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 AUDITORS' REPORT                                                             14

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CONSOLIDATED FINANCIAL STATEMENTS:

Consolidated statements of financial condition at September 30, 2003 and 2002            15

Consolidated statements of income for years ended September 30, 2003 and 2002            16

Consolidated statements of stockholders' equity for the years ended
September 30, 2003 and 2002                                                          17 -18

Consolidated statements of cash flows for the years ended
September 30, 2003 and 2002                                                         19 - 20
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                          21 - 34

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COMMON STOCK INFORMATION                                                                 35

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CORPORATE INFORMATION                                                                    36

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</TABLE>



<PAGE>


                          WAKE FOREST BANCSHARES, INC.
                      SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                  September 30,
                                           -----------------------------------------------------------
                                            2003         2002         2001         2000          1999
                                           -------      -------      -------      -------      -------
Financial Condition Data:                                        (In Thousands)
<S>                                        <C>          <C>          <C>          <C>          <C>
Total assets                               $85,674      $92,985      $93,337      $83,268      $72,396
Investments (1)                             16,381       15,331       16,645        9,607        9,635
Loans receivable, net                       67,016       75,747       74,632       72,564       61,467
Deposits                                    68,840       76,767       77,221       67,874       57,654
Stockholders' equity                        15,542       14,840       14,549       14,172       13,468

</TABLE>

<TABLE>
<CAPTION>
                                                              Years Ended September 30,
                                           ------------------------------------------------------------
                                            2003         2002         2001         2000         1999
                                           -------      -------      -------      -------      -------
                                                      (In Thousands, Except Per Share Data)
<S>                                        <C>          <C>          <C>          <C>          <C>
Operating Data:
Interest and dividend income               $ 5,325      $ 6,445      $ 7,674      $ 6,797      $ 6,204
Interest expense                             2,325        3,436        4,359        3,326        3,027
                                           -------      -------      -------      -------      -------
Net interest income                          3,000        3,009        3,315        3,471        3,177
Provision for loan losses                      215          144           39           34           --
Noninterest income                             315          350           79           50           42
Noninterest expense                          1,234        1,497        1,540        1,356        1,275
                                           -------      -------      -------      -------      -------
Income before income taxes                   1,866        1,718        1,815        2,131        1,944
Income tax expense                             715          662          676          800          741
                                           -------      -------      -------      -------      -------
Net income                                 $ 1,151      $ 1,056      $ 1,139      $ 1,331      $ 1,203
                                           =======      =======      =======      =======      =======
Basic earnings per share                   $  1.01      $  0.92      $  1.00      $  1.15      $  1.02
Diluted earnings per share                    1.00         0.92         0.99         1.15         1.02
Dividends per share                           0.52         0.48         0.48         0.48         0.48
Dividend payout ratio                        29.68%       52.15%       48.42%       41.87%       47.06%

Selected Other Data:
Return on average assets (3)                  1.30%        1.11%        1.24%        1.71%        1.62%
Return on average equity (3)                  7.57%        7.24%        7.93%        9.64%        8.83%
Interest rate spread (3)                      2.94%        2.57%        2.78%        3.54%        3.38%
Average equity to average assets (3)         17.15%       15.39%       15.68%       17.74%       18.35%
Net interest margin (3)                       3.48%        3.24%        3.70%        4.54%        4.34%
Allowance for loan losses to
Nonperforming loans (2)                     259.11%       44.23%       31.61%        0.00%       89.51%
Nonperforming loans to total loans (2)        0.37%        1.38%        1.35%        0.00%        0.48%

</TABLE>

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


                                       1
<PAGE>

                             REPORT TO STOCKHOLDERS

I am pleased to report that your Company reported earnings of $1.15 million, or
$1.00 per diluted share, for our fiscal year ended September 30, 2003. These
positive results were accomplished even though a couple of impediments created
an unfavorable operating environment. For the third year in a row, revenue
generation was hindered by narrowing interest rate margins. Because the Company
maintains loan and investment portfolios which are rate sensitive, the Federal
Reserve actions to maintain market interest rates at historically low levels
have had a negative impact on our revenue stream. In contrast, the Company's
cost of funds has continued to decline at a somewhat slower rate. While the
Company's earnings are less likely to experience volatile fluctuations, short
term profits tend to suffer as protection against longer term interest rate
risk. In addition, sluggish local economic conditions which have lingered for
several years now continued to impede loan demand and current year results.

The Company declared cash dividends of $0.52 per share for the current year,
having increased its dividend from $0.12 a quarter during the first two quarters
to $0.14 a quarter during the third and fourth quarters. Because recent federal
tax changes now tax certain dividends at the same rate as long term capital
gains, shareholders benefit from cash dividends in a similar fashion to equities
that have relied solely upon capital appreciation. We are able to provide this
continuing benefit because the Company is profitable and is in a strong capital
position. The Company also reported an efficiency ratio of approximately 37%
during 2003, a measure that demonstrates the Company's intention to operate in a
prudent and lean manner. The Company's return on assets amounted to 1.30% during
the current year. In addition, our stock price generally traded in an
increasingly higher range throughout the current year.

Current year loan demand was respectable, but customer refinancings and
subsequent repayments reduced the Company's loan portfolio. The Company's
business plan continues to be based upon foregoing long-term fixed rate loans
due to the rate risks associated with holding such loans, particularly in a low
interest rate environment. However, the popularity of that loan product during
the current year caused the Company's loan portfolio to decline. In order to
participate in the refinancing boom and generate fee income, the Company began
to originate and sell long term fixed rate mortgage loans in the secondary
market. We believe this line of business will allow us to be much more
competitive in the residential loan markets. Housing starts in our lending area
began to increase in the latter part of 2003. As a result, construction lending,
which represents a sizable part of our lending business, has begun to pick up.
Assuming recent favorable economic indicators can be sustained, the long-term
fundamentals for the Wake Forest area continue to be positive. 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. We also intend to remain competitive with our deposit
products to ensure that the Company has sufficient liquidity for continued
growth and profitability.

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

                                Respectfully,



                                Robert C. White
                                President & Chief Executive Officer




                                       2
<PAGE>


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

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


                                     GENERAL

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

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

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

Members of the MHC consist of depositors and certain borrowers of the
Association, who have the sole authority to elect the board of directors of the
MHC for as long as it remains in mutual form. The MHC's principal asset consists
of 635,000 shares of the Company's common stock. The MHC also is eligible to
receive its proportional share of dividends declared and paid by the Company,
but elected to waive the receipt of its quarterly dividends for all but the
first quarter of the current year. Such funds when received are invested in
deposits with the Association. The MHC, which by law must own in excess of 50%
of the stock of the Company, currently has an ownership interest of 55.4% 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 servicing
loans, loan sales, customer deposit account service charges, and other sources
of revenue. The Association's principal operating expenses, aside from interest
expense, consist of compensation and related benefits, federal deposit insurance
premiums, office occupancy costs, and other general and administrative expenses.

The following discussion and analysis is intended to assist readers in
understanding the results of operations and changes in financial position at and
for the years ended September 30, 2003 and 2002.



                                       3
<PAGE>

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

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                               FINANCIAL CONDITION

Total assets decreased by $7.3 million during 2003, from $93.0 million at
September 30, 2002 to $85.7 million at September 30, 2003. The decrease in total
assets resulted primarily from a $7.9 million decrease in customer deposits
during the year. Due to lesser loan demand, the Association did not aggressively
pursue the retention of certain deposits. Total investments, including short
term interest-earning deposits and U.S. agency obligations, increased by $1.1
million during 2003. The increase in the Company's investment portfolio was
funded in part by a reduction in the Company's loan portfolio. The investment
securities portfolio, which amounted to $652,750 at September 30, 2003, contains
available for sale securities with net unrealized gains of $418,850. The net
unrealized gains are associated with the Company's investment in Federal Home
Loan Mortgage Corporation ("FHLMC") stock.

Net loans receivable decreased by approximately $8.7 million during 2003 from
$75.7 million at September 30, 2002 to $67.0 million at September 30, 2003. The
Association experienced an abnormally high level of refinancings during 2003
because of the availability of historically low market rates and the
Association's decision not to originate long-term fixed rate loans for its
portfolio. In addition, a weakened economy softened loan demand in the
Association's primary lending markets during 2003. However, the economic base in
the Association's primary lending area has long-term potential, 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 $7.9 million during 2003 and totaled $68.8
million at September 30, 2003. The decrease in deposits occurred primarily
because the Association did not attempt to retain certain competitively priced
deposits. The Association did not aggressively re-price those deposits due in
part to a higher than normal level of liquidity created by a significant level
of refinancings in the current year.

The Company had no outstanding borrowings during 2003, other than the loan by
the Employee Stock Ownership Plan of the Association (the "ESOP") to purchase
shares of stock in the Company. During the current year, the ESOP loan was
repaid. 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, 2003, 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, 2003, the Company had repurchased 71,316 shares
of its common stock for $974,900. 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 1.30% and 1.11% and its
return on average equity was 7.57% and 7.24% for 2003 and 2002, respectively.
The increase in the returns on average assets and average equity during 2003 was
primarily due to a reduction in certain general and administrative expenses in
the current year.

Net Income. The Company's net income for the years ended September 30, 2003 and
2002 was $1,151,150 and $1,056,100, respectively. Net income in 2003 was higher
than the earnings reported in 2002 primarily due to a lesser amount of cost
associated with foreclosed assets and a reduction in compensation cost during
2003.

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 $8,550 to
$3,000,300 for the year ended September 30, 2003 from $3,008,850 reported in
2002. Net interest income remained virtually unchanged from 2002 to 2003
primarily because improvement in Association's net interest spread was offset by
a decline in the volume of net interest-earning assets.

Interest Income. Total interest income decreased to $5.3 million for 2003 from
$6.4 million in 2002, a decrease of $1.1 million. The decline in interest income
during 2003 was attributable to both a 0.77% drop in the Company's yield on
interest earning assets in 2003 and a $6.6 million decline in average interest
earning assets. The Company's overall yield on interest earning assets was 6.17%
in 2003 as compared with 6.94% in 2002.

Interest Expense. Total interest expense decreased from $3.4 million in 2002 to
$2.3 million in 2003, a decrease of $1.1 million. During 2003, the Association's
cost of funds decreased from 4.37% in 2002 to 3.23% in 2003, a decrease of
1.14%. The decrease in interest expense from 2002 to 2003 was due primarily to a
decrease in the Association cost of funds, which in turn was created by a
decline in overall market rates. However, approximately one third of the
reduction in interest expense was due to a decline in the volume of
interest-bearing deposits between the current year and 2002.

Provision for Loan Losses. The Association provided $215,000 in additional loan
loss provisions during 2003. During 2002, the Association provided $144,250 in
loan loss provisions. During 2003, the Association charged-off $37,850 in loans
against the allowance for loan losses. There were no loans charged-off against
the loan loss allowance during 2002. 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. In
addition, regulatory examiners may require the Association to recognize
adjustments to the allowance for loan losses based on their judgments about
information available to them at the time of their examination.


                                       5
<PAGE>

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

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


                              RESULTS OF OPERATIONS

Non-interest Income. Non-interest income amounted to $315,400 and $349,800 in
2003 and 2002, respectively. Non-interest income typically consists of service
charges and fees associated with the Association's loan and deposit accounts.
However, during 2003 and 2002, the Association also sold FreddieMac shares for a
gain of $158,600 and $273,450, respectively. In addition, during 2003, the
Association received $78,900 in fee income on the origination and sale of
certain long-term fixed rate mortgage loans.

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 $1,234,100
and $1,496,550 in 2003 and 2002, respectively.

Compensation and related benefits decreased from $779,450 in 2002 to $704,250 in
2003. The decrease in compensation and benefits occurred primarily due to a
reduction in salary cost associated with the retirement of the Association's
then Chief Executive Officer in 2002. In addition, compensation and related
benefits decreased in 2003 due to decreased cost associated with the Company's
ESOP retirement plan, which became fully funded during the current year.

Expenses associated with foreclosed assets decreased from $237,050 (including
net losses on the sale or write-down of foreclosed assets amounting to $197,750)
in 2002 to $60,850 in 2003. All of the losses from foreclosed assets in 2002
related to one builder who filed for bankruptcy. The Company believes that
additional loss provisions will not be necessary on currently held foreclosed
assets. Occupancy expense, federal insurance premiums, OTS operating
assessments, data processing expense and other operating expense changed
nominally from 2002 to 2003. Certain administrative expenses are allocated to
the MHC as shown in Note 15 to the Consolidated Financial Statements.

Income Taxes. The Company's effective income tax rate was 38.3% and 38.5% in
2003 and 2002, 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 0.37% and 1.38% at September
30, 2003 and 2002, respectively. The Company's non-performing loans at September
30, 2003 amounted to $247,150 and consisted of three mortgage loans. Two of the
loans are to the same borrower. The Company believes that it has sufficient loan
loss allowances established to cover any loss associated with these loans. Based
on management's analysis of the adequacy of its loan loss allowances, the
Association made provisions for loan losses of $215,000 and $144,250 during
years ended September 30, 2003 and 2002, respectively. The Company's loan loss
allowance was $640,400 and $463,250 at September 30, 2003 and 2002,
respectively. The ratio of the Company's loan loss allowance to outstanding
loans was 0.95% and 0.61% at September 30, 2003 and 2002, respectively. The
ratio increased during the current year due to both a decrease in outstanding
loans receivable and an increase in the current year provision associated with a
greater emphasis on construction loans and loans for land and land development.

At September 30, 2003, the Company had three single-family residential
properties acquired in foreclosure amounting to $442,650, net of recorded loss
allowances. All three of the properties were completed homes initially recorded
as construction loans and all three are currently being marketed. The Company
believes that the properties have been adequately reserved at September 30, 2003
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,
                                                                ----------------------------------------------------------------
                                                                            2003                                2002
                                                                ------------------------------   -------------------------------
                                         At September 30, 2003
                                         ---------------------                         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          $ 15,729     1.07%   $ 16,543    $    210     1.27%   $ 16,281    $    287     1.76%
        Investment securities                   653     4.39%        489          22     4.50%        385          34     8.83%
        Loans receivable (1)                 67,016     6.15%     69,231       5,093     7.36%     76,207       6,124     8.04%
                                           --------             --------    --------             --------    --------
     Total interest-earning assets           83,398     5.19%     86,263    $  5,325     6.17%     92,873    $  6,445     6.94%
     Non-interest-earning assets              2,276                2,375    --------                1,919    --------
                                           --------             --------                         --------
                     Total                 $ 85,674             $ 88,638                         $ 94,792
                                           ========             ========                         ========
Liabilities and stockholders' equity:
     Interest-bearing liabilities:
        ESOP debt                          $     --     0.00%   $      9    $      1     4.39%   $     61    $      3     4.92%
        Passbook accounts                     3,063     0.40%      3,358          23     0.68%      3,336          53     1.59%
        NOW & MMDA accounts                  15,338     3.73%     16,559         172     1.04%     17,723         304     1.72%
        Certificates of deposit              50,439               52,146       2,129     4.08%     57,586       3,076     5.34%
                                           --------             --------    --------             --------    --------
     Total interest-bearing liabilities      68,840     2.94%     72,072    $  2,325     3.23%     78,706    $  3,436     4.37%
     Non-interest-bearing liabilities         1,292                2,658    --------                1,494    --------
     Stockholders' equity                    15,542               13,908                           14,592
                                           --------             --------                         --------
                     Total                 $ 85,674             $ 88,638                         $ 94,792
                                           ========             ========                         ========
Net interest income and
     interest rate spread (2)                           2.25%               $  3,000     2.94%               $  3,009     2.57%
                                                                            ========                         ========
Net yield on interest-earning
     assets (3)                                         2.55%                            3.48%                            3.24%
Ratio of interest-earning assets to
     interest-bearing liabilities                     121.15%                          119.69%                          118.00%

</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,
                                                  2003 vs. 2002                                  2002 vs. 2001
                                         Increase (Decrease) Attributable to           Increase (Decrease) Attributable to
                                    --------------------------------------------    -------------------------------------------
                                                             Rate/                                           Rate/
                                    Volume        Rate      Volume        Net       Volume       Rate       Volume        Net
                                    -------     -------     -------     -------     -------     -------     -------     -------
<S>                                 <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>
Assets:
    Interest-earning assets:
       Interest-earning deposits    $     5     $   (80)    $    (2)    $   (77)    $   116     $  (423)    $   (73)    $  (380)
       Investment securities              9         (17)         (4)        (12)       (119)         78         (66)       (107)
       Loans receivable                (561)       (518)         48      (1,031)        288        (987)        (43)       (742)
                                    -------     -------     -------     -------     -------     -------     -------     -------
                    Total              (547)       (615)         42      (1,120)        285      (1,332)       (182)     (1,229)
                                    -------     -------     -------     -------     -------     -------     -------     -------
Liabilities:
    Interest-bearing
    liabilities:
       ESOP debt                         (3)         --           1          (2)         (5)         (4)          2          (7)
       Passbook savings                  --         (30)         --         (30)          5         (45)         (2)        (42)
       NOW & MMDA accounts              (20)       (120)          8        (132)        278        (206)       (151)        (79)
       Certificate of deposit          (290)       (726)         69        (947)       (255)       (580)         40        (795)
                                    -------     -------     -------     -------     -------     -------     -------     -------
                    Total              (313)       (876)         78      (1,111)         23        (835)       (111)       (923)
                                    -------     -------     -------     -------     -------     -------     -------     -------
    Net interest income             $  (234)    $   261     $   (36)    $    (9)    $   262     $  (497)    $   (71)    $  (306)
                                    =======     =======     =======     =======     =======     =======     =======     =======

</TABLE>


                                       8
<PAGE>

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

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


                         CAPITAL RESOURCES AND LIQUIDITY

The Company declared dividends of $.52 per share during 2003. Although the
Company anticipates that it will continue to declare cash dividends on a regular
basis, the Board of Directors will review its policy on the payment of dividends
on an ongoing basis, and such payment may be subject to dividends received from
the Association to the Company, future earnings, cash flows, capital needs, and
regulatory restrictions. During the last three quarters of 2003, the MHC waived
the receipt of its quarterly dividends from the Company. The Board of Directors
of the MHC will continue to review the operating needs of the MHC and may elect
to waive future dividends.

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

During the current year, cash increased by approximately $1.4 million, and
amounted to $16.7 million at September 30, 2003. Cash flow resulting from
internal operating activities provided increases of $1.1 million in cash during
the year ended September 30, 2003. Cash flows from investing activities provided
$8.8 million in cash during the current year, with net loan repayments of $7.2
million being the primary source of cash. Because of historically low rates and
a flat yield curve on shorter term investments, the Association has not been
active in the securities market in 2003. At September 30, 2003, the Association
maintained $1.1 million in short-term certificates of deposit from outside
financial institutions. In addition, the Association sold a portion of its
investment in FreddieMac stock during 2003 and received cash proceeds of
$161,550.

During 2003, financing activities of the Company utilized $8.4 million in cash,
including net deposit decreases of $7.9 million. The majority of the deposit
decrease occurred because the Association had a significant amount of loan
refinancings occur in 2003, 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.


                         OFF-BALANCE SHEET TRANSACTIONS

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


                                       9
<PAGE>

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

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


                         OFF-BALANCE SHEET TRANSACTIONS

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, 2003,
the Association had outstanding loan commitments amounting to $4,781,000. The
undisbursed portion of construction loans amounted to $12,682,650 and unused
lines of credit amounted to $5,082,000 at September 30, 2003.

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


                   ASSET/LIABILITY MANAGEMENT AND MARKET RISK

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

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

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

In order to minimize the potential effects of adverse material and prolonged
increases or decreases in market interest rates on the Company's operations,
management has implemented an asset/liability program designed to improve the
Company's interest rate gap. The program primarily emphasizes the origination of
balloon and other short term loans, or loans with rates which float with Prime
such as construction, commercial real estate and home equity loans. The Company
generally does not originate long-term fixed rate loans for its own portfolio
but will originate such loans for sale in the secondary market. In addition, the
program emphasizes investing in short or intermediate term investment
securities, and the solicitation of checking or transaction deposit accounts
which are less sensitive to changes in interest rates and can be repriced
rapidly. The Board of Directors is responsible for reviewing the Company's asset
and liability policies. On a quarterly basis, the Board reviews interest rate
risk and trends. Management of the Company is responsible for administering the
policies established by the Board with respect to asset and liability goals and
strategies.

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

                                       10
<PAGE>

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

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

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

                                                                EXPECTED MATURITY DATE
                                ------------------------------------------------------------------------------------------
                                                                YEAR ENDED SEPTEMBER 30,
                                ------------------------------------------------------------------------------------------
                                                                (DOLLARS IN THOUSANDS)
                                  2004       2005       2006       2007       2008     THEREAFTER     TOTAL     FAIR VALUE
                                -------    -------    -------    -------    -------    ----------    -------    ----------
<S>                             <C>        <C>        <C>        <C>        <C>          <C>         <C>         <C>
Assets:
     Loans-fixed:
       Balance                  $    88    $    30    $    52    $    38    $    --      $ 1,409     $ 1,617     $ 1,647
       Interest rate               4.26%      6.08%      9.14%     10.00%        --         8.26%       8.07%         --

     Loans-variable (1):
       Balance                   44,003      8,096      7,620      4,983        696           --      65,398      65,497
       Interest rate               5.22%      7.75%      7.87%      8.66%      6.81%          --        6.12%         --

     Investments (2):
       Balance                   16,381         --         --         --         --           --      16,381      16,381
       Interest rate               1.20%        --         --         --         --           --        1.20%         --

Liabilities:
     Deposits (3):
       Balance                   18,401         --         --         --         --           --      18,401      18,401
       Interest rate               0.82%        --         --         --         --                     0.82%         --

     Deposits-certificates:
       Balance                   25,350     16,695      3,560      2,868      1,966           --      50,439      51,747
       Interest rate               2.76%      4.79%      4.62%      4.85%      3.58%          --        3.71%         --

</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 December 2002, the Financial Accounting Standards Board "FASB" issued SFAS
No. 148, "Accounting for Stock Based Compensation-Transition and Disclosure-an
amendment of FASB Statement No. 123." The statement provides alternative methods
of transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition this statement amends the
disclosure requirements of Statement No. 123 to require prominent disclosure in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reporting
results. FASB Statement No. 148 is effective for fiscal years ending after
December 15, 2002 and the Company has adopted the disclosure requirements
associated with the statement.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement is generally effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. This statement is not currently
applicable to the Company.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." The statement
was developed in response to concerns about classifications in the statement of
financial condition of certain financial instruments that have characteristics
of both liabilities and equity but have been presented either entirely as equity
or between the liabilities section and the equity section of the balance sheet.
The statement applies primarily to certain derivative instruments and other
financial instruments which embody unconditional obligations to redeem equity
shares. The statement is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the first interim
period beginning after June 15, 2003. 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

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

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

Interest Income Recognition:

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


                     IMPACT OF INFLATION AND CHANGING PRICES

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


                SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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


                                       13
<PAGE>


                          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, 2003 and 2002
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, 2003 and 2002, 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.




Dixon Odom PLLC
Sanford, North Carolina
October  24, 2003


                                       14
<PAGE>


WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 2003 AND 2002

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


<TABLE>
<CAPTION>
                                                                                     2003              2002
                                                                                 ------------     ------------
<S>                                                                              <C>              <C>
ASSETS
Cash:
  Interest-earning deposits                                                      $ 15,728,550     $ 14,377,050
  Noninterest-earning deposits                                                      1,013,650          926,200
                                                                                 ------------     ------------
                                                                                   16,742,200       15,303,250
                                                                                 ------------     ------------
Investment securities (Note 2):
  Available for sale, at market value                                                 426,850          623,500
  FHLB stock, at cost                                                                 225,900          330,400
Loans receivable, net of allowance for loan losses
  of $640,400 in 2003 and 463,250 in 2002 (Note 3)                                 67,015,550       75,747,400
Accrued interest receivable                                                            93,050           77,350
Property and equipment, net (Note 4)                                                  386,950          403,700
Foreclosed assets, net (Note 5)                                                       442,650          422,900
Deferred income taxes (Note 11)                                                       205,650           41,300
Prepaid expenses and other assets                                                     135,300           35,700
                                                                                 ------------     ------------
          Total assets                                                           $ 85,674,100     $ 92,985,500
                                                                                 ============     ============
LIABILITIES AND EQUITY
Liabilities:
  Deposits (Note 6)                                                              $ 68,839,950     $ 76,767,500
  Accrued interest on deposits                                                         17,800           24,350
  Accounts payable and accrued expenses                                               620,050          575,250
  Dividends payable                                                                    71,450          137,900
  Note payable - ESOP (Note 10)                                                            --           29,450
  Redeemable common stock held by the ESOP, net of
    unearned ESOP shares (Note 10)                                                    582,950          611,250
                                                                                 ------------     ------------
          Total liabilities                                                        70,132,200       78,145,700
                                                                                 ------------     ------------
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 in 2003 and 2002                                                            12,150           12,150
  Additional paid-in-capital                                                        5,199,450        5,062,900
  Accumulated other comprehensive income                                              259,700          379,800
  Retained  earnings, substantially restricted (Note 12)                           11,045,500       10,298,850
  Common stock in treasury, at cost ( 71,316 shares in 2003
    and 67,472 shares in 2002                                                        (974,900)        (913,900)
                                                                                 ------------     ------------
          Total stockholders' equity                                               15,541,900       14,839,800
                                                                                 ------------     ------------
                                                                                 $ 85,674,100     $ 92,985,500
                                                                                 ============     ============

</TABLE>

See Notes to Consolidated Financial Statements.


                                       15
<PAGE>


WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2003 AND 2002

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

<TABLE>
<CAPTION>

                                                             2003             2002
                                                          -----------     -----------
<S>                                                       <C>             <C>
Interest and dividend income:
  Loans                                                   $ 5,092,450     $ 6,123,650
  Investment securities                                        22,200          34,300
  Interest-bearing deposits                                   210,400         287,300
                                                          -----------     -----------
                                                            5,325,050       6,445,250
                                                          -----------     -----------
Interest expense:
  Deposits (Note 6)                                         2,324,300       3,433,200
  Borrowings                                                      450           3,200
                                                          -----------     -----------
                                                            2,324,750       3,436,400
                                                          -----------     -----------

Net interest income before provision for loan losses        3,000,300       3,008,850
Provision for loan losses (Note 3)                           (215,000)       (144,250)
                                                          -----------     -----------
Net interest income after provision for loan losses         2,785,300       2,864,600
                                                          -----------     -----------
Noninterest income:
  Service fees and other income                                77,900          76,350
  Gain on sale of mortgage loans                               78,900              --
  Gain on sale of investment securities                       158,600         273,450
                                                          -----------     -----------
                                                              315,400         349,800
                                                          -----------     -----------
Noninterest expense:
  Compensation and benefits (Notes 7, 8, 9, and 10)           704,250         779,450
  Occupancy                                                    45,800          46,550
  Federal insurance premiums and operating assessments         42,350          44,250
  Data processing and outside service fees                    113,700         114,550
  Foreclosed assets                                            60,850         237,050
  Other operating expense                                     267,150         274,700
                                                          -----------     -----------
                                                            1,234,100       1,496,550
                                                          -----------     -----------

Income before income taxes                                  1,866,600       1,717,850
                                                          -----------     -----------
Income taxes (Note 11):
  Current                                                     806,200         734,350
  Deferred                                                    (90,750)        (72,600)
                                                          -----------     -----------
                                                              715,450         661,750
                                                          -----------     -----------
          Net income                                      $ 1,151,150     $ 1,056,100
                                                          ===========     ===========

Basic earnings per share                                  $      1.01     $      0.92
Diluted earnings per share                                $      1.00     $      0.92
Dividends paid per share                                  $      0.52     $      0.48

</TABLE>

See Notes to Consolidated Financial Statements.


                                       16
<PAGE>


WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2003 AND 2002

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

<TABLE>
<CAPTION>
                                                    Shares of                   Additional
                                                     Common          Common       Paid in
                                                      Stock          Stock        Capital
                                                    ---------     ----------    ----------
<S>                                                 <C>           <C>           <C>
Balance at September 30, 2001                       1,155,026     $   12,150    $4,996,900
Comprehensive income:
  Net income for 2002                                                     --            --
  Net change in unrealized gain 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
Comprehensive income:
  Net income for 2003                                                     --            --
  Net change in unrealized (loss) on securities                           --            --
     Total comprehensive income
Contributions to ESOP (Note 10)                                           --        16,000
Market value adjustment for redeemable
  common stock held by ESOP                                               --       120,550
Cash dividends ($0.52 per share)                                          --            --
Acquisition of 3,844 shares of common
  stock for the treasury                               (3,844)            --            --
                                                   ----------     ----------    ----------
Balance at September 30, 2003                       1,145,296     $   12,150    $5,199,450
                                                   ==========     ==========    ==========

</TABLE>

See Notes to Consolidated Financial Statements.


                                       17
<PAGE>

WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2003 AND 2002

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

<TABLE>
<CAPTION>

 Accumulated
    Other                          Treasury
Comprehensive      Retained          Stock
   Income          Earnings         Acquired           Total
-------------    ------------     ------------     ------------
<S>              <C>              <C>              <C>
$    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
          --        1,151,150               --        1,151,150
    (120,100)              --               --         (120,100)
                                                   ------------
                                                      1,031,050
                                                   ------------
          --               --               --           16,000
          --          (62,850)              --           57,700
          --         (341,650)              --         (341,650)
          --               --          (61,000)         (61,000)
------------     ------------     ------------     ------------
$    259,700     $ 11,045,500     $   (974,900)    $ 15,541,900
============     ============     ============     ============

</TABLE>


                                       18
<PAGE>

WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2003 AND 2002

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

<TABLE>
<CAPTION>
                                                                             2003              2002
                                                                         ------------     ------------
<S>                                                                      <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES

Net income                                                               $  1,151,150     $  1,056,100
Adjustments to reconcile net income to net
 cash provided by operating activities:
   Depreciation                                                                26,800           30,400
   Provision for loan losses                                                  215,000          144,250
   Provision for loss on foreclosed assets                                      2,500          206,000
   Amortization of unearned RRP shares                                             --           18,900
   Amortization of unearned ESOP shares                                        29,450           58,850
   Gain on sale of investment securities                                     (158,600)        (273,450)
   Gain on sale of foreclosed assets, net                                      (6,450)          (8,250)
   ESOP compensation expense credited to
     paid-in-capital                                                           16,000           37,550
   Deferred income taxes                                                      (90,750)         (72,600)
Loans orignated for sale in the secondary market                           (3,989,450)              --
Proceeds from loans sold in the secondary market                            3,929,450               --
Changes in assets and liabilities:
  (Increase) decrease in:
    Accrued interest receivable                                               (15,700)           8,750
    Prepaid expenses and other assets                                         (39,600)          41,800
Increase (decrease) in:
    Accounts payable and accrued expenses                                      38,250            1,700
                                                                         ------------     ------------
          Net cash provided by operating activities                         1,108,050        1,250,000
                                                                         ------------     ------------
CASH FLOWS FROM INVESTING ACTIVITIES

Principal collected on  loans                                              45,852,050       26,415,000
Mortgage loans purchased                                                     (100,000)        (195,000)
Loans originated                                                          (38,549,000)     (28,469,250)
Proceeds from sale of foreclosed assets                                     1,299,650          782,300
Capital additions to foreclosed assets                                         (1,700)         (21,700)
Proceeds from sale of available for sale investment securities                161,550          277,700
Maturities of available for sale investment securities                             --          500,000
Redemption of FHLB of Atlanta stock                                           104,500               --
Purchases of property and equipment                                           (10,050)         (10,450)
                                                                         ------------     ------------
          Net cash provided by (used in) investing activities               8,757,000         (721,400)
                                                                         ------------     ------------

</TABLE>


See Notes to Consolidated Financial Statements.


                                       19
<PAGE>

WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2003 AND 2002

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

<TABLE>
<CAPTION>
                                                                2003             2002
                                                            ------------     ------------
<S>                                                         <C>              <C>
CASH FLOWS FROM FINANCING ACTIVITIES

Cash dividends paid                                         $   (408,100)    $   (551,350)
Principal payments on ESOP note payable                          (29,450)         (58,850)
Proceeds from stock options exercised                                 --            9,550
Purchase of treasury stock                                       (61,000)        (103,200)
Net decrease in deposits                                      (7,927,550)        (406,600)
                                                            ------------     ------------
Net cash used in financing activities                         (8,426,100)      (1,110,450)
                                                            ------------     ------------

          Net increase (decrease) in cash                      1,438,950         (581,850)
                                                            ------------     ------------
Cash:
  Beginning                                                   15,303,250       15,885,100
                                                            ------------     ------------
  Ending                                                    $ 16,742,200     $ 15,303,250
                                                            ============     ============
Supplemental Disclosures of Cash Flow Information
  Cash payments for:
     Interest                                               $  2,331,300     $  3,458,550
     Income taxes                                           $    831,400     $    710,000

Supplemental Schedule of Noncash Investing
 and Financing Activities:
  Fair value of ESOP shares in excess of unearned
    ESOP shares (charged) credited to retained earnings     $    (62,850)    $     59,750
  Change in unrealized gain (loss) on available for sale
     securities, net of tax effect                          $   (120,100)    $   (237,050)
  Loans receivable transferred to foreclosed assets         $  1,313,800     $    989,000

</TABLE>


                                       20
<PAGE>


WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 1.  NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

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

The Company is majority owned by Wake Forest Bancorp, M.H.C., (the "MHC") a
mutual holding company. Members of the MHC consist of depositors and certain
borrowers of the Association, who have the sole authority to elect the board of
directors of the MHC for as long as it remains in mutual form. The MHC's
principal assets consist of 635,000 shares of the Company's common stock and
deposits at the Association for accumulated dividends paid on those shares. The
MHC, which by law must own in excess of 50% of the stock of the Company,
currently has an ownership interest of 55.4% of the Company. The mutual holding
company is registered as a savings and loan holding company and is subject to
regulation, examination, and supervision by the OTS.

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

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

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

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

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

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

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

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


                                       21
<PAGE>

WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

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

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

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

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

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


                                       22
<PAGE>

WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

Earnings per share: The Company provides for a dual presentation of basic and
diluted earnings per share (EPS) with a reconciliation of the numerator and
denominator of the EPS computations. Basic earnings per share amounts are based
on the weighted average shares of common stock outstanding. Diluted earnings per
share assume the conversion, exercise or issuance of all potential common stock
instruments such as options, warrants and convertible securities, unless the
effect is to reduce a loss or increase earnings per share. 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 2003 and 2002 are as
follows:

<TABLE>
<CAPTION>
                                                                                 2003          2002
                                                                               ---------    ---------
      <S>                                                                      <C>          <C>
      Weighted average outstanding shares used for basic EPS                   1,144,765    1,145,935
      Plus incremental shares from assumed issuances
        pursuant to stock options and stock award plans                            8,699        7,802
                                                                               ---------    ---------
      Weighted average outstanding shares used for diluted EPS                 1,153,464    1,153,737
                                                                               =========    =========

</TABLE>

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

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

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure (Statement 148). Statement 148 amends
SFAS No. 123, Accounting for Stock-Based Compensation (Statement 123), to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of Statement 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. Statement 148 is effective for
financial statements for fiscal years ending after December 15, 2002. The
Company continues to account for its stock-based compensation in accordance with
APB 25 and has adopted the disclosure provisions of Statement 148 effective for
all periods presented herein. Accordingly, no compensation cost has been
recorded.

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) for 2002. There was
no fair value expense effect for 2003 because the five year period over which
the options vested and would have been expensed under SFAS No. 123 expired.

Fair value of financial instruments: Estimated fair values have been determined
by the Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required to develop the
estimates of fair value. Accordingly, the estimates for the fair value of the
Company's financial instruments are not necessarily indicative of the amounts
the Company could realize in a current market exchange. The use of different
market assumptions or estimation methodologies may have a material effect on the
estimated fair value amounts. The fair value estimates are based on pertinent
information available to management as of September 30, 2003. 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:


                                       23
<PAGE>

WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

   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.

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

NOTE 2.  INVESTMENT SECURITIES

The amortized cost, estimated market value and gross unrealized gains and losses
of the Association's investment securities at September 30, 2003 and 2002 are as
follows:

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

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


                                       24
<PAGE>

WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2.  INVESTMENT SECURITIES (CONTINUED)

<TABLE>
<CAPTION>
                                                                                2002
                                               ----------------------------------------------------------------------
                                                                      Gross             Gross           Estimated
                                                 Amortized         Unrealized        Unrealized           Market
                                                    Cost              Gains            Losses             Value
                                               ---------------    --------------    --------------    ---------------
<S>                                            <C>                <C>               <C>               <C>
Available for sale 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>

During 2002, FHLMC shares with a cost basis of $4,250 were sold for $277,700
resulting in a realized gain of $273,450.

The change during 2003 and 2002 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>
                                                                                       2003               2002
                                                                                  ---------------    ----------------
<S>                                                                               <C>                <C>
Accumulated other comprehensive income, beginning of year                         $     379,800      $      616,850
  Change in unrealized gains, net of tax effect of $13,350 in 2003
     and $41,400 in 2002                                                                (21,750)            (67,500)
  Reclassification adjustment for gains realized in income                             (158,600)           (273,450)
  Tax effect of gains realized in income                                                 60,250             103,900
                                                                                  ---------------    ----------------
Accumulated other comprehensive income, end of year                               $     259,700      $      379,800
                                                                                  ===============    ================
</TABLE>

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

NOTE 3. LOANS RECEIVABLE

Loans receivable consist of the following:

<TABLE>
<CAPTION>
                                                                                    2003                  2002
                                                                              -----------------     -----------------
<S>                                                                           <C>                   <C>
First mortgage loans:
Single family, one-to-four units                                              $     19,053,800      $     25,410,200
Multifamily, residential                                                               536,850               442,050
Commercial real estate                                                              13,171,700            15,141,300
Land                                                                                14,864,600            12,502,550
Residential construction                                                            28,553,750            29,302,150
Commercial construction                                                              2,419,700               593,200
                                                                              -----------------     -----------------
                                                                                    78,600,400            83,391,450
Equity line mortgages                                                                1,728,500             1,878,100
Loans on savings accounts                                                              107,850               159,650
                                                                              -----------------     -----------------
                                                                                    80,436,750            85,429,200
                                                                              -----------------     -----------------
Undisbursed portion of loans in process                                            (12,682,650)           (9,025,000)
Allowance for loan losses                                                             (640,400)             (463,250)
Deferred loan fees                                                                     (98,150)             (193,550)
                                                                              -----------------     -----------------
                                                                                   (13,421,200)           (9,681,800)
                                                                              -----------------     -----------------
                                                                              $     67,015,550      $     75,747,400
                                                                              =================     =================
Weighted average yield on loans receivable                                                6.15%                 7.09%
                                                                              -----------------     -----------------
</TABLE>


                                       25
<PAGE>

WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3.  LOANS RECEIVABLE (CONTINUED)

The change in the Association's allowance for loan losses is as follows for the
years ended September 30, 2003 and 2002:

<TABLE>
<CAPTION>
                                                                                     2003                 2002
                                                                               -----------------    -----------------
<S>                                                                            <C>                  <C>
Balance, beginning of year                                                     $       463,250      $       319,000
Provision for loan loss                                                                215,000              144,250
Charge-offs                                                                            (37,850)                  --
                                                                               -----------------    -----------------
Balance, end of year                                                           $       640,400      $       463,250
                                                                               =================    =================
</TABLE>

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, 2003 and 2002, reserves for uncollected interest
totaling $17,300 and $24,000 were established on loans amounting to $247,150 and
$832,050, respectively. The balance of accruing loans past due more than 90 days
was $0 and $215,250 at September 30, 2003 and 2002, respectively. Interest
income that would have been recorded in 2003 and 2002 if non-accrual loans had
been current was $17,300 and $24,000, respectively. The amount of interest
income recognized on these loans in 2003 and 2002 was $2,350 and $36,500,
respectively.

The Association had $38,150 and $832,050 in loans outstanding at September 30,
2003 and 2002, respectively, which it considered impaired. Valuation allowances
related to these impaired loans amounted to $5,000 and $95,000 at September 30,
2003 and 2002, respectively. The average investment in impaired loans in 2003
and 2002 was $365,000 and $833,000, respectively. Interest income recognized on
impaired loans on a cash basis during 2003 and 2002 was $30,900 and $36,500,
respectively.

Shareholders of the Company with 10% or more ownership and officers and
directors, including their families and companies of which they are principal
owners, are considered to be related parties. These related parties were loan
customers of, and had other transactions with the Association in the ordinary
course of business. In management's opinion, these loans and transactions were
on the same terms as those for comparable loans and transactions with
non-related parties during the years ended September 30, 2003 and 2002.

Aggregate loan transactions with related parties during the years ended
September 30, 2003 and 2002 were as follows:

<TABLE>
<CAPTION>
                                                                                  2003                 2002
                                                                            -----------------    -----------------
<S>                                                                         <C>                  <C>
Beginning balance                                                           $         74,300     $        413,300
New loans                                                                            218,000                   --
Reductions                                                                          (218,400)            (339,000)
                                                                            -----------------    -----------------
Ending balance                                                              $         73,900     $         74,300
                                                                            =================    =================
Maximum balance during the year                                             $        242,300     $        413,300
                                                                            =================    =================
</TABLE>

NOTE 4.  PROPERTY AND EQUIPMENT

Property and equipment at September 30, 2003 and 2002 are summarized as follows:

<TABLE>
<CAPTION>
                                                                                   2003                 2002
                                                                             ------------------   -----------------
<S>                                                                          <C>                  <C>
Land                                                                         $          20,950    $         20,950
Office buildings and improvements                                                      608,800             608,800
Furniture and fixtures                                                                 211,100             201,050
                                                                             ------------------   -----------------
                                                                                       840,850             830,800
Less accumulated depreciation                                                         (453,900)           (427,100)
                                                                             ------------------   -----------------
                                                                             $         386,950    $        403,700
                                                                             ==================   =================
</TABLE>


                                       26
<PAGE>

WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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, 2003 and 2002:

<TABLE>
<CAPTION>
                                                                                    2003                 2002
                                                                             -----------------    -----------------
<S>                                                                          <C>                  <C>
Balance, beginning of year                                                   $        128,000     $           5,000
Provision for loss on foreclosed assets                                                 2,500               206,000
Charge-offs                                                                           (54,000)              (83,000)
                                                                             -----------------    -----------------
Balance, end of year                                                         $         76,500      $        128,000
                                                                             =================    =================
</TABLE>



In addition to the provisions described above, the Company incurred $58,350 and
$31,050 in expense associated with holding foreclosed assets during 2003 and
2002, respectively. The Company reported a net gain (after adjusting for
write-downs) of $6,450 and $8,250 from the disposal of foreclosed assets during
2003 and 2002, respectively.

NOTE 6.  DEPOSITS

Deposits at September 30, 2003 and 2002 consist of the following:

<TABLE>
<CAPTION>
                                                                                  2003                 2002
                                                                           -------------------  -------------------
<S>                                                                        <C>                  <C>
Passbook accounts, weighted average rate of  0.40%
  (1.00% in 2002)                                                          $        3,063,150   $        3,645,850
MMDA accounts, weighted average rate of 1.04%
  (1.50% in 2002)                                                                  12,877,000           14,809,500
NOW accounts, weighted average rate of  0.25%
  (1.00% in 2002)                                                                   1,584,350            1,568,600
Certificate of deposit accounts, weighted average rate of 3.73%
  (4.59% in 2002)                                                                  50,438,950           56,206,350
Noninterest-bearing accounts                                                          876,500              537,250
                                                                           -------------------  -------------------
                                                                           $       68,839,950   $       76,767,550
                                                                           ===================  ===================
Weighted average cost of deposits                                                        2.94%                3.72%
                                                                           ===================  ===================
</TABLE>

Certificate of deposit accounts by maturity at September 30, 2003 are summarized
as follows:

<TABLE>
<CAPTION>

Maturity Period:
<S>                                                                                             <C>
     2004                                                                                       $       25,350,500
     2005                                                                                               16,694,600
     2006                                                                                                3,559,550
     2007                                                                                                2,867,700
     2008                                                                                                1,966,600
                                                                                                -------------------
                                                                                                $       50,438,950
                                                                                                ===================
</TABLE>




                                       27
<PAGE>

WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 6.  DEPOSITS

The aggregate amount of certificate of deposit accounts at September 30, 2003
with a minimum denomination of $100,000 by maturity are summarized as follows:

<TABLE>

<S>                                                        <C>
Maturity Period:
  Within three months                                      $        1,799,300
  After three months but within six months                          1,183,200
  After six months but within twelve months                         1,945,600
  After twelve months                                              13,698,800
                                                           -------------------
                                                           $       18,626,900
                                                           ===================
</TABLE>


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

NOTE 7.  EMPLOYEES AND DIRECTORS BENEFIT PLANS

The Association has a 401k plan which covers substantially all employees. The
Association matches employee contributions up to 7.5% and pays administrative
costs of the Plan. Plan expenses amounted to $1,650 and $1,700 during 2003 and
2002, respectively.

The Association has a non-qualified noncontributory retirement plan covering its
directors. Retirement plan expense is computed based on the discounted present
value of expected future payments over the expected service years for the
directors. Under the plan, directors will receive upon retirement, monthly
payments for ten years in amounts not to exceed $5,000 annually. Other
stipulations and limitations based on years of service, death and disability,
change of control, and early termination apply. Expense associated with the plan
amounted to $2,400 and $4,750 for 2003 and 2002, 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, 2003, 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 $-0- and $17,500 for years
ended September 30, 2003 and 2002, respectively.


                                       28

<PAGE>

WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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, 2003 and 2002 is presented below:

<TABLE>
<CAPTION>

                                                                        2003                 2002
                                                                 -----------------    -----------------
<S>                                                                        <C>                  <C>
Stock options outstanding at beginning of the year                         37,336               38,086
Granted                                                                        --                   --
Exercised                                                                      --                 (750)
Terminated                                                                     --                   --
                                                                 -----------------    -----------------
Stock options outstanding at end of the year                               37,336               37,336
                                                                 =================    =================
Stock options exercisable at end of the year                               37,336               37,336
                                                                 =================    =================
</TABLE>

NOTE 10.  EMPLOYEE STOCK OPTION PLAN (ESOP)

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

The Association made cash contributions to the ESOP sufficient to amortize the
debt, but recorded expense based upon the fair value of the shares allocated to
plan participants each year. The difference between the cash contributions and
the amount expensed was credited or charged to additional paid-in capital.
Retirement expense associated with the ESOP was $47,050 and $96,400 for the
years ended September 30, 2003 and 2002, respectively.

The ESOP has a put option which requires that the Company repurchase its common
stock from eligible participants in the ESOP who elect to receive cash in
exchange for their common stock. The Company is required to reflect as a
liability the maximum possible cash obligation to redeem the shares, which is
the fair value of such shares. The initial purchase of common stock by the ESOP
was treated as a reduction in stockholder's equity and as a liability for the
put option. The liability for the put option has been reduced to the extent of
the unearned ESOP shares at the end of each fiscal year end. The liability for
the put option at September 30, 2003 was $582,950 based upon the market price of
the Company's shares at that time. The liability for the put option will
fluctuate based upon the fair value of the shares with the resulting increase or
decrease reflected as change to retained earnings.

Shares of the Company held by the ESOP at September 30, 2003 and 2002 are as
follows:

<TABLE>
<CAPTION>
                                                                      2003              2002
                                                                 ---------------    --------------
<S>                                                                  <C>               <C>
       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
                                                                 ===============    ==============
</TABLE>


                                       29
<PAGE>

WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 11.  INCOME TAXES

At September 30, 2003 and 2002, 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, 2003, the remaining liability associated with the
recaptured reserves is approximately $11,950. 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:

<TABLE>
<CAPTION>
                                                                 2003                  2002
                                                           -----------------     -----------------
<S>                                                                  <C>                    <C>
Statutory federal income tax rate                                     34.00 %               34.00 %
Increase (decrease) in income taxes resulting from:
  State income taxes, net of federal benefit                           4.69                  4.12
  Other                                                               (0.36)                 0.40
                                                           -----------------     -----------------
Effective tax rate                                                    38.33 %               38.52 %
                                                           =================     =================
</TABLE>

Deferred income taxes consist of the following components as of September 30,
2003 and 2002:

<TABLE>
<CAPTION>
                                                                 2003                 2002
                                                           ------------------   -----------------
<S>                                                        <C>                  <C>
Deferred tax assets:
  Loan loss allowances                                     $         243,350    $        176,050
  Health insurance accrual                                            83,600              77,350
  Retirement plan accrual                                             66,100              65,150
  Other                                                               13,050               7,100
                                                           ------------------   -----------------
                                                                     406,100             325,650
                                                           ------------------   -----------------
Deferred tax liabilities:
  Tax bad debt reserves                                               12,000              23,950
  Excess accumulated tax depreciation                                 29,300              27,600
  Unrealized net appreciation, investments                           159,150             232,800
                                                           ------------------   -----------------
                                                                     200,450             284,350
                                                           ------------------   -----------------
                                                           $         205,650    $         41,300
                                                           ==================   =================
</TABLE>


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.


                                       30

<PAGE>

WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 12.  CAPITAL (CONTINUED)

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

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%
</TABLE>



The Company has an ongoing stock repurchase program authorizing the Company to
repurchase up to an additional $173,000 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, 2003, the Company had repurchased 71,316 shares
of its common stock. The program continues until terminated by the Board of
Directors.

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

The Association is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and the
undisbursed portion of construction loans. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amounts
recognized in the statement of financial condition. The contract or notional
amounts of those instruments reflect the extent of involvement the Association
has in particular classes of financial instruments. The Association's exposure
to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit is represented by the
contractual notional amount of those instruments. The Association uses the same
credit policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments. At September 30, 2003, the Association had
outstanding loan commitments amounting to $4,781,000. The undisbursed portion of
construction loans amounted to $12,682,650 and unused lines of credit amounted
to $5,082,000 at September 30, 2003.


                                       31
<PAGE>

WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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, 2003 and 2002. 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>
                                          Amount               Value                Amount               Value
                                     -----------------    -----------------    -----------------   ------------------
<S>                                  <C>                  <C>                  <C>                 <C>
Financial assets:
-----------------
 Cash and cash equivalents           $     16,742,200     $     16,742,200     $     15,303,250    $      15,303,250
 Investment securities                        426,850              426,850              623,500              623,500
 FHLB stock                                   225,900              225,900              330,400              330,400
 Loans receivable                          67,015,550           67,144,050           75,747,400           75,951,150
 Accrued interest receivable                   93,050               93,050               77,350               77,350
Financial liabilities:
----------------------
 Deposits                                  68,839,950           70,148,300           76,767,500           78,346,050
 Note payable - ESOP                               --                   --               29,450               29,450
Accrued interest payable                       17,800               17,800               24,350               24,350
Dividends payable                              71,450               71,450              137,900              137,900
</TABLE>

NOTE 15.  MUTUAL HOLDING COMPANY FINANCIAL DATA

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

                                       Condensed Balance Sheets
                                     September 30, 2003 and 2002
<TABLE>
<CAPTION>
                                                                                    2003                 2002
                                                                             ------------------   -----------------
<S>                                                                          <C>                  <C>
Assets:
 Cash and cash equivalents                                                   $       1,352,050    $      1,317,400
 Accrued dividends receivable, subsidiary                                                   --              76,200
 Investment in Wake Forest Bancshares, Inc.                                          6,293,650           5,732,550
                                                                             ------------------   -----------------
                   Total assets                                              $       7,645,700    $      7,126,150
                                                                             ==================   =================
Liabilities:
 Accounts payable and accrued expenses                                       $          11,300    $         16,200
                                                                             ------------------   -----------------
Equity:
 Capitalization by Wake Forest Federal                                                 106,350             106,350
 Equity in Wake Forest Bancshares, Inc.                                              3,854,700           3,854,700
 Retained earnings                                                                   3,673,350           3,148,900
                                                                             ------------------   -----------------
                   Total equity                                                      7,634,400           7,109,950
                                                                             ------------------   -----------------
                   Total liabilities and equity                              $       7,645,700    $      7,126,150
                                                                             ==================   =================
</TABLE>


                                       32

<PAGE>

WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 15.  MUTUAL HOLDING COMPANY FINANCIAL DATA (CONTINUED)


                                    Condensed Statements of Income
                            For the Years Ended September 30, 2003 and 2002
<TABLE>
<CAPTION>
                                                                                   2003                 2002
                                                                             ------------------   -----------------
<S>                                                                                <C>                   <C>
Revenues:
  Interest income                                                            $      26,900        $       30,650
  Equity in earnings of subsidiary                                                 637,300               581,550
                                                                             ------------------   -----------------
                  Total income                                                     664,200               612,200
                                                                             ------------------   -----------------
Expenses:
  Accounting and tax expense                                                        19,550                16,550
  Attorney Fees                                                                     24,000                18,250
  Director's fees                                                                   77,200                74,450
  Other                                                                             19,000                17,150
                                                                             ------------------   -----------------
                  Total expense                                                    139,750               126,400
                                                                             ------------------   -----------------
                  Net income                                                 $     524,450        $      485,800
                                                                             ==================   =================
</TABLE>

                                   Condensed Statements of Cash Flows
                              For the Years Ended September 30, 2003 and 2002
<TABLE>
<CAPTION>
                                                                                   2003                 2002
                                                                             ------------------   -----------------
<S>                                                                          <C>                  <C>
Cash Flows from Operating Activities:
 Net income                                                                  $         524,450    $        485,800
 Cash dividends                                                                        152,400             304,800
  Equity in earnings of Wake Forest Federal                                           (637,300)           (581,550)
  Increase (decrease) in accounts payable                                               (4,900)             15,550
                                                                             ------------------   -----------------
          Net cash provided by operating activities                                     34,650             224,600
Cash and cash equivalents- beginning                                                 1,317,400           1,092,800
                                                                             ------------------   -----------------
Cash and cash equivalents- ending                                            $       1,352,050    $      1,317,400
                                                                             ==================   =================
</TABLE>

NOTE 16.  PARENT COMPANY ONLY FINANCIAL DATA

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


                                      Condensed Balance Sheets
                                    September 30, 2003 and 2002
<TABLE>
<CAPTION>
                                                                                    2003                 2002
                                                                             ------------------   -----------------
<S>                                                                          <C>                  <C>
Assets:
 Cash and cash equivalents                                                   $         173,000    $        231,250
 Accrued dividends receivable, Wake Forest Federal                                      71,450             137,900
 Investment in Wake Forest Federal                                                  15,368,350          14,605,450
 Other assets                                                                              550               3,100
                                                                             ------------------   -----------------
          Total assets:                                                      $      15,613,350    $     14,977,700
                                                                             ==================   =================
Liabilities and Equity:
 Accrued dividends payable                                                   $          71,450    $        137,900
                                                                             ------------------   -----------------
 Common stock                                                                           12,150              12,150
 Additional paid-in capital                                                         13,458,350          13,384,450
 Accumulated other comprehensive income                                                259,700             379,800
 Retained earnings                                                                   2,786,600           1,977,300
 Treasury stock acquired                                                              (974,900)           (913,900)
                                                                             ------------------   -----------------
          Total equity                                                              15,541,900          14,839,800
                                                                             ------------------   -----------------
          Total liabilities and equity                                       $      15,613,350    $     14,977,700
                                                                             ==================   =================
</TABLE>


                                       33

<PAGE>

WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 16.  PARENT COMPANY ONLY FINANCIAL DATA (CONTINUED)

                                     Condensed Statements of Income
                               For the Years Ended September 30, 2003 and 2002



<TABLE>
<CAPTION>
                                                                                     2003                2002
                                                                             ------------------   -----------------
<S>                                                                          <C>                  <C>
  Interest income                                                            $           2,350    $          5,550
  Equity in earnings of Wake Forest Federal                                         (1,150,950)         (1,055,050)
  Other expense                                                                         (2,150)             (4,550)
                                                                             ------------------   -----------------
          Net income                                                         $       1,151,150    $      1,056,050
                                                                             ==================   =================
</TABLE>

<TABLE>
<CAPTION>

                                     Condensed Statement of Cash Flows
                               For the Years Ended September 30, 2003 and 2002

                                                                                     2003                2002
                                                                             ------------------   -----------------
<S>                                                                          <C>                  <C>
Cash Flows from Operating Activities:
 Net income                                                                  $       1,151,150    $      1,056,050
  Equity in earnings of Wake Forest Federal                                         (1,150,950)         (1,055,050)
  Dividends received from Wake Forest Federal                                          341,650             556,950
  (Increase) decrease in accrued dividends receivable                                   66,450                 700
  (Increase) decrease in other assets                                                    2,550                (600)
                                                                             ------------------   -----------------
          Net cash provided by operating activities                                    410,850             558,050
                                                                             ------------------   -----------------
Cash Flows from Financing Activities:
 Treasury stock acquired                                                               (61,000)           (103,200)
 Proceeds from exercise of stock options                                                    --               9,550
 Decrease in accrued dividends payable                                                 (66,450)               (700)
 Dividends paid                                                                       (341,650)           (556,950)
                                                                             ------------------   -----------------
          Net cash provided from financing activities                                 (469,100)           (651,300)
                                                                             ------------------   -----------------
Decrease in cash                                                                       (58,250)            (93,250)
Cash and cash equivalents- beginning                                                   231,250             324,500
                                                                             ------------------   -----------------
Cash and cash equivalents- ending                                            $         173,000    $        231,250
                                                                             ==================   =================
</TABLE>



                                       34

<PAGE>

                          WAKE FOREST BANCSHARES, INC.
                            COMMON STOCK INFORMATION

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


The Company's stock (previously as Wake Forest Federal Savings & Loan
Association) began trading on April 3, 1996. There are 1,145,296 shares of
common stock outstanding (net of treasury shares) of which approximately 42%
were held by individual stockholders at September 30, 2003. The MHC and the ESOP
hold approximately 58%. 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, 2003 and 2002, 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>
2003
----
First Quarter                                                          $    0.12      $       16.000   $        15.000
Second Quarter                                                              0.12              16.750            15.100
Third Quarter                                                               0.14              18.500            16.000
Fourth Quarter                                                              0.14              20.000            17.300

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

</TABLE>





                                       35
<PAGE>

                                          WAKE FOREST BANCSHARES, INC.
                                             CORPORATE INFORMATION
<TABLE>
<CAPTION>
                                                   OFFICERS
                                                   --------
<S>                                         <C>                                    <C>
Robert C. White                                                                    Billy B. Faulkner
President, Chief Executive Officer                                                 Vice President, Secretary
 & Chief Financial Officer                                                           & Treasurer

Susan S. Carter                                                                    Wanda R. Keith
Assistant Vice President and                                                       Assistant Vice President and
Assistant Treasurer                                                                Assistant Secretary
                                                  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
Real Estate Investor                                                               Former CEO of the Company
                                            William S. Wooten
                                            Dentist
Harold R. Washington                                                               Leelan A. Woodlief
Former Owner of                             Robert C. White                        Owner of Farm Supply
Automobile Distributorship                  CEO of the Company                     Company


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

Mellon Investor Services LLC                Thacher Proffitt & Wood LLP            Dixon 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
</TABLE>

                              ANNUAL MEETING

       The 2003 annual meeting of stockholders of Wake Forest
       Bancshares, Inc. will be held at 2:00 pm on Tuesday, February 17,
       2004 at the Wake Forest Police and Justice Center at 401 Elm Avenue,
       Wake Forest, N.C.

                               FORM 10-KSB

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







                                       36