EXHIBIT 13.1

                                    CONTENTS

<TABLE>
<CAPTION>

<S>                                                                         <C>
SELECTED CONSOLIDATED FINANCIAL DATA                                             1

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REPORT TO STOCKHOLDERS                                                           2

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MANAGEMENT'S DISCUSSION AND ANALYSIS                                        3 - 13

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INDEPENDENT AUDITOR'S REPORT                                                    14

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CONSOLIDATED FINANCIAL STATEMENTS:

Consolidated statements of financial condition at September 30, 2002 and 2001   15

Consolidated statements of income for years ended September 30, 2002 and 2001   16

Consolidated statements of stockholders' equity for the years ended
September 30, 2002 and 2001                                                17 - 18

Consolidated statements of cash flows for the years ended
September 30, 2002 and 2001                                                19 - 20
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                 21 - 36

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COMMON STOCK INFORMATION                                                        37

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CORPORATE INFORMATION                                                           38

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</TABLE>

<PAGE>


                          WAKE FOREST BANCSHARES, INC.
                      SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                  September 30,
                                              ------------------------------------------------------
                                                 2002      2001         2000       1999         1998
                                              ---------   --------    --------    --------   -------
<S>                                          <C>        <C>         <C>         <C>         <C>
Financial Condition Data:                                         (In Thousands)
Total assets                                 $ 92,985    $ 93,337    $ 83,268    $ 72,396    $ 74,360
Investments (1)                                15,331      16,645       9,607       9,635      17,528
Loans receivable, net                          75,747      74,632      72,564      61,467      55,363
Deposits                                       76,767      77,221      67,874      57,654      60,038
Stockholders' equity                           14,840      14,549      14,172      13,468      13,167
</TABLE>

<TABLE>
<CAPTION>
                                                                Years Ended September 30,
                                              ------------------------------------------------------
                                                 2002       2001        2000         1999      1998
                                              ---------   --------    --------    --------   -------
<S>                                          <C>        <C>         <C>         <C>         <C>
Operating Data:                                          (In Thousands, Except Per Share Data)
Interest and dividend income                 $  6,445     $ 7,674     $ 6,797     $ 6,204     $ 5,983
Interest expense                                3,436       4,359       3,326       3,027       3,072
                                             --------    --------    --------    --------    --------
Net interest income                             3,009       3,315       3,471       3,177       2,911
Provision for loan losses                         144          39          34          --          --
Noninterest income                                350          79          50          42          34
Noninterest expense                             1,497       1,540       1,356       1,275       1,264
                                             --------    --------    --------    --------    --------
Income before income taxes                      1,718       1,815       2,131       1,944       1,681
Income tax expense                                662         676         800         741         620
                                             --------    --------    --------    --------    --------
Net income                                   $  1,056     $ 1,139     $ 1,331     $ 1,203     $ 1,061
                                             ========     =======     =======     =======     =======

Basic earnings per share                     $   0.92     $  1.00     $  1.15     $  1.02     $  0.91
Diluted earnings per share                       0.92        0.99        1.15        1.02        0.89
Dividends per share                              0.48        0.48        0.48        0.48        0.46
Dividend payout ratio                           52.15%      48.42%      41.87%      47.06%      51.69%
Selected Other Data:
Return on average assets (3)                     1.11%       1.24%       1.71%       1.62%       1.28%
Return on average equity (3)                     7.24%       7.93%       9.64%       8.83%       7.26%
Interest rate spread (3)                         2.57%       2.78%       3.54%       3.38%       3.39%
Average equity to average assets (3)            15.39%      15.68%      17.74%      18.35%      17.63%
Net interest margin (3)                          3.24%       3.70%       4.54%       4.34%       4.26%
Allowance for loan losses to
nonperforming loans (2)                         44.23%      31.61%       0.00%      89.51%     196.79%
Nonperforming loans to total loans (2)           1.38%       1.35%       0.00%       0.48%       0.24%
</TABLE>

(1)  Includes interest earning deposits and investment securities

(2)  Nonperforming loans include mortgage loans delinquent more than 90 days

(3)  Average balances are derived from month-end balances


                                       1
<PAGE>



                             REPORT TO STOCKHOLDERS


In September, Wake Forest Bancshares, Inc. celebrated its seventh year as a
public company. I am pleased to report that the Company reported earnings of
$1.06 million, or $0.92 per share, for our fiscal year ended September 30, 2002.
These results were noteworthy because they were achieved in spite of several
obstacles. Income during the current year continued to be hindered by narrowing
interest rate margins. Because the Company maintains loan and investment
portfolios which are rate sensitive, Federal Reserve actions to maintain market
interest rates at historically low levels have had a negative impact on our
revenue stream. In contrast, the Company's cost of funds has continued to
decline at a somewhat slower rate. In addition, sluggish local economic
conditions for the second year in row impeded loan demand and current year
results.

The Company paid a cash dividend of $0.12 per share during each quarter of the
current year, a generous 52% of total 2002 earnings. The Company is able to
provide this benefit to its shareholders because it continues to be profitable
and maintains a strong capital position. In addition, the Company reported
operating expenses as a percentage of net interest income of approximately 42%
during 2002, a ratio that indicates the Company operates in a prudent and lean
manner. The Company's return on assets amounted to 1.11% during the current
year. In addition, while the overall equity markets experienced significant
losses in 2002, the Company's stock price generally traded within a narrow
range, without substantial price fluctuation.

Current year loan demand was respectable, but not as strong as in recent years.
Housing starts in our lending area were down for the second straight year. As a
result, construction lending, which represents a sizable part of our lending
business, was down during 2002. Most builders were much more cautious and
concentrated on lowering their inventories. However, assuming the economy can be
placed back on track, the long-term fundamentals for the Wake Forest area
continue to be positive, both commercially and in the residential housing market
during the next few years. The Wake Forest community's close proximity to
Raleigh and the Research Triangle Park are advantageous, and the Company is
committed to prudent loan growth as our community expands. In December, the
Company began to originate loans for sale in the secondary market. We believe
this line of business will allow us to be much more competitive in the
residential loan markets. We also intend to remain competitive with our deposit
products to ensure continued growth and profitability.

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


                                            Respectfully,


                                            /s/ Robert C. White
                                            -----------------------------
                                            Robert C. White
                                            President & Chief Executive Officer

                                       2
<PAGE>



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

                                     GENERAL

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

The formation of the Company had no impact on the operations of the Association
or the MHC. The Association continues to operate at the same location, with the
same management, and subject to all the rights, obligations and liabilities of
the Association which existed immediately prior to the formation of the Company.

The Company conducts no business other than holding stock in the Association,
investing dividends received from the Association, repurchasing its common stock
from time to time, and distributing dividends on its common stock to its
shareholders. The principal business of the Association is accepting deposits
from the general public and using those deposits and other sources of funds
primarily to make loans secured by real estate and, to a lesser extent, other
forms of collateral located in the Association's primary market area of Wake and
Franklin counties in North Carolina.

Members of the MHC consist of depositors and certain borrowers of the
Association, who have the sole authority to elect the board of directors of the
MHC for as long as it remains in mutual form. The MHC's principal asset consists
of 635,000 shares of the Company's common stock. The MHC also currently receives
its proportional share of dividends declared and paid by the Company and such
funds are invested in deposits with the Association. The MHC, which by law must
own in excess of 50% of the stock of the Company, currently has an ownership
interest of 55% of the Company. The MHC's Board of Directors, which is currently
the same as the Association's and the Company's Board of Directors, will
generally be able to control the outcome of most matters presented to the
stockholders of the Company for resolution by vote except for certain matters
related to stock compensation plans, a vote regarding conversion of the mutual
holding company to stock form, or other matters which require an affirmative
vote by the minority stockholders. The Company and the MHC are registered as
savings and loan holding companies and are subject to regulation, examination,
and supervision by the OTS.

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

The following discussion and analysis is intended to assist readers in
understanding the results of operations and changes in financial position at and
for the years ended September 30, 2002 and 2001.


                                       3
<PAGE>

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

                               FINANCIAL CONDITION

Total assets decreased by $351,000 during 2002, from $93.4 million at September
30, 2001 to $93.0 million at September 30, 2002. The minor decrease in total
assets resulted primarily from an slight decrease of $406,600 in customer
deposits during the year. Total investments, including short term
interest-earning deposits and U.S. agency obligations decreased by $1.3 million
during 2002. The decrease in the Company's investment portfolio funded a $1.1
million increase in the Company's loan portfolio. The investment securities
portfolio, which amounted to $953,900 at September 30, 2002, contains available
for sale securities with net unrealized gains of $613,000. The net unrealized
gains are associated with the Company's investment in Federal Home Loan Mortgage
Corporation ("FHLMC") stock.

Net loans receivable increased by approximately $1.1 million during 2002 from
$74.6 million at September 30, 2001 to $75.7 million at September 30, 2002. Due
to a weakened economy, loan demand in the Association's primary lending markets
softened during 2002, particularly for new housing sales and starts. However,
the economic base in the Association's primary lending areas has increased over
the last several years, primarily due to the continuing growth in the Research
Triangle/Wake County area and the expansion of its population base into
surrounding communities such as Wake Forest. This expansion is expected to
continue over the next several years.

Customer deposits decreased by $406,600 during 2002 and totaled $76.8 million at
September 30, 2002. The slight decrease in deposits occurred primarily due to
the increasingly competitive environment for deposits in the Association's
retail markets.

The Company had no outstanding borrowings during 2002, other than the loan by
the Employee Stock Ownership Plan of the Association (the "ESOP") to purchase
shares of stock in the Company, which is shown as a liability of the Company.
The Company has borrowing capacity through the Association's ability to borrow
funds from the Federal Home Loan Bank (the "FHLB") of Atlanta. This capacity is
currently set at 12% of the Association's total assets, subject to available
collateral.

The Company and the Association are required to meet certain capital
requirements as established by the OTS (the "Office of Thrift Supervision"). At
September 30, 2002, all capital requirements were met. (See Note 12 to the
consolidated financial statements). The Board of Directors of the Company has
approved an ongoing stock repurchase program authorizing the Company to
repurchase its outstanding common stock, subject to regulatory approval. The
repurchases are made through registered broker-dealers from shareholders in open
market purchases at the discretion of management. The Company intends to hold
the shares repurchased as treasury shares, and may utilize such shares to fund
stock benefit plans or for any other general corporate purpose as permitted by
applicable law. At September 30, 2002, the Company had repurchased 67,472 shares
of its common stock for $913,900. The program continues until terminated by the
Board of Directors.



                                       4
<PAGE>

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

                              RESULTS OF OPERATIONS

Returns. The Company's return on average assets was 1.11% and 1.24% and its
return on average equity was 7.24% and 7.93% for 2002 and 2001, respectively.
The decrease in the returns on average assets and average equity during 2002 was
primarily due to narrowing interest rate margins.

Net Income. The Company's net income for the years ended September 30, 2002 and
2001 was $1,056,100 and $1,139,250, respectively. Net income in 2002 was lower
than the earnings reported in 2001 primarily due to a decline in interest rate
spreads created by rate movements precipitated by the Federal Reserve.

Net Interest Income. Net interest income represents the difference between
income derived from interest-earning assets and interest expense incurred on
interest-bearing liabilities. Net interest income is affected by both (i) the
difference between the rates of interest earned on interest-earning assets and
the rates paid on interest-bearing liabilities ("interest rate spread") and (ii)
the relative amounts of interest-earning assets and interest-bearing liabilities
outstanding during the period. Net interest income decreased by $305,850 to $3.0
million for the year ended September 30, 2002 from $3.3 million reported in
2001. The decline in net interest income during 2002 was attributable primarily
to the greater sensitivity of the Company's loan and investment portfolios to
rate movements as compared to its deposits. As market rates declined during 2002
and 2001, the Company's yields on interest earnings assets fell at a quicker
rate than its cost of funds. As a result, the Company's net interest rate spread
declined from 2.78% in 2001 to 2.57% in 2002.

Interest Income. Total interest income decreased to $6.5 million for 2002 from
$7.7 million in 2001, a decrease of $1.2 million. The decline in interest income
during 2002 was primarily attributable to a 1.64% drop in the Company's yield on
interest earning assets in 2002. The Company's overall yield on interest earning
assets was 6.94% in 2002 as compared with 8.58% in 2001.

Interest Expense. Total interest expense decreased from $4.3 million in 2001 to
$3.4 million in 2002, a decrease of $922,550. During 2002, the Association's
cost of funds decreased from 5.80% in 2001 to 4.37% in 2001, a decrease of
1.43%. The decrease in interest expense from 2001 to 2002 was due primarily to a
decrease in the Association cost of funds, which in turn was created by a
decline in overall market rates.

Provision for Loan Losses. The Association provided $144,250 in additional loan
loss provisions during 2002. During 2001, the Association provided $39,000 in
loan loss provisions. There were no loans charged off against the loan loss
allowance during 2002 or 2001. However, the Association had certain losses
associated with foreclosed assets as explained in the "non-interest expense" and
the "asset quality" sections which follow. The provisions, which are charged to
operations, and the resulting loan loss allowances are amounts the Association's
management believes will be adequate to absorb losses that are estimated to have
occurred. Loans are charged off against the allowance when management believes
that uncollectibility is confirmed. Subsequent recoveries, if any, are credited
to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revisions as more information becomes available.


                                       5
<PAGE>

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

                              RESULTS OF OPERATIONS

Non-interest Income. Non-interest income amounted to $349,800 and $79,250 in
2002 and 2001, respectively. Non-interest income typically consists of service
charges and fees associated with the Association's loan and deposit accounts.
However, during 2002, the Association also sold FHLMC shares with a cost basis
of $4,250 for a gain of $273,450.

Non-interest Expense. Non-interest expense consists primarily of operating
expenses for compensation and related benefits, occupancy, federal insurance
premiums, OTS operating assessments, data processing charges, and costs
associated with foreclosed assets. Non-interest expenses amounted to $1,496,550
and $1,540,150 in 2002 and 2001, respectively.

Compensation and related benefits decreased from $1,057,700 in 2001 to $779,450
in 2002. The decrease in compensation and benefits occurred primarily due a
reduction in salary cost associated with the retirement of two officers, one in
2001 and the other in 2002. In addition, compensation and related benefits
decreased in 2002 due to increased cost associated with certain post-retirement
benefits provided to current and former employees in 2001.

Expenses associated with foreclosed assets increased from $19,750 in 2001 to
$237,050 in 2002, including net losses on the sale or write-down of foreclosed
assets amounted to $197,750 in 2002. All of the losses from foreclosed assets
related to one builder who filed for bankruptcy during 2002. The Company
believes that additional loss provisions will not be necessary on current
holdings. Occupancy expense, federal insurance premiums, OTS operating
assessments, data processing expense and other operating expense changed
nominally from 2001 to 2002. Certain administrative expenses are allocated to
the MHC as shown in Note 15 to Consolidated Financial Statements.

Income Taxes. The Company's effective income tax rate was 38.5% and 37.2% in
2002 and 2001, respectively. The differences in rates were due to changes in the
components of permanent tax differences.

                                  ASSET QUALITY

The Company's level of non-performing loans, defined as loans past due 90 days
or more, as a percentage of loans outstanding, was 1.38% and 1.35% at September
30, 2002 and 2001, respectively. The Company's non-performing loans at September
30, 2002 amounted to $1,047,295 and consisted of nine residential mortgage
loans. Four of the loans are to the same borrower. The Company believes that it
has sufficient allowances established to cover any loss associated with these
loans. Based on management's analysis of the adequacy of its allowances,
$144,250 and $39,000 in provisions for additional loan loss allowances were made
during years ended September 30, 2002 and 2001, respectively. The Company's loan
loss allowance was $463,250 at September 30, 2002.

At September 30, 2002, the Company had three single-family residential
properties acquired in foreclosure amounting to $422,900, net of recorded
allowances. All three of the properties were partially completed homes to the
same borrower at date of foreclosure. All three are being readied for market.
The Company believes that the properties have been adequately reserved at
September 30, 2002 and no further loss is expected.


                                       6
<PAGE>


                  AVERAGE BALANCES, INTEREST, YIELDS AND COSTS

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

<TABLE>
<CAPTION>
                                                                                 Year Ended September 30,
                                                               ------------------------------------------------------------
                                                                          2002                           2001
                                                               --------------------------    ------------------------------
                                       At September 30, 2002
                                       ---------------------                       Average                          Average
                                        Actual      Yield/     Average             Yield/     Average                Yield/
Assets:                                Balance       Cost      Balance   Interest   Cost      Balance    Interest    Cost
                                       --------    ---------  -------    --------  ------     -------    --------   ------
<S>                                    <C>         <C>        <C>        <C>        <C>       <C>        <C>        <C>
     Interest-earning assets:
        Interest-earning deposits      $ 14,377      1.87%    $ 16,281   $   287      1.76%   $ 13,867   $   667      4.81%
        Investment securities               954      5.00%         385        34      8.83%      2,478       141      5.69%
        Loans receivable (1)             75,747      7.09%      76,207     6,124      8.04%     73,142     6,866      9.39%
                                       --------               --------   -------              --------   -------
     Total interest-earning assets       91,078      6.26%      92,873     6,445      6.94%     89,487   $ 7,674      8.58%
     Non-interest-earning assets          1,907                  1,919   -------                 2,118   -------
                                       --------               --------                        --------
                     Total             $ 92,985               $ 94,792                          91,605
                                       ========               ========                        ========

Liabilities and stockholders' equity:
     Interest-bearing liabilities:
        ESOP debt                      $     29      4.75%    $     61   $     3      4.92%   $    123   $    10      8.13%
        Passbook accounts                 3,646      1.00%       3,336        53      1.59%      3,167        95      3.00%
        NOW & MMDA accounts              16,915      1.41%      17,723       304      1.72%     10,258       383      3.73%
        Certificates of deposit          56,206      4.60%      57,586     3,076      5.34%     61,651     3,871      6.28%
                                       --------               --------   -------              --------   -------
     Total interest-bearing liabilities  76,796      3.72%      78,706   $ 3,436      4.37%     75,199   $ 4,359      5.80%
                                                                         -------                         -------
     Non-interest-bearing liabilities     1,349                  1,494                           2,047
     Stockholders' equity                14,840                 14,592                          14,359
                                       --------               --------                        --------
                     Total             $ 92,985               $ 94,792                        $ 91,605
                                       ========               ========                        ========
Net interest income
and interest rate spread (2)                         2.54%               $ 3,009      2.57%              $ 3,315      2.78%
                                                                         =======                         =======

Net yield on interest-earning assets (3)             3.11%                            3.24%                           3.70%
Ratio of interest-earning assets to
     interest-bearing liabilities                  118.24%                          118.00%                         119.00%
</TABLE>

(1)  Balance is net of deferred loan fees and loans in process. Non-accrual
     loans are included in the balances.

(2)  Interest rate spread represents the difference between the average yield on
     interest-earning assets and the average cost of interest-bearing
     liabilities.

(3)  Net yield on interest-earning assets represents net interest income divided
     by average interest-earning assets.


                                       7
<PAGE>





                   RATE/VOLUME ANALYSIS OF NET INTEREST INCOME

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

<TABLE>
<CAPTION>

                                          Year ended September 30,              Year ended September 30,
                                              2002 vs. 2001                           2001 vs. 2000
                                    Increase (Decrease) Attributable to     Increase (Decrease) Attributable to
                                    -----------------------------------     -----------------------------------
                                                         Rate/               Rate/
Assets:                             Volume    Rate      Volume      Net     Volume    Rate    Volume     Net
                                    ------   -------    ------   --------   ------    ----    ------    -------
<S>                                <C>       <C>       <C>       <C>        <C>     <C>       <C>      <C>
    Interest-earning assets:
       Interest-earning deposits   $ 116     $ (423)   $ (73)    $ (380)    $ 534   $  (68)   $ (115)  $  351
                                   -----     ------    -----     ------     -----   ------    ------   ------
       Investment securities        (119)        78      (66)      (107)      (25)       1        (1)     (25)
       Loans receivable              288       (987)     (43)      (742)      434      109         7      550
                                   -----     ------    -----     ------     -----   ------    ------   ------
                    Total            285     (1,332)    (182)    (1,229)      943       42      (109)     876
                                   -----     ------    -----     ------     -----   ------    ------   ------
Liabilities:
    Interest-bearing liabilities:
       ESOP debt                      (5)        (4)       2         (7)       (6)      (2)        1       (7)
       Passbook savings                5        (45)      (2)       (42)      (11)       0         0      (11)
       NOW & MMDA accounts           278       (206)    (151)       (79)       27      (32)       (2)      (7)
       Certificate of deposit       (255)      (580)      40       (795)      731      259        67    1,057
                                   -----     ------    -----     ------     -----   ------    ------   ------
                    Total             23       (835)    (111)      (923)      741      225        66    1,032
                                   -----     ------    -----     ------     -----   ------    ------   ------
    Net interest income            $ 262     $ (497)   $ (71)    $ (306)    $ 202   $ (183)   $ (175)  $ (156)
                                   =====     ======    =====     ======     =====   ======    ======   ======
</TABLE>


                                       8
<PAGE>



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

                         CAPITAL RESOURCES AND LIQUIDITY

The Company declared dividends of $.12 per share for each quarter during 2002.
Although the Company anticipates that it will continue to declare cash dividends
on a regular basis, the Board of Directors will review its policy on the payment
of dividends on an ongoing basis, and such payment may be subject to dividends
received from the Association to the Company, future earnings, cash flows,
capital needs, and regulatory restrictions.

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

During the current year, cash decreased by approximately $581,850, and amounted
to $15.3 million at September 30, 2002. Cash flow resulting from internal
operating activities provided increases of $1.2 million in cash during the year
ended September 30, 2002. Cash flows from investing activities utilized $721,400
in cash during the current year, with a net growth in loans of $1.1 million
being the primary use of cash. Because of historically low rates and a flat
yield curve on shorter term investments, the Association allowed $500,000 in
investment securities to mature without reinvesting the proceeds during 2002. In
addition, the Association sold a portion of its investment in FHLMC stock during
2002 and received cash proceeds of $277,700.

During 2002, financing activities of the Company utilized $1.1 million in cash,
including net deposit decreases of $406,600. The majority of the deposit
decrease occurred because the Association's loan demand was marginal in 2002,
and as a result the Association did not aggressively market for deposits. The
Association's ability to generate deposits has historically been sufficient to
fund its loan demand and provide for adequate liquidity without the need to
access other forms of credit availability. In addition, the Association has a
readily available source of credit through its borrowing capacity at the FHLB of
Atlanta, currently equal to 12% of total assets. Cash provided by operating and
financing activities is used to originate new loans to customers, to maintain
the Association's liquid investment portfolios, and to meet short term liquidity
requirements.

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


                                       9
<PAGE>

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

                   ASSET/LIABILITY MANAGEMENT AND MARKET RISK

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

Other types of market risk, such as foreign currency and commodity price risk,
do not arise in the normal course of the Company's business activities. In
addition, the Company does not currently engage in trading activities or use
derivative instruments to control interest rate risk. The Company's asset and
liability management objectives are to (i) improve the rate sensitivity of its
interest-earning assets in relation to interest-bearing liabilities, and (ii)
maintain an appropriate ratio of interest-sensitive assets to interest-sensitive
liabilities with comparable maturities. Management realizes certain risks are
inherent and that the goal is to minimize interest rate risk.

In the absence of other factors, the Company's overall yield on interest-earning
assets will increase as will its cost of funds on its interest-bearing
liabilities when market rates increase over an extended period of time.
Conversely, the Company's yields and cost of funds will decrease when market
rates decline. The Company is able to manage these swings to some extent by
attempting to control the maturities or repricing adjustments of its
interest-earning assets and interest-bearing liabilities over given periods of
time.

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

In order to minimize the potential effects of adverse material and prolonged
increases or decreases in market interest rates on the Company's operations,
management has implemented an asset/liability program designed to improve the
Company's interest rate gap. The program primarily emphasizes the origination of
balloon and other short term loans, such as construction and home equity loans
that are held for investment purposes. In addition, the program emphasizes
investing in short or intermediate term investment securities, and the
solicitation of checking or transaction deposit accounts which are less
sensitive to changes in interest rates and can be repriced rapidly.

The Board of Directors is responsible for reviewing the Company's asset and
liability policies. On a quarterly basis, the Board reviews interest rate risk
and trends. Management of the Company is responsible for administering the
policies established by the Board with respect to asset and liability goals and
strategies.

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


                                       10
<PAGE>


                          WAKE FOREST BANCSHARES, INC.
                              MARKET RISK ANALYSIS


<TABLE>
<CAPTION>
                                                                    EXPECTED MATURITY DATE
                                   -----------------------------------------------------------------------------------------
                                                                     YEAR ENDED SEPTEMBER 30,
                                   -----------------------------------------------------------------------------------------
                                                                     (Dollars in Thousands)
                                      2003       2004         2005          2006       2007  Thereafter  Total    Fair Value
                                   ---------- ----------   ----------   ----------- -------- ----------  -------  ----------
<S>                                   <C>          <C>          <C>       <C>       <C>       <C>          <C>    <C>
Assets:
     Loans-fixed:
       Balance                     $   160      $    --      $    --       $   --    $   --   $ 2,457   $ 2,617    $ 2,627
       Interest rate                  4.65%          --           --           --        --      8.95%     8.69%        --

     Loans-variable (1):
       Balance                      38,104       11,751       16,703        4,361     2,211        --    73,130     73,324
       Interest rate                  6.08%        8.49%        7.81%        8.15%     8.05%       --      7.05         --

     Investments (2):
       Balance                      14,718           --           --           --        --        --    14,718     15,331
       Interest rate                  2.07%          --           --           --        --        --      2.07%        --

Liabilities:
     Deposits (3):
       Balance                      20,561           --           --           --        --        --    20,561     20,561
       Interest rate                  1.33%          --           --           --        --        --      1.33%        --

     Deposits-certificates:
       Balance                      30,146       11,511        9,941        1,751     2,857        --    56,206     57,785
       Interest rate                  4.09%        4.08%        6.22%        6.40%     4.86%       --      4.58%        --
</TABLE>



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


                                       11
<PAGE>

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

                          FUTURE REPORTING REQUIREMENTS

In April 2002, the Financial Accounting Standards Board "FASB" issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." SFAS No. 145 updates, clarifies,
and simplifies existing accounting pronouncements. The statement rescinds SFAS
No. 4, which required all gains and losses from extinguishment of debt to be
aggregated and, if material, classified as an extraordinary item, net of related
income tax effect. As a result, the criteria in APB No. 30 will now be used to
classify those gains and losses. SFAS No. 64 amended SFAS No. 4 and is no longer
necessary as SFAS No. 4 has been rescinded. SFAS No. 44 has also been rescinded
as it is no longer necessary. SFAS No. 145 amends SFAS No. 13 to require that
certain lease modifications that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-lease transactions.
This statement also makes technical corrections to existing pronouncements.
While those corrections are not substantive in nature, in some instances, they
may change accounting practice. This statement is not currently applicable to
the Company.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF Issue 94-3, a
liability for an exit cost, as defined, was recognized at the date of an
entity's commitment to an exit plan. The provisions of this statement are
effective for exit or disposal activities that are initiated after December 31,
2002 with earlier application encouraged. This statement is not currently
applicable to the Company.

                   CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

Allowance for Loan Losses:

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


                                       12
<PAGE>

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

                   CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Identified problem and impaired loans are measured for impairment based on the
present value of expected future cash flows discounted at the loan's effective
interest rate, the loan's observable market price or the fair value of the
collateral, if the loan is collateral dependent. This evaluation is inherently
subjective as it requires material estimates that may be susceptible to
significant change. The adequacy of the allowance is also reviewed by management
based upon its evaluation of then-existing economic and business conditions
affecting the key lending areas of the Company and other conditions, such as new
loan products, collateral values, loan concentrations, changes in the mix and
volume of the loan portfolio; trends in portfolio credit quality, including
delinquency and charge-off rates; and current economic conditions that may
affect a borrower's ability to repay. Although management believes it has
established and maintained the allowance for loan losses at appropriate levels,
future adjustments may be necessary if economic, real estate and other
conditions differ substantially from the current operating environment.

Interest Income Recognition.

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

                     IMPACT OF INFLATION AND CHANGING PRICES

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

                SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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


                                       13
<PAGE>


                          INDEPENDENT AUDITORS' REPORT

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


We have audited the accompanying consolidated statements of financial condition
of Wake Forest Bancshares, Inc. and Subsidiary as of September 30, 2002 and 2001
and the related consolidated statements of income, stockholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Wake Forest
Bancshares, Inc. and Subsidiary as of September 30, 2002 and 2001, and the
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.

/s/ Dixon Odom PLLC

Dixon Odom PLLC
Sanford, North Carolina
October  18, 2002


                                       14
<PAGE>


WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 2002 AND 2001
------------------------------------------------------------------------------


<TABLE>
<CAPTION>

ASSETS                                                                              2002                  2001
                                                                              -----------------     -----------------
<S>                                                                           <C>                   <C>
Cash:
  Interest-bearing deposits                                                   $     14,377,050      $     14,804,050
  Noninterest-bearing deposits                                                         926,200             1,081,050
                                                                              -----------------     -----------------
                                                                                    15,303,250            15,885,100
                                                                              -----------------     -----------------
Investment securities (Note 2):
  Available for sale, at market value                                                  623,500             1,510,100
  FHLB stock, at cost                                                                  330,400               330,400
Loans receivable, net of allowance for loan losses
  of $463,250 in 2002 and $319,000 in 2001 (Note 3)                                 75,747,400            74,632,400
Accrued interest receivable                                                             77,350                86,100
Property and equipment, net (Note 4)                                                   403,700               423,650
Foreclosed assets, net (Note 5)                                                        422,900               391,250
Deferred income tax assets (Note 11)                                                    41,300                    --
Prepaid expenses and other assets                                                       35,700                77,500
                                                                              -----------------     -----------------
          Total assets                                                        $     92,985,500      $     93,336,500
                                                                              =================     =================

LIABILITIES AND EQUITY
Liabilities:
  Deposits (Note 6)                                                           $     76,767,500       $    77,174,100
  Accrued interest on deposits                                                          24,350                46,500
  Accounts payable and accrued expenses                                                575,250               551,400
  Dividends payable                                                                    137,900               138,600
  Note payable - ESOP (Note 10)                                                         29,450                88,300
  Deferred income taxes (Note 11)                                                           --               176,550
  Redeemable common stock held by the ESOP, net of
    unearned ESOP shares (Note 10)                                                     611,250               612,100
                                                                              -----------------     -----------------
          Total liabilities                                                         78,145,700            78,787,550
                                                                              -----------------     -----------------
Commitments and contingencies (Note 13)
Stockholders' Equity (Note 12):
  Preferred stock, authorized 1,000,000 shares, none issued                                 --                    --
  Common stock, $.01 par value, authorized 5,000,000 shares; issued 1,216,612
    shares (1,215,862 at September 30, 2001)                                            12,150                12,150
  Additional paid-in-capital                                                         5,062,900             4,996,900
  Accumulated other comprehensive income                                               379,800               616,850
  Retained  earnings, substantially restricted (Note 12)                            10,298,850             9,733,750
  Common stock in treasury, at cost ( 67,472 shares in 2002
    and 60,836 shares in 2001                                                        (913,900)             (810,700)
                                                                              -----------------     -----------------
          Total stockholders' equity                                                14,839,800            14,548,950
                                                                              -----------------     -----------------
                                                                              $     92,985,500      $     93,336,500
                                                                              =================     =================
</TABLE>

See Notes to Consolidated Financial Statements.


                                       15
<PAGE>


WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2002 AND 2001
------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                             2002            2001
                                                          -----------     -----------
<S>                                                       <C>             <C>
Interest and dividend income:
  Loans                                                   $ 6,123,650     $ 6,865,600
  Investment securities                                        34,300         141,250
  Interest-bearing deposits                                   287,300         666,800
                                                          -----------     -----------
                                                            6,445,250       7,673,650
                                                          -----------     -----------
Interest expense:
  Deposits (Note 6)                                         3,433,200       4,348,700
  Borrowings                                                    3,200          10,250
                                                          -----------     -----------
                                                            3,436,400       4,358,950
                                                          -----------     -----------

Net interest income before provision for loan losses        3,008,850       3,314,700
Provision for loan losses (Note 3)                           (144,250)        (39,000)
                                                          -----------     -----------
Net interest income after provision for loan losses         2,864,600       3,275,700
                                                          -----------     -----------

Noninterest income:
  Service fees and other income                                76,350          79,250
  Gain on sale of investment securities                       273,450            --
                                                          -----------     -----------
                                                              349,800          79,250
                                                          -----------     -----------
Noninterest expense:
  Compensation and benefits (Notes 7, 8, 9, and 10)           779,450       1,057,700
  Occupancy                                                    46,550          41,700
  Federal insurance premiums and operating assessments         44,250          41,050
  Data processing and outside service fees                    114,550         120,250
  Foreclosed assets                                           237,050          19,750
  Other operating expense                                     274,700         259,700
                                                          -----------     -----------
                                                            1,496,550       1,540,150
                                                          -----------     -----------

Income before income taxes                                  1,717,850       1,814,800
                                                          -----------     -----------
Income taxes (Note 11):
  Current                                                     734,350         725,900
  Deferred                                                    (72,600)        (50,350)
                                                          -----------     -----------
                                                              661,750         675,550
                                                          -----------     -----------
          Net income                                      $ 1,056,100     $ 1,139,250
                                                          ===========     ===========

Basic earnings per share                                  $      0.92     $      1.00
Diluted earnings per share                                $      0.92     $      0.99
Dividends paid per share                                  $      0.48     $      0.48

</TABLE>


See Notes to Consolidated Financial Statements.

                                       16
<PAGE>



WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2002 AND 2001
------------------------------------------------------------------------------



<TABLE>
<CAPTION>
                                                     Shares of                     Additional
                                                      Common          Common        Paid in
                                                       Stock           Stock        Capital
                                                     ---------      ----------     ----------
<S>                                                  <C>            <C>            <C>
Balance at September 30, 2000                        1,171,062      $   12,150     $4,916,450
Comprehensive income:
  Net income for 2001                                                    --              --
  Net change in unrealized gain on securities                            --              --
     Total comprehensive income
Contributions to ESOP (Note 10)                                          --            23,700
Market value adjustment for redeemable
  common stock held by ESOP                                              --              --
Amortization of earned RRP shares (Note 8)                               --            56,750
Cash dividends ($0.48 per share)                                         --              --
Acquisition of 16,036 shares of common
  stock for the treasury                               (16,036)          --              --
                                                    ----------      ----------     ----------
Balance at September 30, 2001                        1,155,026          12,150      4,996,900
Comprehensive income:
  Net income for 2002                                                    --              --
  Net change in unrealized (loss) on securities                          --              --
     Total comprehensive income
Contributions to ESOP (Note 10)                                          --            37,550
Market value adjustment for redeemable
  common stock held by ESOP                                              --              --
Amortization of earned RRP shares (Note 8)                               --            18,900
Cash dividends ($0.48 per share)                                         --              --
Exercise of stock options                                  750           --             9,550
Acquisition of 6,636 shares of common
  stock for the treasury                                (6,636)          --              --
                                                    ----------      ----------     ----------
Balance at September 30, 2002                        1,149,140      $   12,150     $5,062,900
                                                    ==========      ==========     ==========
</TABLE>

See Notes to Consolidated Financial Statements.



                                       17
<PAGE>
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2002 AND 2001
------------------------------------------------------------------------------




  Accumulated
     Other                             Treasury
 Comprehensive       Retained           Stock
    Income           Earnings          Acquired            Total
--------------    --------------    ---------------   -------------
$    496,250      $  9,352,150      $   (605,450)     $ 14,171,550
        --           1,139,250              --           1,139,250
     120,600              --                --             120,600
                                                      ------------
                                                         1,259,850
                                                      ------------
        --                --                --              23,700
        --            (206,000)             --            (206,000)
        --                --                --              56,750
        --            (551,650)             --            (551,650)
        --                --            (205,250)         (205,250)
------------      ------------      ------------      ------------
     616,850         9,733,750          (810,700)       14,548,950
        --           1,056,100              --           1,056,100
    (237,050)             --                --            (237,050)
                                                      ------------
                                                           819,050
                                                      ------------
        --                --                --              37,550
        --              59,750              --              59,750
        --                --                --              18,900
        --            (550,750)             --            (550,750)
        --                --                --               9,550
        --                --            (103,200)         (103,200)
------------      ------------      ------------      ------------
$    379,800      $ 10,298,850      $   (913,900)     $ 14,839,800
============      ============      ============      ============




                                       18

<PAGE>


WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2002 AND 2001
------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                               2002              2001
                                                           ------------      ------------
<S>                                                        <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES

Net income                                                 $  1,056,100      $  1,139,250
Adjustments to reconcile net income to net
 cash provided  by operating activities:
   Depreciation                                                  30,400            29,500
   Provision for loan losses                                    144,250            39,000
   Provision for loss on foreclosed assets                      206,000             5,000
   Amortization of unearned RRP shares                           18,900            56,750
   Amortization of unearned ESOP shares                          58,850            58,850
   Gain on sale of investment securities                       (273,450)             --
   Gain on sale of foreclosed assets, net                        (8,250)             --
   ESOP compensation expense credited to
     paid-in-capital                                             37,550            23,700
   Deferred income taxes                                        (72,600)          (50,350)
Changes in assets and liabilities:
  (Increase) decrease in:
    Accrued interest receivable                                   8,750            40,700
    Prepaid expenses and other assets                            41,800           (25,100)
Increase (decrease) in:
    Accounts payable and accrued expenses                         1,700           116,900
                                                           ------------      ------------
          Net cash provided by operating activities           1,250,000         1,434,200
                                                           ------------      ------------

CASH FLOWS FROM INVESTING ACTIVITIES

Principal collected on  loans                                26,415,000        35,818,000
Mortgage loans purchased                                       (195,000)         (140,000)
Loans originated                                            (28,469,250)      (38,181,500)
Proceeds from sale of foreclosed assets                         782,300              --
Capital additions to foreclosed assets                          (21,700)             --
Proceeds from sale of investment securities                     277,700              --
Maturities of available for sale investment securities          500,000         1,750,000
Purchase of FHLB stock                                             --             (39,700)
Purchases of property and equipment                             (10,450)          (20,250)
                                                           ------------      ------------
          Net cash used in investing activities                (721,400)         (813,450)
                                                           ------------      ------------
</TABLE>


See Notes to Consolidated Financial Statements.



                                       19
<PAGE>
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2002 AND 2001
------------------------------------------------------------------------------



<TABLE>
<CAPTION>
                                                                 2002              2001
                                                             -------------     -------------
<S>                                                          <C>               <C>
CASH FLOWS FROM FINANCING ACTIVITIES

Cash dividends paid                                          $   (551,350)     $   (553,600)
Principal payments on ESOP note payable                           (58,850)          (58,850)
Proceeds from stock options exercised                               9,550              --
Purchase of treasury stock                                       (103,200)         (205,250)
Net increase (decrease) in savings accounts                      (406,600)        9,346,200
                                                             ------------      ------------
Net cash provided by (used in) financing activities            (1,110,450)        8,528,500
                                                             ------------      ------------
          Net increase (decrease) in cash                        (581,850)        9,149,250
                                                             ------------      ------------
Cash:
  Beginning                                                    15,885,100         6,735,850
                                                             ------------      ------------
  Ending                                                     $ 15,303,250      $ 15,885,100
                                                             ============      ============
Cash and cash Equivalents:
  Cash                                                       $    926,200      $  1,081,050
  Interest bearing overnight funds                             14,377,050        14,804,050
                                                             ------------      ------------
          Total cash and cash equivalents                    $ 15,303,250      $ 15,885,100
                                                             ============      ============
Supplemental Disclosures of Cash Flow Information
  Cash payments for:
     Interest                                                $  3,458,550      $  4,368,650
     Income taxes                                            $    710,000      $    787,200

Supplemental Schedule of Noncash Investing
 and Financing Activities:
  Fair value of ESOP shares in excess of unearned
     ESOP shares (charged) credited to retained earnings     $     59,750      $   (206,000)
  Change in unrealized gain (loss) on available for sale
  securities, net of tax effect                              $   (237,050)     $    120,600
  Loans receivable transferred to foreclosed assets          $    989,000      $    396,250
</TABLE>



                                       20
<PAGE>


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

NOTE 1.  NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Wake Forest Bancshares, Inc. (the "Company") is located in Wake Forest, North
Carolina and is the parent stock holding company of Wake Forest Federal Savings
& Loan Association (the "Association" or "Wake Forest Federal"), it's only
subsidiary. The Company conducts no business other than holding all of the stock
in the Association, investing dividends received from the Association,
repurchasing its common stock from time to time, and distributing dividends on
its common stock to its shareholders. The Association's principal activities
consist of obtaining savings deposits and providing mortgage credit to customers
in its primary market area, the counties of Wake and Franklin, North Carolina.
The Company's and the Association's primary regulator is the Office of Thrift
Supervision (OTS) and its deposits are insured by the Savings Association
Insurance Fund (SAIF) of the Federal Deposit Insurance Corporation (FDIC).

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

The Company was formed on May 7, 1999 solely for the purpose of becoming a
savings and loan holding company and had no prior operating history. The
formation of the Company had no impact on the operations of the Association or
the MHC. The Association continues to operate at the same location, with the
same management, and subject to all the rights, obligations and liabilities of
the Association which existed immediately prior to the formation of the Company.

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

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

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

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

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



                                       21
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------


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

         Securities held to maturity: Securities classified as held to maturity
         are those debt securities the Company has both the intent and ability
         to hold to maturity regardless of changes in market conditions,
         liquidity needs or changes in general economic conditions. These
         securities are carried at cost adjusted for amortization of premiums or
         accretion of discounts, computed by a method which approximates the
         interest method, over their contractual lives. The Company currently
         has no securities which are classified as held to maturity.

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

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

Loans receivable: Loans receivable are stated at unpaid principal balances, less
the allowance for loan losses and net deferred loan origination fees. The
Association's loan portfolio consists principally of mortgage loans
collateralized by first trust deeds on single family residences, other
residential property, commercial property and land.

Loan fees: The Association receives fees for originating mortgage loans. The
Association defers all loan fees less certain direct costs as an adjustment to
yield with subsequent amortization into income over the life of the related
loan.

Allowance for loan losses: The allowance for loan losses is established as
losses are estimated to have occurred through a provision for loan losses
charged to earnings. Such evaluation includes a review of loans for which
collectibility appears doubtful and other factors, including the nature and
volume of the portfolio, historical experience, estimated value of any
underlying collateral, and current economic conditions. While management uses
the best information available to make evaluations, future adjustments may be
necessary, if economic or other conditions differ substantially from the
assumptions used.

The Association establishes specific loan loss allowances for impaired loans if
it is doubtful that all principal and interest due according to the loan terms
will be collected. An allowance is recorded if the present value of the loan's
future cash flows, discounted using the loan's effective interest rate, is less
than the carrying value of the loan.

An impaired loan can also be valued at its fair value in the market place or on
the basis of its underlying collateral if the loan is primarily collateral
dependent. If foreclosure is imminent, and the loan is collateral dependent, the
loan is valued based upon the fair value of the underlying collateral.


                                       22
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

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

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

Property, equipment and depreciation: Property and equipment are stated at cost
less accumulated depreciation. Depreciation is computed primarily by use of the
straight-line method.

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

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

Earnings per share: The Company provides for a dual presentation of basic and
diluted earnings per share (EPS) with a reconciliation of the numerator and
denominator of the EPS computations. Basic earnings per share amounts are based
on the weighted average shares of common stock outstanding. Diluted earnings per
share assume the conversion, exercise or issuance of all potential common stock
instruments such as options, warrants and convertible securities, unless the
effect is to reduce a loss or increase earnings per share. Shares owned by the
Company's Employee Stock Ownership Plan (the "ESOP") that have not been
committed to be released are not considered to be outstanding for the purposes
of computing earnings per share. No adjustments were required to net income for
any period presented in the computation of diluted earnings per share.

The basic and diluted weighted average shares outstanding for 2002 and 2001 are
as follows:

<TABLE>
<CAPTION>

                                                               2002          2001
                                                             ---------     ---------
<S>                                                          <C>           <C>
Weighted average outstanding shares used for basic EPS       1,145,935     1,144,907
Plus incremental shares from assumed issuances
     pursuant to stock options and stock award plans             7,802         3,426
                                                             ---------     ---------
Weighted average outstanding shares used for diluted EPS     1,153,737     1,148,333
                                                             =========     =========
</TABLE>


                                       23
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

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

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

Fair value of financial instruments: Estimated fair values have been determined
by the Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required to develop the
estimates of fair value. Accordingly, the estimates for the fair value of the
Company's financial instruments are not necessarily indicative of the amounts
the Company could realize in a current market exchange. The use of different
market assumptions or estimation methodologies may have a material effect on the
estimated fair value amounts. The fair value estimates are based on pertinent
information available to management as of September 30, 2002. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date, and
therefore, current estimates of fair value may differ significantly from the
amounts presented herein. The following methods and assumptions were used by the
Company in estimating its fair value disclosures for financial instruments:

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

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

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

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

   ESOP note payable: The fair value of the ESOP note is assumed to be equal to
   its recorded amount because the terms of the note are similar to the terms
   that could currently be obtained for comparable debt instruments.

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



                                       24
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

NOTE 2.  INVESTMENT SECURITIES

The amortized cost, estimated market value and gross unrealized gains and losses
of the Association's investment securities at September 30, 2002 and 2001 are as
follows:

<TABLE>
<CAPTION>
                                                                 2002
                                     ----------------------------------------------------------
                                                       Gross          Gross        Estimated
                                       Amortized     Unrealized     Unrealized       Market
                                         Cost          Gains          Losses          Value
                                     ------------   ------------   ------------   ------------
<S>                                    <C>            <C>            <C>            <C>
Available for sale securities:
 Marketable equity securities:
  FHLMC stock                          $ 10,900       $612,600       $   --         $ 623,500
Nonmarketable equity securities:
  Federal Home Loan Bank stock          330,400           --             --           330,400
                                       --------       --------       --------       ---------
                                       $341,300       $612,600       $   --         $ 953,900
                                       ========       ========       ========       =========
</TABLE>



<TABLE>
<CAPTION>
                                                                 2001
                                     ----------------------------------------------------------
                                                       Gross          Gross        Estimated
                                       Amortized     Unrealized     Unrealized       Market
                                         Cost          Gains          Losses          Value
                                     ------------   ------------   ------------   ------------
<S>                                    <C>            <C>            <C>            <C>
Available for sale securities:
 Marketable equity securities:
  FHLMC stock                          $ 15,200       $992,550       $   --         $1,007,750
 Debt securities:
  U.S. Treasury and agency securities   500,000          2,350           --            502,350
                                       --------       --------       --------       ----------
                                        515,200        994,900           --          1,510,100
Nonmarketable equity securities:
  Federal Home Loan Bank stock          330,400          --              --            330,400
                                       --------       --------       --------       ----------
                                       $845,600       $994,900       $   --         $1,840,500
                                       ========       ========       ========       ==========
</TABLE>


During 2002, FHLMC shares with cost basis of $4,250 were sold for $277,700
resulting in a realized gain of $273,450. There were no sales of investment
securities during the year ended September 30, 2001.

The change during 2002 and 2001 in accumulated other comprehensive income which
consists solely of net unrealized gains and losses associated with available for
sale securities is as follows:

<TABLE>
<CAPTION>
                                                                   2002             2001
                                                                 ---------        ---------
<S>                                                              <C>              <C>
Accumulated other comprehensive income, beginning of year        $ 616,850        $ 496,250
  Change in unrealized gains                                      (108,900)         194,550
  Reclassification adjustment for gains realized in income        (273,450)            --
  Change in related deferred income taxes                          145,300          (73,950)
                                                                 ---------        ---------
Accumulated other comprehensive income, end of year              $ 379,800        $ 616,850
                                                                 =========        =========
</TABLE>



The Association, as a member of the Federal Home Loan Bank system, maintains an
investment in capital stock of the Federal Home Loan Bank. No ready market
exists for the bank stock. For disclosure purposes, such stock is assumed to
have a market value which is equal to cost.


                                       25
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------


NOTE 3.  LOANS RECEIVABLE

Loans receivable consist of the following:
                                                    2002               2001
                                                 -----------        -----------
First mortgage loans:
Single family, one-to-four units                 $25,410,200        $27,250,850
Multifamily, residential                             442,050            324,550
Commercial real estate                            15,141,300         15,104,300
Land                                              12,502,550          9,569,200
Residential construction                          29,302,150         28,597,200
Commercial construction                              593,200          3,883,500
                                                 -----------        -----------
                                                  83,391,450         84,729,600
Equity line mortgages                              1,878,100          2,461,300
Loans on savings accounts                            159,650            144,300
                                                 -----------        -----------
                                                  85,429,200         87,335,200
                                                 -----------        -----------
Less:
Undisbursed portion of loans in process            9,025,000         12,157,650
Allowance for loan losses                            463,250            319,000
Deferred loan fees                                   193,550            226,150
                                                 -----------        -----------
                                                   9,681,800         12,702,800
                                                 -----------        -----------
                                                 $75,747,400        $74,632,400
                                                 ===========        ===========
Weighted average yield on loans receivable              7.09%              8.50%
                                                 ===========        ===========


The change in the Association's allowance for loan losses is as follows for the
years ended September 30, 2002 and 2001:
                                                     2002               2001
                                                 -----------        -----------
Balance, beginning of year                       $   319,000        $   280,000
Provision for loan loss                              144,250             39,000
Charge-offs                                            --                 --
                                                 -----------        -----------
Balance, end of year                             $   463,250        $   319,000
                                                 ===========        ===========


The Association does not accrue interest on loans past due 90 days or more if,
in the opinion of management, collectibility is in doubt. Such interest is
removed from income through the establishment of a reserve for uncollected
interest. At September 30, 2002, a reserve for uncollected interest totaling
$24,000 was established on loans amounting to $832,050. At September 30, 2001, a
reserve for uncollected interest on loans delinquent more than 90 days was not
established because management expected all such interest to be fully
collectible. The balance of accruing loans past due more than 90 days was
approximately $215,250 and $1,009,200 at September 30, 2002 and 2001,
respectively. Interest income that would have been recorded in 2002 if
non-accrual had been current would have been $24,000. The amount of interest
income recognized on these loans in 2002 was $36,500.

The Association had $832,050 in loans outstanding at September 30, 2002 which it
considered impaired. Valuation allowances related to these impaired loans
amounted to $95,000 at September 30, 2002. There were no impaired loans at
September 30, 2002 without related allowances. The average investment in
impaired loans in 2002 was $833,000. Interest income recognized on impaired
loans during 2002 was $36,500, which was recognized on a cash basis.


                                       26

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


NOTE 3.  LOANS RECEIVABLE (CONTINUED)

Shareholders of the Company with 10% or more ownership and officers and
directors, including their families and companies of which they are principal
owners, are considered to be related parties. These related parties were loan
customers of, and had other transactions with the Association in the ordinary
course of business. In management's opinion, these loans and transactions were
on the same terms as those for comparable loans and transactions with
non-related parties during the years ended September 30, 2002 and 2001.

Aggregate loan transactions with related parties during the years ended
September 30, 2002 and 2001 were as follows:


                                         2002             2001
                                      ---------        ---------
Beginning balance                     $ 413,300        $ 441,750
New loans                                  --               --
Reductions                             (339,000)         (28,450)
                                      ---------        ---------
Ending balance                        $  74,300        $ 413,300

                                      =========        =========
Maximum balance during the year       $ 413,300        $ 441,750
                                      =========        =========


NOTE 4.  PROPERTY AND EQUIPMENT

Property and equipment at September 30, 2002 and 2001 are summarized as follows:

                                          2002              2001
                                        ---------        ---------
Land                                    $  20,950        $  20,950
Office buildings and improvements         608,800          608,800
Furniture and fixtures                    201,050          190,600
                                        ---------        ---------
                                          830,800          820,350
Less accumulated depreciation            (427,100)        (396,700)
                                        ---------        ---------
                                        $ 403,700        $ 423,650
                                        =========        =========



NOTE 5.  FORECLOSED ASSETS

The change in the Association's allowance for loss on foreclosed assets is as
follows for the years ended September 30, 2002 and 2001:

                                                2002             2001
                                              ---------        ---------
Balance, beginning of year                    $   5,000        $    --
Provision for loss on foreclosed assets         206,000            5,000
Charge-offs                                     (83,000)            --
                                              ---------        ---------
Balance, end of year                          $ 128,000        $   5,000
                                              =========        =========



In addition to the provisions detailed above, the Company incurred $29,900 and
$9,500 in expense associated with holding foreclosed assets during 2002 and
2001, respectively. The Company reported a net gain (after adjusting for
write-downs) of $8,250 and $1,850 from the disposal of foreclosed assets during
2002 and 2001, respectively.



                                       27
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

NOTE 6.  DEPOSITS

Deposits at September 30, 2002 and 2001 consist of the following:

<TABLE>
<CAPTION>
                                                                          2002              2001
                                                                      -----------        -----------
<S>                                                                   <C>                <C>
Passbook accounts, weighted average rate of 1.00%
  (3.00% in 2001)                                                     $ 3,645,850        $ 3,192,150
MMDA accounts, weighted average rate of 1.50%
  (3.00% in 2001)                                                      14,809,500          9,301,700
NOW accounts, weighted average rate of 1.00%
  (2.50% in 2001)                                                       1,568,600          1,457,700
Certificate of deposit accounts, weighted average rate of 4.59%
  (6.07% in 2001)                                                      56,206,350         62,670,700
Noninterest-bearing accounts                                              537,250            551,850
                                                                      -----------        -----------
                                                                      $76,767,550        $77,174,100
                                                                      ===========        ===========
Weighted average cost of deposits                                            3.72%              5.45%
                                                                      ===========        ===========
</TABLE>



Certificate of deposit accounts by maturity at September 30, 2002 are summarized
as follows:

<TABLE>
<CAPTION>
<S>                                                                                      <C>
Maturity Period:
     2003                                                                                $30,146,350
     2004                                                                                 11,511,400
     2005                                                                                  9,940,650
     2006                                                                                  1,751,000
     2007                                                                                  2,856,950
                                                                                         -----------
                                                                                         $56,206,350
                                                                                         ===========
</TABLE>



The aggregate amount of certificate of deposit accounts at September 30, 2002
with a minimum denomination of $100,000 by maturity are summarized as follows:

<TABLE>
<CAPTION>
<S>                                                                                     <C>
Maturity Period:
  Within three months                                                                   $ 2,551,700
  After three months but within six months                                                1,945,500
  After six months but within twelve months                                               3,035,050
  After twelve months                                                                    11,230,400
                                                                                        ------------
                                                                                        $18,762,650
                                                                                        ============
</TABLE>



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


                                       28
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

NOTE 7.  EMPLOYEES AND DIRECTORS BENEFIT PLANS

The Association has a noncontributory 401k plan for substantially all employees.
The Association has no obligation to make contributions to the plan, but pays
administrative costs of the Plan. Plan expenses amounted to $1,700 and $2,050
during 2002 and 2001, respectively.

The Association has a non-qualified noncontributory retirement plan covering its
directors. Retirement plan expense is computed based on the discounted present
value of expected future payments over the expected service years for the
directors. Under the plan, directors will receive upon retirement, monthly
payments for ten years in amounts not to exceed $5,000 annually. Other
stipulations and limitations based on years of service, death and disability,
change of control, and early termination apply. Expense associated with the plan
amounted to $4,750 and $9,600 for 2002 and 2001, respectively.

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

NOTE 8.  RECOGNITION AND RETENTION PLAN

The Company has a Recognition and Retention Plan (the "RRP") whereby 22,248
shares of common stock were awarded to employees and directors. In January,
1998, the Association issued shares of common stock from authorized but unissued
shares to fund the plan. The RRP shares vest over a five year period and at
September 30, 2002, 97.6% of the shares had been awarded and 100% of the shares
awarded had vested. Accelerated vesting may occur in certain circumstances as
disclosed in the plan documents. Compensation expense is incurred over the
vesting period. Expense associated with the plan was $17,500 and $52,550 for
years ended September 30, 2002 and 2001, respectively.

NOTE 9.  STOCK OPTION PLAN

The Company has a stock option plan for the benefit of its officers, directors,
and key employees. Options totaling 54,000 at a grant price of $12.75 were
granted on January 22, 1997. No options have been granted since that date. The
options became exercisable at the rate of 20% annually for years during periods
of service as an employee, officer, or director, and expire after ten years.
Accelerated vesting may occur in certain circumstances as disclosed in the plan
documents. Options are exercisable at the fair value on the date of grant. A
summary of the changes in the Company's options during the years ended September
30, 2002 and 2001 is presented below:

                                                           2002          2001
                                                          ------        -------
Stock options outstanding at beginning of the year        38,086         51,586
Granted                                                     --             --
Exercised                                                   (750)          --
Terminated                                                  --          (13,500)
                                                         -------        -------
Stock options outstanding at end of the year              37,336         38,086
                                                         =======        =======
Stock options exercisable at end of the year              37,336         30,469
                                                         =======        =======


                                       29
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------


NOTE 9.  STOCK OPTION PLAN (CONTINUED)

Grants of options under the plan are accounted for following Accounting
Principles Board (APB) Opinion No. 25 and its related interpretations.
Accordingly, no compensation cost has been recorded. In 1995, the Financial
Accounting Standards Board issued Standard No. 123, which requires disclosures
concerning the fair value of options and encourages accounting recognition for
options using the fair value method. The Company has elected to apply the
disclosure-only provisions of the Statement.

However, had compensation cost been recorded based on the fair value ($4.17 per
share) of awards at the grant date, the pro forma impact on the Company's net
income and earnings per share would have been to reduce such amounts by
approximately $19,300 ($0.02 per basic and dilutive share) and $19,700 ($0.02),
respectively, for 2002 and 2001. The fair value of each grant is estimated at
the grant date using the Black-Scholes option-pricing model with the following
assumptions for 1997 when the options were granted: dividend rate of 2.75%;
risk-free interest rate of 5.87%; expected lives of 10 years; and price
volatility of 26.51%.

NOTE 10.  EMPLOYEE STOCK OPTION PLAN (ESOP)

The Association has an ESOP to benefit substantially all employees. As a part of
the Association's initial public offering in April 1996, the ESOP purchased
41,200 shares of common stock with the proceeds from a loan received from a
third party financial institution. The note requires quarterly principal
payments of $14,714 plus interest at the lending institution's prime rate (4.75%
at September 30, 2002) until March, 2003. The Association is expected to make
quarterly contributions to the ESOP in amounts sufficient to allow the ESOP to
make its scheduled principal and interest payments on the note. The unallocated
ESOP shares are pledged as collateral for the debt. Dividends on unallocated
shares are not reported as dividends in the financial statements. As the debt is
repaid, shares are released from collateral and allocated to active employees,
based on the proportion of debt service paid in the year. The debt of the ESOP
is recorded as debt in the Company's accompanying consolidated balance sheet. At
September 30, 2002, the remaining future principal payments of $29,450 are all
due in 2003.

The Association makes cash contributions to the ESOP sufficient to amortize the
debt, but records expense based upon the fair value of the shares allocated to
plan participants each year. The difference between the cash contributions and
the amount expensed is credited or charged to additional paid-in capital. ESOP
compensation expense was $96,400 and $82,600 for the years ended September 30,
2002 and 2001, respectively.

The ESOP has a put option which requires that the Company repurchase its common
stock from participants in the ESOP who are eligible to receive benefits under
the terms of the plan and elect to receive cash in exchange for their common
stock. The Company is required to reflect as a liability the maximum possible
cash obligation to redeem the shares, which is the fair value of such shares,
whether allocated or unallocated. The initial purchase of common stock by the
ESOP is treated as a reduction in stockholder's equity and as a liability for
the put option. The liability for the put option has been reduced to the extent
of the unearned ESOP shares at the end of each fiscal year end. The liability
for the put option at September 30, 2002, based upon the bid price of the ESOP
shares at that time of $15.50, was $611,250. The liability for the put option
will fluctuate based upon the fair value of the shares with the resulting
increase or decrease reflected as change to retained earnings.




                                       30
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------


NOTE 10.  EMPLOYEE STOCK OPTION PLAN (ESOP) (CONTINUED)

Shares of the Company held by the ESOP at September 30, 2002 and 2001 are as
follows:

                                                   2002              2001
                                                 ---------        ---------
Shares held by the ESOP                             41,200           41,200
Shares released for allocation                     (38,257)         (32,372)
                                                 ---------        ---------
Unreleased (unearned) shares                         2,943            8,828
                                                 =========        =========
Fair value of unreleased (unearned) shares       $  45,600        $ 150,100
                                                 =========        =========


NOTE 11.  INCOME TAXES

At September 30, 2002 and 2001, retained earnings contain $1,434,000 in tax
related bad debt reserves for which no deferred income taxes have been provided
because the Association does not intend to use the reserves for purposes other
than to absorb losses. The balance represents the Association's bad debt
reserves at September 30, 1988, and the unrecorded deferred income taxes amount
to approximately $545,000. If amounts which qualified as bad debt deductions are
used for purposes other than to absorb losses or adjustments arising from the
carryback of net operating losses, income taxes may be imposed at the then
existing rates. The Association also must recapture its tax bad debt reserves
which have accumulated since 1988 (the "base year") amounting to approximately
$189,000. The tax associated with the recaptured reserves is approximately
$72,000 and is being paid out over a six year period beginning with the 1999
year. At September 30, 2002, the remaining liability associated with the
recaptured reserves is approximately $23,950. Deferred income taxes have been
established for the taxes associated with the recaptured reserves.

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

                                                           2002      2001
                                                          -------   -------
Statutory federal income tax rate                         34.00 %   34.00 %
Increase (decrease) in income taxes resulting from:
  State income taxes, net of federal benefit               4.12      3.04
  Other                                                    0.40      0.18
                                                          -----     -----
Effective tax rate                                        38.52 %   37.22 %
                                                          =====     =====


Deferred income taxes consist of the following components as of September 30,
2002 and 2001:

                                                    2002            2001
                                                 ---------        ---------
Deferred tax assets:
  Loan loss allowances                           $ 176,050        $ 121,200
  Deferred loan fees                                 7,100            5,500
  Health insurance accrual                          77,350           70,900
  Retirement plan accrual                           65,150           63,400
                                                 ---------        ---------
                                                   325,650          261,000
                                                 ---------        ---------
Deferred tax liabilities:
  Tax bad debt reserves                             23,950           35,900
  Excess accumulated tax depreciation               27,600           23,550
  Unrealized net appreciation, investments         232,800          378,100
                                                 ---------        ---------
                                                   284,350          437,550
                                                 ---------        ---------
                                                 $  41,300        $(176,550)
                                                 =========        =========




                                       31
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

NOTE 12.  CAPITAL

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

Subject to applicable law, the Boards of Directors of the Company and the
Association may each provide for the payment of dividends. Future declarations
of cash dividends, if any, by the Company may depend upon dividend payments by
the Association to the Company. Subject to regulations promulgated by the OTS,
the Association will not be permitted to pay dividends on its common stock if
its net worth would be reduced below the amount required for the liquidation
account or its minimum regulatory capital requirements. In addition, as an
institution which is considered well capitalized under the OTS's Prompt
Corrective Action regulations, the Association may pay a cash dividend to Wake
Forest Bancshares, Inc., with prior notification to the OTS, if the total amount
of all capital distributions (including the proposed distribution) for the
applicable calendar year does not exceed the Association's net income for the
year plus retained net income (net income minus capital distributions) for the
preceding two years. However, the OTS retains the right to deny any capital
distribution if it raises safety and soundness concerns.

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

<TABLE>
<CAPTION>
                                                                  MINIMUM REQUIREMENTS TO BE:
                                           --------------------------------------------------------------------------
In Thousands                                  ACTUAL                 ADEQUATELY CAPITALIZED      WELL CAPITALIZED
                                           --------------------------------------------------------------------------
                                            Amount       Ratio       Amount       Ratio       Amount      Ratio
                                           --------------------------------------------------------------------------
<S>                                        <C>           <C>         <C>        <C>          <C>          <C>
2002
Total Capital to Risk Weighted Assets      $ 14,923      22.18%      $ 5,383    8.00%        $ 6,729      10.00%
Tier 1 Capital to Risk Weighted Assets     $ 14,460      21.49%      $ 2,691    4.00%        $ 4,037       6.00%
Tier 1 Capital to Average Assets           $ 14,460      15.65%      $ 3,695    4.00%        $ 4,619       5.00%

2001
Total Capital to Risk Weighted Assets      $ 14,251      22.63%      $ 5,037    8.00%        $ 6,296      10.00%
Tier 1 Capital to Risk Weighted Assets     $ 13,932      22.13%      $ 2,518    4.00%        $ 3,778       6.00%
Tier 1 Capital to Average Assets           $ 13,932      15.09%      $ 3,694    4.00%        $ 4,617       5.00%

</TABLE>


The Company has an ongoing stock repurchase program authorizing the Company to
repurchase up to an additional $231,000 of its outstanding common stock. The
repurchases are made through registered broker-dealers from shareholders in open
market purchases at the discretion of management. The Company intends to hold
the shares repurchased as treasury shares, and may utilize such shares to fund
stock benefit plans or for any other general corporate purpose as permitted by
applicable law. At September 30, 2002, the Company had repurchased 67,472 shares
of its common stock. The program continues until terminated by the Board of
Directors.



                                       32
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

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

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

The Association's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The
Association uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. At September 30, 2002,
the Association had outstanding loan commitments amounting to $3,319,000. The
undisbursed portion of construction loans amounted to $9,025,000 and unused
lines of credit amounted to $6,502,000 at September 30, 2002.

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

NOTE 14.  FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at September 30, 2002 and 2001. See Note 1
for a description of the Company's accounting policies and the limitations of
its disclosures in reporting on the fair value of its financial instruments.

<TABLE>
<CAPTION>
                                                     September 30,
                                --------------------------------------------------------
                                           2002                          2001
                                --------------------------    --------------------------
                                  Carrying        Fair         Carrying         Fair
                                   Amount         Value         Amount          Value
                                -----------    -----------    -----------    -----------
<S>                             <C>            <C>            <C>            <C>
Financial assets:
-----------------
 Cash                           $15,303,250    $15,303,250    $15,885,100    $15,885,100
 Investment securities              623,500        623,500      1,510,100      1,510,100
 FHLB stock                         330,400        330,400        330,400        330,400
 Loans receivable                75,747,400     75,951,150     74,632,400     74,930,300
 Accrued interest receivable         77,350         77,350         86,100         86,100
Financial liabilities:
----------------------
 Deposits                        76,767,500     78,346,050     77,220,600     79,186,050
 Note payable - ESOP                 29,450         29,450         88,300         88,300
Accrued interest payable             24,350         24,350         46,500         46,500

</TABLE>


                                       33
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

NOTE 15.  MUTUAL HOLDING COMPANY FINANCIAL DATA

The MHC owns approximately 55% of the Company's common stock. Members of the
mutual holding company consist of depositors and certain borrowers of the
Association, who have the sole authority to elect the board of directors of the
mutual holding company. The mutual holding company is registered as a savings
and loan holding company and is subject to regulation, examination, and
supervision by the OTS.

The following is a summary of the condensed financial statements of Wake Forest
Bancorp, M.H.C. as of and for the periods indicated:

                        Condensed Balance Sheets
                       September 30, 2002 and 2001
<TABLE>
<CAPTION>
                                                                 2002           2001
                                                               ----------    ----------
<S>                                                            <C>           <C>
Assets:
 Cash and cash equivalents                                     $1,317,400    $1,092,800
 Accrued dividends receivable, subsidiary                          76,200        76,200
 Investment in Wake Forest Bancshares, Inc.                     5,732,550     5,455,800
                                                               ----------    ----------
                    Total assets                               $7,126,150    $6,624,800
                                                               ==========    ==========
Liabilities:
 Accounts payable and accrued expenses                         $   16,200    $      650
                                                               ----------    ----------
Equity:
 Capitalization by Wake Forest Federal                            106,350       106,350
 Equity in Wake Forest Bancshares, Inc.                         3,854,700     3,854,700
 Retained earnings                                              3,148,900     2,663,100
                                                               ----------    ----------
                    Total equity                                7,109,950     6,624,150
                                                               ----------    ----------
                    Total liabilities and equity               $7,126,150    $6,624,800
                                                               ==========    ==========
</TABLE>




                     Condensed Statements of Income
             For the Years Ended September 30, 2002 and 2001

<TABLE>
<CAPTION>
                                                                 2002           2001
                                                               ----------    ----------
<S>                                                            <C>           <C>
Revenues:
  Interest income                                              $ 30,650      $ 46,900
  Equity in earnings of subsidiary                              581,550       623,100
                                                               --------      --------
                    Total income                                612,200       670,000
                                                               --------      --------
Expenses:
  Accounting and tax expense                                     16,550        17,350
  Attorney Fees                                                  18,250        21,400
  Director's fees                                                74,450        84,900
  Other                                                          17,150        14,300
                                                               --------      --------
                    Total expense                               126,400       137,950
                                                               --------      --------
                    Net income                                 $485,800      $532,050
                                                               ========      ========
</TABLE>


                                       34
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------


NOTE 15.  MUTUAL HOLDING COMPANY FINANCIAL DATA (CONTINUED)

                   Condensed Statements of Cash Flows
             For the Years Ended September 30, 2002 and 2001

<TABLE>
<CAPTION>
Cash Flows from Operating Activities:                     2002             2001
                                                       -----------     -----------
<S>                                                    <C>             <C>
 Net income                                            $   485,800     $   532,050
 Noncash income items:
  Equity in earnings of Wake Forest Federal               (581,550)       (623,100)
  Change in assets and liabilities:
  Decrease in investment in subsidiary - dividends         304,800         304,800
  Increase (decrease) in accounts payable                   15,550             650
                                                       -----------     -----------
          Net cash provided by operating activities        224,600         214,400
Cash and cash equivalents- beginning                     1,092,800         878,400
                                                       -----------     -----------
Cash and cash equivalents- ending                      $ 1,317,400     $ 1,092,800
                                                       ===========     ===========
</TABLE>



NOTE 16.  PARENT COMPANY ONLY FINANCIAL DATA

The following is a summary of the condensed financial statements of Wake Forest
Bancshares, Inc. for the periods indicated:

                        Condensed Balance Sheets
                       September 30, 2002 and 2001

<TABLE>
<CAPTION>

                                                          2002             2001
                                                      ------------     ------------
<S>                                                   <C>              <C>
Assets:
 Cash and cash equivalents                            $    231,250     $    324,500
 Accrued dividends receivable, Wake Forest Federal         137,900          138,600
 Investment in Wake Forest Federal                      14,605,450       14,221,950
 Other assets                                                3,100            2,500
                                                      ------------     ------------
          Total assets:                               $ 14,977,700     $ 14,687,550
                                                      ============     ============
Liabilities:
 Accrued dividends payable                            $    137,900     $    138,600
                                                      ------------     ------------
Equity:
 Common stock                                               12,150           12,150
 Additional paid-in capital                             13,384,450       13,256,250
 Accumulated other comprehensive income                    379,800          616,850
 Retained earnings                                       1,977,300        1,474,400
 Treasury stock acquired                                  (913,900)        (810,700)
                                                      ------------     ------------
          Total equity                                  14,839,800       14,548,950
                                                      ------------     ------------
          Total liabilities and equity                $ 14,977,700     $ 14,687,550
                                                      ============     ============
</TABLE>


                                       35
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------


NOTE 16.  PARENT COMPANY ONLY FINANCIAL DATA (CONTINUED)

                     Condensed Statements of Income
             For the Years Ended September 30, 2002 and 2001

<TABLE>
<CAPTION>
                                                           2002             2001
                                                         -----------     -----------
<S>                                                      <C>             <C>
Interest income                                          $     5,550     $    10,050
Equity in earnings of Wake Forest Federal                  1,055,050       1,133,350
Miscellaneous expense                                         (3,950)           (400)
Income tax expense                                              (600)         (3,750)
                                                         -----------     -----------
                Net income                               $ 1,056,050     $ 1,139,250
                                                         ===========     ===========
</TABLE>



                    Condensed Statement of Cash Flows
             For the Years Ended September 30, 2002 and 2001

<TABLE>
<CAPTION>
                                                            2002             2001
                                                         -----------     -----------
<S>                                                      <C>             <C>
Cash Flows from Operating Activities:
 Net income                                              $ 1,056,050     $ 1,139,250
 Noncash income items:
  Equity in earnings of Wake Forest Federal               (1,055,050)     (1,133,350)
  Dividends received from Wake Forest Federal                556,950         806,950
 Change in assets and liabilities:
  (Increase) decrease in accrued dividends receivable            700           1,950
  (Increase) decrease in other assets                           (600)         (2,500)
  Increase (decrease) in income tax payable                     --            (3,350)
                                                         -----------     -----------
          Net cash provided by operating activities          558,050         808,950
                                                         -----------     -----------
Cash Flows from Financing Activities:
 Treasury stock acquired                                    (103,200)       (205,250)
  Proceeds from exercise of stock options                      9,550            --
  Increase (decrease) in accrued dividends payable              (700)         (1,950)
 Dividends paid                                             (556,950)       (556,950)
                                                         -----------     -----------
          Net cash provided from financing activities       (651,300)       (764,150)
                                                         -----------     -----------
Increase (decrease) in cash                                  (93,250)         44,800
Cash and cash equivalents- beginning                         324,500         279,700
                                                         -----------     -----------
Cash and cash equivalents- ending                        $   231,250     $   324,500
                                                         ===========     ===========
</TABLE>



                                       36
<PAGE>


                          WAKE FOREST BANCSHARES, INC.
                            COMMON STOCK INFORMATION
------------------------------------------------------------------------------


The Company's stock (previously as Wake Forest Federal Savings & Loan
Association) began trading on April 3, 1996. There are 1,149,140 shares of
common stock outstanding (net of treasury shares) of which approximately 41%
were held by 350 stockholders of record on September 30, 2002. The MHC, ESOP and
RRP Trust hold approximately 59%. The Company's stock is not actively traded,
although the stock is quoted on the OTC Electronic Bulletin Board under the
symbol "WAKE." The table below reflects the stock trading and dividend payment
frequency of the Company's stock for the years ended September 30, 2002 and
2001, based upon information provided to management of the Company by certain
securities firms effecting transactions in the Company's stock on an agency
basis.


<TABLE>
<CAPTION>
                                                               Stock Price
                                                    ---------------------------------
                                      Dividends          High              Low
                                     ------------   ---------------  ----------------
<S>                                    <C>              <C>              <C>
2002
----
First Quarter                          $    0.12        $   18.000       $    16.050
Second Quarter                              0.12            18.000            14.400
Third Quarter                               0.12            17.500            15.250
Fourth Quarter                              0.12            16.800            15.020

2001
----
First Quarter                          $    0.12        $   12.750       $    11.500
Second Quarter                              0.12            13.250            12.125
Third Quarter                               0.12            17.000            13.250
Fourth Quarter                              0.12            18.050            15.750
</TABLE>



                                       37
<PAGE>


                          WAKE FOREST BANCSHARES, INC.
                              CORPORATE INFORMATION

                               EXECUTIVE OFFICERS
                               ------------------

Robert C. White                                       Billy B. Faulkner
President, Chief                                      Vice President, Secretary
Executive Officer                                      & Treasurer
 & Chief Financial
   Officer

                                    DIRECTORS
                                    ---------

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



STOCK TRANSFER AGENT            SPECIAL LEGAL COUNSEL       INDEPENDENT AUDITORS
--------------------            ---------------------       --------------------
Mellon Investor Services LLC    Thacher, Proffitt & Wood    Dixon Odom PLLC
PO Box 3315                     1700 Pennsylvania Ave. N.W. 408 Summit Drive
S. Hackensack, NJ  07606        Washington, DC  20006       Sanford, NC  27331

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


                                 ANNUAL MEETING

                The 2003 annual meeting of stockholders of Wake Forest
                Bancshares, Inc. will be held at 2:00 pm on Tuesday, February
                18, 2003 at the Wake Forest Police and Justice Center at 401 Elm
                Avenue, Wake Forest, N.C.

                                   FORM 10-KSB

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


                                       38