                                            cost         gains       losses        value
                                                                      
                                                          (In thousands)

Held to maturity:
  Corporate bonds and notes            $    4,992   $        2   $       19   $    4,975
  U.S. Government and agency
    obligations                               641            1           --          642
  Municipal obligations                       169           10           --          179
                                       ----------   ----------   ----------   ----------

                                       $    5,802   $       13   $       19   $    5,796
                                       ==========   ==========   ==========   ==========

Available for sale:
  Corporate bonds and notes            $    1,006   $       18   $       --   $    1,024
  U.S. Government and agency
    obligations                            56,122            1          962       55,161
  Municipal obligations                    11,183          180           43       11,320
                                       ----------   ----------   ----------   ----------

                                       $   68,311   $      199   $    1,005   $   67,505
                                       ==========   ==========   ==========   ==========


                                                         March 31, 2005
                                                         Gross        Gross    Estimated
                                        Amortized   unrealized   unrealized         fair
                                            cost         gains       losses        value
                                                                      
                                                          (In thousands)
Held to maturity:
  Corporate bonds and notes            $   10,021   $      124   $       54   $   10,091
  U.S. Government and agency
    obligations                             1,796            7           --        1,803
  Municipal obligations                       195           12           --          207
                                       ----------   ----------   ----------   ----------

                                       $   12,012   $      143   $       54   $   12,101
                                       ==========   ==========   ==========   ==========

Available for sale:
  Corporate bonds and notes            $    1,011   $       54           $-   $    1,065
  U.S. Government and agency
    obligations                            50,209            1          767       49,443
  Municipal obligations                    10,343           86           93       10,336
                                       ----------   ----------   ----------   ----------

                                       $   61,563   $      141   $      860   $   60,844
                                       ==========   ==========   ==========   ==========


                                       69


                         WAYNE SAVINGS BANCSHARES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          March 31, 2006, 2005 and 2004


NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES (continued)

The Company has pledged $14.8 million and $7.8 million in investment  securities
to secure public deposits and commercial repurchase agreements at March 31, 2006
and 2005, respectively.

The  amortized  cost,  gross  unrealized  gains,  gross  unrealized  losses  and
estimated fair values of mortgage-backed  securities at March 31, 2006 and 2005,
including those designated as available for sale, are summarized as follows:




                                                                    2006
                                                               Gross        Gross    Estimated
                                              Amortized   unrealized   unrealized         fair
                                                   cost        gains       losses        value
                                                                        
                                                               (In thousands)
Held to maturity:
  Federal Home Loan Mortgage
    Corporation participation certificates   $      381   $        4   $       --   $      385
  Government National Mortgage
    Association participation certificates          609            1            6          604
  Federal National Mortgage
    Association participation certificates          809            7           --          816
                                             ----------   ----------   ----------   ----------

                                             $    1,799   $       12   $        6   $    1,805
                                             ==========   ==========   ==========   ==========

Available for sale:
  Federal Home Loan Mortgage
    Corporation participation certificates   $   21,746   $       24   $      271   $   21,499
  Government National Mortgage
    Association participation certificates        1,835           --           40        1,795
  Federal National Mortgage
    Association participation certificates       27,105           69          407       26,767
  Private Issue Mortgage Association
    participation certificates                    3,974           --          103        3,871
                                             ----------   ----------   ----------   ----------

                                             $   54,660   $       93   $      821   $   53,932
                                             ==========   ==========   ==========   ==========


                                       70


                         WAYNE SAVINGS BANCSHARES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          March 31, 2006, 2005 and 2004


NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES (continued)




                                                                     2005
                                                               Gross        Gross    Estimated
                                              Amortized   unrealized   unrealized         fair
                                                   cost        gains       losses        value
                                                                        
                                                               (In thousands)

Held to maturity:
  Federal Home Loan Mortgage
    Corporation participation certificates   $      604   $        9   $       --   $      613
  Government National Mortgage
    Association participation certificates        1,014            2            5        1,011
  Federal National Mortgage
    Association participation certificates        1,010           13           --        1,023
                                             ----------   ----------   ----------   ----------

                                             $    2,628   $       24   $        5   $    2,647
                                             ==========   ==========   ==========   ==========

Available for sale:
  Federal Home Loan Mortgage
    Corporation participation certificates   $   23,043   $       55   $      265   $   22,833
  Government National Mortgage
    Association participation certificates        2,474            3           22        2,455
  Federal National Mortgage
    Association participation certificates       30,686           92          334       30,444
  Private Issue Mortgage Association
    participation certificates                    2,001           --            9        1,992
                                             ----------   ----------   ----------   ----------

                                             $   58,204   $      150   $      630   $   57,724
                                             ==========   ==========   ==========   ==========


                                       71


                         WAYNE SAVINGS BANCSHARES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          March 31, 2006, 2005 and 2004


NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES (continued)

The amortized cost of investment and mortgage-backed securities, including those
designated as available  for sale,  at March 31, 2006 and 2005,  by  contractual
terms to  maturity,  are shown  below.  Expected  maturities  will  differ  from
contractual  maturities  because  borrowers  may  generally  prepay  obligations
without prepayment penalties.

                                                   March 31,
                                          2006                   2005
                                             Estimated                 Estimated
                                Amortized      fair      Amortized       fair
                                  cost         value        cost         value
                                                (In thousands)

Held to maturity:
  Due within one year or less  $    4,992   $    4,975   $    6,032   $    6,121
  Due in one to five years             --           --        4,989        4,976
  Due in five to ten years            169          179          194          207
  Due after ten years                 641          642          797          797
                               ----------   ----------   ----------   ----------
                                    5,802        5,796       12,012       12,101

Mortgage-backed securities          1,799        1,805        2,628        2,647
                               ----------   ----------   ----------   ----------

                               $    7,601   $    7,601   $   14,640   $   14,748
                               ==========   ==========   ==========   ==========

Available for sale:
  Due within one year or less  $   17,643   $   17,475   $    3,997   $    3,974
  Due in one to five years         32,537       31,837       45,567       44,890
  Due in five to ten years          9,287        9,171          992          980
  Due after ten years               8,844        9,022       11,007       11,000
                               ----------   ----------   ----------   ----------
                                   68,311       67,505       61,563       60,844

Mortgage-backed securities         54,660       53,932       58,204       57,724
                               ----------   ----------   ----------   ----------

                               $  122,971   $  121,437   $  119,767   $  118,568
                               ==========   ==========   ==========   ==========

Proceeds from the sale of mortgage-backed securities during the year ended March
31,  2005,  totaled $2.9 million  resulting in no gross  realized  gain or loss.
Proceeds  from the sales of  mortgage-backed  securities  during  the year ended
March 31,  2004,  totaled  $4.4 million  resulting  in gross  realized  gains of
$16,000.

                                       72


                         WAYNE SAVINGS BANCSHARES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          March 31, 2006, 2005 and 2004


NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES (continued)

The table below indicates the length of time individual  securities have been in
a continuous unrealized loss position at March 31, 2006 and 2005:




                                                                     March 31, 2006
                               Less than 12 months                 12 months or longer                       Total
                                    Estimated                           Estimated                          Estimated
    Description of     Number of      fair     Unrealized   Number of     fair     Unrealized   Number of     fair     Unrealized
      securities      investments     value      losses    investments    value      losses    investments    value      losses
                                                                                                   
                                                          (Dollars in thousands)

Municipal obligations           5   $   3,323   $      43          --   $      --   $      --           5   $   3,323   $      43
U.S. Government and
  agency obligations           20      22,103         273          28      31,395         689          48      53,498         962
Corporate bonds
  and notes                     1       2,487          19          --          --          --           1       2,487          19
Mortgage-backed
  securities                   23      22,735         256          29      21,211         571          52      43,946         827
                        ---------   ---------   ---------   ---------   ---------   ---------   ---------   ---------   ---------

Total temporarily
  impaired securities          49   $  50,648   $     591          57   $  52,606   $   1,260         106   $ 103,254   $   1,851
                        =========   =========   =========   =========   =========   =========   =========   =========   =========



                                                                     March 31, 2005
                               Less than 12 months                 12 months or longer                       Total
                                    Estimated                           Estimated                          Estimated
    Description of     Number of      fair     Unrealized   Number of     fair     Unrealized   Number of     fair     Unrealized
      securities      investments     value      losses    investments    value      losses    investments    value      losses
                                                                                                   
Municipal obligations           5   $   3,339   $      45           1   $     921   $      48           6   $   4,260   $      93
U.S. Government and
  agency obligations           43      43,412         717           2       1,948          50          45      45,360         767
Corporate bonds
  and notes                     1       2,466          54          --          --          --           1       2,466          54
Mortgage-backed
  securities                   29      30,357         356          13      10,473         279          42      40,830         635
                        ---------   ---------   ---------   ---------   ---------   ---------   ---------   ---------   ---------

Total temporarily
  impaired securities          78   $  79,574   $   1,172          16   $  13,342   $     377          94   $  92,916   $   1,549
                        =========   =========   =========   =========   =========   =========   =========   =========   =========



Management  has  the  intent  and  ability  to  hold  these  securities  for the
foreseeable  future and the  decline in the fair  value is  primarily  due to an
increase in market  interest  rates.  The fair values are expected to recover as
securities approach the respective maturity dates.

                                       73


                         WAYNE SAVINGS BANCSHARES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          March 31, 2006, 2005 and 2004


NOTE C - LOANS RECEIVABLE

The composition of the loan portfolio at March 31 is as follows:

                                                              2006          2005
                                                               (In thousands)

One- to four-family residential                           $149,134      $157,658
Multi-family residential                                     7,930         7,872
Construction                                                 4,675         4,053
Nonresidential real estate and land                         50,778        29,187
Commercial                                                  21,550        14,075
Consumer and other                                           4,901         4,306
                                                          --------      --------
                                                           238,968       217,151
Less:
  Undisbursed portion of loans in process                    1,729         1,638
  Deferred loan origination fees                               443           512
  Allowance for loan losses                                  1,484         1,374
                                                          --------      --------

                                                          $235,312      $213,627
                                                          ========      ========

The Bank's  lending  efforts have  historically  focused on one- to  four-family
residential  and  multi-family  residential  real estate loans,  which  comprise
approximately  $160.0 million,  or 68%, of the total loan portfolio at March 31,
2006, and $167.9 million, or 79%, of the total loan portfolio at March 31, 2005.
Generally, such loans have been underwritten on the basis of no more than an 80%
loan-to-value  ratio, which has historically  provided the Company with adequate
collateral coverage in the event of default. Nevertheless, the Bank, as with any
lending  institution,  is  subject  to the risk that real  estate  values  could
deteriorate in the primary lending area of north central Ohio, thereby impairing
collateral  values.  However,  management is of the belief that residential real
estate values in the Company's primary lending area are presently stable.

As discussed  previously,  Wayne Savings has sold whole loans and  participating
interests in loans in the  secondary  market,  retaining  servicing on the loans
sold.  Loans sold and serviced for others totaled  approximately  $34.4 million,
$34.0 million and $35.3 million at March 31, 2006, 2005 and 2004, respectively.

In the normal course of business, the Bank has made loans to directors, officers
and their related business  interests.  Related party loans are made on the same
terms that are widely available to other  employees,  as long as the director or
executive  officer  is  not  given  preferential  treatment  compared  to  other
participating  employees.  The aggregate  dollar amount of loans  outstanding to
directors,  officers and their related business interests totaled  approximately
$2.8  million,  $2.8 million and $2.7 million at March 31, 2006,  2005 and 2004,
respectively.

                                       74


                         WAYNE SAVINGS BANCSHARES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          March 31, 2006, 2005 and 2004


NOTE D - ALLOWANCE FOR LOAN LOSSES

The activity in the  allowance  for loan losses is summarized as follows for the
years ended March 31:

                                                     2006       2005       2004
                                                           (In thousands)

Balance at beginning of year                      $ 1,374    $   815    $   678
Provision for losses on loans                         211        430        173
Stebbins acquisition                                   --        230         --
Charge-offs of loans                                 (158)      (126)       (65)
Recovery of loans previously charged off               57         25         29
                                                  -------    -------    -------

Balance at end of year                            $ 1,484    $ 1,374    $   815
                                                  =======    =======    =======

As of March 31, 2006, the Bank's  allowance for loan losses was comprised solely
of a  general  loan  loss  allowance,  which is  includible  as a  component  of
regulatory risk-based capital.

Non-accrual and nonperforming loans totaled approximately  $772,000 and $906,000
at March 31, 2006 and 2005, respectively.

During  the years  ended  March 31,  2006,  2005 and  2004,  interest  income of
approximately  $44,000,  $40,000  and  $37,000,  respectively,  would  have been
recognized had non-accrual  loans been performing in accordance with contractual
terms.

NOTE E - OFFICE PREMISES AND EQUIPMENT

Office premises and equipment are comprised of the following at March 31:

                                                                2006        2005
                                                                 (In thousands)

Land and improvements                                        $ 1,654     $ 1,654
Office buildings and improvements                              7,310       7,294
Furniture, fixtures and equipment                              4,038       3,776
Leasehold improvements                                           356         356
                                                             -------     -------
                                                              13,358      13,080
Less accumulated depreciation and amortization                 4,801       4,158
                                                             -------     -------

                                                             $ 8,557     $ 8,922
                                                             =======     =======

                                       75


                         WAYNE SAVINGS BANCSHARES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          March 31, 2006, 2005 and 2004


NOTE F - DEPOSITS

Deposits consist of the following major classifications at March 31:

Deposit type and weighted-average
interest rate                                              2006             2005
                                                              (In thousands)

NOW accounts
  2006 - 0.33%                                          $ 56,791
  2005 - 0.43%                                                          $ 53,060
Savings accounts
  2006 - 0.58%                                            61,339
  2005 - 0.74%                                                            82,184
Money market investor
  2006 - 2.09%                                            20,656
  2005 - 1.34%                                                            18,097
Commercial repurchase agreements
  2006 -3.76%                                              5,704              --
                                                        --------        --------
     Total demand, transaction and
       Savings account deposits                          144,490         153,341

Certificates of deposit
  Original maturities of:
    Less than 12 months
      2006 - 4.05%                                        61,814
      2005 - 1.99%                                                        42,483
    12 to 24 months
      2006 - 2.38%                                        19,181
      2005 - 1.97%                                                        24,438
    25 to 36 months
     2006 - 3.41%                                         18,541
     2005 - 3.02%                                                         16,039
    More than 36 months
      2006 - 4.44%                                        53,641
      2005 - 4.39%                                                        53,183
    Jumbo
      2006 - 4.34%                                        34,903
      2005 - 3.24%                                                        31,102
                                                        --------        --------

     Total certificates of deposit                       188,080         167,245
                                                        --------        --------

     Total deposit accounts                             $332,570        $320,586
                                                        ========        ========


At March 31, 2006 and 2005, the Bank had  certificates  of deposit with balances
in excess of $100,000 totaling $37.8 million and $34.4 million, respectively.

                                       76


                         WAYNE SAVINGS BANCSHARES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          March 31, 2006, 2005 and 2004


NOTE F - DEPOSITS (continued)

Interest  expense on  deposits  for the years ended  March 31 is  summarized  as
follows:

                                                    2006        2005        2004

Savings accounts                                  $  464      $  653      $  688
NOW and money market deposit accounts                527         383         269
Commercial repurchase agreements                     148          --          --
Certificates of deposit                            6,058       4,648       4,942
                                                  ------      ------      ------

                                                  $7,197      $5,684      $5,899
                                                  ======      ======      ======

    Maturities of outstanding certificates of deposit at March 31 are summarized
as follows:

                                                          2006             2005
                                                            (In thousands)
Maturing year ending March 31,
          2006                                      $       --        $  91,507
          2007                                         129,966           38,083
          2008                                          34,454           18,277
          2009                                          11,439            9,056
          2010                                          10,370            9,333
          2011                                           1,271              289
          2012 and thereafter                              580              700
                                                    ----------        ---------

                                                    $  188,080        $ 167,245
                                                    ==========        =========


NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK

Advances from the Federal Home Loan Bank were  collateralized  at March 31, 2006
and 2005 by pledges of certain residential mortgage loans totaling $40.9 million
and $50.0 million,  respectively, and the Bank's investment in Federal Home Loan
Bank stock, are summarized as follows:

                                      Maturing
                                     year ending
Interest rate range                   March 31,                 2006       2005
                                                          (Dollars in thousands)
Floating rate - 2.95%                  2006                 $     --    $15,000
3.13% - 3.36%                          2007                   15,250      7,500
3.51% - 3.61%                          2008                    5,000      5,000
4.01%                                  2009                    2,500      2,500
4.34%                                  2010                    2,500      2,500
4.60%                                  2011                    2,500      2,500
4.77% - 4.87%                          2012 and thereafter     5,000      5,000
                                                            --------    -------

                                                            $ 32,750    $40,000
                                                            ========    =======

       Weighted-average interest rate                           4.19%      3.59%
                                                            ========    =======

                                       77


                         WAYNE SAVINGS BANCSHARES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          March 31, 2006, 2005 and 2004


NOTE H - FEDERAL INCOME TAXES

The provision for federal income taxes (benefits) at the 34% statutory composite
tax rate is as follows:

                                                   2006        2005         2004
                                                          (In thousands)

Federal income taxes computed at
  expected 34% statutory rate                   $   706     $   101     $ 1,312
Cash surrender value of life insurance             (130)        (88)        (88)
Tax-exempt obligations, net                        (159)       (129)        (80)
Other                                                18          31          10
                                                -------     -------     -------

Federal income tax provision (benefit)
  per consolidated financial statements         $   435     $   (85)    $ 1,154
                                                =======     =======     =======

The composition of the  Corporation's  net deferred tax liability at March 31 is
as follows:

    Taxes (payable) refundable on temporary                    2006        2005
    differences at statutory rate:                             (In thousands)

Deferred tax assets:
  Deferred loan origination fees                            $   151     $   174
  General loan loss allowance                                   516         487
  Unrealized losses on securities available for sale            522         409
  Reserve for uncollected interest                               16          59
  Benefit plan expense                                          128         166
  Other                                                          10          38
                                                            -------     -------
     Total deferred tax assets                                1,343       1,333

Deferred tax liabilities:
  Prepaid pension                                              (187)       (306)
  Federal Home Loan Bank stock dividends                     (1,080)     (1,000)
  Book/tax depreciation differences                            (312)       (257)
  Financed loan fees                                           (109)        (90)
  Bad debt deduction                                             --         (16)
  Mortgage servicing rights                                    (106)        (97)
  Purchase price adjustments - net                             (214)       (200)
                                                            -------     -------
     Total deferred tax liabilities                          (2,008)     (1,966)
                                                            -------     -------

     Net deferred tax liability                             $  (665)    $  (633)
                                                            =======     =======

                                       78


                         WAYNE SAVINGS BANCSHARES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          March 31, 2006, 2005 and 2004


NOTE H - FEDERAL INCOME TAXES (continued)

Prior to fiscal  1997,  Wayne  Savings was allowed a special bad debt  deduction
based on a percentage of earnings,  generally limited to 8% of otherwise taxable
income and subject to certain  limitations  based on aggregate loans and deposit
account balances at the end of the year. This cumulative  percentage of earnings
bad debt deduction totaled  approximately  $2.7 million as of March 31, 2006. If
the amounts that qualified as deductions for federal income taxes are later used
for purposes other than bad debt losses, including distributions in liquidation,
such  distributions  will be subject to federal income taxes at the then current
corporate  income tax rate.  The amount of  unrecognized  deferred tax liability
relating to the  cumulative  bad debt  deduction was  approximately  $918,000 at
March 31, 2006.


NOTE I - COMMITMENTS

The Company 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,
including  commitments to extend credit.  Such commitments  involve,  to varying
degrees,  elements  of credit  and  interest-rate  risk in excess of the  amount
recognized in the consolidated  statements of financial condition.  The contract
or  notional  amounts of the  commitments  reflect  the extent of the Company 's
involvement in such financial instruments.

The  Company'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 Company
uses the same credit policies in making commitments and conditional  obligations
as those utilized for on-balance-sheet instruments.

At  March  31,  2006,   the  Company  had  total   outstanding   commitments  of
approximately  $1.6 million to originate  loans at rates  ranging from 5.875% to
6.50%.  The Bank also had loans in  process of $1.7  million at March 31,  2006,
consisting  entirely of one- to four-family  loans. The Company had unused lines
of credit  outstanding  under home  equity  loans of $18.4  million at March 31,
2006.  The Company also had $306,000  unused lines of credit  outstanding  under
overdraft lines at March 31, 2006. Additionally, the Company had unused lines of
credit on  commercial  loans of $10.6  million at March 31,  2006 and 2005,  and
outstanding letters of credit of $913,000 at March 31, 2006.

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 may expire without being
drawn upon, the total  commitment  amounts do not necessarily  represent  future
cash

                                       79


                         WAYNE SAVINGS BANCSHARES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          March 31, 2006, 2005 and 2004


NOTE I - COMMITMENTS (continued)

requirements. Management believes that all disbursements for commitments will be
funded via normal cash flow from operations and existing excess  liquidity.  The
Company evaluates each customer's  creditworthiness on a case-by-case basis. The
amount of  collateral  obtained,  if it is deemed  necessary by the Company upon
extension  of  credit,  is  based  on  management's  credit  evaluation  of  the
counterparty.  Collateral  on  loans  may vary  but the  preponderance  of loans
granted generally includes a mortgage interest in real estate as security.

The Company leases certain branch banking facilities under operating leases. The
minimum annual lease payments over the initial lease term are as follows:

Fiscal year ended                                                (In thousands)

       2007                                                          $ 85
       2008                                                            86
       2009                                                            86
       2010                                                            59
       2011                                                            63
                                                                     ----

       Total                                                         $379
                                                                     ====

The  Company   incurred   rental  expense  under   operating   leases   totaling
approximately $71,000,  $70,000 and $68,000 for the fiscal years ended March 31,
2006, 2005 and 2004, respectively.

There were no other material commitments or contingencies at March 31, 2006.


NOTE J - REGULATORY CAPITAL

The Bank is subject to minimum regulatory  capital standards  promulgated by the
OTS. Failure to meet minimum capital requirements can initiate certain mandatory
and possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the  consolidated  financial  statements.
Under  capital  adequacy  guidelines  and the  regulatory  framework  for prompt
corrective  action,  the Bank must meet specific capital guidelines that involve
quantitative   measures   of  the  Bank's   assets,   liabilities   and  certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's  capital  amounts  and  classification  are also  subject to  qualitative
judgments by the regulators about components, risk-weightings and other factors.
The minimum  capital  standards of the OTS generally  require the maintenance of
regulatory capital sufficient to meet each of three tests, hereinafter described
as the  tangible  capital  requirement,  the core  capital  requirement  and the
risk-based capital  requirement.  The tangible capital requirement  provides for
minimum tangible  capital  (defined as stockholders'  equity less all intangible
assets)  equal to 1.5% of adjusted  total assets.  The core capital  requirement
provides  for minimum  core capital  (tangible  capital  plus  certain  forms of
supervisory goodwill and other qualifying  intangible assets) generally equal to
4.0% of adjusted  total assets  except for those  associations  with the highest
examination  rating  and  acceptable  levels  of risk.  The  risk-based  capital
requirement  provides  for the  maintenance  of core  capital  plus general loss
allowances equal to 8.0% of  risk-weighted  assets.  In computing  risk-weighted
assets,  the Bank  multiplies  the  value of each  asset on their  statement  of
financial condition by a defined risk-weighting factor, e.g. one- to four-family
residential loans carry a risk-weighted factor of 50%.

                                       80


                         WAYNE SAVINGS BANCSHARES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          March 31, 2006, 2005 and 2004


NOTE J - REGULATORY CAPITAL (continued)

As of March 31, 2006, management believes that the Bank met all capital adequacy
requirements to which it was subject.  As of the most recent  examination  date,
management  was advised by the OTS that the Bank met the  definition  of a "well
capitalized" institution.

The Bank's  management  believes  that,  under the  current  regulatory  capital
regulations,   the  Bank  will   continue  to  maintain   its   well-capitalized
classification in the foreseeable future.  However, events beyond the control of
the Bank,  such as increased  interest rates or a downturn in the economy in the
Bank's market area,  could adversely  affect future earnings and,  consequently,
the ability to meet future minimum regulatory capital requirements.

The Bank is subject to  regulations  imposed by the OTS  regarding the amount of
capital distributions payable to the Company.  Generally,  the Bank's payment of
dividends  is limited,  without  prior OTS  approval,  to net  earnings  for the
current calendar year, plus the two preceding years, less capital  distributions
paid over the comparable time period.  Insured institutions are required to file
an  application  with  the  OTS  for  capital  distributions  in  excess  of the
limitation. In fiscal 2006, the Bank received capital distributions in excess of
the  last  two  year's  earnings.  As a  result,  the  Bank  will  have  to file
applications  for future  capital  distributions.  Management  does not  believe
future  dividend  payments  will be  unreasonably  restricted  given the  Bank's
current well-capitalized status.

The following  tables sets forth Wayne  Savings'  tangible,  core and risk-based
capital rates at March 31, 2006 and 2005.



                                                   As of March 31, 2006
                                                                                    To be "well-
                                                                                 capitalized" under
                                                        For capital              prompt corrective
                                Actual               adequacy purposes           action provisions
                           ----------------        --------------------        ---------------------
                           Amount     Ratio           Amount     Ratio            Amount      Ratio
                                                                              
                                                  (Dollars in thousands)

Tangible capital           $33,078      8.2%       =>$ 6,046    =>1.5%         =>$20,152     => 5.0%

Core capital               $33,078      8.2%       =>$16,122    =>4.0%         =>$24,183     => 6.0%

Risk-based capital         $34,562     15.0%       =>$18,410    =>8.0%         =>$23,010     =>10.0%



                                                   As of March 31, 2005
                                                                                    To be "well-
                                                                                 capitalized" under
                                                        For capital              prompt corrective
                                Actual               adequacy purposes           action provisions
                           ----------------        --------------------        ---------------------
                           Amount     Ratio           Amount     Ratio            Amount      Ratio
                                                                              
                                                  (Dollars in thousands)

Tangible capital           $36,471      9.1%       =>$ 6,017    =>1.5%         =>$20,057     => 5.0%

Core capital               $36,471      9.1%       =>$16,046    =>4.0%         =>$24,069     => 6.0%

Risk-based capital         $37,845     17.6%       =>$17,200    =>8.0%         =>$21,500     =>10.0%



                                       81


                         WAYNE SAVINGS BANCSHARES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          March 31, 2006, 2005 and 2004


NOTE K - RETIREMENT PLANS

The Company had a  non-contributory  insured  defined  benefit pension plan (the
"Plan")  covering  all  eligible  employees.  The Plan  benefits  were  based on
years-of-service  and other  factors . In fiscal 2004,  Wayne  Savings froze its
defined benefit pension plan. Also in fiscal 2004, management changed the Plan's
investment structure from life insurance to stocks and bonds. At March 31, 2006,
Plan assets consisted of 2% cash, 61% stocks and 37% bonds. The Company's intent
is  to  terminate  the  Plan  at  some  point  in  the  future  when   financial
considerations  are more favorable.  Contributions  are intended to provide only
for benefits accrued for service to the plan freeze date.

Information  with respect to the Plan for the years ended March 31,  2006,  2005
and 2004 is as follows:

The changes in benefit obligations are computed as follows:




                                                               2006       2005       2004
                                                                             
                                                                     (In thousands)

Projected benefit obligation at beginning of year           $ 2,323    $ 2,381    $ 2,002
Service cost                                                     --         --         55
Interest cost                                                   136        152        137
Actuarial (gain) loss                                          (236)       339        351
Benefits paid                                                (1,216)      (549)      (164)
                                                            -------    -------    -------

Projected benefit obligation at end of year                 $ 1,007    $ 2,323    $ 2,381
                                                            =======    =======    =======


The changes in the Plan's assets are computed as follows:



                                                               2006       2005       2004
                                                                             
                                                                     (In thousands)
Fair value of plan assets at beginning of year              $ 2,323    $ 2,704    $ 1,499
Actual return on plan assets                                    149        155        145
Employer contributions                                           --         13      1,224
Benefits paid                                                (1,216)      (549)      (164)
                                                            -------    -------    -------

Fair value of plan assets at end of year                    $ 1,256    $ 2,323    $ 2,704
                                                            =======    =======    =======


The following table sets forth the Plan's funded status at March 31:

                                                              2006          2005
                                                                 (In thousands)

Funded status                                                 $249          $ --
Unrecognized net actuarial loss                                300           957
                                                              ----          ----

Prepaid pension cost                                          $549          $957
                                                              ====          ====

                                       82


                         WAYNE SAVINGS BANCSHARES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          March 31, 2006, 2005 and 2004


NOTE K - RETIREMENT PLANS (continued)

The weighted-average actuarial assumptions used in the valuations were:

                                                     2006      2005      2004

Weighted-average discount rate                       6.50%     6.00%     6.50%
Weighted-average expected long-term rate
  of return on plan assets                           7.00%     7.00%     7.00%

Net periodic pension costs includes the following components:

                                                     2006      2005      2004
                                                          (In thousands)

Service cost                                        $  --     $  --     $  55
Interest cost                                         136       152        26
Actual return on plan assets, net                    (159)     (155)     (145)
Amortization of prior net loss                         73        28       166
Settlement losses                                     358        89        --
                                                    -----     -----     -----

Net periodic pension cost                           $ 408     $ 114     $ 102
                                                    =====     =====     =====

The following benefit payments are expected to be paid in future years:

        iscal                                                        Benefits
                                                                  (In thousands)

        2007                                                           $  28
        2008                                                              28
        2009                                                              28
        2010                                                              44
        2011                                                              44
        Thereafter                                                       189

The Bank has a  savings  plan  covering  substantially  all  employees  who meet
certain age and service  requirements.  Under the plan,  the Bank  matches  each
participant's  contribution - up to 3% of the participant's  salary; a 50% match
is provided for up to the next 4% of the participant's salary. This contribution
is dependent on  availability  of sufficient  net earnings from current or prior
years.  Additional  contributions  may be  made  as  approved  by the  Board  of
Directors.  Expense under the plan totaled approximately $135,000,  $121,000 and
$78,000 for the fiscal years ended March 31, 2006, 2005 and 2004, respectively.

                                       83


                         WAYNE SAVINGS BANCSHARES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          March 31, 2006, 2005 and 2004


NOTE L - CONDENSED FINANCIAL STATEMENTS OF WAYNE SAVINGS BANCSHARES, INC.

The following condensed financial statements summarize the financial position of
Wayne Savings Bancshares, Inc. as of March 31, 2006 and 2005, and the results of
its operations  and its cash flows for the years ended March 31, 2006,  2005 and
2004:

                         WAYNE SAVINGS BANCSHARES, INC.
                        STATEMENT OF FINANCIAL CONDITION
                             March 31, 2006 and 2005
                                 (In thousands)

ASSETS                                                         2006        2005

Cash and due from banks                                    $     98    $    480
Notes receivable from Wayne Savings                           1,240       1,304
Investment in Wayne Savings                                  34,569      38,321
Prepaid expenses and other assets                                22         547
                                                           --------    --------

         Total assets                                      $ 35,929    $ 40,652
                                                           ========    ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Accrued expenses and other liabilities                     $    413    $    453

Stockholders' equity
  Common stock and additional paid-in capital                35,997      35,524
  Retained earnings                                          11,394      11,371
  Less required contributions for shares acquired by ESOP    (1,239)     (1,304)
  Less 595,322 and 282,261 of treasury stock at
    March 31, 2006 and 2005, respectively - at cost          (9,625)     (4,600)
  Accumulated other comprehensive loss                       (1,011)       (792)
                                                           --------    --------
         Total stockholders' equity                          35,516      40,199
                                                           --------    --------

         Total liabilities and stockholders' equity        $ 35,929    $ 40,652
                                                           ========    ========

                                       84


                         WAYNE SAVINGS BANCSHARES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          March 31, 2006, 2005 and 2004


NOTE L -  CONDENSED  FINANCIAL  STATEMENTS  OF WAYNE  SAVINGS  BANCSHARES,  INC.
(continued)

                         WAYNE SAVINGS BANCSHARES, INC.
                              STATEMENT OF EARNINGS
                    Year ended March 31, 2006, 2005 and 2004
                                 (In thousands)

                                                       2006      2005      2004

Income
  Interest income                                   $    85   $   103   $   183
  Gain on sale of investment securities                  --        --         2
  Equity in earnings of subsidiary                    1,715     1,610     2,851
                                                    -------   -------   -------
         Total income                                 1,800     1,713     3,036

General, administrative and other expense               199     1,966       409
                                                    -------   -------   -------

Earnings (loss) before federal income tax benefits    1,601      (253)    2,627

Federal income tax benefits                             (39)     (634)      (77)
                                                    -------   -------   -------

Net earnings                                        $ 1,640   $   381   $ 2,704
                                                    =======   =======   =======

                                       85


                         WAYNE SAVINGS BANCSHARES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          March 31, 2006, 2005 and 2004


NOTE L -  CONDENSED  FINANCIAL  STATEMENTS  OF WAYNE  SAVINGS  BANCSHARES,  INC.
(continued)

                         WAYNE SAVINGS BANCSHARES, INC.
                             STATEMENT OF CASH FLOWS
                    Year ended March 31, 2006, 2005 and 2004
                                 (In thousands)



                                                                                2006       2005       2004
                                                                                           

Cash flows from operating activities:
  Net earnings for the year                                                  $ 1,640    $   381    $ 2,704
   Adjustments to reconcile net earnings to net cash provided by
  operating activities:
    Gain on sale of investment securities designated as available for sale        --         --         (2)
    Amortization and depreciation                                                 --          2         42
    (Undistributed earnings) excess distributions from consolidated
       subsidiary                                                              3,704      1,791     (1,351)
    Acceleration of Stock Option and Management Recognition Plan expense          --      1,142         --
    Increase (decrease) in cash due to changes in:
      Prepaid expenses and other assets                                          526       (471)       (29)
      Accrued expenses and other liabilities                                     (40)      (177)        61
                                                                             -------    -------    -------
         Net cash provided by operating activities                             5,830      2,668      1,425

Cash flows provided by investing activities:
  Purchase of investment securities designated as available for sale              --       (500)    (2,006)
  Proceeds from maturity of investment securities  designated
    as available for sale                                                         --      1,000      5,001
  Proceeds from sale of investment securities designated as
    available for sale                                                            --         --      1,502
  Purchase of mortgage-backed securities designated as available for sale         --         --       (716)
  Principal repayment on mortgage-backed securities designated as
    available for sale                                                            --        709         10
  Repayment of ESOP loan                                                          65        152        156
                                                                             -------    -------    -------
         Net cash provided by investing activities                                65      1,361      3,947

Cash flows used in financing activities:
  Payment of dividends on common stock                                        (1,617)    (1,737)    (1,786)
  Purchase of treasury stock                                                  (5,025)    (2,797)    (1,803)
  Proceeds from exercise of stock options                                        285         --         61
  Tax benefits related to employee stock plans                                    80         --         20
  Shares acquired by Management Recognition Plan                                  --         --     (1,142)
                                                                             -------    -------    -------
         Net cash used in financing activities                                (6,277)    (4,534)    (4,650)
                                                                             -------    -------    -------

         Net increase (decrease) in cash and cash equivalents                   (382)      (505)       722

Cash and cash equivalents at beginning of year                                   480        985        263
                                                                             -------    -------    -------

Cash and cash equivalents at end of year                                     $    98    $   480    $   985
                                                                             =======    =======    =======


                                       86


                         WAYNE SAVINGS BANCSHARES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          March 31, 2006, 2005 and 2004


NOTE M - BUSINESS COMBINATION

During 2004, the Company agreed to acquired Stebbins  Bancshares,  Inc. Stebbins
Bancshares,  Inc.  was merged  into the  Company in fiscal  2005 and its banking
subsidiary  Stebbins  National Bank,  continued  operations as a branch of Wayne
Savings. Wayne Savings Bancshares, Inc. paid $1.3 million in connection with the
acquisition.

Presented below are Wayne Savings Bancshares'  pro-forma condensed  consolidated
statements of earnings and earnings per share which have been prepared as if the
acquisition had been  consummated as of the beginning of each of the years ended
March 31, 2005 and 2004.

                                                             2005           2004
                                                             (In thousands)
                                                               (Unaudited)

Total interest income                                    $ 17,805       $ 19,476
Total interest expense                                      6,740          7,349
                                                         --------       --------
Net interest income                                        11,065         12,127
Provision for losses on loans                                 430            213
Other income                                                1,719          2,051
General, administrative and other expense                  12,025         10,142
                                                         --------       --------
Earnings before income taxes (benefits)                       329          3,823
Federal income taxes (benefits)                               (85)         1,093
                                                         --------       --------

NET EARNINGS                                             $    414       $  2,730
                                                         ========       ========

Earnings per share
  Basic                                                  $    .12       $    .73
                                                         ========       ========
  Diluted                                                $    .12       $    .73
                                                         ========       ========

NOTE N - RELATED PARTIES

The Bank  paid  legal  fees to the law firm to which one of the  Directors  is a
partner. The amount paid totaled approximately $35,000,  $24,000 and $22,000 for
the years ended March 31, 2006, 2005 and 2004, respectively.

In the normal course of business Wayne Savings received demand and time deposits
from directors,  officers and their related business  interests of approximately
$702,000 and $904,000 at March 31, 2006 and 2005, respectively.


                                       87


                         WAYNE SAVINGS BANCSHARES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          March 31, 2006, 2005 and 2004


NOTE O - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following table  summarizes the Company's  quarterly  results for the fiscal
years ended March 31, 2006 and 2005.



                                                               Three Months Ended
                                                June 30,  September 30,   December 31,       March 31,
                                                                              
2006:                                                 (In thousands, except per share data)

Total interest income                       $      4,681   $      4,798   $      4,981    $      5,228
Total interest expense                             1,882          1,966          2,117           2,315
                                            ------------   ------------   ------------    ------------

Net interest income                                2,799          2,832          2,864           2,913
Provision for losses on loans                         --             --             --             211
Other income                                         408            446            467             456
General, administrative and other expense          2,619          2,652          3,186           2,442
                                            ------------   ------------   ------------    ------------

Earnings before income taxes                         588            626            145             716
Federal income taxes                                 148            159            (26)            154
                                            ------------   ------------   ------------    ------------

Net earnings                                $        440   $        467   $        171    $        562
                                            ============   ============   ============    ============

Earnings per share:
  Basic                                     $        .13   $        .14   $        .05    $        .18
                                            ============   ============   ============    ============
  Diluted                                   $        .13   $        .14   $        .05    $        .18
                                            ============   ============   ============    ============



                                                               Three Months Ended
                                                June 30,  September 30,   December 31,       March 31,
                                                                              
2005:                                                 (In thousands, except per share data)

Total interest income                       $      4,244   $      4,381   $      4,465    $      4,542
Total interest expense                             1,625          1,609          1,711           1,771
                                            ------------   ------------   ------------    ------------

Net interest income                                2,619          2,772          2,754           2,771
Provision for losses on loans                         15             15             15             385
Other income                                         405            493            389             397
General, administrative and other expense          2,369          2,580          2,592           4,333
                                            ------------   ------------   ------------    ------------

Earnings before income taxes                         640            670            536          (1,550)
Federal income taxes                                 178            181            133            (577)
                                            ------------   ------------   ------------    ------------

Net earnings                                $        462   $        489   $        403    $       (973)
                                            ============   ============   ============    ============

Earnings per share:
  Basic                                     $        .20   $        .16   $        .15    $       (.40)
                                            ============   ============   ============    ============

  Diluted                                   $        .20   $        .16   $        .15    $       (.40)
                                            ============   ============   ============    ============



                                       88


ITEM 9.     Changes in and Disagreements With Accountants on Accounting and
- ---------------------------------------------------------------------------
            Financial Disclosure
            --------------------

         Not Applicable

ITEM 9A.    Controls and Procedures
- -----------------------------------

         Our management evaluated, with the participation of our Chief Executive
Officer  and  Chief  Financial  Officer,  the  effectiveness  of our  disclosure
controls and  procedures  (as defined in Rule  13a-15(e) or 15d-15(e)  under the
Securities  Exchange  Act of 1934) as of the end of the  period  covered by this
report.  Based  on such  evaluation,  our  Chief  Executive  Officer  and  Chief
Financial Officer have concluded that our disclosure controls and procedures are
designed  to ensure  that  information  required  to be  disclosed  by us in the
reports  that we file or submit  under the  Securities  Exchange  Act of 1934 is
recorded,  processed,  summarized and reported within the time periods specified
in the SEC's rules and regulations and are operating in an effective manner.

ITEM 9B.    Other Information
- -----------------------------

         Not Applicable

                                    PART III
                                    --------

ITEM 10.    Directors and Executive Officers of the Registrant
- --------------------------------------------------------------

         The  information  required herein is incorporated by reference from the
section captioned "Information with Respect to Nominees for Director, Continuing
Directors and Executive  Officers" in the Company's  definitive  proxy statement
for the annual meeting of  shareholders to be held on July 27, 2006, (the "Proxy
Statement")  expected to be filed with the Securities and Exchange Commission on
or about June 29, 2006.

         Incorporated  by reference to "Beneficial  Ownership of Common Stock by
Certain  Beneficial  Owners and Management - Section 16(a) Beneficial  Ownership
Reporting Compliance" in the Proxy Statement.

         The Company  has  adopted a Code of Conduct and Ethics that  applies to
its principal  executive  officer and principal  financial  officer,  as well as
other  officers  and  employees  of the Company and the Bank.  Upon receipt of a
written  request we will furnish without charge to any stockholder a copy of the
Code of Conduct and Ethics.  Such written  requests should be directed to Mr. H.
Stewart Fitz Gibbon III, Secretary,  Wayne Savings  Bancshares,  Inc., 151 North
Market Street, Wooster, Ohio 44691.

ITEM 11.    Executive Compensation
- ----------------------------------

         The  information  required herein is incorporated by reference from the
sections  captioned  "Management  Compensation,"  "Report  of  the  Compensation
Committee" and "Performance Graph" in the Proxy Statement.

ITEM 12.    Security Ownership of  Certain Beneficial Owners and  Management and
- --------------------------------------------------------------------------------
            Related Stockholder Matters
            ---------------------------

         The information  required  herein is  incorporated  herein by reference
from the section  captioned  "Beneficial  Ownership  of Common  Stock by Certain
Beneficial Owners and Management" and Item 5 hereof.

                                       89


ITEM 13.    Certain Relationships and Related Transactions
- ----------------------------------------------------------

         The  information  required by this Item 13 of Form 10-K is incorporated
by reference from the section captioned "Management  Compensation - Indebtedness
of Management and Related Party Transactions" in the Proxy Statement.

ITEM 14.    Principal Accountant Fees and Services
- --------------------------------------------------

         The  information  required herein is incorporated by reference from the
section  captioned  "Proposal II -  Ratification  of  Appointment of Independent
Registered Public Accounting Firm" in the Proxy Statement.

                                     PART IV
                                     -------

ITEM 15.    Exhibits, Financial Statement Schedules
- ---------------------------------------------------

         (a)(1)   Financial Statements

                  The  following  documents  have  been  filed  under  "Item  8,
         Financial Statement and Supplementary Data" of this Form 10.

         (i)      Report of Independent Registered Certified Public Accountants;
         (ii)     Consolidated Statements of Financial Condition;
         (iii)    Consolidated Statements of Earnings;
         (iv)     Consolidated Statements of Stockholders' Equity;
         (v)      Consolidated  Statements  of Cash  Flows;  and  (vi)  Notes to
                  Consolidated Financial Statements.

         (a)(2)   Financial Statement Schedules
                  -----------------------------

                  All  financial  statement  schedules  have been omitted as the
         required  information is inapplicable or has been included in the Notes
         to Consolidated Financial Statements.

         (a)(3)   Exhibits
                  --------

        Exhibit Number     Description
        --------------     -----------------------------------------------------
         3.1(1)            Articles of Incorporation
         3.2(1)            Bylaws
         4.0(2)            Form of Common  Stock  Certificate  of Wayne  Savings
                           Bancshares, Inc.
         10.1(3)           Employment  Agreement between Wayne Savings Community
                           Bank and Bryan C. Fehr dated May 27, 2004
         10.2(3)           Employment  Agreement between Wayne Savings Community
                           Bank and H.  Stewart  Fitz Gibbon III dated  November
                           14, 2005
         10.3(4)           Employment  Agreement between Wayne Savings Community
                           Bank and Phillip E. Becker dated February 15, 2005
         10.4(5)           The Wayne  Savings and Loan  Company  1993  Incentive
                           Stock Option Plan
         10.5(6)           Wayne Savings  Bancshares,  Inc. Amended and Restated
                           2003 Stock Option Plan
         11.0(7)           Statement re: computation of per share earnings
         21.0              Subsidiaries of  Registrant-Reference is made to Item
                           1 - "Business" for the Required Information
         23.0              Consent of Grant Thornton LLP

                                       90


        Exhibit Number     Description
        --------------     -----------------------------------------------------
         31.1              Certification   pursuant   to  Rule   13a-14(a)   and
                           15d-14(a) of the  Securities  Exchange Act of 1934 of
                           the Chief Executive Officer

         31.2              Certification   pursuant   to  Rule   13a-14(a)   and
                           15d-14(a) of the  Securities  Exchange Act of 1934 of
                           the Chief Financial Officer

         32.0              Certification pursuant to 18 U.S.C. Section 1350


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

         (1)      Filed as exhibits to the Plan of Conversion and Reorganization
                  filed as Exhibit 2 to the Registrant's  registration statement
                  on Form  SB-2,  initially  filed on  September  18,  2001,  as
                  amended (Registration No. 333-69600).

         (2)      Filed as Exhibit 4, to the Registrant's registration statement
                  on Form  SB-2,  initially  filed on  September  18,  2001,  as
                  amended (Registration No. 333-69600).

         (3)      Incorporated  by reference  to the  Exhibits to the  Company's
                  Form 10-K for year  ended  March 31,  2004,  filed on June 29,
                  2004 (File No. 000-23433).

         (4)      Incorporated  by reference  to the  Exhibits to the  Company's
                  Form  10-Q for  quarter  ended  December  31,  2004,  filed on
                  February 11, 2005 (File No. 000-23433).

         (5)      Incorporated  by  reference  from the  Company's  Registration
                  Statement  on Form S-8 filed on  December  4,  1997  (File No.
                  333-41479).

         (6)      Incorporated  by  reference  from the  Company's  Registration
                  Statement  on Form S-8  filed on  October  5,  2004  (File No.
                  333-119556).

         (7)      Incorporated   by   reference   to  Note  A.8.  of  "Notes  to
                  Consolidated Financial Statements" in Item 8 hereof.

         (b)      The  Exhibits  listed  under  (a)(3) of this Item 15 are filed
                  herewith.

         (c)      Reference is made to (a)(2) of this Item 15.

                                       91


                                   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, thereunto duly authorized.


                                      WAYNE SAVINGS BANCSHARES, INC.


Date:    June 28, 2006                By:  /s/Phillip E. Becker
                                           -------------------------------------
                                           Phillip E. Becker
                                           President and Chief Executive Officer


         Pursuant to the  requirements of the Securities  Exchange of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
Registrant and in the capacities and on the dates indicated.



                                                

By:      /s/Phillip E. Becker                        By:      /s/H. Stewart Fitz Gibbon III
         ------------------------------------                 -----------------------------------
         Phillip E. Becker, President and                     H. Stewart Fitz Gibbon III, Senior Vice President,
         Chief Executive Officer and Director                 Chief Financial Officer, Corporate Secretary and
         (Principal Executive Officer)                        Treasurer


Date:    June 28, 2006                                        Date:    June 28, 2006


By:      /s/Myron Swartzentruber                    By:      /s/Kenneth R. Lehman
         ------------------------------------                 -----------------------------------
         Myron Swartzentruber, Vice President                 Kenneth R. Lehman, Director
         Controller (Principal Accounting Officer)

Date:    June 28, 2006                                        Date:    June 28, 2006


By:      /s/Frederick J. Krum                        By:      /s/James C. Morgan
         ------------------------------------                 -----------------------------------
         Frederick J. Krum, Director                          James C. Morgan, Director

Date:    June 28, 2006                                        Date:    June 28, 2006


By:      /s/Terry A. Gardner                         By:      /s/Russell L. Harpster
         ------------------------------------                 -----------------------------------
         Terry A. Gardner, Director                           Russell L. Harpster,
                                                              Chairman of the Board of Directors
Date:    June 28, 2006                                        Date:    June 28, 2006


By:      /s/Daniel R. Buehler
         ------------------------------------
         Daniel R. Buehler, Director

Date:    June 28, 2006










                                         STOCKHOLDER INFORMATION

==========================================================================================================
                                                                       

Annual Meeting                                                         Transfer Agent

The Annual Meeting of Stockholders will be                             Registrar and Transfer Company
held at 10:00 a.m., on July 27, 2006, at                               10 Commerce Drive
The Greenbriar Conference Centre,                                      Cranford, New Jersey  07016-3572
50 Riffel Road
Wooster, Ohio  44691

Special Counsel                                                        Investor Information

Elias, Matz, Tiernan & Herrick LLP                                     Executive Offices
734 15th Street N.W., 12th Floor                                       Wayne Savings Bancshares, Inc.
Washington, DC  20005                                                  151 N. Market Street - P.O. Box 858
                                                                       Wooster, Ohio  44691
                                                                       (330) 264-5767
Independent Registered Certified
Public Accountants

Grant Thornton LLP
4000 Smith Road
Suite 500
Cincinnati, Ohio  45209

==========================================================================================================


                                     DIRECTORS AND OFFICERS
                                 WAYNE SAVINGS BANCSHARES, INC.

         Board of Directors                              Executive Officers

         Russell L. Harpster                             Phillip E. Becker
         Chairman                                        President and Chief Executive Officer

         Phillip E. Becker                               H. Stewart Fitz Gibbon III
         Daniel R. Buehler                               Senior Vice President and Chief Financial Officer
         Terry A. Gardner                                Corporate Secretary and Treasurer
         James C. Morgan
         Kenneth R. Lehman                               Bryan K. Fehr
         Frederick J. Krum                               Senior Vice President and Operations Officer

         Kenneth G. Rhode, Emeritus
         Donald E. Massaro, Emeritus
         Joseph L. Retzler, Emeritus