EXHIBIT 13.1


                                    CONTENTS

<TABLE>
<CAPTION>


-------------------------------------------------------------------------------------------------------------------
<S>                                                                                                        <C>
SELECTED CONSOLIDATED FINANCIAL DATA                                                                             1

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

REPORT TO STOCKHOLDERS                                                                                           2

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MANAGEMENT'S DISCUSSION AND ANALYSIS                                                                        3 - 13

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INDEPENDENT AUDITOR'S REPORT                                                                                    14

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CONSOLIDATED FINANCIAL STATEMENTS:

Consolidated statements of financial condition at September 30, 2001 and 2000                                   15

Consolidated statements of income for years ended September 30, 2001 and 2000                                   16

Consolidated statements of stockholders' equity for the years ended
September 30, 2001 and 2000                                                                                 17 -18

Consolidated statements of cash flows for the years ended
September 30, 2001 and 2000                                                                                19 - 20
-------------------------------------------------------------------------------------------------------------------

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                                 21 - 37

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COMMON STOCK INFORMATION                                                                                        38

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CORPORATE INFORMATION                                                                                           39

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

</TABLE>




<PAGE>


                          WAKE FOREST BANCSHARES, INC.
                      SELECTED CONSOLIDATED FINANCIAL DATA


<TABLE>
<CAPTION>



                                                                             September 30,
                                              --------------------------------------------------------------------------------
                                                     2001           2000             1999            1998            1997
                                                 -------------   ------------    -------------   -------------   -------------
Financial Condition Data:                                                     (In Thousands)
<S>                                              <C>             <C>             <C>             <C>             <C>
Total assets                                     $     93,337    $    83,268     $     72,396    $     74,360    $     63,453
Investments (1)                                        16,645          9,607            9,635          17,528           8,671
Loans receivable, net                                  74,632         72,564           61,467          55,363          53,673
Deposits                                               77,221         67,874           57,654          60,038          50,056
Stockholders' equity                                   14,549         14,172           13,468          13,167          12,121


                                                                         Years Ended September 30,
                                              --------------------------------------------------------------------------------
                                                     2001           2000             1999            1998            1997
                                                 -------------   ------------    -------------   -------------   -------------
Operating Data:                                                      (In Thousands, Except Per Share Data)
Interest and dividend income                     $      7,674    $     6,797     $      6,204    $      5,983    $      5,183
Interest expense                                        4,359          3,326            3,027           3,072           2,590
                                                 -------------   ------------    -------------   -------------   -------------
Net interest income                                     3,315          3,471            3,177           2,911           2,593
Provision for loan losses                                  39             34               --              --              --
Noninterest income                                         79             50               42              34              56
Noninterest expense                                     1,540          1,356            1,275           1,264           1,195
                                                 -------------   ------------    -------------   -------------   -------------
Income before income taxes                              1,815          2,131            1,944           1,681           1,454
Income tax expense                                        676            800              741             620             543
                                                 -------------   ------------    -------------   -------------   -------------
Net income                                       $      1,139    $     1,331     $      1,203    $      1,061    $        911

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

Basic earnings per share                         $       1.00    $      1.15     $       1.02    $       0.91    $       0.79
Diluted earnings per share                               0.99           1.15             1.02            0.89            0.78
Dividends per share                                      0.48           0.48             0.48            0.46            0.35
Dividend payout ratio                                   48.42%         41.87%           47.06%          51.69%          44.87%
Selected Other Data:
Return on average assets (3)                             1.24%          1.71%            1.62%           1.28%           1.47%
Return on average equity (3)                             7.93%          9.64%            8.83%           7.26%           7.55%
Interest rate spread (3)                                 2.78%          3.54%            3.38%           3.39%           3.32%
Average equity to average assets (3)                    15.68%         17.74%           18.35%          17.63%          19.47%
Net interest margin (3)                                  3.70%          4.54%            4.34%           4.26%           4.32%
Allowance for loan losses to
nonperforming loans (2)                                 31.61%          0.00%           89.51%         196.79%         134.43%
Nonperforming loans to total loans (2)                   1.35%          0.00%            0.48%           0.24%           0.36%


</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 Wake Forest Bancshares, Inc. reported earnings of
$1.14 million, or $0.99 per share, for our fiscal year ended September 30, 2001.
Historically, the Company recorded its third best earnings year ever, and these
results were achieved in spite of several impediments. Income during the current
year was hampered by narrowing interest rate margins. Because the Company
maintains loan and investment portfolios which are rate sensitive, frequent
Federal Reserve moves to lower interest rates have had more of a negative impact
on our revenue stream. In contrast, the Company's cost of funds has continued to
decline at a somewhat slower rate. In addition, sluggish economic conditions in
2001, particularly when compared to the more robust environment of recent years,
impeded current year results. However, the Company did report asset growth of
$10.1 million, or 12%, and deposit growth of $9.3 million, or 14% during 2001,
respectively.

The Company paid a cash dividend of $0.12 per share during each quarter of the
current year, a generous 48% of total 2001 earnings. The Company is able to
provide this benefit to its shareholders because it continues to be profitable
and maintains a strong capital position. In addition, the Company reported
operating expenses as a percentage of net interest income of approximately 45%
during 2001, an enviable ratio compared to most of our peers in the industry.
The Company's return on assets amounted to 1.24% during the current year.

Current year loan demand was solid, but not quite as strong as in recent years.
As a result, construction lending, which represents a sizable part of our
lending business, was somewhat stagnant during 2001. Most builders became more
cautious and concentrated on lowering their inventories on-hand. However, the
Wake Forest area has experienced widespread growth, both commercially and in
residential housing during the last few years, and that growth is expected to
continue due to the area's proximity to Raleigh and the Research Triangle Park.
Management is committed to continued but prudent loan growth as our community
expands. We also intend to remain competitive with our deposit products to
ensure continued growth and profitability.

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



                                  Respectfully,


                                  /s/ Anna O. Sumerlin
                                  Anna O. Sumerlin
                                  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 solely
for the purpose of becoming a savings and loan holding company and had no prior
operating history. The Company owns 100% of the stock of Wake Forest Federal
Savings & Loan Association ("Wake Forest Federal" or the "Association"). The
Company in turn is majority owned by Wake Forest Bancorp, M.H.C., (the "MHC") a
mutual holding company.

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

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

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

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

The following discussion and analysis is intended to assist readers in
understanding the results of operations and changes in financial position at and
for the years ended September 30, 2001 and 2000.



                                       3
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------------------------------------------------


                               FINANCIAL CONDITION

Total assets increased by $10.1 million during 2001, from $83.3 million at
September 30, 2000 to $93.4 million at September 30, 2001. The increase in total
assets resulted primarily from an increase of $9.3 million in customer deposits.
Total investments, including short term interest-earning deposits and U.S.
agency obligations increased by $7.0 million during the current year. The
increase in the Company's investment portfolio is primarily due to stagnant loan
demand. The investment securities portfolio, which amounted to $1.8 million at
September 30, 2001, contains available for sale securities with net unrealized
gains of $994,900. The net gain reflects an increase of approximately $194,550
over the net unrealized gain on available for sale securities at September 30,
2000, primarily as a result of unrealized gains during the current year on the
Association's investment in Federal Home Loan Mortgage Corporation ("FHLMC")
stock.

Net loans receivable increased by approximately $2.1 million during 2001 from
$72.6 million at September 30, 2000 to $74.7 million at September 30, 2001. Due
to the slowing economy, loan demand in the Association's primary lending markets
softened somewhat during 2001, particularly for new housing starts. However, the
economic base in the Association's primary lending areas has increased over the
last several years, primarily due to the continuing growth in the Research
Triangle/Wake County area and the expansion of its population base into
surrounding communities such as Wake Forest. This expansion is expected to
continue over the next several years.

Customer deposits increased by approximately $9.3 million during 2001 and
totaled $77.2 million at September 30, 2001. The increase occurred because the
Association competitively priced its deposit products at the beginning of the
year, anticipating increased loan demand.

The Company had no outstanding borrowings during 2001 or 2000, other than the
loan by the Employee Stock Ownership Plan of the Association (the "ESOP") to
purchase shares of stock in the Company, which is shown as a liability of the
Company. The Company has borrowing capacity through the Association's ability to
borrow funds from the Federal Home Loan Bank (the "FHLB") of Atlanta. This
capacity is currently set at 12% of the Association's total assets, subject to
available collateral.

The Company and the Association are required to meet certain capital
requirements as established by the OTS (the "Office of Thrift Supervision"). At
September 30, 2001, 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, 2001, the Company had repurchased 60,836 shares
of its common stock for $810,700. 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 1.24% and 1.71% and its
return on average equity was 7.93% and 9.64% for 2001 and 2000, respectively.
The decrease in the returns on average assets and average equity during 2001 was
primarily due to narrowing interest rate margins.

Net Income. The Company's net income for the years ended September 30, 2001 and
2000 was $1,139,250 and $1,330,900, respectively. Net income in 2001 was lower
than the earnings reported in 2000 primarily due to a decline in interest rate
spreads created by rate movements precipitated by the Federal Reserve. Beginning
in January 2001, the Federal Reserve began a campaign to stimulate the U.S.
economy by lowering interest rates eight times for a total of 350 basis points.

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 $156,650 to $3.3 million for the year ended
September 30, 2001 from $3.5 million reported in 2000. The decline in net
interest income during 2001 was attributable primarily to the greater
sensitivity of the Company's loan and investment portfolios to rate movements as
compared to its deposits. As market rates declined during 2001, the Company's
yields on interest earnings assets fell at a quicker rate than its cost of
funds. As a result, the Company's net interest rate spread declined from 3.54%
in 2000 to 2.78% in 2001.

Interest Income. Total interest income increased to $7.7 million for 2001 from
$6.8 million in 2000, an increase of $875,950. The rise in interest income
during 2001 was primarily attributable to a $13.0 million increase in the
average balance of interest earning assets outstanding in 2001. The Company's
overall yield on interest earning assets was 8.58% in 2001 as compared with
8.88% in 2000.

Interest Expense. Total interest expense increased from $3.3 million in 2000 to
$4.4 million in 2001, an increase of $1,032,600. During 2001, the Association's
average balance of outstanding deposits increased by approximately $13.0 million
from 2000. The Association's cost of funds increased from 5.34% in 2000 to 5.80%
in 2001, an increase of 46 basis points. The increase in interest expense from
2000 to 2001 was due primarily to an increase in the volume of outstanding
deposits, but the Association's higher cost of funds in 2001 also had some
impact.

Provision for Loan Losses. The Association provided $39,000 in additional loan
loss provisions during 2001. During 2000, the Association provided $34,250 in
loan loss provisions. There were no loans charged off against the loan loss
allowance during 2001. During 2000, the Association charged-off $17,250 against
it loan loss allowance for a non-performing loan which subsequently paid off
during the same period. 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.



                                       5
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------------------------------------------------

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.

The Association's level of non-performing loans, defined as loans past due 90
days or more, amounted to 1.35% and .00% as percentage of total loans
outstanding at September 30, 2001 and 2000, respectively. Management believes
that such loans are adequately collateralized and that the Association's loan
loss allowances are adequate to absorb the loss, if any, that might result from
foreclosure.

Noninterest Income. Noninterest income amounted to $79,250 and $50,100 in 2001
and 2000, respectively. Noninterest income consists primarily of service charges
and fees associated with the Association's loan and deposit accounts.

Noninterest Expense. Noninterest expense consists primarily of operating
expenses for compensation and related benefits, occupancy, federal insurance
premiums, OTS operating assessments, and data processing charges. Noninterest
expenses amounted to $1,540,150 and $1,356,250 in 2001 and 2000, respectively.

Compensation and related benefits increased from $872,200 in 2000 to $1,057,700
in 2001. The increase in compensation and benefits occurred primarily due to
additional salary expense associated with the hiring of a new senior loan
officer and the retirement of the individual who previously held that position.
In addition, compensation and related benefits increased due to increased cost
associated with certain post retirement benefits provided to current and former
employees.

Occupancy expense, federal insurance premiums, OTS operating assessments, data
processing expense and other operating expense changed nominally from 2000 to
2001.

Income Taxes. The Company's effective income tax rate was 37.2% and 37.5% in
2001 and 2000, respectively. The differences in rates were due to changes in the
components of permanent tax differences.

                     IMPACT OF INFLATION AND CHANGING PRICES

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



                                       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,
                                                                                 ----------------------------------------------
                                                    At September 30, 2001                            2001
                                                   ------------------------      ----------------------------------------------
                                                                                                                 Average
                                                     Actual                        Average                        Yield/
                                                     Balance     Yield/Cost        Balance          Interest       Cost
                                                   ------------  ----------      -------------     -----------  -----------
Assets:                                                                                         (Dollars in Thousands)
<S>                                                <C>             <C>           <C>               <C>                <C>
Interest earning assets:
   Interest-earning deposits                       $    14,804       3.29%       $     13,867      $      667           4.81%
   Investment securities                                 1,841       6.01%              2,478             141           5.69%
   Loans receivable (1)                                 74,632       8.50%             73,142           6,866           9.39%
                                                   ------------                  -------------     -----------
Total interest-earning assets                           91,277       7.62%             89,487           7,674           8.58%
                                                                                                   -----------
Non-interest-earning assets                              2,060                          2,118
                                                   ------------                  -------------
        Total                                      $    93,337                   $     91,605
                                                   ============                  =============

Liabilities and retained earnings:
Interest-bearing liabilities:
   ESOP Debt                                       $        88       6.00%       $        123      $       10           8.13%
   Passbook accounts                                     3,192       3.00%              3,167              95           3.00%
   NOW and MMDA accounts                                10,759       2.93%             10,258             383           3.73%
   Certificates of deposit                              62,671       6.07%             61,651           3,871           6.28%
                                                   ------------                  -------------     -----------
Total interest-bearing                                  76,710       5.45%             75,199      $    4,359           5.80%
                                                                                                   -----------
Non-interest-bearing liabilities                         2,078                          2,047
Stockholders' Equity                                    14,549                         14,359
                                                   ------------                  -------------
        Total                                      $    93,337                   $     91,605
                                                   ============                  =============
Net interest income and interest
   rate spread (2)                                                   2.17%                              3,315           2.78%
                                                                                                   ===========
Net yield on interest-
   earning assets (3)                                                3.02%                                              3.70%
Ratio of interest-earning assets
   to interest-bearing liabilities                                 118.99%                                            119.00%
</TABLE>

<TABLE>
<CAPTION>
                                                                   Year Ended September 30,
                                                           ----------------------------------------
                                                                             2000
                                                           ----------------------------------------
                                                                                         Average
                                                             Average                      Yield/
                                                             Balance        Interest       Cost
                                                           ------------    -----------  -----------
<S>                                                          <C>             <C>              <C>
Assets:
Interest earning assets:
   Interest-earning deposits                                 $     5,155     $      316       6.13%
   Investment securities                                           2,923            166       5.68%
   Loans receivable (1)                                           68,435          6,316       9.23%
                                                             ------------    -----------
Total interest-earning assets                                     76,513          6,798       8.88%
                                                                             -----------
Non-interest-earning assets                                        1,274
                                                             ------------
        Total                                                $    77,787
                                                             ============
Liabilities and retained earnings:
Interest-bearing liabilities:
   ESOP Debt                                                 $       190     $       17       8.96%
   Passbook accounts                                               3,533            106       3.00%
   NOW and MMDA accounts                                           9,587            390       4.07%
   Certificates of deposit                                        48,936          2,814       5.75%
                                                             ------------    -----------
Total interest-bearing                                            62,246     $    3,327       5.34%
                                                                             -----------
Non-interest-bearing liabilities                                   1,734
Stockholders' Equity                                              13,807
                                                             ------------
        Total                                                $    77,787
                                                             ============
Net interest income and interest
   rate spread (2)                                                           $    3,471       3.54%
                                                                             ===========
Net yield on interest-
   earning assets (3)                                                                         4.54%
Ratio of interest-earning assets
   to interest-bearing liabilities                                                          122.92%
</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 distinguishes between (i) changes in net
             interest income attributable to volume (changes in volume
             multiplied by the prior period's interest rate), (ii) changes in
             net interest income attributable to rate (changes in interest rates
             multiplied by the prior period's volume), and (iii) mixed changes
             (changes in volume multiplied by changes in rates).




<TABLE>
<CAPTION>

                                                                    Year ended September 30,
                                                                          2001 vs. 2000
                                           --------------------------------------------------------------------
                                                              Increase (Decrease) Attributable to
                                           --------------------------------------------------------------------
                                                                                    Rate/
                                             Volume               Rate             Volume              Net
                                           ------------       -------------      ------------      ------------
Assets:                                                                   (In Thousands)
<S>                                        <C>                <C>                <C>               <C>
     Interest-earnings assets:
        Interest-bearing deposits          $      534         $       (68)       $     (115)       $       351
        Investment securities                     (25)                  1                (1)               (25)
        Loans receivable                          434                 109                 7                550
                                           ------------       -------------      ------------      ------------

             Total                                943                  42              (109)               876
                                           ------------       -------------      ------------      ------------

Liabilities:
     Interest-bearing liabilities:
        ESOP Debt                                  (6)                 (2)                1                 (7)
        Passbook savings                          (11)                 --                --                (11)
        NOW and MMDA accounts                      27                 (32)               (2)                (7)
        Certificates of deposit                   731                 259                67              1,057
                                           ------------       -------------      ------------      ------------

             Total                                741                 225                66              1,032
                                           ------------       -------------      ------------      ------------

             Net interest income           $      202         $      (183)       $     (175)       $      (156)
                                           ============       =============      ============      ============







                                                           Year ended September 30,
                                                                2000 vs. 1999
                                        ------------------------------------------------------------------
                                                     Increase (Decrease) Attributable to

                                        ------------------------------------------------------------------
                                                                              Rate/
                                          Volume            Rate              Volume              Net
                                        ------------     ------------      -------------      ------------
Assets:                                                                   (In Thousands)
     Interest-earnings assets:
        Interest-bearing deposits       $     (300)      $       128       $        (69)      $      (241)
        Investment securities                   (3)               (2)                --                (5)
        Loans receivable                       862               (19)                (3)              840
                                        ------------     ------------      -------------      ------------

             Total                             559               107                (72)              594
                                        ------------     ------------      -------------      ------------



Liabilities:
     Interest-bearing liabilities:
        ESOP Debt                               (4)                2                 --                (2)
        Passbook savings                         3                --                 --                 3
        NOW and MMDA accounts                    1                62                 --                63
        Certificates of deposit                151                80                  5               236
                                        ------------     ------------      -------------      ------------

             Total                             151               144                  5               300
                                        ------------     ------------      -------------      ------------

             Net interest income        $      408       $       (37)      $        (77)              294
                                        ============     ============      =============      ============

</TABLE>


                                       8
<PAGE>


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

                         CAPITAL RESOURCES AND LIQUIDITY

The Company declared dividends of $.12 per share for each quarter during 2001.
Although the Company anticipates that it will continue to declare cash dividends
on a regular basis, the Board of Directors will review its policy on the payment
of dividends on an ongoing basis, and such payment may be subject to dividends
received from the Association to the Company, future earnings, cash flows,
capital needs, and regulatory restrictions.

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

During the current year, cash increased by approximately $9.1 million, and
amounted to $15.9 million at September 30, 2001. Cash flow resulting from
internal operating activities provided increases of $1.4 million in cash during
the year ended September 30, 2001. Cash flows from investing activities utilized
$813,450 in cash during the current year, with a net growth in loans of $2.5
million being the primary use of cash. Because of historically low rates and a
flat yield curve, the Association allowed $1,750,000 in investment securities to
mature without reinvesting the proceeds during 2001.

During 2001, financing activities of the Company provided $8.5 million in cash,
including net deposit increases of $9.3 million. The majority of the deposit
increase occurred during the first part of 2001 when the Association's loan
demand remained strong. The Association's ability to generate deposits has
historically been sufficient to fund its loan demand and provide for adequate
liquidity without the need to access other forms of credit availability. In
addition, the Association has a readily available source of credit through its
borrowing capacity at the FHLB of Atlanta, currently equal to 12% of total
assets. Cash provided by operating and financing activities is used to originate
new loans to customers, to maintain the Association's liquid investment
portfolios, and to meet short term liquidity requirements.

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



                                       9
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------------------------------------------------

                   ASSET/LIABILITY MANAGEMENT AND MARKET RISK

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

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

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

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

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

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

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



                                       10
<PAGE>


                          WAKE FOREST BANCSHARES, INC.
                              MARKET RISK ANALYSIS


<TABLE>
<CAPTION>


                                                                      Expected Maturity Date
                                  -------------------------------------------------------------------------------------------------
                                                                      Year Ended September 30,
                                  -------------------------------------------------------------------------------------------------
                                                                       (Dollars in Thousands)

                                      2002             2003            2004             2005             2006          Thereafter
                                  -------------    -------------   -------------    -------------    -------------    -------------
Assets:
<S>                                  <C>               <C>             <C>              <C>              <C>            <C>
     Loans-fixed:
       Balance                       $ 19,968          $     6         $    11          $    71          $    88        $   2,811
       Interest rate                     8.50%           10.00%           7.75%           10.20%            9.24%            9.18%


     Loans-variable (1):
       Balance                         16,186           11,618          20,400            1,050            2,423                --
       Interest rate                     7.99%            8.80%           8.72%            8.08%            7.99%

     Investments (2):
       Balance                         15,650               --              --               --               --                --
       Interest rate                     3.53%              --              --               --               --                --


Liabilities:
     Deposits (3):
       Balance                         14,503               --              --               --               --                --
       Interest rate                     3.75%              --              --               --               --                --

     Deposits-certificates:
       Balance                         37,048           13,724           2,673            7,761            1,512                --
       Interest rate                     5.89%            6.15%           5.52%            6.70%            6.57%               --








                                     Expected Maturity Date
                                -----------------------------------
                                     Year Ended September 30,
                                -----------------------------------
                                      (Dollars in Thousands)


                                       Total          Fair Value
                                    -------------    --------------
Assets:
     Loans-fixed:
       Balance                        $ 22,955         $  22,981
       Interest rate                      8.60%               --


     Loans-variable (1):
       Balance                          51,677            51,949
       Interest rate                      8.46%               --

     Investments (2):
       Balance                          15,650            16,645
       Interest rate                      3.53%               --


Liabilities:
     Deposits (3):
       Balance                          14,503            14,503
       Interest rate                      3.75%               --

     Deposits-certificates:
       Balance                          62,718            64,682
       Interest rate                      6.05%               --

</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

The Financial Accounting Standards Board (FASB) has issued Statements of
Financial Accounting Standard (SFAS) No. 141, "Business Combinations." SFAS No.
141 supercedes APB Opinion No. 16 "Business Combinations," and SFAS No. 38
"Accounting for Preacquisition Contingencies of Purchased Enterprises" and
requires that all business combinations be accounted for using the purchase
method. SFAS No. 141 carries forward without reconsideration those portions of
APB Opinion No. 16 "Business Combinations," that provide guidance related to the
application of the purchase method. The Statement also requires that intangible
assets that meet certain criteria be recognized as assets apart from goodwill.
The provisions of this Statement apply to all business combinations initiated
after June 30, 2001. The Statement also applies to all business combinations
accounted for using the purchase method for which the date of acquisition is
July 1, 2001, or later. The Statement currently has no effect on the Company's
financial reporting considerations.

FASB has also issued SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS
No. 142 addresses financial accounting and reporting for acquired goodwill and
other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets."
The Statement addresses how intangible assets that are acquired individually or
with a group of other assets (but not those acquired in a business combination)
should be accounted for in financial statements upon their acquisition. The
Statement also addresses how goodwill and other intangible assets should be
accounted for after they have been initially recognized in the financial
statements. The Statement carries forward without reconsideration those
provisions of APB Opinion 17 related to the accounting for internally developed
intangible assets. The provisions of the Statement are required to be applied
starting with fiscal years beginning after December 15, 2001, and early
application is permitted for entities with fiscal years beginning after March
15, 2001, under certain conditions. Impairment losses for goodwill and
indefinite-lived intangible assets that arise due to the initial application of
this Statement (resulting from a transitional impairment test) are to be
reported as resulting from a change in accounting principle. The Statement
currently has no effect on the Company's financial reporting considerations.

FASB has also issued SFAS No. 143 "Accounting for Asset Retirement Obligations,"
which requires that obligations associated with the retirement of tangible
long-lived assets be recorded as a liability when those obligations are
incurred, with the amount of the liability initially measured at fair value. The
Statement will be effective for financial statements beginning after June 15,
2002 though early adoption is encouraged. The application SFAS No. 143 is not
expected at have an impact on the Company's financial statements.

In addition, FASB has issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121 and applies
to all long-lived assets, including discontinued operations, and amends APB No.
30 "Reporting the Effects of Disposal of a Segment of Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS
No. 144 requires that long-lived assets that are to be disposed of by sale be
measured at the lower of book or fair value less cost to sell. The Statement is
effective for financial statements issued for fiscal years beginning after
December 15, 2001 and its provisions are generally expected to be apllied
prospectively. The application of this Statement is not expected to have an
effect on the Company's financial statements.



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

                SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Statements herein regarding estimated future revenue and expense levels and
other matters may constitute forward-looking statements under the federal
securities laws. 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, 2001 and 2000
and the related consolidated statements of operations, 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 audits 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Wake Forest
Bancshares, Inc. and Subsidiary as of September 30, 2001 and 2000, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States of America.


/s/ Dixon Odom PLLC
Dixon Odom PLLC
Sanford, North Carolina
October 25, 2001



                                       14
<PAGE>


WAKE FOREST BANCSHARES, INC.
STATEMENTS OF CONSOLIDATED FINANCIAL CONDITION
September 30, 2001 and 2000
------------------------------------------------------------------------------



<TABLE>
<CAPTION>

ASSETS                                                                           2001                2000
                                                                           -----------------   -----------------
Cash:
<S>                                                                        <C>                 <C>
  Interest-bearing deposits                                                $     14,804,050    $      6,250,450
  Noninterest-bearing deposits                                                    1,081,050             485,400
                                                                           -----------------   -----------------
                                                                                 15,885,100           6,735,850
                                                                           -----------------   -----------------
Investment securities (Note 2):
  Available for sale, at market value                                             1,510,100           3,065,550
  FHLB stock                                                                        330,400             290,700
Loans receivable, net (Note 3)                                                   74,632,400          72,564,150
Accrued interest receivable                                                          86,100             126,800
Foreclosed assets, net (Note 5)                                                     391,250                  --
Property and equipment, net (Note 4)                                                423,650             432,900
Prepaid expenses and other assets                                                    77,500              52,400
                                                                           -----------------   -----------------
          Total assets                                                     $     93,336,500    $     83,268,350
                                                                           =================   =================

LIABILITIES AND EQUITY
Liabilities:
  Deposits (Note 6)                                                        $     77,220,600    $     67,874,400
  Accounts payable and accrued expenses                                             551,400             434,500
  Dividends payable                                                                 138,600             140,550
  Note payable - ESOP (Note 10)                                                      88,300             147,150
  Deferred income taxes (Note 11)                                                   176,550             152,950
  Redeemable common stock held by the ESOP, net of
    unearned ESOP shares (Note 10)                                                  612,100             347,250
                                                                           -----------------   -----------------
          Total liabilities                                                      78,787,550          69,096,800
                                                                           -----------------   -----------------
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 1,215,862 shares                                                           12,150              12,150
  Additional paid-in-capital                                                       4,996,900           4,916,450
  Accumulated other comprehensive income                                             616,850             496,250
  Retained  earnings, substantially restricted (Note 12)                           9,733,750           9,352,150
  Less: Treasury stock acquired (Note 12)                                           (810,700)           (605,450)
                                                                           -----------------   -----------------
          Total stockholders' equity                                              14,548,950          14,171,550
                                                                           -----------------   -----------------
                                                                           $      93,336,500   $      83,268,350
                                                                           =================   =================

</TABLE>



See Notes to Consolidated Financial Statements.

                                       15

<PAGE>


WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended September 30, 2001 and 2000
------------------------------------------------------------------------------


<TABLE>
<CAPTION>

                                                                                    2001                  2000
                                                                              -----------------     -----------------
<S>                                                                           <C>                   <C>
Interest and dividend income:
  Loans                                                                       $      6,865,600      $      6,316,250
  Investment securities                                                                141,250               166,050
  Interest-bearing deposits                                                            666,800               315,400
                                                                              -----------------     -----------------
                                                                                     7,673,650             6,797,700
                                                                              -----------------     -----------------
Interest expense:
  Deposits (Note 6)                                                                  4,348,700             3,309,750
  Borrowings                                                                            10,250                16,600
                                                                              -----------------     -----------------
                                                                                     4,358,950             3,326,350
                                                                              -----------------     -----------------

Net interest income before provision for loan losses                                 3,314,700             3,471,350
Provision for loan losses (Note 3)                                                     (39,000)              (34,250)
                                                                              -----------------     -----------------
Net interest income after provision for loan losses                                  3,275,700             3,437,100
                                                                              -----------------     -----------------

Noninterest income                                                                      79,250                50,100
                                                                              -----------------     -----------------

Noninterest expense:
  Compensation and benefits (Notes 7, 8, 9, and 10)                                  1,057,700               872,200
  Occupancy                                                                             41,700                45,900
  Federal insurance premiums and operating assessments                                  41,050                42,300
  Data processing and outside service fees                                             120,250               108,450
  Other operating expense                                                              279,450               287,400
                                                                              -----------------     -----------------
                                                                                     1,540,150             1,356,250
                                                                              -----------------     -----------------

Income before income taxes                                                           1,814,800             2,130,950
                                                                              -----------------     -----------------
Income taxes (Note 11):
  Current                                                                              725,900               822,250
  Deferred                                                                             (50,350)              (22,200)
                                                                              -----------------     -----------------
                                                                                       675,550               800,050
                                                                              -----------------     -----------------
          Net income                                                          $      1,139,250      $      1,330,900
                                                                              =================     =================

Basic earnings per share                                                      $           1.00      $           1.15
Diluted earnings per share                                                    $           0.99      $           1.15
Dividends paid per share                                                      $           0.48      $           0.48

</TABLE>



See Notes to Consolidated Financial Statements.


                                       16
<PAGE>


WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended September 30, 2001 and 2000
------------------------------------------------------------------------------


<TABLE>
<CAPTION>

                                                           Shares of                               Additional
                                                             Common               Common             Paid in
                                                             Stock                Stock              Capital
                                                        -----------------    -----------------   ----------------

<S>                                                       <C>                <C>                 <C>
Balance at September 30, 1999                                1,190,462       $        12,150     $    4,843,600
Comprehensive income:
  Net income for 2000                                                                     --                 --
  Net change in unrealized gain on securities                                             --                 --
     Total comprehensive income
Contributions to ESOP (Note 9)                                                            --             16,100
Market value adjustment for redeemable
  common stock held by ESOP                                                               --                 --
Amortization of earned RRP shares (Note 7)                                                --             56,750
Cash dividends ($0.48 per share)                                                          --                 --
Acquisition of 19,400 shares of common
  stock for the treasury                                                                  --                 --
                                                               (19,400)                   --                 --
                                                        -----------------    -----------------   ----------------
Balance at September 30, 2000                                1,171,062       $        12,150     $    4,916,450
Comprehensive income:
  Net income for 2001                                                                     --                 --
  Net change in unrealized (loss) on securities                                           --                 --
     Total comprehensive income
Contributions to ESOP (Note 9)                                                            --             23,700
Market value adjustment for redeemable
  common stock held by ESOP                                                               --                 --
Amortization of earned RRP shares (Note 7)                                                --             56,750
Cash dividends ($0.48 per share)                                                          --                 --
Acquisition of 16,036 shares of common
  stock for the treasury                                                                  --                 --
                                                               (16,036)
                                                        -----------------    -----------------   ----------------
Balance at September 30, 2001                                1,155,026       $        12,150     $    4,996,900
                                                        =================    =================   ================

</TABLE>

See Notes to Consolidated Financial Statements.



                                       17


<PAGE>
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended September 30, 2001 and 2000
------------------------------------------------------------------------------



<TABLE>
<CAPTION>


         Accumulated
            Other                                         Treasury
        Comprehensive              Retained                Stock
            Income                 Earnings               Acquired                 Total
     ---------------------    -------------------    -------------------     -------------------
     <S>                      <C>                    <C>                     <C>
     $         472,900        $     8,490,850        $      (351,650)        $      13,467,850

                    --              1,330,900                     --                 1,330,900
                23,350                     --                     --                    23,350
                                                                             -------------------
                                                                                     1,354,250
                                                                             -------------------
                    --                     --                     --                    16,100

                    --                 87,600                     --                    87,600
                    --                     --                     --                    56,750
                    --               (557,200)                    --                  (557,200)
                    --                     --               (253,800)                 (253,800)
     ---------------------    -------------------    -------------------     -------------------
               496,250              9,352,150               (605,450)               14,171,550
                    --              1,139,250                     --                 1,139,250
               120,600                     --                     --                   120,600
                                                                             -------------------
                                                                                     1,259,850
                                                                             -------------------
                    --                     --                     --                    23,700
                    --               (206,000)                    --                  (206,000)
                    --                     --                     --                    56,750
                    --               (551,650)                    --                  (551,650)
                    --                     --               (205,250)                 (205,250)
     ---------------------    -------------------    -------------------     -------------------
     $         616,850        $     9,733,750        $      (810,700)        $      14,548,950
     =====================    ===================    ===================     ===================


</TABLE>
                                       18


<PAGE>


WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, 2001 and 2000
------------------------------------------------------------------------------



<TABLE>
<CAPTION>



                                                                                   2001                   2000
                                                                             ------------------     -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                          <C>                    <C>
Net income                                                                   $       1,139,250      $       1,330,900
Adjustments to reconcile net income to net
 cash provided by operations:
   Depreciation                                                                         29,500                 33,600
   Provision for loss on loans                                                          39,000                 34,250
   Provision for loss on foreclosed assets                                               5,000                     --
   Amortization of premiums (discounts) on investments                                      --                    (50)
   Amortization of unearned RRP shares                                                  56,750                 56,750
   Amortization of unearned ESOP shares                                                 58,850                 58,850
   ESOP compensation expense credited to
     paid-in-capital                                                                    23,700                 16,100
   Deferred income taxes                                                               (50,350)               (22,200)
Changes in assets and liabilities:
   (Increase) decrease in:
    Accrued interest receivable                                                         40,700                (24,950)
    Prepaid expenses and other assets                                                  (25,100)                12,800
Increase (decrease) in:
    Accounts payable and accrued expenses                                              116,900                 47,150
                                                                             ------------------     ------------------
          Net cash provided by operating activities                                  1,434,200              1,543,200
                                                                             ------------------     ------------------

CASH FLOWS FROM INVESTING ACTIVITIES

Principal collected on  loans                                                       35,818,000             36,428,900
Mortgage loans purchased                                                              (140,000)               (25,000)
Loans originated                                                                   (38,181,500)           (47,535,000)
Maturities of FHLB time deposits                                                            --              1,000,000
Maturities of available for sale investment securities                               1,750,000                500,000
Purchase of FHLB stock                                                                 (39,700)               (10,300)
Purchases of property and equipment                                                    (20,250)               (14,500)
                                                                             ------------------     ------------------
          Net cash used in investing activities                                       (813,450)            (9,655,900)
                                                                             ------------------     -----------------

</TABLE>

See Notes to Consolidated Financial Statements.


                                       19

<PAGE>

WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, 2001 and 2000
------------------------------------------------------------------------------



<TABLE>
<CAPTION>

                                                                    2001            2000
                                                              ---------------   ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
<S>                                                           <C>               <C>
Cash dividends paid                                           $     (553,600)   $     (560,350)
Principal payments on ESOP note payable                              (58,850)          (58,850)
Purchase of treasury stock                                          (205,250)          (253,800)
Net increase (decrease) in savings accounts                        9,346,200         10,220,500
                                                              ---------------   ----------------
Net cash provided by (used in) financing activities                8,528,500          9,347,500
                                                              ---------------   ----------------

          Net increase (decrease) in cash                          9,149,250          1,234,800
                                                              ---------------   ----------------

Cash:
  Beginning                                                        6,735,850          5,501,050
                                                              ---------------   ----------------
  Ending                                                      $   15,885,100    $     6,735,850
                                                              ===============   ================

Cash and cash Equivalents:
  Cash                                                        $    1,081,050    $       485,400
  Interest bearing overnight funds                                14,804,050          6,250,450
                                                              ---------------   ----------------
          Total cash and cash equivalents                     $   15,885,100    $     6,735,850
                                                              ===============   ================

Supplemental Disclosures of Cash Flow Information
  Cash payments for:
     Interest                                                 $    4,368,650    $     3,328,050
     Income taxes                                             $      787,200    $       828,950

Supplemental Schedule of Noncash Investing
 and Financing Activities:
  Fair value of ESOP shares in excess of unearned
     ESOP shares (charged) credited to retained earnings      $     (206,000)   $        87,600
Change in unrealized gain (loss) on available for sale
securities, net of tax effect                                 $      120,600    $        23,350
Loans receivable transferred to foreclosed assets             $      396,250    $            --

</TABLE>


                                       20


<PAGE>


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

NOTE 1.  NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

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

The Company is majority owned by Wake Forest Bancorp, M.H.C., (the "MHC") a
mutual holding company. Members of the MHC consist of depositors and certain
borrowers of the Association, who have the sole authority to elect the board of
directors of the MHC for as long as it remains in mutual form. The MHC's
principal assets consist of 635,000 shares of the Company's common stock and
deposits at the Association for accumulated dividends paid on those shares. The
MHC, which by law must own in excess of 50% of the stock of the Company,
currently has an ownership interest of 55% of the Company. The mutual holding
company is registered as a savings and loan holding company and is subject to
regulation, examination, and supervision by the OTS.

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

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

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

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

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

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



                                       21
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------------------------------------------------

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

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

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

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

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

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

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

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

An impaired loan can also be valued at its fair value in the market place or on
the basis of its underlying collateral if the loan is primarily collateral
dependent. If foreclosure is imminent, and the loan is collateral dependent, the
loan is valued based upon the fair value of the underlying collateral. The
Association had no loans outstanding during the years ended September 30, 2001
and 2000 which it considered to be impaired. Therefore, there is no specific
allowance for impaired loans at September 30, 2001 and 2000.



                                       22
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------------------------------------------------

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

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

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

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

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

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

The basic and diluted weighted average shares outstanding for 2001 and 2000 are
as follows:


<TABLE>
<CAPTION>

                                                                               2001                2000
                                                                         -----------------   -----------------
<S>                                                                           <C>                 <C>
Weighted average outstanding shares used for basic EPS                        1,144,907           1,153,048
Plus incremental shares from assumed issuances
     pursuant to stock options and stock award plans                              3,426                  --
                                                                         -----------------   -----------------
Weighted average outstanding shares used for diluted EPS                      1,148,333           1,153,048
                                                                         =================   =================
</TABLE>




                                       23
<PAGE>

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

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

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

Fair value of financial instruments: Estimated fair values have been determined
by the Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required to develop the
estimates of fair value. Accordingly, the estimates for the fair value of the
Company's financial instruments are not necessarily indicative of the amounts
the Company could realize in a current market exchange. The use of different
market assumptions or estimation methodologies may have a material effect on the
estimated fair value amounts. The fair value estimates are based on pertinent
information available to management as of September 30, 2001. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date, and
therefore, current estimates of fair value may differ significantly from the
amounts presented herein. The following methods and assumptions were used by the
Company in estimating its fair value disclosures for financial instruments:

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

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

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

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

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

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


                                       24
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------------------------------------------------

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, 2001 and 2000 are as
follows:


<TABLE>
<CAPTION>

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

</TABLE>



<TABLE>
<CAPTION>


                                                                            2000
                                               ----------------------------------------------------------------------
                                                                      Gross             Gross           Estimated
                                                 Amortized         Unrealized        Unrealized           Market
                                                    Cost              Gains            Losses             Value
                                               ---------------    --------------    --------------    ---------------
<S>                                            <C>                <C>               <C>               <C>
Available for sale securities:
 Marketable equity securities:
  FHLMC stock                                  $      15,200      $    822,950      $        --       $      838,150
 Debt securities:
  U.S. Treasury and agency securities              2,250,000                --          (22,600)           2,227,400
                                               ---------------    --------------    --------------    ---------------
                                                   2,265,200           822,950          (22,600)           3,065,550
Nonmarketable equity securities:
  Federal Home Loan Bank stock                       290,700                --               --              290,700
                                               ---------------    --------------    --------------    ---------------
                                               $   2,555,900      $    822,950      $   (22,600)      $    3,356,250
                                               ===============    ==============    ==============    ===============

</TABLE>

There were no sales of investment securities during the years ended September
30, 2001 and 2000.


The amortized cost and estimated market values of available for sale debt
securities at September 30, 2001 by contractual maturity are shown below:



                                            Amortized             Market
                                              Cost               Value
                                       -----------------   -----------------
Due in one year or less                $      500,000      $       502,350
                                       =================   =================

                                       25


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

NOTE 2.  INVESTMENT SECURITIES (CONTINUED)

The change during 2001 and 2000 in net unrealized gains and losses associated
with available for sale securities is as follows:

<TABLE>
<CAPTION>

                                                                                   2001                 2000
                                                                             -----------------    -----------------
<S>                                                                          <C>                  <C>
Balance in equity component, beginning of year                               $       496,250      $      472,900
  Change in unrealized gains                                                         194,500              37,700
Change in related deferred income taxes                                              (73,900)            (14,350)
                                                                             -----------------    -----------------
Balance in equity component, end of year                                     $       616,850      $      496,250
                                                                             =================    =================
</TABLE>




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

NOTE 3.  LOANS RECEIVABLE

Loans receivable consist of the following:

<TABLE>
<CAPTION>


                                                                                    2001                  2000
                                                                              -----------------     -----------------
<S>                                                                           <C>                   <C>
First mortgage loans:
Single family, one-to-four units                                              $     27,250,850      $     27,073,250
Multifamily, residential                                                               324,550               186,850
Commercial real estate                                                              15,104,300            10,594,750
Land                                                                                 4,538,950             6,342,450
Residential construction                                                            28,597,200            26,859,100
Commercial construction                                                              3,883,500             3,932,750
Lines of credit                                                                      5,030,250             5,785,750
                                                                              -----------------     -----------------
                                                                                    84,729,600            80,774,900
Equity line mortgages                                                                2,461,300             3,338,100
Loans on savings accounts                                                              144,300               643,750
                                                                              -----------------     -----------------
                                                                                    87,335,200            84,756,750
                                                                              -----------------     -----------------
Less:
Undisbursed portion of loans in process                                             12,157,650            11,708,850
Allowance for loan losses                                                              319,000               280,000
Deferred loan fees                                                                     226,150               203,750
                                                                              -----------------     -----------------
                                                                                    12,702,800            12,192,600
                                                                              -----------------     -----------------
                                                                              $     74,632,400      $     72,564,150
                                                                              =================     =================
Weighted average yield on loans receivable                                                8.50%                 9.19%
                                                                              =================     =================

</TABLE>


                                       26
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------------------------------------------------

NOTE 3.  LOANS RECEIVABLE (CONTINUED)

The change in the Association's allowance for loan losses is as follows for the
years ended September 30, 2001 and 2000:


<TABLE>
<CAPTION>

                                                                                    2001                 2000
                                                                              -----------------    -----------------
<S>                                                                           <C>                  <C>
Balance, beginning of year                                                    $        280,000     $        263,000
Provision for loan loss                                                                 39,000               34,250
Charge-offs                                                                                 --              (17,250)
                                                                              -----------------    -----------------
Balance, end of year                                                          $        319,000              280,000
                                                                              =================    =================


</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, 2001, a reserve for uncollected interest on loans
delinquent more than 90 days was not established because management expected all
such interest to be fully collectible. At September 30, 2000, there were no
loans delinquent more than 90 days. The balance of accruing loans past due more
than 90 days was approximately $1,009,200 at September 30, 2001.

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, 2001 and 2000.

Aggregate loan transactions with related parties during the years ended
September 30, 2001 and 2000 were as follows:

<TABLE>
<CAPTION>


                                                                                      2001                2000
                                                                                -----------------   ------------------
<S>                                                                             <C>                 <C>
Beginning balance                                                               $       441,750     $       296,250
New loans                                                                                    --             247,500
Reductions                                                                              (28,450)           (102,000)
                                                                                -----------------   ------------------
Ending balance                                                                  $       413,300     $       441,750
                                                                                =================   ==================
Maximum balance during the year                                                 $       441,750     $       523,800
                                                                                =================   ==================

</TABLE>



NOTE 4.  PROPERTY AND EQUIPMENT

Property and equipment at September 30, 2001 and 2000 are summarized as follows:



<TABLE>
<CAPTION>


                                                                                   2001                 2000
                                                                             -----------------    -----------------
<S>                                                                          <C>                  <C>
Land                                                                         $        20,950      $        20,950
Office buildings and improvements                                                    608,800              608,550
Furniture and fixtures                                                               190,600              170,600
                                                                             -----------------    -----------------
                                                                                     820,350              800,100
Less accumulated depreciation                                                       (396,700)            (367,200)
                                                                             -----------------    -----------------
                                                                             $       423,650      $       432,900
                                                                             =================    =================
</TABLE>


                                       27

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

NOTE 5.  FORECLOSED ASSETS

The Company has an allowance for losses on foreclosed assets of $5,000 at
September 30, 2001. In addition to the $5,000 provision, the Company incurred
$9,500 in expense associated with holding foreclosed assets during 2001. The
Company reported a net gain of $1,850 from the disposal of foreclosed assets
during 2001. No other charge-offs or recoveries occurred in 2001. The Company
had no foreclosed assets during 2000.

NOTE 6.  DEPOSITS

Deposits at September 30, 2001 and 2000 consist of the following:


<TABLE>
<CAPTION>


                                                                               2001                 2000
                                                                        -------------------   ------------------
<S>                                                                     <C>                   <C>
Passbook accounts, weighted average rate of  3.00%
  (3.00% in 2000)                                                       $      3,192,150      $      3,276,150
MMDA accounts, weighted average rate of 3.00%
  (4.65% in 2000)                                                              9,301,700             7,766,150
NOW accounts, weighted average rate of  2.50%
  (2.50% in 2000)                                                              1,457,700             1,589,700
Certificate of deposit accounts, weighted average rate of 6.07%
  (6.27% in 2000)                                                             62,670,700            54,504,800
Noninterest-bearing accounts                                                     551,850               681,400
                                                                        -------------------   ------------------
                                                                              77,174,100            67,818,200
Accrued interest on deposits                                                      46,500                56,200
                                                                        -------------------   ------------------
                                                                        $     77,220,600            67,874,400
                                                                        ===================   ==================
Weighted average cost of deposits                                                   5.45%                 5.77%
                                                                        ===================   ==================

</TABLE>




Certificate of deposit accounts by maturity at September 30, 2001 are summarized
as follows:

<TABLE>
<CAPTION>


<S>                                                                                        <C>
Maturity Period:
     2002                                                                                  $         37,001,900
     2003                                                                                            13,723,550
     2004                                                                                             2,672,950
     2005                                                                                             7,760,800
     2006                                                                                             1,511,500
                                                                                              ------------------
                                                                                           $         62,670,700
                                                                                              ==================
</TABLE>


                                       28


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



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

NOTE 6.  DEPOSITS (CONTINUED)

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


Maturity Period:
  Within three months                                       $         2,950,800
  After three months but within six months                            3,339,150
  After six months but within twelve months                           5,502,800
  After twelve months                                                 7,431,450
                                                            -------------------
                                                            $       19,224,200
                                                            ===================





NOTE 7.  EMPLOYEES AND DIRECTORS BENEFIT PLANS

The Association has a noncontributory 401k plan for substantially all employees.
The Association has no obligation to make contributions to the plan, but pays
administrative costs of the Plan. Plan expenses amounted to $2,050 and $2,950
during 2001 and 2000, 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 $9,600 and $26,200 for 2001 and 2000, respectively.

The Association has also entered into employment agreements with its three 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, 2001, 80% of the shares 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 $52,550 for both years ended September 30, 2001 and 2000.



                                       29
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------------------------------------------------

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. The options become exercisable at the rate of 20%
annually for five years during such 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. There were no additional
options granted or exercised during 2001 or 2000. During 2001, 13,500 options
were forfeited, including 10,800 options which had vested. At September 30, 2001
and 2000, 38,086 and 51,586 options, respectively, were outstanding. In
addition, at September 30, 2001 and 2000, 30,469 and 30,952 options,
respectively, were exercisable at the weighted average exercise price of $12.75
per share.

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

However, had compensation cost been recorded based on the fair value ($4.17 per
share) of awards at the grant date, the pro forma impact on the Company's net
income and earnings per share would have been to reduce such amounts by
approximately $19,700 ($0.02 per basic and dilutive share) and $28,000 ($0.02),
respectively, for 2001 and 2000. The fair value of each grant is estimated at
the grant date using the Black-Scholes option-pricing model with the following
assumptions for 1997 when the options were granted: dividend rate of 2.75%;
risk-free interest rate of 5.87%; expected lives of 10 years; and price
volatility of 26.51%.

NOTE 10.  EMPLOYEE STOCK OPTION PLAN (ESOP)

The Association has an ESOP to benefit substantially all employees. As a part of
the Association's initial public offering in April 1996, the ESOP purchased
41,200 shares of common stock with the proceeds from a loan received from a
third party financial institution. The note requires quarterly principal
payments of $14,714 plus interest at the lending institution's prime rate (6.00%
at September 30, 2001) until March, 2003. The Association is expected to make
quarterly contributions to the ESOP in amounts sufficient to allow the ESOP to
make its scheduled principal and interest payments on the note. The unallocated
ESOP shares are pledged as collateral for the debt. Dividends on unallocated
shares are not reported as dividends in the financial statements. As the debt is
repaid, shares are released from collateral and allocated to active employees,
based on the proportion of debt service paid in the year. The debt of the ESOP
is recorded as debt in the Company's accompanying consolidated balance sheet.

At September 30, 2001, future principal payments are due as follows:


       Year Ended:
       -----------
    September 30, 2002                             $          58,850
    September 30, 2003                                        29,450
                                                   -----------------
                                                   $          88,300
                                                   =================



                                       30
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------------------------------------------------



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

The Association makes cash contributions to the ESOP sufficient to amortize the
debt, but records expense based upon the fair value of the shares allocated to
plan participants each year. The difference between the cash contributions and
the amount expensed is credited or charged to additional paid-in capital. ESOP
compensation expense was $82,600 and $76,700 for the years ended September 30,
2001 and 2000, respectively.

The ESOP has a put option which requires that the Company repurchase its common
stock from participants in the ESOP who are eligible to receive benefits under
the terms of the plan and elect to receive cash in exchange for their common
stock. The Company is required to reflect as a liability the maximum possible
cash obligation to redeem the shares, which is the fair value of such shares,
whether allocated or unallocated. The initial purchase of common stock by the
ESOP is treated as a reduction in stockholder's equity and as a liability for
the put option. The liability for the put option has been reduced to the extent
of the unearned ESOP shares at the end of each fiscal year end. The liability
for the put option at September 30, 2001, based upon the fair value of the ESOP
shares at that time of $17.00, was $612,100. 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, 2001 and 2000 are as
follows:

<TABLE>
<CAPTION>

                                                               2001              2000
                                                          --------------    --------------
<S>                                                       <C>               <C>
Shares held by the ESOP                                         41,200            41,200
Shares released for allocation                                 (32,372)          (26,486)
                                                         --------------    --------------
Unreleased (unearned) shares                                     8,828            14,714
                                                         ==============    ==============
Fair value of unreleased (unearned) shares                   $ 150,100         $ 176,550
                                                         ==============    ==============

</TABLE>



NOTE 11.  INCOME TAXES

At September 30, 2001 and 2000, 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, 2001, the remaining liability associated with the recaptured reserves is
approximately $35,900. Deferred income taxes have been established for the taxes
associated with the recaptured reserves.


                                       31
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------------------------------------------------

NOTE 11.   INCOME TAXES (CONTINUED)

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

<TABLE>
<CAPTION>


                                                                                  2001                  2000
                                                                            -----------------     -----------------
<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                                           3.04                 3.65
                                                                                       0.18                (0.11)
                                                                            -----------------     -----------------
Effective tax rate                                                                    37.22%               37.54%
                                                                            =================     =================
</TABLE>



Deferred income taxes consist of the following components as of September 30,
2001 and 2000:


<TABLE>
<CAPTION>

                                                                                   2001                 2000
                                                                             -----------------    -----------------
<S>                                                                          <C>                  <C>
Deferred tax assets:
  Loan loss allowances                                                       $       121,200      $        106,400
  Deferred loan fees                                                                   5,500                15,600
  Health insurance accrual                                                            70,900                18,150
  Retirement plan accrual                                                             63,400                82,300
                                                                             -----------------    -----------------
                                                                                     261,000               222,450
                                                                             -----------------    -----------------
Deferred tax liabilities:
  Tax bad debt reserves                                                               35,900                47,900
  Excess accumulated tax depreciation                                                 23,550                23,350
  Unrealized net appreciation, investments                                           378,100               304,150
                                                                             -----------------    -----------------
                                                                                     437,550               375,400
                                                                             -----------------    -----------------
                                                                             $      (176,550)             (152,950)
                                                                             =================    =================
</TABLE>


NOTE 12.  CAPITAL

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

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


                                       32
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------------------------------------------------

NOTE 12.   CAPITAL (CONTINUED)

The Association is subject to the capital requirements established by the Office
of Thrift Supervision (OTS). The OTS requires that the Association meet three
separate capital standards; tangible capital of at least 1.5% of total assets,
core capital of at least 3% of total assets, and risk-based capital of at least
8% of risk-weighted assets. At September 30, 2001, the Association met and
exceeded all of the capital requirements described above as shown in the table
below:


<TABLE>
<CAPTION>


                                                               Tangible              Core              Risk-based
                                                               Capital             Capital              Capital
                                                             Requirement         Requirement          Requirement
                                                           -----------------   -----------------    -----------------
<S>                                                        <C>                 <C>                  <C>
Equity (GAAP)                                              $    14,548,950     $    14,548,950      $    14,548,950
Equity of Wake Forest Bancshares                                  (327,000)           (327,000)            (327,000)
Net unrealized gain on investment securities                      (616,850)           (616,850)            (616,850)
Supplemental capital items:
General valuation allowances                                            --                  --              319,000
                                                           -----------------   -----------------    -----------------
Regulatory capital                                              13,605,100          13,605,100           13,924,100
Minimum capital requirement                                      1,385,100           2,770,200            5,036,850
                                                           -----------------   -----------------    -----------------
Excess regulatory capital                                  $    12,220,000     $    10,834,900      $     8,887,250
                                                           =================   =================    =================

Total assets at September 30, 2001 less fair
  market value adjustment of securities                    $    92,339,100     $   92,339,100                    --
Risk-weighted assets at September 30, 2000                              --                 --       $    62,960,750


Capital as a percentage of assets:
  Actual                                                             14.73%             14.73%                22.12%
  Required                                                            1.50               3.00                  8.00
                                                                -----------         ----------             ----------
  Excess                                                             13.23%             11.73%                14.12%
                                                                ===========         ==========             ==========
</TABLE>


Under the OTS prompt corrective action regulations, a savings association is
considered to be well capitalized if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of core capital to risk-weighted assets is at
least 6.0%, and its ratio of core capital to total average assets is at least
5.0%. The Association meets all of the above requirements and is considered to
be well capitalized under the prompt corrective action regulations.

The Company has an ongoing stock repurchase program authorizing the Company to
repurchase up to an additional $325,000 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, 2001, the Company had repurchased 60,836 shares
of its common stock. The program continues until terminated by the Board of
Directors.


                                       33
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------------------------------------------------

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, 2001,
the Association had outstanding loan commitments amounting to $1,799,000. The
undisbursed portion of construction loans amounted to $12,157,650 and unused
lines of credit amounted to $4,957,000 at September 30, 2001.

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, 2001 and 2000. See Note 1
for a description of the Company's accounting policies and the limitations of
its disclosures in reporting on the fair value of its financial instruments.


<TABLE>
<CAPTION>

                                                                    September 30,
                                     -------------------------------------------------------------------------------
                                                   2001                                     2000
                                     --------------------------------------   --------------------------------------
                                         Carrying               Fair              Carrying               Fair
                                          Amount               Value               Amount               Value
                                     -----------------    -----------------   ------------------   -----------------
<S>                                  <C>                  <C>                 <C>                  <C>
Financial assets:
 Cash                                $     15,885,100      $    15,885,100     $    6,735,850       $    6,735,850
 Investment securities                      1,510,100            1,510,100          3,065,550            3,065,550
 FHLB stock                                   330,400              330,400            290,700              290,700
 Loans receivable                          74,632,400           74,930,300         72,564,150           72,292,850
 Accrued interest receivable                   86,100               86,100            126,800              126,800
Financial liabilities:
 Deposits                                  77,220,600           79,186,050         67,874,400           67,730,450
 Note payable - ESOP                           88,300               88,300            147,150              147,150


</TABLE>

                                       34

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

NOTE 15.  MUTUAL HOLDING COMPANY FINANCIAL DATA

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

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


                        Condensed Balance Sheets
                       September 30, 2001 and 2000


<TABLE>
<CAPTION>


                                                                                   2001                 2000
                                                                             -----------------    -----------------
<S>                                                                          <C>                  <C>
Assets:
 Cash and cash equivalents                                                   $    1,092,800       $      878,400
 Accrued dividends receivable, subsidiary                                            76,200               76,200
 Investment in Wake Forest Bancshares, Inc.                                       5,455,800            5,137,500
                                                                             -----------------    -----------------
                            Total assets                                     $    6,624,800       $    6,092,100
                                                                             =================    =================

Liabilities:
 Accounts payable and accrued expenses                                       $          650       $           --
                                                                             -----------------    -----------------
Equity:
 Capitalization by Wake Forest Federal                                              106,350              106,350
 Equity in Wake Forest Bancshares, Inc.                                           3,854,700            3,854,700
 Retained earnings                                                                2,663,100            2,131,050
                                                                             -----------------    -----------------
                            Total equity                                          6,624,150            6,092,100
                                                                             -----------------    -----------------
                            Total liabilities and equity                     $    6,624,800       $    6,092,100
                                                                             =================    =================

</TABLE>





                     Condensed Statements of Income
             For the Years Ended September 30, 2001 and 2000


<TABLE>
<CAPTION>

                                                                                   2001                 2000
                                                                             -----------------    -----------------
<S>                                                                          <C>                  <C>
Interest income                                                              $      46,900        $      40,250
Equity in earnings of subsidiary                                                   623,100              715,450
                                                                             -----------------    -----------------
                             Total income                                          670,000              755,700
                                                                             -----------------    -----------------

Accounting and tax expenses                                                         17,350               17,850
Attorney Fees                                                                       21,400               20,000
Director's fees                                                                     84,900               91,650
Other                                                                               14,300               16,950
                                                                             -----------------    -----------------
                            Total expense                                          137,950              146,450
                                                                             -----------------    -----------------
                            Net income                                       $     532,050        $     609,250
                                                                             =================    =================
</TABLE>



                                       35

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

NOTE 15.  MUTUAL HOLDING COMPANY FINANCIAL DATA (CONTINUED)


                   Condensed Statements of Cash Flows
             For the Years Ended September 30, 2001 and 2000


<TABLE>
<CAPTION>

Cash Flows from Operating Activities:                                              2001                 2000
                                                                             -----------------    -----------------
<S>                                                                          <C>                  <C>
 Net income                                                                  $      532,050       $       609,250
 Noncash income items:
  Equity in earnings of Wake Forest Federal                                        (623,100)             (715,450)
  Change in assets and liabilities:
  Decrease in investment in subsidiary - dividends                                  304,800               304,800
  Increase (decrease) in accounts payable                                               650               (11,200)
                                                                             -----------------    -----------------
          Net cash provided by operating activities                                 214,400               187,400
Cash and cash equivalents- beginning                                                878,400               691,000
                                                                             -----------------    -----------------
Cash and cash equivalents- ending                                            $    1,092,800       $       878,400
                                                                             =================    =================
</TABLE>


NOTE 16.  PARENT COMPANY ONLY FINANCIAL DATA

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


<TABLE>
<CAPTION>

                        Condensed Balance Sheets
                       September 30, 2001 and 2000
                                                                                   2001                 2000
                                                                             -----------------    -----------------
<S>                                                                          <C>                  <C>
Assets:
 Cash and cash equivalents                                                   $        324,500     $        279,700
 Accrued dividends receivable, Wake Forest Federal                                    138,600              140,550
 Investment in Wake Forest Federal                                                 14,064,700           13,738,300
 Other assets                                                                           2,500                   --
                                                                             -----------------    -----------------
                                                                             $     14,530,300     $     14,158,550
                                                                             =================    =================
Liabilities:
 Accrued dividends payable                                                   $        138,600              140,550
 Income taxes payable                                                                      --                3,350
                                                                             -----------------    -----------------
                                                                                      138,600              143,900
                                                                             -----------------    -----------------
Equity:
 Common stock                                                                          12,150               12,150
 Additional paid-in capital                                                        13,715,850           13,715,850
 Retained earnings                                                                  1,474,400              892,100
 Treasury stock acquired                                                             (810,700)            (605,450)
                                                                             -----------------    -----------------
                                                                                   14,391,700           14,014,650
                                                                             -----------------    -----------------
                                                                             $     14,530,300     $     14,158,550
                                                                             =================    =================

</TABLE>



                                       36
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------------------------------------------------

NOTE 16.  PARENT COMPANY ONLY FINANCIAL DATA (CONTINUED)

                     Condensed Statements of Income
             For the Years Ended September 30, 2001 and 2000

<TABLE>
<CAPTION>
                                                                                   2001                 2000
                                                                             -----------------    -----------------
<S>                                                                          <C>                  <C>
Interest income                                                              $        10,050      $        16,800
Equity in earnings of Wake Forest Federal                                          1,133,350            1,321,100
Miscellaneous expense                                                                   (400)                (850)
Income tax expense                                                                    (3,750)              (6,150)
                                                                             -----------------    -----------------
                           Net income                                        $     1,139,250            1,330,900
                                                                             =================    =================
</TABLE>

                    Condensed Statement of Cash Flows
             For the Years Ended September 30, 2001 and 2000


<TABLE>
<CAPTION>
                                                                                   2001                 2000
                                                                             -----------------    -----------------

<S>                                                                          <C>                  <C>
Cash Flows from Operating Activities:
 Net income                                                                  $     1,139,250      $      1,330,900
 Noncash income items:
  Equity in earnings of Wake Forest Federal                                       (1,133,350)           (1,321,100)
 Change in assets and liabilities:
  (Increase) decrease in accrued dividends receivable                                  1,950                 3,150
  Increase (decrease) in accrued dividends payable                                    (1,950)               (3,150)
  (Increase) decrease in other assets                                                 (2,500)                   --
  Increase (decrease) in income tax payable                                           (3,350)                  800
                                                                             -----------------    -----------------
          Net cash provided by operating activities                                       50                10,600
                                                                             -----------------    -----------------
Cash Flows from Financing Activities:
 Treasury stock acquired                                                            (205,250)             (253,800)
 Dividends received from Wake Forest Federal                                         806,950               560,350
 Dividends paid                                                                     (556,950)             (560,350)
                                                                             -----------------    -----------------
          Net cash provided from financing activities                                 44,750              (253,800)
                                                                             -----------------    -----------------
Increase (decrease) in cash                                                           44,800              (243,200)
Cash and cash equivalents- beginning                                                 279,700               522,900
                                                                             -----------------    -----------------
Cash and cash equivalents- ending                                            $       324,500               279,700
                                                                             =================    =================
</TABLE>

                                       37
<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 1,155,026 shares of
common stock outstanding (net of treasury shares) of which approximately 42%
were held by 350 stockholders of record on September 30, 2001. The MHC, ESOP and
RRP Trust 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, 2001 and
2000, based upon information provided to management of the Company by certain
securities firms effecting transactions in the Company's stock on an agency
basis.



                                                         Stock Price
                                                -------------------------------
                                   Dividends         High              Low
                                  ------------  --------------   ---------------
2001
----
First Quarter                     $    0.12     $       12.750   $        11.500
Second Quarter                         0.12             13.250            12.125
Third Quarter                          0.12             17.000            13.250
Fourth Quarter                         0.12             18.050            15.750

2000
----
First Quarter                     $    0.12      $      14.125     $      13.000
Second Quarter                         0.12             14.125            12.500
Third Quarter                          0.12             12.750            10.000
Fourth Quarter                         0.12             12.750            11.875




                                       38
<PAGE>


                          WAKE FOREST BANCSHARES, INC.
                              CORPORATE INFORMATION




                              CORPORATE INFORMATION


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

<TABLE>
<CAPTION>

<S>                              <C>                                    <C>
Anna O. Sumerlin                 Robert C. White                        Billy B. Faulkner
President and CEO                Vice President/Secretary &             Vice President
                                 Treasurer

                                    DIRECTORS
                                    ---------

Howard Brown                     Rodney M. Privette                     R. W. Wilkinson III
Chairman of the Board            Owner of Insurance Agency              Vice Chairman of the Board
Former Owner of                                                         Former Managing Officer
Oil Distribution Company                                                of Wake Forest Federal

John D. Lyon                     Paul Brixhoff                          Anna O. Sumerlin
Owner of Appraisal Company       Former Owner of Auto Supply            CEO of the Company and
                                 Company                                Wake Forest Federal

Harold R. Washington             William S. Wooten                      Leelan A. Woodlief
Former Owner of                  Dentist                                Owner of Farm Supply
Automobile Distributorship                                              Company

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

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

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



</TABLE>



                                 ANNUAL MEETING

             The 2002 annual meeting of stockholders of Wake Forest
              Bancshares, Inc. will be held at 2:00 pm on Tuesday,
             February 19, 2002 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.



                                       39