<PAGE>

                    U. S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB
      [ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
                              Exchange Act of 1934

                   For the fiscal year ended December 31, 2002

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

           For the transition period from ____________ to ____________

                        Commission file number 000-33223

                        GATEWAY FINANCIAL HOLDINGS, INC.
                        --------------------------------
             (Exact name of registrant as specified in its charter)

NORTH CAROLINA                                                        56-2040581
--------------------------------------------------------------------------------
(State of incorporation)                       (IRS Employer Identification No.)

1145 NORTH ROAD STREET, ELIZABETH CITY, NORTH CAROLINA                     27909
--------------------------------------------------------------------------------
(Address of principal executive offices)                              (Zip code)

                                 (252) 334-1511
                                 --------------
              (Registrant's telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]

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

State issuer's revenues for its most recent fiscal year $13.1 million.

The aggregate market value of the registrant's Common Stock at March 11, 2003,
held by those persons deemed by the registrant to be non-affiliates, was
approximately $21.9 million.

As of March 11, 2003, (the most recent practicable date), the registrant had
outstanding 3,006,007 shares of common stock, no par value per share.




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                          FORM 10-KSB TABLE OF CONTENTS


<TABLE>
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Index                                                                                                          PAGE
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PART I

        Item 1.    Description of Business..................................................................      3
        Item 2.    Properties...............................................................................     11
        Item 3.    Legal Proceedings........................................................................     11
        Item 4.    Submission of Matters to a Vote of Security Holders......................................     11

PART II

        Item 5.    Market for Common Equity and Related Stockholder Matters.................................     12
        Item 6.    Management's Discussion and Analysis of Financial Condition and Results of Operations....     13
        Item 7.    Financial Statements.....................................................................     34
        Item 8.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.....     62

PART III

        Item 9.    Directors and Executive Officers of the Registrant; Compliance with Section 16(a)........     62
        Item 10.   Executive Compensation...................................................................     62
        Item 11.   Securities Ownership of Certain Beneficial Owners and Management.........................     62
        Item 12.   Certain Relationships and Related Transactions...........................................     62
        Item 13.   Exhibits and Reports on Form 8-K.........................................................     63
        Item 14.   Controls and Procedures..................................................................     63
</TABLE>



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                                     PART I

                        ITEM 1. - DESCRIPTION OF BUSINESS

GENERAL

Gateway Financial Holdings, Inc. (the "Company") is a one-bank holding company
incorporated under the laws of North Carolina to serve as the holding company
for Gateway Bank & Trust Co. (the "Bank"). The Company is registered with the
Federal Reserve System as a financial holding company. Gateway Financial
Holdings, Inc. acquired all of the outstanding capital stock of the Bank on
October 1, 2001. Gateway Bank & Trust Co. was incorporated on November 24, 1998,
and commenced operations on December 1, 1998, as a North Carolina chartered
commercial bank with its deposits insured up to applicable limits by the Federal
Deposit Insurance Corporation ("FDIC"). The Bank is a member of the Federal
Reserve System. The primary purpose of the Bank is to serve the banking needs of
individuals and businesses in Northeastern North Carolina and Tidewater
Virginia, with all decisions and product offerings to be in the best interests
of its customers while providing an acceptable return for the shareholders of
the Company. The Company's slogan is "High tech . . . High touch." The Company
uses technology combined with personalized attention to provide customers with
better service. The Company offers a wide range of banking services including
checking and savings accounts; commercial, installment, mortgage, and personal
loans; safe deposit boxes; and other associated services. In addition to the
principal banking office in Elizabeth City, North Carolina, the Company has
three additional full service branch offices, one each in Plymouth and Roper,
North Carolina, and in Virginia Beach, Virginia. The Bank also has two
wholly-owned subsidiaries. Gateway Insurance Services, Inc., an insurance agency
with offices in Edenton, Hertford, Elizabeth City, Plymouth and Kitty Hawk,
North Carolina, sells insurance products to businesses and individuals. Gateway
Investment Services, Inc. assists bank customers in their securities brokerage
activities through an unaffiliated broker-dealer. Through this arrangement
Gateway Investment Services earns revenues through commission sharing from the
unaffiliated broker-dealer. Certain Gateway Investment Services employees are
also employees of the unaffiliated broker-dealer.

MARKET AREA

The Company's market area is the northeastern coastal region of North Carolina
and the Hampton Roads metropolitan statistical area ("MSA") of Virginia. The
Bank's main office is located in Elizabeth City, North Carolina, in Pasquotank
County, the largest municipality in the northeastern coastal region of North
Carolina with a population of over 17,200. Within the ten mile radius of the
main office site of the Bank is a population of over 37,000 with an average
household income of over $41,000. The Bank also has offices in Edenton (Chowan
County), Kitty Hawk (Dare County), Plymouth and Roper (Washington County) in
northeastern North Carolina. The Edenton office opened in January 2002 and Kitty
Hawk opened in September 2002. The areas served by the North Carolina offices
had a 2000 population of over 129,556. Median family income in 2000 for the
North Carolina counties served by the Bank ranged from $28,800 to $42,400.
Retail sales for these counties were estimated at $768.1 million. Approximately
97.2% of the work force is employed in nonagricultural wage and salary
positions. Government employed 24% of the labor. The major non-governmental
employment sectors were trade (21%), service (22%), manufacturing (17%), and
construction (5%).

The Hampton Roads MSA, which includes Norfolk, Virginia Beach and Chesapeake, is
the second largest urban concentration in the southern United States, and the
27th largest in the country, with an estimated population of over 1.5 million.
The Port of Virginia, actually four general cargo terminals, is the largest
intermodal facility on the East Coast of the United States. The Norfolk Naval
Base is the world's largest naval base and Hampton Roads is home to seven of the
nation's 60 largest stateside military facilities. Hampton Roads' total personal
income in 1998 was estimated at $36.9 billion and estimated gross retail sales
in the MSA exceeded $13.3 billion. The MSA had a labor force of over 721,000.
Non-farm payroll jobs were estimated to be 691,000 in 2000.

The Bank has two offices in Chesapeake (opened in November 2002 and January
2003), which had a 2000 estimated population of 199,184, and one office in
Virginia Beach, which had a 2000 estimated population of 425,257. In 2000, the
median household income in Chesapeake was over $50,700 and the median household
income in Virginia Beach exceeded $48,700. The major employment sectors were
management and professional (35%), sales (29%), services (14%), and construction
(11%).



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The Company will continue to solicit retail deposits from consumers, principally
in the form of Certificates of Deposit, Money Market Accounts and Demand
Deposits, and from small businesses, principally in the form of Demand Deposits
and Money Market Accounts. These deposits will be actively sought in order to
provide funding for anticipated loan demand. Bank management is committed to
keeping its focus aggressively on its stated marketing plan of developing
relationships with small businesses, residential builders, and consumers.

COMPETITION

The Bank, the operating subsidiary of the Company, faces considerable
competition in its market areas. As of June 2002, there were 12 branches in
Pasquotank County, North Carolina operated by seven commercial banks, including
the Bank, and one savings institution. As of that date, approximately $575
million in deposits were located in Pasquotank County, and deposits of the Bank
on that date totaled $94.4 million. As of June 2002, there were six branches in
Washington County operated by five commercial banks, including the Bank, with
approximately $119 million in deposits. Deposits of the Bank on that date
totaled $19.7 million. As of June 2002, there were eight branches in Chowan
County, including the Bank, operated by six commercial banks with approximately
$151 million in deposits. Deposits of the Bank on that date totaled $3.1
million. As of June 2002, there were 19 branches in Dare County operated by
seven commercial banks and one savings institution with approximately $651
million in deposits. As of June 2002, there were 52 branches in Chesapeake,
Virginia operated by 14 commercial banks with approximately $1.3 billion in
deposits. As of June 2002, there were 100 branches in Virginia Beach operated by
14 commercial banks, including the Bank, and three savings institutions with
approximately $3.6 billion in deposits. Deposits of the Bank on that date
totaled $22.7 million. Almost 53% of the deposits in the Virginia Beach market
were controlled by the top three bank holding companies. Therefore, in its
market area, the Bank has significant competition for deposits and loans from
other depository institutions. Many of the Bank's competitors have substantially
greater resources, broader geographic markets, and higher lending limits than
the Bank and offer certain services which the Bank does not provide.
Additionally, with the elimination of restrictions on interstate banking, the
Bank may be required to compete with out-of-state financial institutions that
are not presently in its market area. The Bank also competes with credit unions,
insurance companies, money market mutual funds, and other financial
institutions, some of which are not subject to the same degree of regulation and
restrictions as the Bank, in attracting deposits and making loans.

OTHER PRODUCTS AND SERVICES

Other Banking Products and Services.

To enable it to offer more personalized service to its customers, the Company
offers or expects to offer additional products and services for its customers.
Products and services currently offered are a debit card program, automated
teller machines and drive-through facilities at its branches and internet
banking to both business and individual customers.

Other Financial Services.

The Company, through its subsidiary, Gateway Investment Services, Inc., uses a
networking arrangement to make available securities brokerage products to its
customers. Commercial and personal insurance products are offered through the
Bank's insurance subsidiary, Gateway Insurance Services, Inc.

EMPLOYEES

The Company had 96 full-time equivalent employees at December 31, 2002. None of
the Company's employees are covered by a collective bargaining agreement. The
Company considers its relations with its employees to be good.


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                           SUPERVISION AND REGULATION

Banking is a complex, highly regulated industry. The primary goals of the bank
regulatory scheme are to maintain a safe and sound banking system and to
facilitate the conduct of sound monetary policy. In furtherance of these goals,
Congress has created several largely autonomous regulatory agencies and enacted
numerous laws that govern banks, bank holding companies and the banking
industry. The descriptions of and references to the statutes and regulations
below are brief summaries and do not purport to be complete. The descriptions
are qualified in their entirety by reference to the specific statutes and
regulations discussed.

GATEWAY FINANCIAL HOLDINGS, INC.

Gateway Financial Holdings, Inc. (the "GFH") is a bank holding company that has
elected to be treated as a financial holding company. As a bank holding company
under the Bank Holding Company Act of 1956, as amended, GFH is registered with
and subject to regulation by the Federal Reserve. GFH is required to file annual
and other reports with, and furnish information to, the Federal Reserve. The
Federal Reserve conducts periodic examinations of GFH and may examine any of its
subsidiaries, including the Bank.

The Bank Holding Company Act provides that a bank holding company must obtain
the prior approval of the Federal Reserve for the acquisition of more than five
percent of the voting stock or substantially all the assets of any bank or bank
holding company. In addition, the Bank Holding Company Act restricts the
extension of credit to any bank holding company by its subsidiary bank. The Bank
Holding Company Act also provides that, with certain exceptions, a bank holding
company may not engage in any activities other than those of banking or managing
or controlling banks and other authorized subsidiaries or own or control more
than five percent of the voting shares of any company that is not a bank. The
Federal Reserve has deemed limited activities to be closely related to banking
and therefore permissible for a bank holding company.

However, with the passage of the Gramm-Leach-Bliley Financial Services
Modernization Act of 1999, which became effective on March 11, 2000, the types
of activities in which a bank holding company may engage were significantly
expanded. Subject to various limitations, the Modernization Act generally
permits a bank holding company to elect to become a "financial holding company."
A financial holding company may affiliate with securities firms and insurance
companies and engage in other activities that are "financial in nature." Among
the activities that are deemed "financial in nature" are, in addition to
traditional lending activities, securities underwriting, dealing in or making a
market in securities, sponsoring mutual funds and investment companies,
insurance underwriting and agency activities, certain merchant banking
activities as well as activities that the Federal Reserve considers to be
closely related to banking.

A bank holding company may become a financial holding company under the
Modernization Act if each of its subsidiary banks is "well-capitalized" under
the Federal Deposit Insurance Corporation Improvement Act prompt corrective
action provisions, is well managed and has at least a satisfactory rating under
the Community Reinvestment Act. In addition, the bank holding company must file
a declaration with the Federal Reserve that the bank holding company wishes to
become a financial holding company. A bank holding company that falls out of
compliance with these requirements may be required to cease engaging in some of
its activities. GFH has elected, and been authorized by the Federal Reserve, to
become a financial holding company.

Under the Modernization Act, the Federal Reserve serves as the primary
"umbrella" regulator of financial holding companies, with supervisory authority
over each parent company and limited authority over its subsidiaries. Expanded
financial activities of financial holding companies generally will be regulated
according to the type of such financial activity: banking activities by banking
regulators, securities activities by securities regulators and insurance
activities by insurance regulators. The Modernization Act also imposes
additional restrictions and heightened disclosure requirements regarding private
information collected by financial institutions.

Enforcement Authority. GFH will be required to obtain the approval of the
Federal Reserve prior to engaging in or, with certain exceptions, acquiring
control of more than 5% of the voting shares of a company engaged in, any new
activity. Prior to granting such approval, the Federal Reserve must weigh the
expected benefits of any such new activity to the public (such as greater
convenience, increased competition, or gains in efficiency) against the risk of


                                     Page 5
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possible adverse effects of such activity (such as undue concentration of
resources, decreased or unfair competition, conflicts of interest, or unsound
banking practices). The Federal Reserve has cease-and-desist powers over bank
holding companies and their nonbanking subsidiaries where their actions would
constitute a serious threat to the safety, soundness or stability of a
subsidiary bank. The Federal Reserve also has authority to regulate debt
obligations (other than commercial paper) issued by bank holding companies. This
authority includes the power to impose interest ceilings and reserve
requirements on such debt obligations. A bank holding company and its
subsidiaries are also prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property or furnishing
of services.

Interstate Acquisitions. Federal banking law generally provides that a bank
holding company may acquire or establish banks in any state of the United
States, subject to certain aging and deposit concentration limits. In addition,
North Carolina banking laws permit a bank holding company which owns stock of a
bank located outside North Carolina to acquire a bank or bank holding company
located in North Carolina. Federal banking law will not permit a bank holding
company to own or control banks in North Carolina if the acquisition would
exceed 20% of the total deposits of all federally-insured deposits in North
Carolina.

Capital Adequacy. The Federal Reserve has promulgated capital adequacy
regulations for all bank holding companies with assets in excess of $150
million. The Federal Reserve's capital adequacy regulations are based upon a
risk-based capital determination, whereby a bank holding company's capital
adequacy is determined in light of the risk, both on- and off-balance sheet,
contained in the company's assets. Different categories of assets are assigned
risk weightings and are counted at a percentage of their book value.

The regulations divide capital between Tier 1 capital (core capital) and Tier 2
capital. For a bank holding company, Tier 1 capital consists primarily of common
stock, related surplus, noncumulative perpetual preferred stock, minority
interests in consolidated subsidiaries and a limited amount of qualifying
cumulative preferred securities. Goodwill and certain other intangibles are
excluded from Tier 1 capital. Tier 2 capital consists of an amount equal to the
allowance for loan and lease losses up to a maximum of 1.25% of risk-weighted
assets, limited other types of preferred stock not included in Tier 1 capital,
hybrid capital instruments and term subordinated debt. Investments in and loans
to unconsolidated banking and finance subsidiaries that constitute capital of
those subsidiaries are excluded from capital. The sum of Tier 1 and Tier 2
capital constitutes qualifying total capital. The Tier 1 component must comprise
at least 50% of qualifying total capital.

Every bank holding company has to achieve and maintain a minimum Tier 1 capital
ratio of at least 4.0% and a minimum total capital ratio of at least 8.0%. In
addition, banks and bank holding companies are required to maintain a minimum
leverage ratio of Tier 1 capital to average total consolidated assets (leverage
capital ratio) of at least 3.0% for the most highly-rated, financially sound
banks and bank holding companies and a minimum leverage ratio of at least 4.0%
for all other banks. The Federal Deposit Insurance Corporation and the Federal
Reserve define Tier 1 capital for banks in the same manner for both the leverage
ratio and the risk-based capital ratio. However, the Federal Reserve defines
Tier 1 capital for bank holding companies in a slightly different manner. As of
December 31, 2002, GFH's Tier 1 leverage capital ratio and total capital were
9.71% and 10.50%, respectively.

The guidelines also provide that banking organizations experiencing internal
growth or making acquisitions will be expected to maintain strong capital
positions substantially above the minimum supervisory level, without significant
reliance on intangible assets. The guidelines also indicate that the Federal
Reserve will continue to consider a "Tangible Tier 1 Leverage Ratio" in
evaluating proposals for expansion or new activities. The Tangible Tier 1
Leverage Ratio is the ratio of Tier 1 capital, less intangibles not deducted
from Tier 1 capital, to quarterly average total assets. As of December 31, 2002,
the Federal Reserve had not advised GFH of any specific minimum Tangible Tier 1
Leverage Ratio applicable to it.

Source of Strength for Subsidiaries. Bank holding companies are required to
serve as a source of financial strength for their depository institution
subsidiaries, and, if their depository institution subsidiaries become
undercapitalized, bank holding companies may be required to guarantee the
subsidiaries' compliance with capital restoration plans filed with their bank
regulators, subject to certain limits.


                                     Page 6
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Dividends. As a bank holding company that does not, as an entity, currently
engage in separate business activities of a material nature, the ability of GFH
to pay cash dividends depends upon the cash dividends received from its
subsidiary bank. The only source of income to GFH is dividends and management
fees paid by the Bank. GFH must pay all of its operating expenses from funds it
receives from the Bank. Therefore, shareholders may receive dividends from GFH
only to the extent that funds are available after payment of operating expenses.
In addition, the Federal Reserve generally prohibits bank holding companies from
paying dividends except out of operating earnings, and the prospective rate of
earnings retention appears consistent with the bank holding company's capital
needs, asset quality and overall financial condition. GFH expects that, for the
foreseeable future, any dividends paid by the Bank to it will likely be limited
to amounts needed to pay any separate expenses of GFH.

Change of Control. State and federal banking law restricts the amount of voting
stock of a bank that a person may acquire without the prior approval of banking
regulators. The Bank Holding Company Act requires that a bank holding company
obtain the approval of the Federal Reserve before it may merge with a bank
holding company, acquire a subsidiary bank, acquire substantially all of the
assets of any bank, or before it may acquire ownership or control of any voting
shares of any bank or bank holding company if, after such acquisition, it would
own or control, directly or indirectly, more than 5% of the voting shares of
that bank or bank holding company. The overall effect of such laws is to make it
more difficult to acquire GFH by tender offer or similar means than it might be
to acquire control of another type of corporation. Consequently, GFH
shareholders may be less likely to benefit from rapid increases in stock prices
that often result from tender offers or similar efforts to acquire control of
other types of companies.

THE BANK

Gateway Bank & Trust Co. (the "Bank") is subject to various requirements and
restrictions under the laws of the United States and the State of North
Carolina. As a North Carolina bank, the Bank is subject to regulation,
supervision and regular examination by the North Carolina Banking Commission. As
a member of the Federal Reserve, the Bank is subject to regulation, supervision
and regular examination by the Federal Reserve. The North Carolina Banking
Commission and the Federal Reserve have the power to enforce compliance with
applicable banking statutes and regulations. These requirements and restrictions
include requirements to maintain reserves against deposits, restrictions on the
nature and amount of loans that may be made and the interest that may be charged
thereon and restrictions relating to investments and other activities of the
Bank.

Transactions with Affiliates. The Bank may not engage in specified transactions
(including, for example, loans) with its affiliates unless the terms and
conditions of those transactions are substantially the same or at least as
favorable to the Bank as those prevailing at the time for comparable
transactions with or involving other nonaffiliated entities. In the absence of
comparable transactions, any transaction between the Bank and its affiliates
must be on terms and under circumstances, including credit standards, which in
good faith would be offered or would apply to nonaffiliated companies. In
addition, transactions referred to as "covered transactions" between the Bank
and its affiliates may not exceed 10% of the Bank's capital and surplus per
affiliate and an aggregate of 20% of its capital and surplus for covered
transactions with all affiliates. Certain transactions with affiliates, such as
loans, also must be secured by collateral of specific types and amounts. The
Bank also is prohibited from purchasing low-quality assets from an affiliate.
Every company under common control with the Bank, including GFH, is deemed to be
an affiliate of the Bank.

Loans to Insiders. Federal law also constrains the types and amounts of loans
that the Bank may make to its executive officers, directors and principal
shareholders. Among other things, these loans are limited in amount, must be
approved by the Bank's board of directors in advance, and must be on terms and
conditions as favorable to the Bank as those available to an unrelated person.

Regulation of Lending Activities. Loans made by the Bank are also subject to
numerous federal and state laws and regulations, including the Truth-In-Lending
Act, Federal Consumer Credit Protection Act, the Equal Credit Opportunity Act,
the Real Estate Settlement Procedures Act and adjustable rate mortgage
disclosure requirements. Remedies to the borrower or consumer and penalties to
the Bank are provided if the Bank fails to comply with these laws and
regulations. The scope and requirements of these laws and regulations have
expanded significantly in recent years.


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Branch Banking. All banks located in North Carolina are authorized to branch
statewide. Accordingly, a bank located anywhere in North Carolina has the
ability, subject to regulatory approval, to establish branch facilities near any
of our facilities and within our market area. If other banks were to establish
branch facilities near our facilities, it is uncertain whether these branch
facilities would have a material adverse effect on our business.

Federal law provides for nationwide interstate banking and branching, subject to
certain aging and deposit concentration limits that may be imposed under
applicable state laws. Applicable North Carolina statutes permit regulatory
authorities to approve de novo branching in North Carolina by institutions
located in states that would permit North Carolina institutions to branch on a
de novo basis into those states. Federal regulations prohibit an out-of-state
bank from using interstate branching authority primarily for the purpose of
deposit production. These regulations include guidelines to insure that
interstate branches operated by an out-of-state bank in a host state are
reasonably helping to meet the credit needs of the host state communities served
by the out-of-state bank.

Reserve Requirements. Pursuant to regulations of the Federal Reserve, the bank
must maintain average daily reserves against its transaction accounts. No
reserves are required to be maintained on the first $5.7 million of transaction
accounts, but reserves equal to 3.0% must be maintained on the aggregate
balances of those accounts between $5.7 million and $41.8 million, and reserves
equal to 10.0% plus $1.2 million must be maintained on aggregate balances in
excess of $41.8 million. These percentages are subject to adjustment by the
Federal Reserve. Because required reserves must be maintained in the form of
vault cash or in a non-interest-bearing account at a Federal Reserve Bank, the
effect of the reserve requirement is to reduce the amount of the institution's
interest-earning assets. As of December 31, 2002, the bank met its reserve
requirements.

Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as
implemented by regulations of the federal bank regulatory agencies, an insured
bank has a continuing and affirmative obligation, consistent with its safe and
sound operation, to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for banks, nor does it limit a bank's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the federal bank regulatory agencies, in connection with their
examination of insured banks, to assess the banks' records of meeting the credit
needs of their communities, using the ratings of "outstanding," "satisfactory,"
"needs to improve," or "substantial noncompliance," and to take that record into
account in its evaluation of certain applications by those banks. All banks are
required to make public disclosure of their CRA performance ratings. The Bank
received a "satisfactory" rating in its most recent CRA examination.

Governmental Monetary Policies. The commercial banking business is affected not
only by general economic conditions but also by the monetary policies of the
Federal Reserve. Changes in the discount rate on member bank borrowings, control
of borrowings, open market transactions in United States government securities,
the imposition of and changes in reserve requirements against member banks and
deposits and assets of foreign bank branches, and the imposition of and changes
in reserve requirements against certain borrowings by banks and their affiliates
are some of the monetary policies available to the Federal Reserve. Those
monetary policies influence to a significant extent the overall growth of all
bank loans, investments and deposits and the interest rates charged on loans or
paid on time and savings deposits in order to mitigate recessionary and
inflationary pressures. These techniques are used in varying combinations to
influence overall growth and distribution of bank loans, investments, and
deposits, and their use may also affect interest rates charged on loans or paid
for deposits.

The monetary policies of the Federal Reserve Board have had a significant effect
on the operating results of commercial banks in the past and are expected to
continue to do so in the future. In view of changing conditions in the national
economy and money markets, as well as the effect of actions by monetary and
fiscal authorities, no prediction can be made as to possible future changes in
interest rates, deposit levels, loan demand or the business and earnings of the
Bank.

Dividends. All dividends paid by the Bank are paid to GFH, the sole shareholder
of the Bank. The general dividend policy of the Bank is to pay dividends at
levels consistent with maintaining liquidity and preserving applicable capital
ratios and servicing obligations. The dividend policy of the Bank is subject to
the discretion of the board of directors of the Bank and will depend upon such
factors as future earnings, financial condition, cash needs, capital adequacy,
compliance with applicable statutory and regulatory requirements and general
business conditions.


                                     Page 8
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The ability of the Bank to pay dividends is restricted under applicable law and
regulations. Under North Carolina banking law, dividends must be paid out of
retained earnings and no cash dividends may be paid if the Bank's surplus is
less than 50% of its paid-in capital. Also, under federal banking law, no cash
dividend may be paid if the Bank is undercapitalized or insolvent or if payment
of the cash dividend would render the Bank undercapitalized or insolvent, and no
cash dividend may be paid by the Bank if it is in default of any deposit
insurance assessment due to the Federal Deposit Insurance Corporation.

The exact amount of future dividends on the stock of the Bank will be a function
of the profitability of the Bank in general and applicable tax rates in effect
from year to year. The Bank's ability to pay dividends in the future will
directly depend on its future profitability, which cannot be accurately
estimated or assured. Management expects that, for the foreseeable future,
profits resulting from the Bank's operations will be retained by the Bank as
additional capital to support its operations and growth other than dividends
paid by the Bank to GFH as needed to pay any separate expenses of GFH.

Capital Adequacy. The capital adequacy regulations which apply to state banks,
such as the Bank, are similar to the Federal Reserve requirements promulgated
with respect to bank holding companies discussed above.

Changes in Management. Any depository institution that has been chartered less
than two years, is not in compliance with the minimum capital requirements of
its primary federal banking regulator, or is otherwise in a troubled condition
must notify its primary federal banking regulator of the proposed addition of
any person to the board of directors or the employment of any person as a senior
executive officer of the institution at least 30 days before such addition or
employment becomes effective. During this 30-day period, the applicable federal
banking regulatory agency may disapprove of the addition of such director or
employment of such officer. The Bank is not subject to any such requirements.

Enforcement Authority. The federal banking laws also contain civil and criminal
penalties available for use by the appropriate regulatory agency against certain
"institution-affiliated parties" primarily including management, employees and
agents of a financial institution, as well as independent contractors such as
attorneys and accountants and others who participate in the conduct of the
financial institution's affairs and who caused or are likely to cause more than
minimum financial loss to or a significant adverse affect on the institution,
who knowingly or recklessly violate a law or regulation, breach a fiduciary duty
or engage in unsafe or unsound practices. These practices can include the
failure of an institution to timely file required reports or the submission of
inaccurate reports. These laws authorize the appropriate banking agency to issue
cease and desist orders that may, among other things, require affirmative action
to correct any harm resulting from a violation or practice, including
restitution, reimbursement, indemnification or guarantees against loss. A
financial institution may also be ordered to restrict its growth, dispose of
certain assets or take other action as determined by the primary federal banking
agency to be appropriate.

Prompt Corrective Action. Banks are subject to restrictions on their activities
depending on their level of capital. Federal "prompt corrective action"
regulations divide banks into five different categories, depending on their
level of capital. Under these regulations, a bank is deemed to be
"well-capitalized" if it has a total risk-based capital ratio of 10% or more, a
core capital ratio of six percent or more and a leverage ratio of five percent
or more, and if the bank is not subject to an order or capital directive to meet
and maintain a certain capital level. Under these regulations, a bank is deemed
to be "adequately capitalized" if it has a total risk-based capital ratio of
eight percent or more, a core capital ratio of four percent or more and a
leverage ratio of four percent or more (unless it receives the highest composite
rating at its most recent examination and is not experiencing or anticipating
significant growth, in which instance it must maintain a leverage ratio of three
percent or more). Under these regulations, a bank is deemed to be
"undercapitalized" if it has a total risk-based capital ratio of less than eight
percent, a core capital ratio of less than four percent or a leverage ratio of
less than three percent. Under these regulations, a bank is deemed to be
"significantly undercapitalized" if it has a risk-based capital ratio of less
than six percent, a core capital ratio of less than three percent and a leverage
ratio of less than three percent. Under such regulations, a bank is deemed to be
"critically undercapitalized" if it has a leverage ratio of less than or equal
to two percent. In addition, the applicable federal banking agency has the
ability to downgrade a bank's classification (but not to "critically
undercapitalized") based on other considerations even if the bank meets the
capital guidelines.


                                     Page 9
<PAGE>

If a state member bank, such as the Bank, is classified as undercapitalized, the
bank is required to submit a capital restoration plan to the Federal Reserve. An
undercapitalized bank is prohibited from increasing its assets, engaging in a
new line of business, acquiring any interest in any company or insured
depository institution, or opening or acquiring a new branch office, except
under certain circumstances, including the acceptance by the Federal Reserve of
a capital restoration plan for that bank.

If a state member bank is classified as undercapitalized, the Federal Reserve
may take certain actions to correct the capital position of the bank. If a state
member bank is classified as significantly undercapitalized, the Federal Reserve
would be required to take one or more prompt corrective actions. These actions
would include, among other things, requiring sales of new securities to bolster
capital, changes in management, limits on interest rates paid, prohibitions on
transactions with affiliates, termination of certain risky activities and
restrictions on compensation paid to executive officers. If a bank is classified
as critically undercapitalized, the bank must be placed into conservatorship or
receivership within 90 days, unless the Federal Deposit Insurance Corporation
determines otherwise.

The capital classification of a bank affects the frequency of examinations of
the bank and impacts the ability of the bank to engage in certain activities and
affects the deposit insurance premiums paid by the bank. The Federal Reserve is
required to conduct a full-scope, on-site examination of every member bank at
least once every twelve months.

Banks also may be restricted in their ability to accept brokered deposits,
depending on their capital classification. "Well-capitalized" banks are
permitted to accept brokered deposits, but all banks that are not
well-capitalized are not permitted to accept such deposits. The Federal Reserve
may, on a case-by-case basis, permit member banks that are adequately
capitalized to accept brokered deposits if the Federal Reserve determines that
acceptance of such deposits would not constitute an unsafe or unsound banking
practice with respect to the bank.

Deposit Insurance. The Bank's deposits are insured up to $100,000 per insured
account by the Bank Insurance Fund of the Federal Deposit Insurance Corporation.
The Bank's deposit insurance assessments may increase depending upon the risk
category and subcategory, if any, to which the Bank is assigned. The Federal
Deposit Insurance Corporation assesses insurance premiums on a bank's deposits
at a variable rate depending on the probability that the deposit insurance fund
will incur a loss with respect to the bank. The Federal Deposit Insurance
Corporation determines the deposit insurance assessment rates on the basis of
the bank's capital classification and supervisory evaluations. Each of these
categories has three subcategories, resulting in nine assessment risk
classifications. The three subcategories with respect to capital are
"well-capitalized," "adequately capitalized" and "less than adequately
capitalized" (that would include "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized" banks). The three
subcategories with respect to supervisory concerns are "healthy," "supervisory
concern" and "substantial supervisory concern." A bank is deemed "healthy" if it
is financially sound with only a few minor weaknesses. A bank is deemed subject
to "supervisory concern" if it has weaknesses that, if not corrected, could
result in significant deterioration of the bank and increased risk to the Bank
Insurance Fund of the Federal Deposit Insurance Corporation. A bank is deemed
subject to "substantial supervisory concern" if it poses a substantial
probability of loss to the Bank Insurance Fund. Any increase in insurance
assessments could have an adverse effect on the Bank's earnings.

GFH's management and the Bank's management cannot predict what other legislation
might be enacted or what other regulations might be adopted or the effects
thereof.



                                    Page 10
<PAGE>

                               ITEM 2 - PROPERTIES

The Company currently operates out of eight banking offices as set forth below:

<TABLE>
<CAPTION>
                                                               Approximate Square              Year Established/
                   Office Location                                   Footage                       Acquired
---------------------------------------------------         -----------------------         -----------------------
<S>                                                                    <C>                           <C>

ELIZABETH CITY - 1145 North Road Street                                9,000                         1999
VIRGINIA BEACH - 4460 Corporation Lane, Suite 100                      4,000                         2000
PLYMOUTH - 433 U.S. Highway 64 East                                    5,200                         2000
ROPER - 102 W. Buncomb Street                                            550                         2000
EDENTON - 344 Virginia Road                                            1,500                         2002
KITTY HAWK - 3600 Croatan Highway                                      6,500                         2002
CHESAPEAKE - 111 Gainsbourgh Square                                    7,200                         2002
CHESAPEAKE - 575 Cedar Road                                            2,000                         2003
</TABLE>

All properties owned by the Company and its subsidiaries, including land,
buildings and improvements, furniture, equipment and vehicles, had a net book
value at December 31, 2002 of $10.5 million. In the opinion of the Company's
management, such properties are adequately covered by insurance.



                           ITEM 3 - LEGAL PROCEEDINGS

The Company is aware of no material legal proceeding to which the Company or any
of its subsidiaries is a party or of which any of their properties is subject.


          ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted for a vote of our shareholders during the fourth
quarter of fiscal 2002.



                                    Page 11
<PAGE>

                                     PART II

        ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is traded on the NASDAQ under the symbol "GBTS". The following
table sets forth the high and low sales prices for shares of our common stock
for the periods indicated. Where appropriate, prices have been adjusted for the
effects of an 11-for-10 stock split effected in the form of a 10% stock dividend
in 2002. The last reported sales price of the common stock on March 4, 2003 was
$8.63 per share. As of December 31, 2002, Gateway Bank had approximately 2,100
shareholders of record.

<TABLE>
<CAPTION>
                                                                       High               Low
                                                                   -------------    -------------
                  <S>          <C>                                 <C>              <C>

                  2002         First Quarter                       $        8.86    $        7.64
                               Second Quarter                               9.66             8.18
                               Third Quarter                                9.14             7.00
                               Fourth Quarter                               8.43             7.09

                  2001         First Quarter                       $       10.00    $        7.27
                               Second Quarter                              10.91             7.27
                               Third Quarter                                9.22             7.41
                               Fourth Quarter                              10.00             7.41
</TABLE>

We conducted an initial public offering of our common stock that closed in 1998,
pursuant to which we sold 1,044,495 shares at $11.00 per share in cash. During
2000, we sold 515,597 shares of our common stock at $10.00 per share in a public
offering. During 2001, we sold 1,110,973 units at $9.25 per unit in a public
offering, with each such unit consisting of one share of our common stock and
one warrant to purchase, on a split-adjusted basis, 1.1 shares of our common
stock at a price of $10.09 per share at any time until June 30, 2004. Those
warrants are traded separately on the NASDAQ under the symbol "GBTSW".

The following table sets forth the high and low sales prices for our warrants
for the periods indicated. The warrants commenced trading separately in the
third quarter of 2001. The last reported sales price of the warrants on March 4,
2003 was $1.31 per warrant.

<TABLE>
<CAPTION>
                                                                       High               Low
                                                                   -------------    -------------
                  <S>          <C>                                 <C>              <C>

                  2002         First Quarter                       $        1.55    $         .70
                               Second Quarter                               1.85             1.05
                               Third Quarter                                1.75             1.05
                               Fourth Quarter                               1.40              .90

                  2001         Third Quarter                       $        1.40    $        1.00
                               Fourth Quarter                               1.50              .90
</TABLE>

We have not paid cash dividends, and we anticipate that all or substantially all
of our earnings for the foreseeable future will be required for use in the
development of the Company's business. Consequently, we do not anticipate paying
cash dividends for the foreseeable future. As a holding company, we are
dependent upon our subsidiary, Gateway Bank, to provide funding for our
operating expenses and dividends. North Carolina banking law will permit the
payment of dividends only out of retained earnings and will prohibit the payment
of cash dividends if Gateway Bank's surplus is less than 50% of its paid-in
capital. Also, under federal banking law, no cash dividend may be paid if
Gateway Bank is undercapitalized or insolvent or if payment of the cash dividend
would render Gateway Bank undercapitalized or insolvent, and no cash dividend
may be paid by Gateway Bank if it is in default of any deposit insurance
assessment due to the FDIC. Subject to these restrictions, our Board of
Directors will consider the payment of dividends when it is deemed prudent to do
so.


                                    Page 12
<PAGE>

           ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

Management's discussion and analysis is intended to assist readers in the
understanding and evaluation of the financial condition and results of
operations of Gateway Financial Holdings, Inc. It should be read in conjunction
with the audited financial statements and accompanying notes included in this
annual report and the supplemental financial data appearing throughout this
discussion and analysis. On May 14, 2002, the Company's Board of Directors
declared an 11-for-10 stock split, effected in the form of a 10% stock dividend,
which was distributed June 5, 2002 to shareholders of record on May 22, 2002.
All references in this discussion and analysis to per share results and weighted
average shares outstanding have been adjusted to reflect the effects of this
stock split.


                                    OVERVIEW

Gateway Financial Holdings, Inc. is a one-bank holding company incorporated
under the laws of North Carolina to serve as the holding company for Gateway
Bank & Trust Co. (the "Bank"). Gateway Financial Holdings, Inc. acquired all of
the outstanding capital stock of the Bank on October 1, 2001. Gateway Financial
Holdings, Inc., the Bank and the Bank's wholly owned subsidiaries are
collectively referred to as the "Company."

 The Bank began operations on December 1, 1998 in a temporary banking facility
located in Elizabeth City, North Carolina. Soon thereafter, construction started
on the Bank's permanent headquarters facility located at 1145 North Road Street
in Elizabeth City. The Bank moved into this attractive and customer friendly
facility in November 1999. Since inception, the Bank has aggressively pursued
its primary objective of building a full service banking operation with broad
customer support in a market area that includes northeastern North Carolina and
the Tidewater area of Virginia, supplementing the banking enterprise with other
financial services intended to generate significant non-interest income. In
addition to completion of its headquarters facility, the Bank completed, in
March of 2000, the successful acquisition of two branches in Plymouth and Roper,
North Carolina, and the de novo opening in July 2000 of its first Virginia
branch in Virginia Beach. In January 2002 the bank opened one new branch in a
leased facility in Edenton, North Carolina. Two other newly-constructed owned
facilities were opened, one in Kitty Hawk, North Carolina during September 2002
and one in Chesapeake, Virginia during November 2002. Kitty Hawk, approximately
an hour's drive from Elizabeth City, is located on the Outer Banks of North
Carolina, a popular and rapidly growing vacation, resort and recreational area.
Chesapeake offers a strong economy and the Company has a large shareholder base
in the area. The Bank will continue to consider opportunities such as the
acquisition of an additional branch or branches where an opportunity consistent
with the Bank's long-range strategic objectives is presented. The Bank will also
continue to explore de novo branching opportunities in markets it considers
attractive.

In addition to our banking activities, the Bank has focused on insurance and
brokerage services to develop sustainable and growth-oriented sources of
non-interest income. The Bank acquired the Dowd & Twiddy insurance agencies in
January 2000 and Fidelity Insurance in January 2001. These agencies were
combined to form Gateway Insurance Services, Inc. which sells insurance products
to businesses and individuals. Gateway Insurance Services, Inc. maintains
offices in Elizabeth City, Hertford, Edenton, Plymouth and Kitty Hawk, North
Carolina. In addition, the Bank organized Gateway Investment Services, Inc. in
September 1999 to assist bank customers in their securities brokerage activities
through a networking arrangement with an unaffiliated broker-dealer. Through
this arrangement, Gateway Investment Services earns revenues through commission
sharing from the unaffiliated broker-dealer. The Bank will continue to look for
ways to expand non-traditional banking activities in its insurance subsidiary
and securities networking arrangement, which create significant sources of
non-interest income.

During its initial years operations, the Company has concentrated its efforts on
building a franchise and infrastructure that can deliver and sustain long-term
profitability. Toward that objective, and consistent with its business plans,
the Company incurred significant operating losses from its date of opening
through December 31, 2000. These losses totaled approximately $2.5 million. The
Company achieved its first profitable quarter during the three months ended
March 31, 2001, reporting net income of $130,000 for the period. The Company has
now achieved profitability in eight consecutive quarters, producing net income
of $547,000 in 2001 and $627,000 in 2002. While management expects the Company
to continue to be profitable, continued expansion activity can be expected to
generate significant additional costs that can negatively impact earnings as the
Company pursues its growth strategies.


                                    Page 13
<PAGE>

           SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA

The information presented below is derived in part from the audited consolidated
financial statements and notes thereto of the Company. This information
presented below does not purport to be complete and should be read in
conjunction with the Company's consolidated financial statements appearing
elsewhere in this annual report.

<TABLE>
<CAPTION>
                                                                  For the Years Ended December 31,
                                                 ------------------------------------------------------------------
                                                      2002             2001              2000             1999
                                                 -------------     -------------    -------------     -------------
<S>                                              <C>               <C>              <C>               <C>
                                                            (Dollars in thousands, except per share data)
OPERATING DATA:
   Total interest income                         $      10,311     $       9,125    $       6,181     $       1,859
   Total interest expense                                4,819             5,059            3,457               753
                                                 -------------     -------------    -------------     -------------
    Net interest income                                  5,492             4,066            2,724             1,106
   Provision for loan losses                               480               440              482               455
                                                 -------------     -------------    -------------     -------------
    Net interest income after
      provision for loan losses                          5,012             3,626            2,242               651
   Total non-interest income                             2,826             2,420            1,341                95
   Total non-interest expense                            7,211             5,499            4,655             1,758
                                                 -------------     -------------    -------------     -------------
    Income (loss) before income taxes                      627               547           (1,072)           (1,012)
   Provision for income taxes                                -                 -                -                 -
                                                 -------------     -------------    -------------     -------------
    Net income (loss)                            $         627     $         547    $      (1,072)    $      (1,012)
                                                 =============     =============    =============     =============

PER SHARE DATA: (6)
   Net income (loss), basic and diluted          $        0.21     $        0.23    $       (0.75)    $      (0.88)
   Dividends                                                 -                 -                -                -
   Book value                                             7.97              7.65             7.53             8.20
   Tangible book value                                    7.21              6.87             6.46             8.20

BALANCE SHEET DATA:
   Total assets                                  $     231,053     $     160,832    $     110,694     $      44,235
   Loans receivable                                    161,488           107,240           75,921            29,574
   Allowance for loan losses                             1,721             1,435            1,028               462
   Deposits                                            174,663           115,717           90,293            32,181
   Borrowings                                           31,401            21,300            6,500             2,500
   Shareholders' equity                                 23,968            22,998           13,441             9,426

SELECTED PERFORMANCE RATIOS:
   Return on average assets                              0.32%             0.41%          (1.33)%           (3.51)%
   Return on average equity                              2.58%             2.96%          (9.76)%          (10.20)%
   Net interest margin (1)                               3.09%             3.32%            3.78%             4.18%
   Net interest spread  (2)                              2.68%             2.66%            3.07%             2.25%
   Non-interest income as a percentage of
    total revenue                                       33.97%            37.31%           32.99%             7.91%
   Non-interest income as a percentage of
    average assets                                       1.46%             1.80%            1.66%             0.33%
   Non-interest expense to average assets                3.71%             4.10%            5.78%             6.09%
   Efficiency ratio (3)                                 86.69%            84.78%          114.51%           146.38%
   Dividend payout ratio                                 0.00%             0.00%            0.00%             0.00%
</TABLE>



                                    Page 14
<PAGE>

<TABLE>
<CAPTION>
                                                                  For the Years Ended December 31,
                                                 ------------------------------------------------------------------
                                                      2002             2001              2000             1999
                                                 -------------     -------------    -------------     -------------
<S>                                              <C>               <C>              <C>               <C>
                                                            (Dollars in thousands, except per share data)

ASSET QUALITY RATIOS:
   Nonperforming loans to period-end loans               0.82%             0.00%            0.00%             0.00%
   Allowance for loan losses to period-end
    loans                                                1.07%             1.34%            1.35%             1.56%
   Allowance for loan losses to nonperforming
    loans                                              129.59%                NM               NM                NM
   Nonperforming assets to total assets (4)              0.67%             0.14%            0.00%             0.00%
   Net loan charge-offs to average
    loans outstanding                                    0.15%             0.04%            0.01%             0.02%

CAPITAL RATIOS: (5)
   Total risk-based capital                             12.51%            17.89%           15.71%            53.43%
   Tier 1 risk-based capital                            11.57%            16.72%           14.44%            50.93%
   Leverage ratio                                        9.71%            13.74%           11.31%            23.65%
   Equity to assets ratio                               10.37%            14.30%           12.14%            21.31%

OTHER DATA:
   Number of banking offices                                 7                 4                4                 1
   Number of full time equivalent employees                 96                69               53                22
</TABLE>

(1)      Net interest margin is net interest income divided by average
         interest-earning assets.

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

(3)      Efficiency ratio is non-interest expense divided by the sum of net
         interest income and non-interest income.

(4)      Nonperforming assets consists of nonaccrual loans, restructured loans,
         and real estate owned, where applicable.

(5)      Capital ratios are for the Bank.

(6)      Restated for 11-for-10 stock split occurring during 2002.


                                    Page 15
<PAGE>

                               FINANCIAL CONDITION
                           DECEMBER 31, 2002 AND 2001

The Company continued its pattern of strong growth during the 2002, with total
assets increasing by $70.2 million, or 43.7%, to $231.1 million at year end.
This growth was principally reflected in increased loans and investment
securities available for sale. Total loans increased by $54.3 million, or 50.6%,
from $107.2 million at the beginning of the year to $161.5 million at year end.
Investment securities available for sale increased by $13.4 million, or 42.8%,
from $31.2 million to $44.6 million. The increase in loans was comprised
principally of increases of $17.1 million, $12.8 million and $17.5 million,
respectively, in commercial loans, construction loans, and commercial mortgage
loans - three areas of lending which the Company targets. The Company maintained
liquidity at what it believes to be an appropriate level, as liquid assets,
consisting of cash and due from banks, interest-earning deposits in other banks
and investment securities available for sale, increased in the aggregate to
$54.1 million, or 23.4% of total assets, at December 31, 2002. Other increases
in total assets resulted from the Bank's additional investment in stock of the
Federal Home Loan Bank of Atlanta of $755,000, which increased its total
investment to $1.7 million. Additionally, the Company's investment in premises
and equipment increased by $5.0 million as a result of growth and expansion and
costs incurred in development of the new full service branches in Chesapeake,
Virginia, which opened during November 2002, and Kitty Hawk, North Carolina,
which opened during September 2002.

Funding for the growth in assets and loans was provided by increases of $59.0
million and $10.1 million, respectively, in deposit accounts and total
borrowings. Total deposit accounts increased 50.9%, from $115.7 million at
December 31, 2001 to $174.7 million at December 31, 2002. Non-interest-bearing
demand accounts increased by $11.6 million, or 97.3%, from $11.9 million at the
beginning of the period to $23.5 million at the end of the period. Savings,
money market and NOW accounts also increased by more than half, to $34.4
million, with the total increase of $13.9 million representing 68.1% of the
$20.5 million balance at December 31, 2001. Consistent with the Company's
objectives to reduce reliance on time deposits, demand, savings, money market
and NOW accounts of $57.9 million at December 31, 2002 represent 33.2% of total
deposits at that date, up from $32.4 million or 28.0% of total deposits at
December 31, 2001. Time deposits totaled $116.7 million at December 31, 2002 as
compared to $83.3 million at December 31, 2001. Large denomination time deposits
of more than $100,000 were $44.9 million, or 25.7% of total deposits at December
31, 2002 as compared with $34.2 million, or 29.5% of total deposits at December
31, 2001. The Company continues to use brokered deposits to fund growth, with
such deposits increasing from $15.5 million to $29.3 million during the year,
comprising 25.1% of total time deposits at December 31, 2002. Advances from the
Federal Home Loan Bank of Atlanta increased from $18.3 million to $28.4 million
during the twelve months, while total federal funds purchased of $3.0 million
outstanding at the beginning of the year remained unchanged at December 31,
2002.

Total stockholders' equity increased by $970,000, as net income for the current
year of $627,000 was supplemented by an increase of $343,000 in accumulated
other comprehensive income resulting from unrealized securities gains.
Stockholders' equity totaled $24.0 million at December 31, 2002. Its capital
ratios continue to place the Bank well in excess of the minimums required to be
deemed well-capitalized by regulatory measures.



                               NET INTEREST INCOME

Like most financial institutions, the primary component of earnings for the
Company is net interest income. Net interest income is the difference between
interest income, principally from loan and investment securities portfolios, and
interest expense, principally on customer deposits and borrowings. Changes in
net interest income result from changes in volume, spread and margin. For this
purpose, volume refers to the average dollar level of interest-earning assets
and interest-bearing liabilities, spread refers to the difference between the
average yield on interest-earning assets and the average cost of
interest-bearing liabilities, and margin refers to net interest income divided
by average interest-earning assets and is influenced by the level and relative
mix of interest-earning assets and interest-bearing liabilities, as well as
levels of non-interest-bearing liabilities. During the years ended December 31,
2002, 2001 and 2000, average interest-earning assets were $177.5 million, $122.4
million, and $72.1 million, respectively. During these same years, the Company's
net interest margins were 3.09%, 3.32%, and 3.78%, respectively.



                                    Page 16
<PAGE>


Average Balances and Average Rates Earned and Paid. The following table sets
forth, for the periods indicated, information with regard to average balances of
assets and liabilities, as well as the total dollar amounts of interest income
from interest-earning assets and interest expense on interest-bearing
liabilities, resultant yields or costs, net interest income, net interest
spread, net interest margin and ratio of average interest-earning assets to
average interest-bearing liabilities.


<TABLE>
<CAPTION>
                                                                      For the Years Ended December 31,
                                              -----------------------------------------------------------------------------------
                                                          2002                         2001                        2000
                                              --------------------------   --------------------------   -------------------------
                                               Average            Average   Average            Average  Average             Average
                                               Balance   Interest   Rate    Balance   Interest  Rate    Balance   Interest   Rate
                                              --------   --------  -----   --------   --------  -----   --------  --------  -----
<S>                                           <C>        <C>        <C>    <C>        <C>        <C>    <C>       <C>        <C>
                                                                             (Dollars in thousands)

Interest-earning assets:
  Loans                                       $130,769   $  8,178   6.25%  $ 92,461   $  7,288   7.88%  $ 51,146  $  4,794   9.37%
  Interest-earning deposits                      4,055         67   1.65%     3,967        149   3.76%     4,857       301   6.20%
  Investment securities available for sale      40,903      1,959   4.79%    24,970      1,620   6.49%    15,971     1,076   6.74%
  FHLB/FRB stock                                 1,815        107   5.90%       985         68   6.90%       159        10   6.29%
                                              --------   --------  -----   --------   --------  -----   --------  --------  -----

        Total interest-earning assets          177,542     10,311   5.81%   122,383      9,125   7.46%    72,133     6,181   8.57%
                                                         --------  -----              --------  -----             --------  -----

Other assets                                    16,593                       11,747                        8,412
                                              --------                     --------                     --------

        Total assets                          $194,135                     $134,130                     $ 80,545
                                              ========                     ========                     ========

Interest-bearing liabilities:
  Deposits:
     Savings, NOW and money market            $ 28,131        284   1.01%  $ 19,534        400   2.05%  $ 13,732       462   3.36%
     Time deposits                              98,288      3,479   3.54%    72,753      3,998   5.50%    45,342     2,762   6.09%
  Borrowings                                    27,433      1,056   3.85%    13,203        661   5.01%     3,780       233   6.16%
                                              --------   --------  -----   --------   --------  -----   --------  --------  -----

        Total interest-bearing liabilities     153,852      4,819   3.13%   105,490      5,059   4.80%    62,854     3,457   5.50%
                                                         --------  -----              --------  -----             --------  -----

  Demand deposits                               15,166                        9,489                        6,323
  Other liabilities                                798                          659                          384
  Stockholders' equity                          24,319                       18,492                       10,984
                                              --------                     --------                     --------

        Total liabilities and
            stockholders' equity              $194,135                     $134,130                     $ 80,545
                                              ========                     ========                     ========

Net interest income and interest rate spread             $  5,492   2.68%             $  4,066   2.66%            $  2,724   3.07%
                                                         ========  =====              ========  =====             ========  =====

Net interest margin                                                 3.09%                        3.32%                       3.78%
                                                                   =====                        =====                       =====

Ratio of average interest-earning assets to
  average interest-bearing liabilities          115.40%                      116.01%                      114.76%
                                              ========                     ========                     ========
</TABLE>



                                    Page 17
<PAGE>


                              RATE/VOLUME ANALYSIS

The following table analyzes the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities. The table distinguishes between (i) changes
attributable to volume (changes in volume multiplied by the prior period's
rate), (ii) changes attributable to rate (changes in rate multiplied by the
prior period's volume), and (iii) net change (the sum of the previous columns).
The change attributable to both rate and volume (changes in rate multiplied by
changes in volume) has been allocated equally to both the changes attributable
to volume and the changes attributable to rate.

<TABLE>
<CAPTION>
                                           Year Ended                    Year Ended
                                   December 31, 2002 vs. 2001   December 31, 2001 vs. 2000
                                   --------------------------   ---------------------------
                                   Increase (Decrease) Due to   Increase (Decrease) Due to
                                   --------------------------   ---------------------------
                                    Volume    Rate     Total     Volume     Rate     Total
                                   -------  -------   -------   -------   -------   -------
<S>                                <C>      <C>       <C>       <C>       <C>       <C>
                                                   (Dollars in thousands)

Interest income:
  Loans                            $ 2,708  $(1,818)  $   890   $ 3,565   $(1,071)  $ 2,494
  Interest-earning deposits              2      (84)      (82)      (44)     (108)     (152)
  Investment securities available
   for sale                            898     (559)      339       595       (51)      544
  FHLB/FRB stock                        53      (14)       39        54         4        58
                                   -------  -------   -------   -------   -------   -------

        Total interest income        3,661   (2,475)    1,186     4,170    (1,226)    2,944
                                   -------  -------   -------   -------   -------   -------

Interest expense:
  Deposits
    Savings, NOW and
     money market                      131     (247)     (116)      157      (219)      (62)
    Time deposits                    1,154   (1,673)     (519)    1,588      (352)    1,236
  Borrowings                           630     (235)      395       527       (99)      428
                                   -------  -------   -------   -------   -------   -------

        Total interest expense       1,915   (2,155)     (240)    2,272      (670)    1,602
                                   -------  -------   -------   -------   -------   -------

        Net interest income
         increase (decrease)       $ 1,746  $  (320)  $ 1,426   $ 1,898   $  (556)  $ 1,342
                                   =======  =======   =======   =======   =======   =======
</TABLE>


                              RESULTS OF OPERATIONS
                     YEARS ENDED DECEMBER 31, 2002 AND 2001

Overview. The Company reported net income of $627,000 or $.21 per share for the
year ended December 31, 2002, as compared with net income of $547,000 or $.23
per share for 2001, an increase of $80,000 in net income but a decrease of $.02
in net income per share. The Company's primary focus continues to be on growth
and development of its branch network and subsidiary operations, sacrificing
profitability in the near term. The Bank opened one new branch in a leased
facility in Edenton, North Carolina, on January 2, 2002 and two other
newly-constructed owned facilities, one in Kitty Hawk, North Carolina during
September 2002, and one in Chesapeake, Virginia during November 2002. These new
locations increased the number of full service banking branches to seven. The
Company has incurred additional non-interest expenses both as a result of growth
from period to period, and also as a result of staff additions and other costs
incurred as a result of the branch expansion during 2002. However, although the
significant downward trend in interest rates from period to period has had a
negative impact on the Company's total interest income by lowering it below the
levels that would be expected in a more stable interest rate environment,
interest rate spread has remained relatively unchanged primarily due to the
Bank's growth of low cost core deposits. The decrease in income per share also
results from the effect of shares issued in the Company's public stock offering
during the second half of 2001.



                                    Page 18
<PAGE>

Net Interest Income. Like most financial institutions, the primary component of
earnings for the Company is net interest income. Net interest income is the
difference between interest income, principally from loan and investment
securities portfolios, and interest expense, principally on customer deposits
and borrowings. Changes in net interest income result from changes in volume,
spread and margin. For this purpose, volume refers to the average dollar level
of interest-earning assets and interest-bearing liabilities, spread refers to
the difference between the average yield on interest-earning assets and the
average cost of interest-bearing liabilities, and margin refers to net interest
income divided by average interest-earning assets. Margin is influenced by the
level and relative mix of interest-earning assets and interest-bearing
liabilities, as well as by levels of non-interest-bearing liabilities and
capital.

Net interest income increased to $5.5 million for the year ended December 31,
2002, a $1.4 million or 35.1% increase from the $4.1 million earned during 2001.
Total interest income benefited from strong growth in the level of average
earning assets, which offset both the lower asset yields caused by the dramatic
decline in market interest rates from period to period and the effects of
customer-favorable pricing of both loan and deposit products during the current
year. Average total interest-earning assets increased $55.2 million, or 45.1%,
for 2002 as compared to 2001, while the average yield dropped by 165 basis
points from 7.46% to 5.81%. Average total interest-bearing liabilities increased
by $48.4 million, relatively consistent with the increase in interest-earning
assets. The average cost of interest-bearing liabilities decreased by 167 basis
points from 4.80% to 3.13%, resulting in relatively unchanged interest margins
as described above. For the year ended December 31, 2002, the net interest rate
spread was 2.68% and the net interest margin was 3.09%. For the year ended
December 31, 2001, the net interest spread was 2.66% and the net interest margin
was 3.32%.

Provision for Loan Losses. The Company recorded a $480,000 provision for loan
losses in 2002, representing an increase of $40,000 from the $440,000 provision
made in 2001. Provisions for loan losses are charged to income to bring the
allowance for loan losses to a level deemed appropriate by Management. In
evaluating the allowance for loan losses, Management considers factors that
include growth, composition and industry diversification of the portfolio,
historical loan loss experience, current delinquency levels, adverse situations
that may affect a borrower's ability to repay, estimated value of any underlying
collateral, prevailing economic conditions and other relevant factors. In both
2002 and 2001 the provision for loan losses was made principally in response to
growth in loans, as total loans outstanding increased by $54.3 million in 2002
and by $31.3 million in 2001. At December 31, the allowance for loan losses was
$1.7 million for 2002 and $1.4 million for 2001, representing 1.07% and 1.34%,
respectively, of loans outstanding.

Non-Interest Income. Non-interest income totaled $2.8 million for the year ended
December 31, 2002 as compared with $2.4 million for 2001, an increase of
$405,000. Since inception, the Company has actively pursued additional
non-interest income sources outside of traditional banking operations, including
income from insurance and brokerage networking operations. During the current
year, the Company experienced a $110,000 decrease in income from brokerage
operations that resulted from a lower level of trading volume in response to the
downward trends in the securities markets. This decrease in income from
brokerage operations was more than offset by increases of $201,000 in service
charges on deposit accounts which resulted principally from deposit growth,
$176,000 in the fees from mortgage banking operations, $85,000 in gains realized
from sales of available for sale securities and $53,000 in income from insurance
operations. The Company also incurred a loss of $37,000 from the disposal of
foreclosed real estate during the year ended December 31, 2002.

Non-Interest Expenses. Non-interest expenses totaled $7.2 million for the year
ended December 31, 2002, an increase of $1.7 million over the $5.5 million
reported for 2001. Substantially all of this increase resulted from the Bank's
growth and development, and reflects the additional expenses in the current year
associated with the opening of new branches on January 2, 2002, September 9,
2002 and November 14, 2002, increasing the number of full service banking
locations to seven. Five of the seven branches were fully operational throughout
2002, while only three of the seven were operational throughout all of 2001. As
a result of such expansion, personnel costs increased by $991,000, or 33.5%, the
costs of occupancy and equipment increased by $206,000, or 26.8%, and data
processing fees increased by $105,000, or 27.0%. Other non-interest expenses
increased by $409,000, or 29.5%. In comparison, total assets averaged $194.1
million for 2002, an increase of 44.7% over average total assets of $134.1
million for the year ended December 31, 2001.


                                    Page 19
<PAGE>

                         LIQUIDITY AND CAPITAL RESOURCES

The Company's sources of funds are customer deposits, cash and demand balances
due from other banks, interest-earning deposits in other banks and investment
securities available for sale. These funds, together with loan repayments, are
used to make loans and to fund continuing operations. In addition, at December
31, 2002, the Bank had credit availability with the Federal Home Loan Bank of
Atlanta ("FHLB") of approximately $57.8 million, with $28.4 million outstanding,
and federal funds lines of credit with five other financial institutions in the
aggregate amount of $34.7 million, with $3.0 million advanced on these lines.

Total deposits were $174.7 million and $115.7 million at December 31, 2002 and
2001, respectively. As a result of the Company's loan demand exceeding the rate
at which core deposits are being built, the Company has relied heavily on time
deposits as a source of funds. Certificates of deposit are the only deposit
accounts that have stated maturity dates. Such deposits are generally considered
to be rate sensitive. At December 31, 2002 and 2001, time deposits represented
66.8% and 72.0%, respectively, of the Company's total deposits. Certificates of
deposit of $100,000 or more represented 25.7% and 29.5%, respectively, of the
Bank's total deposits at December 31, 2002 and 2001. At December 31, 2002, the
Company had $14.9 million in time deposits from 8 public units and $29.3 million
in brokered time deposits. Management believes that most other time deposits are
relationship-oriented. While we will need to pay competitive rates to retain
these deposits at their maturities, there are other subjective factors that will
determine their continued retention. Based upon prior experience, the Company
anticipates that a substantial portion of outstanding certificates of deposit
will renew upon maturity.

Management anticipates that the Company will rely primarily upon customer
deposits, loan repayments and current earnings to provide liquidity, and will
use funds thus generated to make loans and to purchase securities, primarily
securities issued by the federal government and its agencies, corporate
securities and mortgage-backed securities.

At December 31, 2002 and 2001, the Company's tangible equity to asset ratio was
9.5% and 13.0%, respectively. All capital ratios place the Bank in excess of the
minimum required to be deemed a well-capitalized bank by regulatory measures.
The Bank's Tier I capital ratio at December 31, 2002 and 2001 was 9.7% and
13.7%, respectively.

                                 CAPITAL RATIOS

The Bank is subject to minimum capital requirements. See "Supervision and
Regulation." As the following table indicates, at December 31, 2002, the Bank
exceeded regulatory capital requirements.

<TABLE>
<CAPTION>
                                                                             At December 31, 2002
                                                           --------------------------------------------------------
                                                                Actual              Minimum        Well-Capitalized
                                                                 Ratio            Requirement         Requirement
                                                           ----------------    ----------------    ----------------
<S>                                                                  <C>                   <C>                <C>

         Total risk-based capital ratio...................           12.51%                8.0%               10.0%
         Tier 1 risk-based capital ratio..................           11.57%                4.0%                6.0%
         Leverage ratio...................................            9.71%                4.0%                5.0%
</TABLE>

Management expects that the Bank will remain "well-capitalized" for regulatory
purposes, although there can be no assurance that additional capital will not be
required in the near future due to greater-than-expected growth, or otherwise.


                                    Page 20
<PAGE>

                     CONTRACTUAL OBLIGATIONS AND COMMITMENTS

         In the normal course of business there are various outstanding
contractual obligations of the company that will require future cash outflows.
In addition, there are commitments and contingent liabilities, such as
commitments to extend credit, that may or may not require future cash outflows.
The following table reflects contractual obligations of the company outstanding
as of December 31, 2002.

<TABLE>
<CAPTION>
                                                                     Payments Due by Period
                                          -------------------------------------------------------------------------
                                                           On Demand
                                                           Or Within                                       After
    Contractual Obligations                   Total         1 Year        2-3 Years       4-5 Years       5 Years
----------------------------------        ------------   ------------   ------------   -------------   ------------
<S>                                       <C>            <C>            <C>            <C>             <C>
                                                                         (In thousands)

Federal funds purchased                   $      3,001   $      3,001   $          -   $           -   $          -
FHLB advances                                   28,400         15,000              -           1,400         12,000
Lease obligations                                1,968            253            511             295            909
Deposits                                       174,663        130,608         42,008           2,044              3
                                          ------------   ------------   ------------   -------------   ------------

     Total contractual cash obligations   $    208,032   $    148,862   $     42,519   $       3,739   $     12,912
                                          ============   ============   ============   =============   ============
</TABLE>

         The following table reflects other commitments of the company
outstanding as of December 31, 2002.

<TABLE>
<CAPTION>
                                                           Amount of Commitment Expiration Per Period
                                          -------------------------------------------------------------------------
                                              Total
                                             Amounts        Within                                        After
       Other Commitments                    Committed       1 Year        2-3 Years       4-5 Years       5 Years
----------------------------------        ------------   ------------   ------------   -------------   ------------
<S>                                       <C>            <C>            <C>            <C>             <C>
                                                                         (In thousands)

Undisbursed home equity credit lines      $      5,982   $          -   $          -   $           -   $      5,982
Other commitments and credit lines              30,140         14,653         15,487               -              -
Undisbursed portion of construction loans       15,587         15,587              -               -              -
                                          ------------   ------------   ------------   -------------   ------------

     Total other commitments              $     51,709   $     30,240   $     15,487   $           -   $      5,982
                                          ============   ============   ============   =============   ============
</TABLE>


                           ASSET/LIABILITY MANAGEMENT

The Company's results of operations depend substantially on its net interest
income. Like most financial institutions, the Bank's interest income and cost of
funds are affected by general economic conditions and by competition in the
market place. The purpose of asset/liability management is to provide stable net
interest income growth by protecting the Company's earnings from undue interest
rate risk, which arises from volatile interest rates and changes in the balance
sheet mix, and by managing the risk/return relationships between liquidity,
interest rate risk, market risk, and capital adequacy. The Company maintains,
and has complied with, a Board approved asset/liability management policy that
provides guidelines for controlling exposure to interest rate risk by utilizing
the following ratios and trend analysis: liquidity, equity, volatile liability
dependence, portfolio maturities, maturing assets and maturing liabilities. The
Company's policy is to control the exposure of its earnings to changing interest
rates by generally endeavoring to maintain a position within a narrow range
around an "earnings neutral position," which is defined as the mix of assets and
liabilities that generate a net interest margin that is least affected by
interest rate changes.


                                    Page 21
<PAGE>

When suitable lending opportunities are not sufficient to utilize available
funds, the Company has generally invested such funds in securities, primarily
U.S. Treasury securities, securities issued by governmental agencies,
mortgage-backed securities and corporate obligations. The securities portfolio
contributes to the Company's profits and plays an important part in the overall
interest rate management. However, management of the securities portfolio alone
cannot balance overall interest rate risk. The securities portfolio must be used
in combination with other asset/liability techniques to actively manage the
balance sheet. The primary objectives in the overall management of the
securities portfolio are safety, liquidity, yield, asset/liability management
(interest rate risk), and investing in securities that can be pledged for public
deposits.

In reviewing the needs of the Company with regard to proper management of its
asset/liability program, the Company's management estimates its future needs,
taking into consideration historical periods of high loan demand and low deposit
balances, estimated loan and deposit increases (due to increased demand through
marketing), and forecasted interest rate changes. A number of measures are used
to monitor and manage interest rate risk, including income simulations and
interest sensitivity (gap) analyses. An income simulation model is the primary
tool used to assess the direction and magnitude of changes in net interest
income resulting from changes in interest rates. Key assumptions in the model
include prepayment speeds on mortgage-related assets, cash flows and maturities
of other investment securities, loan and deposit volumes and pricing. These
assumptions are inherently uncertain and, as a result, the model cannot
precisely estimate net interest income or precisely predict the impact of higher
or lower interest rates on net interest income. Actual results will differ from
simulated results due to timing, magnitude and frequency of interest rate
changes and changes in market conditions and management strategies, among other
factors.

Based on the results of the income simulation model as of December 31, 2002, the
Company would expect an increase in net interest income of $280,000 if interest
rates increase from current rates by 100 basis points and a decrease in net
interest income of $378,000 if interest rates decrease from current rates by 100
basis points.

The analysis of an institution's interest rate gap (the difference between the
repricing of interest-earning assets and interest-bearing liabilities during a
given period of time) is another standard tool for the measurement of the
exposure to interest rate risk. The Company believes that because interest rate
gap analysis does not address all factors that can affect earnings performance,
it should be used in conjunction with other methods of evaluating interest rate
risk.


                                    Page 22
<PAGE>

The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 2002 which are
projected to reprice or mature in each of the future time periods shown. Except
as stated below, the amounts of assets and liabilities shown which reprice or
mature within a particular period were determined in accordance with the
contractual terms of the assets or liabilities. Loans with adjustable rates are
shown as being due at the end of the next upcoming adjustment period. Money
market deposit accounts and negotiable order of withdrawal or other transaction
accounts are assumed to be subject to immediate repricing and depositor
availability and have been placed in the shortest period. In making the gap
computations, none of the assumptions sometimes made regarding prepayment rates
and deposit decay rates have been used for any interest-earning assets or
interest-bearing liabilities. In addition, the table does not reflect scheduled
principal payments which will be received throughout the lives of the loans. The
interest rate sensitivity of the Company's assets and liabilities illustrated in
the following table would vary substantially if different assumptions were used
or if actual experience differs from that indicated by such assumptions.


<TABLE>
<CAPTION>
                                                             Terms to Repricing at December 31, 2002
                                             ----------------------------------------------------------------------
                                                              Over 3          Total
                                              3 Months      Months to        Within         Over 12
                                               or Less       12 Months     12 Months        Months         Total
                                             -----------    -----------   -----------    -----------    -----------
<S>                                          <C>           <C>             <C>           <C>            <C>
                                                                     (Dollars in thousands)

Interest-earning assets:
  Loans                                      $    114,705  $     12,017    $  126,722    $    34,766    $   161,488
  Interest-earning deposits                         1,869             -         1,869              -          1,869
  Investment securities available for sale              -             -             -         44,601         44,601
  FHLB/FRB stock                                        -             -             -          2,137          2,137
                                             ------------  ------------    ----------    -----------    -----------

      Total interest-earning assets          $    116,574  $     12,017    $  128,591    $     81,504   $   210,095
                                             ============  ============    ==========    ============   ===========

  Percentage of total interest-earning assets      55.49%         5.72%        61.21%         38.79%        100.00%
  Cumulative percentage to total interest-
   earning assets                                  55.49%        61.21%        61.21%        100.00%        100.00%

Interest-bearing liabilities:
  Deposits:
    Savings, NOW and money market            $     34,441  $          -    $   34,441    $         -    $    34,441
    Time                                           16,933        55,751        72,684         44,055        116,739
  Borrowings                                        8,001        10,000        18,001         13,400         31,401
                                             ------------  ------------    ----------    -----------    -----------

      Total interest-bearing liabilities     $     59,375  $     65,751    $  125,126    $    57,455    $   182,581
                                             ============  ============    ==========    ===========    ===========

  Percentage of total interest-bearing liabilities 32.52%        36.01%        68.53%         31.47%        100.00%
  Cumulative percentage of total interest-
   bearing liabilities                             32.52%        68.53%        68.53%        100.00%        100.00%

Interest sensitivity gap                     $     57,199  $    (53,734)   $    3,465    $    24,049    $    27,514

Cumulative interest sensitivity gap          $     57,199  $      3,465    $    3,465    $    27,514    $    27,514

Cumulative interest sensitivity gap as a
 percentage of total interest-earning assets       27.23%         1.65%         1.65%          13.10%        13.10%

Cumulative ratio of interest-sensitive assets
 to interest-sensitive liabilities                196.34%       102.77%       102.77%         115.07%       115.07%
</TABLE>

The table illustrates that if assets and liabilities reprice in the time
intervals indicated in the table, the Company is asset sensitive within three
months, liability sensitive within twelve months, and asset sensitive
thereafter. As stated above, certain shortcomings are inherent in the method of
analysis presented in the foregoing table. For example, although certain assets
and liabilities may have similar maturities or periods to repricing, they may
react in different degrees to


                                    Page 23
<PAGE>

changes in market interest rates. Also, the interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
interest rates. For instance, while the table is based on the assumption that
interest-bearing demand accounts, money market accounts and savings accounts are
immediately sensitive to movements in rates, the Company expects that in a
changing rate environment the amount of the adjustment in interest rates for
such accounts would be less than the adjustment in categories of assets which
are considered to be immediately sensitive. Additionally, certain assets have
features which restrict changes in the interest rates of such assets both on a
short-term basis and over the lives of such assets. Further, in the event of a
change in market interest rates, prepayment and early withdrawal levels could
deviate significantly from those assumed in calculating the tables. Finally, the
ability of many borrowers to service their adjustable-rate debt may decrease in
the event of an increase in market interest rates. Due to these shortcomings,
the Company places primary emphasis on its income simulation model when managing
its exposure to changes in interest rates.

                           CRITICAL ACCOUNTING POLICY

The Company's most significant critical accounting policy is the determination
of our allowance for loan losses. A critical accounting policy is one that is
both very important to the portrayal of the Company's financial condition and
results, and requires the most difficult, subjective or complex judgments. What
makes these judgments difficult, subjective and/or complex is the need to make
estimates about the effects of matters that are inherently uncertain. If the mix
and amount of future write-offs differ significantly from those assumptions used
in making the Company's determination, the allowance for loan losses and
provision for loan losses on our income statement could be materially affected.
For further discussion of the allowance for loan losses and a detailed
description of the methodology the Company uses in determining the adequacy of
the allowance, see the sections of this discussion titled "Asset Quality,"
"Nonperforming Assets" and "Analysis of the Allowance for Loan Losses."

                           FORWARD LOOKING STATEMENTS

Statements contained in this annual report, which are not historical facts, are
forward-looking statements, as that term is defined in the Private Securities
Litigation Reform Act of 1995. Amounts herein could vary as a result of market
and other factors. Such forward-looking statements are subject to risks and
uncertainties which could cause actual results to differ materially from those
currently anticipated due to a number of factors, which include, but are not
limited to, factors discussed in documents filed by the Company with the
Securities and Commission and the Bank with the Federal Reserve Bank from time
to time. Such forward-looking statements may be identified by the use of such
words as "believe," "expect," "anticipate," "should," "planned," "estimated,"
and "potential." Examples of forward-looking statements include, but are not
limited to, estimates with respect to the financial condition, expected or
anticipated revenue, results of operations and business of the Company that are
subject to various factors which could cause actual results to differ materially
from these estimates. These factors include, but are not limited to, general
economic conditions, changes in interest rates, deposit flows, loan demand, real
estate values, and competition; changes in accounting principles, policies, or
guidelines; changes in legislation or regulations; and other economic,
competitive, governmental, regulatory, and technological factors affecting the
Company's operations, pricing, products and services.

                        RECENT ACCOUNTING PRONOUNCEMENTS

In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and supersedes Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). A liability for
a cost associated with an exit or disposal activity shall be recognized and
measured initially at its fair value in the period in which the liability is
incurred, except for certain qualifying employee termination benefits. SFAS No.
146 will be effective for exit or disposal activities initiated by the Company
after December 31, 2002. This statement is not expected to have a material
impact on the Company's consolidated financial statements upon adoption.


                                    Page 24
<PAGE>

                               LENDING ACTIVITIES

General. The Company provides to its customers a full range of short- to
medium-term commercial, agricultural, Small Business Administration guaranteed,
Farmers Home Administration guaranteed, mortgage, construction and personal
loans, both secured and unsecured. The Bank also makes real estate mortgage and
construction loans.

The Company's loan policies and procedures establish the basic guidelines
governing its lending operations. Generally, the guidelines address the types of
loans that the Company seeks, target markets, underwriting and collateral
requirements, terms, interest rate and yield considerations and compliance with
laws and regulations. All loans or credit lines are subject to approval
procedures and amount limitations. These limitations apply to the borrower's
total outstanding indebtedness to the Company, including the indebtedness of any
guarantor. The policies are reviewed and approved at least annually by the Board
of Directors of the Company. The Company supplements its own supervision of the
loan underwriting and approval process with periodic loan audits by internal
loan examiners and outside professionals experienced in loan review work. The
Company has focused its portfolio lending activities on typically higher
yielding commercial, construction and consumer loans rather than lower yielding
1-4 family mortgages which the Company typically sells in the secondary market.
The following table sets forth at the dates indicated the Company's loan
portfolio composition by type of loan:

<TABLE>
<CAPTION>
                                                                         At December 31,
                                               --------------------------------------------------------------------
                                                            2002                                 2001
                                               -------------------------------     --------------------------------
                                                                    Percent                              Percent
                                                  Amount           of Total            Amount           of Total
                                               -------------     -------------     -------------     --------------
<S>                                            <C>                       <C>       <C>                        <C>
                                                                   (Dollars in thousands)

Commercial                                     $      78,428             48.5%     $      61,364              57.2%
Real estate - construction                            22,861             14.2%            10,050               9.4%
Real estate - commercial mortgage                     32,932             20.4%            15,401              14.3%
Real estate - 1-4 family mortgage                      6,932              4.3%             7,074               6.6%
Consumer                                              12,501              7.7%             7,692               7.2%
Home equity lines of credit                            7,834              4.9%             5,659               5.3%
                                               -------------     ------------      -------------     -------------

Subtotal                                             161,488           100.00%           107,240             100.0%
                                                                 ============                        =============

Less:  Allowance for loan losses                      (1,721)                             (1,435)
                                               -------------                       -------------

Net loans                                      $     159,797                       $     105,805
                                               =============                       =============
</TABLE>

<TABLE>
<CAPTION>
                                                                         At December 31,
                                               --------------------------------------------------------------------
                                                            2000                                 1999
                                               -------------------------------     --------------------------------
                                                                    Percent                              Percent
                                                  Amount           of Total            Amount           of Total
                                               -------------     -------------     -------------     --------------
<S>                                            <C>                       <C>       <C>                        <C>
                                                                   (Dollars in thousands)

Commercial                                     $      35,656             47.0%     $      13,564              45.9%
Real estate - construction                             6,421              8.4%             2,606               8.8%
Real estate - commercial mortgage                     15,746             20.8%             4,815              16.3%
Real estate - 1-4 family mortgage                      7,241              9.5%             3,674              12.4%
Consumer                                               6,594              8.7%             3,729              12.6%
Home equity lines of credit                            4,264              5.6%             1,186               4.0%
                                               -------------     ------------      -------------     -------------

Subtotal                                              75,922            100.0%            29,574             100.0%
                                                                 ============                        =============

Less:  Allowance for loan losses                      (1,028)                               (462)
                                               -------------                       -------------

Net loans                                      $      74,894                       $      29,112
                                               =============                       =============
</TABLE>



                                    Page 25
<PAGE>

The following table presents, at December 31, 2002, (i) the aggregate maturities
or repricings of loans in the named categories of the Company's loan portfolio
and (ii) the aggregate amounts of such loans maturing or repricing after one
year by fixed and variable rates:

<TABLE>
<CAPTION>
                                                  Within 1 Year      1-5 Years       After 5 Years        Total
                                                  -------------    -------------     -------------    -------------
<S>                                              <C>               <C>              <C>               <C>
                                                                       (Dollars in thousands)

Commercial                                       $      53,865     $      23,106    $       1,457     $      78,428
Real estate - construction                              19,841             1,841            1,179            22,861
                                                 -------------     -------------    -------------     -------------

                  Total                          $      73,706     $      24,947    $       2,636     $     101,289
                                                 =============     =============    =============     =============

Fixed rate loans                                                                                      $      26,883
Variable rate loans                                                                                             700
                                                                                                      -------------

                                                                                                      $      27,583
</TABLE>

Commercial Loans. Commercial business lending is the primary focus of the
Company's lending activities. At December 31, 2002, the Company's commercial
loan portfolio equaled $78.4 million or 48.5% of total loans, as compared with
$61.4 million or 57.2% of total loans at December 31, 2001. Commercial loans
include both secured and unsecured loans for working capital, expansion, and
other business purposes. Short-term working capital loans generally are secured
by accounts receivable, inventory and/or equipment. The Company also makes term
commercial loans secured by equipment and real estate. Lending decisions are
based on an evaluation of the financial strength, management and credit history
of the borrower, and the quality of the collateral securing the loan. With few
exceptions, the Company requires personal guarantees and secondary sources of
repayment.

Commercial loans generally provide greater yields and reprice more frequently
than other types of loans, such as real estate loans. More frequent repricing
means that yields on our commercial loans adjust with changes in interest rates.

Real Estate Loans. Real estate loans are made for purchasing, constructing and
refinancing one to four family, five or more family and commercial properties.
The Company offers fixed and adjustable rate options. The Company provides
customers access to long-term conventional real estate loans through its
mortgage loan department which makes Federal National Mortgage Association
("FNMA") - conforming loans for the account of third parties.

Residential one to four family loans amounted to $6.9 million at December 31,
2002, and included approximately $3.7 million of loans obtained in connection
with the acquisition of the two branch offices in March 2000. The Company's
residential mortgage loans are secured by properties located within the
Company's market area. Most of the one to four family residential mortgage loans
that the Company makes are originated for the account of third parties. Such
loans are closed by the third party and therefore are not shown in the Company's
financial statements. The Company receives a fee for each such loan originated,
with such fees aggregating $422,000 for the year ended December 31, 2002 and
$246,000 for the year ended December 31, 2001. The Company anticipates that it
will continue to be an active originator of residential loans for the account of
third parties.

The Company has made, and anticipates continuing to make, commercial real estate
loans. Commercial real estate loans equaled $32.9 at December 31, 2002 and $15.4
million at December 31, 2001. This lending has involved loans secured
principally by commercial buildings for office, storage and warehouse space, and
by agricultural properties. Generally in underwriting commercial real estate
loans, the Company requires the personal guaranty of borrowers and a
demonstrated cash flow capability sufficient to service the debt. Loans secured
by commercial real estate may be in greater amount and involve a greater degree
of risk than one to four family residential mortgage loans. Payments on such
loans are often dependent on successful operation or management of the
properties.

The Company originates one to four family residential construction loans for the
construction of custom homes (where the home buyer is the borrower) and provides
financing to builders and consumers for the construction of pre-sold homes. The
Company generally receives a pre-arranged permanent financing commitment from an
outside


                                    Page 26
<PAGE>

entity prior to financing the construction of pre-sold homes. The Company lends
to builders who have demonstrated a favorable record of performance and
profitable operations and who are building in markets that management believes
it understands and in which it is comfortable with the economic conditions. The
Company also makes commercial real estate construction loans, generally for
owner-occupied properties. The Company further endeavors to limit its
construction lending risk through adherence to established underwriting
procedures. Also, the Company generally requires documentation of all draw
requests and utilizes loan officers to inspect the project prior to paying any
draw requests from the builder. With few exceptions, the Company requires
personal guarantees and secondary sources of repayment on construction loans.

Consumer Loans and Home Equity Lines of Credits. Loans to individuals include
automobile loans, boat and recreational vehicle financing, home equity and home
improvement loans and miscellaneous secured and unsecured personal loans.
Consumer loans generally can carry significantly greater risks than other loans,
even if secured, if the collateral consists of rapidly depreciating assets such
as automobiles and equipment. Repossessed collateral securing a defaulted
consumer loan may not provide an adequate source of repayment of the loan.
Consumer loan collections are sensitive to job loss, illness and other personal
factors. The Company attempts to manage the risks inherent in consumer lending
by following established credit guidelines and underwriting practices designed
to minimize risk of loss.

Loan Approvals. The Company's loan policies and procedures establish the basic
guidelines governing its lending operations. Generally, the guidelines address
the type of loans that the Company seeks, target markets, underwriting and
collateral requirements, terms, interest rate and yield considerations and
compliance with laws and regulations. All loans or credit lines are subject to
approval procedures and amount limitations. These limitations apply to the
borrower's total outstanding indebtedness to the Company, including the
indebtedness of any guarantor. The policies are reviewed and approved at least
annually by the Board of Directors of the Company. The Company supplements its
own supervision of the loan underwriting and approval process with periodic loan
audits by independent, outside professionals experienced in loan review work.

COMMITMENTS AND CONTINGENT LIABILITIES

In the ordinary course of business, the Company enters into various types of
transactions that include commitments to extend credit that are not included in
loans receivable, net, presented on the Company's consolidated balance sheets.
The Company applies the same credit standards to these commitments as it uses in
all its lending activities and has included these commitments in its lending
risk evaluations. The Company's exposure to credit loss under commitments to
extend credit is represented by the amount of these commitments. See "Notes to
CONSOLIDATED Financial Statements."

ASSET QUALITY

The Company considers asset quality to be of primary importance, and employs a
formal internal loan review process to ensure adherence to the Lending Policy as
approved by the Board of Directors. It is the responsibility of each lending
officer to assign an appropriate risk grade to every loan originated. Credit
Administration, through the loan review process, validates the accuracy of the
initial risk grade assessment. In addition, as a given loan's credit quality
improves or deteriorates, it is Credit Administration's responsibility to change
the borrower's risk grade accordingly. The function of determining the allowance
for loan losses is fundamentally driven by the risk grade system. In determining
the allowance for loan losses and any resulting provision to be charged against
earnings, particular emphasis is placed on the results of the loan review
process. Consideration is also given to historical loan loss experience, the
value and adequacy of collateral, economic conditions in the Company's market
area and other factors. For loans determined to be impaired, the allowance is
based on discounted cash flows using the loan's initial effective interest rate
or the fair value of the collateral for certain collateral dependent loans. This
evaluation is inherently subjective as it requires material estimates, including
the amounts and timing of future cash flows expected to be received on impaired
loans that may be susceptible to significant change. The allowance for loan
losses represents management's estimate of the appropriate level of reserve to
provide for probable losses inherent in the loan portfolio.

                                    Page 27
<PAGE>

The Company's policy regarding past due loans normally requires a prompt
charge-off to the allowance for loan losses following timely collection efforts
and a thorough review. Further efforts are then pursued through various means
available. Loans carried in a non-accrual status are generally collateralized
and probable losses are considered in the determination of the allowance for
loan losses.

NONPERFORMING ASSETS

The table sets forth, for the period indicated, information with respect to the
Company's nonaccrual loans, restructured loans, total nonperforming loans
(nonaccrual loans plus restructured loans), and total nonperforming assets.

<TABLE>
<CAPTION>
                                                                               At December 31,
                                              ---------------------------------------------------------------------
                                                   2002              2001               2000              1999
                                               -------------     -------------     -------------     --------------
<S>                                            <C>               <C>               <C>               <C>
                                                                     (Dollars in thousands)

Nonaccrual loans                               $       1,328     $           -     $           -     $            -
Restructured loans                                         -                 -                 -                  -
                                               -------------     -------------     -------------     --------------

   Total nonperforming loans                           1,328                 -                 -                  -

Real estate owned                                        230               230                 -                  -
                                               -------------     -------------     -------------     --------------

   Total nonperforming assets                  $       1,558     $         230     $           -     $            -
                                               =============     =============     =============     ==============

Accruing loans past due 90 days or more        $           -     $           -     $           4     $            -
Potential problem loans                                    -                 -                 -                  -
Allowance for loan losses                              1,721             1,435             1,028                462
Nonperforming loans to period end loans                0.82%                 -                 -                  -
Allowance for loan losses to
   period end loans                                    1.07%             1.34%             1.35%              1.56%
Allowance for loan losses to
   nonperforming loans                               129.59%                 -                 -                  -
Nonperforming assets to total assets                   0.67%             0.14%                 -                  -
</TABLE>

Our consolidated financial statements are prepared on the accrual basis of
accounting, including the recognition of interest income on loans, unless we
place a loan on nonaccrual basis. We account for loans on a nonaccrual basis
when we have serious doubts about the collectibility of principal or interest.
Generally, our policy is to place a loan on nonaccrual status when the loan
becomes past due 90 days. We also place loans on nonaccrual status in cases
where we are uncertain whether the borrower can satisfy the contractual terms of
the loan agreement. Amounts received on nonaccrual loans generally are applied
first to principal and then to interest only after all principal has been
collected. Restructured loans are those for which concessions, including the
reduction of interest rates below a rate otherwise available to that borrower or
the deferral of interest or principal, have been granted due to the borrower's
weakened financial condition. We accrue interest on restructured loans at the
restructured rates when we anticipate that no loss of original principal will
occur. Potential problem loans are loans which are currently performing and are
not included in nonaccrual or restructured loans above, but about which we have
serious doubts as to the borrower's ability to comply with present repayment
terms. These loans are likely to be included later in nonaccrual, past due or
restructured loans, so they are considered by our management in assessing the
adequacy of our allowance for loan losses. At December 31, 2002, we had $1.3
million of nonaccrual loans consisting primarily of loans outstanding to one
borrower. These loans are cross collateralized and are secured by real estate at
an aggregate loan to value ratio of approximately 60%. The borrower, as a result
of cash flow problems, has filed for protection under Chapter 11 of the
bankruptcy code, during which time the Company is not receiving regular interest
payments. Accordingly, Management has placed these loans in nonaccrual status.
Management does not anticipate that the Company will incur any significant loss
on these loans.


                                    Page 28
<PAGE>

Real estate owned consists of foreclosed, repossessed and idled properties. At
December 31, 2002 real estate owned totaled $230,000 or 0.10% of total assets,
and consisted of one single-family residence. We have reviewed a recent
appraisal of this property and believe that its fair value, less estimated costs
to sell, exceeds its carrying value.

ANALYSIS OF ALLOWANCE FOR LOAN LOSSES

Our allowance for loan losses is established through charges to earnings in the
form of a provision for loan losses. We increase our allowance for loan losses
by provisions charged to operations and by recoveries of amounts previously
charged off, and we reduce our allowance by loans charged off. We evaluate the
adequacy of the allowance at least quarterly. In addition, on a quarterly basis
our board of directors reviews our loan portfolio, conducts an evaluation of our
credit quality and reviews our computation of the loan loss provision,
recommending changes as may be required. In evaluating the adequacy of the
allowance, we consider the growth, composition and industry diversification of
the portfolio, historical loan loss experience, current delinquency levels,
adverse situations that may affect a borrower's ability to repay, estimated
value of any underlying collateral, prevailing economic conditions and other
relevant factors deriving from our limited history of operations. Because we
have a limited history of our own, we also consider the loss experience and
allowance levels of other similar banks and the historical experience
encountered by our management and senior lending officers prior to joining us.
In addition, regulatory agencies, as an integral part of their examination
process, periodically review our allowance for loan losses and may require us to
make adjustments to the allowance based upon judgments different from those of
our management.

We use our risk grading program, as described under "Asset Quality," to
facilitate our evaluation of probable inherent loan losses and the adequacy of
the allowance for loan losses. In this program, risk grades are initially
assigned by loan officers and reviewed by Credit Administration, and tested by
our internal auditor. The testing program includes an evaluation of a sample of
new loans, large loans, loans that are identified as having potential credit
weaknesses, loans past due 90 days or more, and nonaccrual loans. We strive to
maintain our loan portfolio in accordance with conservative loan underwriting
policies that result in loans specifically tailored to the needs of our market
area. Every effort is made to identify and minimize the credit risks associated
with such lending strategies. We have no foreign loans and we do not engage in
significant lease financing or highly leveraged transactions.

We follow a loan review program designed to evaluate the credit risk in our loan
portfolio. Through this loan review process, we maintain an internally
classified watch list that helps management assess the overall quality of the
loan portfolio and the adequacy of the allowance for loan losses. In
establishing the appropriate classification for specific assets, management
considers, among other factors, the estimated value of the underlying
collateral, the borrower's ability to repay, the borrower's payment history and
the current delinquent status. As a result of this process, certain loans are
categorized as substandard, doubtful or loss and reserves are allocated based on
management's judgment and historical experience.

Loans classified as "substandard" are those loans with clear and defined
weaknesses such as unfavorable financial ratios, uncertain repayment sources or
poor financial condition that may jeopardize the liquidation of the debt. They
are characterized by the distinct possibility that we will sustain some losses
if the deficiencies are not corrected. A reserve of 15% is generally allocated
to these loans. Loans classified as "doubtful" are those loans that have
characteristics similar to substandard loans but with an increased risk that
collection or liquidation in full is highly questionable and improbable. A
reserve of 50% is generally allocated to loans classified as doubtful. Loans
classified as "loss" are considered uncollectible and of such little value that
their continuance as bankable assets is not warranted. This classification does
not mean that the loan has absolutely no recovery or salvage value but rather it
is not practical or desirable to defer writing off this asset even though
partial recovery may be achieved in the future. As a practical matter, when
loans are identified as loss they are charged off against the allowance for loan
losses. In addition to the above classification categories, we also categorize
loans based upon risk grade and loan type, assigning an allowance allocation
based upon each category.

Growth in loans outstanding has, throughout our history, been the primary reason
for increases in our allowance for loan losses and the resultant provisions for
loan losses necessary to provide for those increases. This growth has been
spread among our major loan categories, with the concentrations of major loan
categories being relatively consistent. Between December 31, 1999 and December
31, 2002, the range of each major category of loans as a


                                    Page 29
<PAGE>

percentage of total loans outstanding is as follows: residential mortgage loans
- 4.3% to 12.4%; commercial mortgage loans - 14.3% to 20.8%; construction loans
- 8.4% to 14.2%; commercial and industrial loans - 45.9% to 57.2%; loans to
individuals - 7.2% to 12.6%; and home equity lines of credit - 4.0% to 5.6%. For
all fiscal years through 2002, our net loan charge-offs in each year were no
more than .15% of average loans outstanding. Because of this sustained trend of
low loss experience, and based upon our assessment of probable loss, we have set
our allowance for loan losses at December 31, 2002 at $1.7 million, representing
1.07% of total loans outstanding.

The allowance for loan losses represents management's estimate of an amount
adequate to provide for known and inherent losses in the loan portfolio in the
normal course of business. We make specific allowances that are allocated to
certain individual loans and pools of loans based on risk characteristics, as
discussed below. In addition to the allocated portion of the allowance for loan
losses, we maintain an unallocated portion that is not assigned to any specific
category of loans. This unallocated portion is intended to reserve for the
inherent risk in the portfolio and the intrinsic inaccuracies associated with
the estimation of the allowance for loan losses and its allocation to specific
loan categories. While management believes that it uses the best information
available to establish the allowance for loan losses, future adjustments to the
allowance may be necessary and results of operations could be adversely affected
if circumstances differ substantially from the assumptions used in making the
determinations. Furthermore, while we believe we have established the allowance
for loan losses in conformity with generally accepted accounting principles,
there can be no assurance that regulators, in reviewing our portfolio, will not
require an increase in our allowance for loan losses. In addition, because
future events affecting borrowers and collateral cannot be predicted with
certainty, there can be no assurance that the existing allowance for loan losses
is adequate or that increases will not be necessary should the quality of any
loans deteriorate as a result of the factors discussed herein. Any material
increase in the allowance for loan losses may adversely affect our financial
condition and results of operations.

The following table shows the allocation of the allowance for loan losses at the
dates indicated. The allocation is based on an evaluation of defined loan
problems, historical ratios of loan losses and other factors that may affect
future loan losses in the categories of loans shown.

<TABLE>
<CAPTION>
                                                                         At December 31,
                                               --------------------------------------------------------------------
                                                            2002                                 2001
                                               -------------------------------     --------------------------------
                                                                  % of Total                           % of Total
                                                  Amount           Loans (1)           Amount           Loans (1)
                                               -------------     -------------     -------------     --------------
<S>                                            <C>                       <C>       <C>                        <C>
                                                                     (Dollars in thousands)
Balance applicable to:
  Commercial                                   $         950             48.5%     $         900              57.2%
  Real estate - construction                             210             14.2%               120               9.4%
  Real estate - mortgage                                 340             24.7%               150              20.9%
  Consumer                                               120              7.7%                90               7.2%
  Home equity lines of credit                             50              4.9%                50               5.3%
  Unallocated                                             51                -                125                -
                                               -------------     ------------      -------------     ------------

  Total                                        $       1,721            100.0%     $       1,435            100.00%
                                               =============     ============      =============     =============
</TABLE>



                                    Page 30
<PAGE>

<TABLE>
<CAPTION>
                                                                         At December 31,
                                               --------------------------------------------------------------------
                                                            2000                                 1999
                                               -------------------------------     --------------------------------
                                                                  % of Total                           % of Total
                                                  Amount           Loans (1)           Amount           Loans (1)
                                               -------------     -------------     -------------     --------------
<S>                                            <C>                       <C>       <C>                        <C>
                                                                     (Dollars in thousands)
Balance applicable to:
  Commercial                                   $         581             47.0%     $         203              45.9%
  Real estate - construction                              90              8.4%                35               8.8%
  Real estate - mortgage                                 230             30.3%                49              28.7%
  Consumer                                                79              8.7%                65              12.6%
  Home equity lines of credit                             47              5.6%                12               4.0%
  Unallocated                                              1                -                 98                -
                                               -------------     ------------      -------------     -------------

  Total                                        $       1,028            100.0%     $         462             100.0%
                                               =============     ============      =============     =============
</TABLE>

(1) Represents total of all outstanding loans in each category as a percent of
total loans outstanding.

The following table sets forth for the periods indicated information regarding
changes in the Company's allowance for loan losses:

<TABLE>
<CAPTION>
                                                                 At or for the Years Ended December 31,
                                               --------------------------------------------------------------------
                                                   2002              2001               2000              1999
                                               -------------     -------------     -------------     --------------
<S>                                            <C>               <C>               <C>               <C>
                                                                     (Dollars in thousands)

Balance at beginning of period                 $       1,435     $       1,028     $         462     $           10
                                               -------------     -------------     -------------     --------------
Charge-offs:
  Commercial                                            (146)              (20)                -                  -
  Real estate                                            (18)                -                 -                  -
  Consumer                                               (30)              (17)               (7)                (3)
  Home equity lines of credit                              -                 -                 -                  -
                                               -------------     -------------     -------------     --------------
     Total charge-offs                                  (194)              (37)               (7)                (3)
                                               -------------     -------------     -------------     --------------
Recoveries:
  Commercial                                               -                 -                 -                  -
  Real estate                                              -                 4                 -                  -
  Home equity lines of credit                              -                 -                 -                  -
                                               -------------     -------------     -------------     --------------
     Total recoveries                                      -                 4                 -                  -
                                               -------------     -------------     -------------     --------------

Net charge-offs                                         (194)              (33)               (7)                (3)

Allowance for loan losses on
  loans purchased                                          -                 -                91                  -

Provision for loan losses charged
  to operations                                          480               440               482                455
                                               -------------     -------------     -------------     --------------

Balance at end of period                       $       1,721     $       1,435     $       1,028     $          462
                                               =============     =============     =============     ==============

Ratio of net loan charge-offs to
  average loans outstanding                            0.15%             0.04%             0.01%              0.02%
</TABLE>


                              INVESTMENT ACTIVITIES

The Company's portfolio of investment securities, all of which are available for
sale, consists primarily of U.S. Treasury and government agency securities, and
mortgage-backed securities. Securities to be held for indefinite periods of time
and not intended to be held to maturity are classified as available for sale and
carried at fair value with any unrealized gains or losses reflected as an
adjustment to stockholders' equity. Securities held for indefinite


                                    Page 31
<PAGE>

 periods of time include securities that management intends to use as part of
its asset/liability management strategy and that may be sold in response to
changes in interest rates and/or significant prepayment risks. It is the
Company's policy to classify all investment securities as available for sale.
The following table summarizes the amortized costs, gross unrealized gains and
losses and the resulting market value of securities available for sale:

<TABLE>
<CAPTION>
                                                                       Gross             Gross
                                                    Amortized       Unrealized        Unrealized         Market
                                                      Cost             Gains            Losses            Value
                                                 -------------     -------------    -------------     -------------
<S>                                              <C>               <C>              <C>               <C>
                                                                       (Dollars in thousands)
December 31, 2002
   U.S. government agencies                      $      24,020     $         293    $           -     $      24,313
   Corporate debt securities                             1,397                41                -             1,438
   Mortgage-backed securities                           18,496               355                1            18,850
                                                 -------------     -------------    -------------     -------------

                                                 $      43,913     $         689    $           1     $      44,601
                                                 =============     =============    =============     =============

December 31, 2001
   U.S. government agencies                      $      16,807     $          94    $          65     $      16,836
   Corporate debt securities                               377                 -                1               376
   Mortgage-backed securities                           13,844               170                -            14,014
                                                 -------------     -------------    -------------     -------------

                                                 $      31,028     $         264    $          66     $      31,226
                                                 =============     =============    =============     =============

December 31, 2000
   U.S. government agencies                      $      10,654     $         208    $           -     $      10,862
   Corporate debt securities                             2,349                31                -             2,380
   Mortgage-backed securities                            8,658               107                9             8,756
                                                 -------------     -------------    -------------     -------------

                                                 $      21,661     $         346    $           9     $      21,998
                                                 =============     =============    =============     =============
</TABLE>

The following table summarizes the amortized costs, fair values and weighted
average yields of securities available-for-sale at December 31, 2002, by
contractual maturity groups:

<TABLE>
<CAPTION>
                                                                                                        Weighted
                                                                 Amortized            Fair               Average
                                                                   Cost               Value             Yield (1)
                                                               ------------       ------------       --------------
<S>                                                            <C>                <C>                         <C>
                                                                             (Dollars in thousands)
Securities available for sale:
   U.S. Government agencies:
     Due after one but within five years                       $     11,727       $     11,935                3.60%
     Due after five but within ten years                             12,294             12,378                3.56%
                                                               ------------       ------------
                                                                     24,021             24,313                3.58%
                                                               ------------       ------------
   Corporate debt securities:
     Due after one but within five years                              1,397              1,438                5.90%
                                                               ------------       ------------

   Mortgage-backed securities:
     Due after one but within five years                              2,644              2,711                4.43%
     Due after five but within ten years                              3,472              3,507                4.54%
     Due after ten years                                             12,379             12,632                4.81%
                                                               ------------       ------------
                                                                     18,496             18,850                4.70%
                                                               ------------       ------------
   Total securities available for sale:
     Due after one but within five years                             15,768             16,084                3.95%
     Due after five but within ten years                             15,766             15,885                3.78%
     Due after ten years                                             12,379             12,632                4.81%
                                                               ------------       ------------
                                                               $     43,913       $     44,601                4.13%
                                                               ============       ============
</TABLE>

(1) Yields on tax-exempt investments have been adjusted to a taxable equivalent
basis using a 34% tax rate.


                                    Page 32
<PAGE>

The Company does not engage in, nor does it presently intend to engage in,
securities trading activities and therefore does not maintain a trading account.
At December 31, 2002, there were no securities of any issuer (other than
governmental agencies) that exceeded 10% of the Company's shareholders' equity.


                                SOURCES OF FUNDS

DEPOSIT ACTIVITIES

The Company provides a range of deposit services, including non-interest-bearing
checking accounts, interest-bearing checking and savings accounts, money market
accounts and certificates of deposit. These accounts generally earn interest at
rates established by management based on competitive market factors and
management's desire to increase or decrease certain types or maturities of
deposits. The Company has used brokered deposits as a funding source. However,
it strives to establish customer relations to attract core deposits in
non-interest-bearing transactional accounts and thus to reduce its costs of
funds.

The following table sets forth for the periods indicated the average balances
outstanding and average interest rates for each major category of deposits.

<TABLE>
<CAPTION>
                                                                         At December 31,
                                         ----------------------------------------------------------------------------
                                                    2002                    2001                      2000
                                         ------------------------  ----------------------   -------------------------
                                           Average        Average    Average      Average    Average         Average
                                           Balance         Rate      Balance       Rate      Balance          Rate
                                         -----------    ---------  ----------    --------   ---------      ----------
<S>                                      <C>              <C>      <C>              <C>     <C>               <C>
                                                                   (Dollars in thousands)
Interest-bearing NOW, money
 market and savings accounts             $  28,131        1.01%    $  19,534        2.05%   $   13,732        3.36%

Time deposits                               98,288        3.54%       72,753        5.50%       45,342        6.09%
                                         ---------                 ---------                ----------

      Total interest-bearing deposits      126,419        2.98%       92,287        4.77%       59,074        5.46%

Demand and other non-interest-bearing
 deposits                                   15,166                     9,489                     6,323
                                         ---------                 ---------                ----------

      Total average deposits             $ 141,585        2.66%    $ 101,776        4.32%   $   65,397        4.93%
                                         =========                 =========                ==========
</TABLE>

The following table sets forth at the dates indicated the amounts and maturities
of certificates of deposit with balances of $100,000 or more at December 31,
2002:

                                                           At December 31, 2002
                                                           --------------------
                                                          (Dollars in thousands)
              Remaining maturity:
                Less than three months                          $      7,752
                Over three months through one year                    24,568
                Over one year through three years                     11,588
                Over three years through five years                      952
                                                                ------------

                           Total                                $     44,860
                                                                ============


                                    Page 33
<PAGE>

BORROWINGS

As additional sources of funding, the Company uses advances from the Federal
Home Loan Bank of Atlanta under a line of credit equal to 25% of the Bank's
total assets ($57.8 million at December 31, 2002). Outstanding advances at
December 31, 2002 were as follows:

<TABLE>
<CAPTION>
                                                   Interest
               Maturity                              Rate                              2002               2001
         --------------------                   --------------                    --------------    ---------------

         <S>                                    <C>                              <C>               <C>
         November 6, 2002                              2.43%                      $            -    $     5,000,000
         December 26, 2002                             4.30%                                   -          5,000,000
         February 20, 2003                             1.34%                           5,000,000                  -
         May 21, 2003                                  1.51%                           5,000,000                  -
         December 19, 2003                             1.80%                           5,000,000                  -
         February 27, 2006                             5.45%                           1,400,000          1,800,000
         March 17, 2010                                5.71%                           1,500,000          1,500,000
         November 10, 2010                             5.43%                           5,000,000          5,000,000
         January 24, 2012                              3.88%                           5,500,000                  -
                                                                                  --------------    ---------------

                                                                                  $   28,400,000    $    18,300,000
                                                                                  ==============    ===============
</TABLE>


Pursuant to collateral agreements with the Federal Home Loan Bank, at December
31, 2002, advances are secured by investment securities available for sale and
by loans with a carrying amount of $5.2 million, which approximates market
value.

In addition, the Company may purchase federal funds through five unsecured
federal funds lines of credit aggregating $34.7 million. These lines are
intended for short-term borrowings and are subject to restrictions limiting the
frequency and term of advances. These lines of credit are payable on demand and
bear interest based upon the daily federal funds rate. The Company had $3.0
million outstanding on this line of credit as of December 31, 2002. The maximum
amount outstanding under these lines of credit at any month-end during 2002 was
$4.2 million.


                          ITEM 7 - FINANCIAL STATEMENTS

                 GATEWAY FINANCIAL HOLDINGS, INC. & SUBSIDIARIES
                 INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

                                                                        Page No.
                                                                        --------

Independent Auditors' Report.........................................      35

Consolidated Balance Sheets as of December 31, 2002 and 2001.........      36

Consolidated Statements of Operations
   for the years ended December 31, 2002 and 2001....................      37

Consolidated Statements of Comprehensive Income
   for the years ended December 31, 2002 and 2001....................      38

Consolidated Statements of Changes in Stockholders' Equity
   for the years ended December 31, 2002 and 2001....................      39

Consolidated Statements of Cash Flows
   for the years ended December 31, 2002 and 2001....................      40

Notes to Consolidated Financial Statements...........................      41


                                    Page 34
<PAGE>


                          INDEPENDENT AUDITORS' REPORT




To the Stockholders and the Board of Directors
Gateway Financial Holdings, Inc.
Elizabeth City, North Carolina


We have audited the accompanying consolidated balance sheets of Gateway
Financial Holdings, Inc. and subsidiaries as of December 31, 2002 and 2001, and
the related consolidated statements of operations, comprehensive income, changes
in stockholders' equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Gateway Financial
Holdings, Inc. and subsidiaries at December 31, 2002 and 2001 and the results of
their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.

As discussed in Note B to the consolidated financial statements, effective
January 1, 2002 the Company adopted the provisions of Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets, and
Statement of Financial Accounting Standards No. 147, Acquisitions of Certain
Financial Institutions.


/s/ Dixon Odom PLLC

Sanford, North Carolina
February 14, 2003


                                    Page 35
<PAGE>


GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
ASSETS                                                                               2002                2001
                                                                               ----------------    ----------------
<S>                                                                            <C>                 <C>

Cash and due from banks                                                        $      7,639,349    $      4,739,042
Interest-earning deposits in other banks                                              1,869,129           7,899,816
Investment in securities available for sale, at fair value (Note C)                  44,600,982          31,226,036

Loans (Note D)                                                                      161,487,359         107,239,691
Allowance for loan losses (Note D)                                                   (1,720,752)         (1,435,185)
                                                                               ----------------    ----------------

                                                                  NET LOANS         159,766,607         105,804,506

Accrued interest receivable                                                           1,166,849             766,027
Stock in Federal Reserve Bank, at cost                                                  467,400             467,400
Stock in Federal Home Loan Bank of Atlanta, at cost                                   1,670,000             915,000
Foreclosed real estate                                                                  230,000             229,912
Premises and equipment, net (Note E)                                                 10,464,678           5,792,725
Core deposit intangibles, net (Note R)                                                  349,693             398,488
Goodwill (Notes O and R)                                                              1,940,752           1,940,752
Other assets                                                                            887,652             652,302
                                                                               ----------------    ----------------

                                                               TOTAL ASSETS    $    231,053,091    $    160,832,006
                                                                               ================    ================

LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits
   Demand                                                                      $     23,483,390    $     11,904,067
   Savings                                                                            2,406,050           1,967,470
   Money market and NOW                                                              32,034,670          18,521,918
   Time (Note F)                                                                    116,738,918          83,323,879
                                                                               ----------------    ----------------

                                                             TOTAL DEPOSITS         174,663,028         115,717,334

Federal funds purchased (Note G)                                                      3,001,000           3,000,000
Advances from Federal Home Loan Bank (Note G)                                        28,400,000          18,300,000
Accrued expenses and other liabilities                                                1,021,282             816,774
                                                                               ----------------    ----------------

                                                          TOTAL LIABILITIES         207,085,310         137,834,108
                                                                               ----------------    ----------------

Stockholders' Equity (Notes I, K and N)
   Preferred stock, 1,000,000 shares authorized, none issued                                  -                   -
   Common  stock,  no par value,  10,000,000  shares  authorized,
    3,006,007 and  2,732,765  shares  issued and  outstanding  at
    December 31, 2002 and 2001, respectively                                         24,787,736          24,788,037
   Accumulated deficit                                                               (1,301,469)         (1,928,745)
   Accumulated other comprehensive income                                               481,514             138,606
                                                                               ----------------    ----------------

                                                 TOTAL STOCKHOLDERS' EQUITY          23,967,781          22,997,898
                                                                               ----------------    ----------------

Commitments (Notes D and L)

                                                      TOTAL LIABILITIES AND
                                                       STOCKHOLDERS' EQUITY    $    231,053,091    $    160,832,006
                                                                               ================    ================
</TABLE>

See accompanying notes.


                                    Page 36
<PAGE>


GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                                       2002               2001
                                                                                  --------------    ---------------
<S>                                                                               <C>               <C>

INTEREST INCOME
   Interest and fees on loans                                                     $    8,178,089    $     7,288,058
   Interest on investment securities                                                   1,958,633          1,620,387
   Interest-earning bank deposits                                                         67,059            149,418
   Other interest and dividends                                                          107,062             67,692
                                                                                  --------------    ---------------

                                                       TOTAL INTEREST INCOME          10,310,843          9,125,555
                                                                                  --------------    ---------------

INTEREST EXPENSE
   Money market, NOW and savings deposits                                                284,490            400,638
   Time deposits (Note F)                                                              3,478,497          3,997,685
   Federal funds purchased                                                                16,401             77,889
   Advances from Federal Home Loan Bank                                                1,039,169            582,953
                                                                                  --------------    ---------------

                                                      TOTAL INTEREST EXPENSE           4,818,557          5,059,165
                                                                                  --------------    ---------------

                                                         NET INTEREST INCOME           5,492,286          4,066,390

PROVISION FOR LOAN LOSSES (Note D)                                                       480,000            440,000
                                                                                  --------------    ---------------

                                                   NET INTEREST INCOME AFTER
                                                   PROVISION FOR LOAN LOSSES           5,012,286          3,626,390
                                                                                  --------------    ---------------

NON-INTEREST INCOME
   Service charges on deposit accounts                                                   581,595            380,987
   Other service fee income                                                              486,718            310,869
   Gain on sale of securities                                                            265,859            180,528
   Insurance operations                                                                1,264,445          1,211,588
   Brokerage operations                                                                  192,666            303,039
   Other                                                                                  34,221             33,114
                                                                                  --------------    ---------------

                                                   TOTAL NON-INTEREST INCOME           2,825,504          2,420,125
                                                                                  --------------    ---------------

NON-INTEREST EXPENSE
   Personnel costs                                                                     3,947,146          2,956,096
   Occupancy and equipment                                                               974,298            768,073
   Data processing fees                                                                  493,051            388,245
   Other (Note J)                                                                      1,796,019          1,387,203
                                                                                  --------------    ---------------

                                                  TOTAL NON-INTEREST EXPENSE           7,210,514          5,499,617
                                                                                  --------------    ---------------

                                                  INCOME BEFORE INCOME TAXES             627,276            546,898

INCOME TAXES (Note H)                                                                          -                  -
                                                                                  --------------    ---------------

                                                                  NET INCOME      $      627,276    $       546,898
                                                                                  ==============    ===============

                                                BASIC AND DILUTED NET INCOME
                                                            PER COMMON SHARE      $          .21    $           .23
                                                                                  ==============    ===============
</TABLE>

See accompanying notes.


                                    Page 37
<PAGE>


GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                                       2002               2001
                                                                                  --------------    ---------------
<S>                                                                               <C>               <C>
Net income                                                                        $      627,276    $       546,898
                                                                                  --------------    ---------------

Other comprehensive income:
   Securities available for sale:
     Unrealized holding gains on available-for-sale securities                           755,667             40,935
       Tax effect                                                                       (226,635)          (113,558)
     Reclassification of gains recognized in net income                                 (265,859)          (180,528)
       Tax effect                                                                         79,735             54,158
                                                                                  --------------    ---------------
         Total other comprehensive income (loss)                                         342,908           (198,993)
                                                                                  --------------    ---------------

Comprehensive income                                                              $      970,184    $       347,905
                                                                                  ==============    ===============
</TABLE>


See accompanying notes.




                                    Page 38
<PAGE>

GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                          Accumulated
                                                                                            Other
                                         Common Stock          Additional                 Comprehensive
                                   -------------------------     Paid-In     Accumulated    Income         Total
                                     Shares        Amount        Capital       Deficit      (Loss)        Equity
                                   -----------   -----------  -----------   -----------   -----------  ------------
<S>                                  <C>         <C>          <C>           <C>           <C>          <C>

Balance at December 31, 2000         1,621,792   $ 8,108,960  $ 7,469,945   $(2,475,643)  $   337,599  $ 13,440,861

  Net income                                 -             -            -       546,898             -       546,898

  Other comprehensive loss                   -             -            -             -      (198,993)     (198,993)

  Issuance of common stock           1,110,973     5,554,865    3,654,267             -             -     9,209,132

  Effect of holding company
    reorganization                           -    11,124,212  (11,124,212)            -             -             -
                                   -----------   -----------  -----------   -----------   -----------  ------------

Balance at December 31, 2001         2,732,765    24,788,037            -    (1,928,745)      138,606    22,997,898

  Net income                                 -             -            -       627,276             -       627,276

  Other comprehensive income                 -             -            -             -       342,908       342,908

  Shares issued in 11-for-10 stock
    split effected as a 10% stock
    dividend                           273,242             -            -             -             -             -

  Cash paid for fractional shares            -          (301)           -             -             -          (301)
                                   -----------   -----------  -----------   -----------   -----------  ------------

Balance at December 31, 2002         3,006,007   $24,787,736  $         -   $(1,301,469)  $   481,514  $ 23,967,781
                                   ===========   ===========  ===========   ===========   ===========  ============
</TABLE>


See accompanying notes.

                                    Page 39
<PAGE>

GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                                        2002              2001
                                                                                   --------------    --------------
<S>                                                                                <C>               <C>

CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                                                      $      627,276    $      546,898
   Adjustments to reconcile net income to net
     cash provided by operating activities:
     Amortization of intangibles                                                           48,705           254,002
     Depreciation and amortization                                                        555,219           237,988
     Realized gain on available-for-sale securities                                      (265,859)         (180,528)
     Realized loss on sale of foreclosed real estate                                       36,536                 -
     Provision for loan losses                                                            480,000           440,000
     Change in assets and liabilities:
       (Increase) decrease in accrued interest receivable                                (400,822)           67,542
       Increase in other assets                                                          (235,260)         (252,691)
       Increase in accrued expenses and other liabilities                                  57,608           289,453
                                                                                   --------------    --------------

                                                          NET CASH PROVIDED BY
                                                          OPERATING ACTIVITIES            903,403         1,402,664
                                                                                   --------------    --------------
CASH FLOWS FROM INVESTING ACTIVITIES
   Purchases of available-for-sale securities                                         (45,289,461)      (30,398,637)
   Maturities, sales and calls of available-for-sale securities                        32,472,334        21,293,722
   Net increase in loans from originations and repayments                             (54,672,101)      (31,731,887)
   Proceeds from sale of foreclosed real estate                                           193,376           151,053
   Purchases of premises and equipment                                                 (5,029,324)       (2,062,175)
   Purchase of Federal Reserve Bank stock                                                       -          (467,400)
   Purchase of Federal Home Loan Bank stock                                              (755,000)         (590,000)
   Net cash (paid) received in branch and subsidiary acquisitions                               -          (600,000)
                                                                                   --------------    --------------

                                                              NET CASH USED BY
                                                          INVESTING ACTIVITIES        (73,080,176)      (44,405,324)
                                                                                   --------------    --------------
CASH FLOWS FROM FINANCING ACTIVITIES
   Increase in deposits                                                                58,945,694        25,424,750
   Net increase in FHLB advances                                                       10,100,000        11,800,000
   Net increase in federal funds purchased                                                  1,000         3,000,000
   Net repayments on other borrowings                                                           -           (92,585)
   Proceeds from issuance of common stock                                                       -         9,209,132
   Cash paid for fractional shares                                                           (301)                -
                                                                                   --------------    --------------

                                                          NET CASH PROVIDED BY
                                                          FINANCING ACTIVITIES         69,046,393        49,341,297
                                                                                   --------------    --------------

                                                   NET INCREASE (DECREASE) IN
                                                     CASH AND CASH EQUIVALENTS         (3,130,380)        6,338,637

CASH AND CASH EQUIVALENTS, BEGINNING                                                   12,638,858         6,300,221
                                                                                   --------------    --------------

                                             CASH AND CASH EQUIVALENTS, ENDING     $    9,508,478    $   12,638,858
                                                                                   ==============    ==============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
   Interest paid                                                                   $    4,772,283    $    4,707,079
                                                                                   ==============    ==============

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITIES
   Unrealized holding gains (losses) on available-for-sale securities, net         $      342,908    $     (198,993)
                                                                                   ==============    ==============

   Transfer from loans to real estate acquired in settlement of loans              $      230,000    $      380,965
                                                                                   ==============    ==============
</TABLE>

Noncash assets acquired and liabilities assumed in a business combination are
presented in Note P.


See accompanying notes.

                                    Page 40
<PAGE>


GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------


NOTE A - ORGANIZATION AND OPERATIONS

Gateway Bank & Trust Co. (the "Bank") was incorporated November 24, 1998 and
began banking operations on December 1, 1998. Effective October 1, 2001, the
Bank became a wholly-owned subsidiary of Gateway Financial Holdings, Inc., a
newly formed financial holding company whose principal business activity
consists of the ownership of the Bank. Gateway Financial Holdings, Inc., the
Bank and the Bank's wholly-owned subsidiaries are collectively referred to
herein as the "Company."

The Bank is engaged in general commercial and retail banking in Northeastern
North Carolina, principally Pasquotank, Camden and Washington Counties, and in
the Tidewater area of Southeastern Virginia, operating under state banking laws
and the rules and regulations of the Federal Deposit Insurance Corporation, the
North Carolina Commissioner of Banks and the Virginia Bureau of Financial
Institutions. The Bank undergoes periodic examinations by those regulatory
authorities.

The Bank has two wholly-owned subsidiaries, Gateway Investment Services, Inc.,
whose principal activity is to engage in brokerage services as an agent for
non-bank investment products and services, and Gateway Insurance Services, Inc.,
an independent insurance agency with offices in Edenton, Hertford, Elizabeth
City and Kitty Hawk, North Carolina.


NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Gateway Financial
Holdings, Inc. and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses.

CASH AND CASH EQUIVALENTS

For the purpose of presentation in the statement of cash flows, cash and cash
equivalents are defined as those amounts included in the balance sheet captions
"Cash and due from banks" and "Interest-earning deposits in other banks."

INVESTMENT SECURITIES HELD TO MATURITY

Investment securities that management has the positive intent and ability to
hold to maturity are reported at cost, adjusted for premiums and discounts that
are recognized in interest income using the interest method over the period to
maturity.


                                    Page 41
<PAGE>

GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INVESTMENT SECURITIES AVAILABLE FOR SALE

Investment securities available for sale are reported at fair value and consist
of debt instruments that are not classified as either trading securities or as
held to maturity securities. Unrealized holding gains and losses, net of
deferred income tax, on available for sale securities are reported as a net
amount in other comprehensive income. Gains and losses on the sale of investment
securities available for sale are determined using the specific-identification
method. Declines in the fair value of individual held to maturity and investment
securities available for sale below their cost that are other than temporary
would result in write-downs of the individual securities to their fair value.
Such write-downs would be included in earnings as realized losses. Premiums and
discounts are recognized in interest income using the interest method over the
period to maturity.

LOANS

Loans that management has the intent and ability to hold for the foreseeable
future or until maturity are reported at their outstanding principal adjusted
for any charge-offs, the allowance for loan losses, and any deferred fees or
costs on originated loans and unamortized premiums or discounts on purchased
loans. Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield of the related loan.
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the extent cash payments are
received.

ALLOWANCE FOR LOAN LOSSES

The provision for loan losses is based upon management's estimate of the amount
needed to maintain the allowance for loan losses at an adequate level. In making
the evaluation of the adequacy of the allowance for loan losses, management
gives consideration to current economic conditions, statutory examinations of
the loan portfolio by regulatory agencies, delinquency information and
management's internal review of the loan portfolio. Loans are considered
impaired when it is probable that all amounts due under the contractual terms of
the loan will not be collected. The measurement of impaired loans is generally
based on the present value of expected future cash flows discounted at the
historical effective interest rate, or upon the fair value of the collateral if
readily determinable. If the recorded investment in the loan exceeds the measure
of fair value, a valuation allowance is established as a component of the
allowance for loan losses. While management uses the best information available
to make evaluations, future adjustments to the allowance may be necessary if
conditions differ substantially from the assumptions used in making the
evaluations. In addition, regulatory examiners may require the Bank to recognize
changes to the allowance for loan losses based on their judgments about
information available to them at the time of their examination.

FORECLOSED REAL ESTATE

Real estate acquired through, or in lieu of, loan foreclosure is initially
recorded at fair value at the date of foreclosure establishing a new cost basis.
After foreclosure, valuations of the property are periodically performed by
management and the real estate is carried at the lower of cost or fair value
minus estimated cost to sell. Revenue and expenses from operations and changes
in the valuation allowance are included in other non-interest expense.


                                    Page 42
<PAGE>

GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

PREMISES AND EQUIPMENT

Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated on the straight-line method over the estimated useful
asset lives of 3 - 10 years for furniture and equipment, 5 years for vehicles,
and 40 years for bank premises. Leasehold improvements are amortized over the
terms of the respective leases or the estimated useful lives of the
improvements, whichever is shorter. Repairs and maintenance costs are charged to
operations as incurred and additions and improvements to premises and equipment
are capitalized. Upon sale or retirement, the cost and related accumulated
depreciation are removed from the accounts and any gains or losses are reflected
in current operations.

FEDERAL HOME LOAN BANK AND FEDERAL RESERVE BANK STOCK

As a requirement for membership, the Company invests in stock of the Federal
Home Loan Bank of Atlanta ("FHLB") and the Federal Reserve Bank ("FRB"). These
investments are carried at cost.

INTANGIBLE ASSETS

Branch and business acquisitions typically result in the Company recording
certain intangible assets, principally deposit base premiums and goodwill. The
Company's policy is to amortize core deposit intangibles on a straight-line
basis over ten years. Other acquisition-related intangible assets, including
goodwill and intangible assets previously subject to Statement of Financial
Accounting Standards No. 72, Accounting for Certain Acquisitions of Banking or
Thrift Institutions, are subject to periodic review and are adjusted for any
impairment in value. As discussed in RECENT ACCOUNTING PRONOUNCEMENTS below,
recently issued accounting pronouncements have significantly affected the way
the Company records and accounts for acquisition-related intangible assets.

INCOME TAXES

Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the tax bases of assets and
liabilities and their carrying amounts for financial reporting purposes.
Deferred tax assets are also recognized for operating loss carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates in
effect for the year in which the temporary differences are expected to be
recovered or settled. Deferred tax assets are reduced by a valuation allowance
if it is more likely than not that the tax benefits will not be realized.

COMPREHENSIVE INCOME

The Company reports as comprehensive income all changes in shareholders' equity
during the year from sources other than shareholders. Other comprehensive income
refers to all components (revenues, expenses, gains, and losses) of
comprehensive income that are excluded from net income. The Company's only
component of other comprehensive income is unrealized gains and losses on
investment securities available for sale.



                                    Page 43
<PAGE>

GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

STOCK COMPENSATION PLANS

Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation, encourages all entities to adopt a fair value based
method of accounting for employee stock compensation plans, whereby compensation
cost is measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting period.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, whereby compensation cost is the excess, if any, of the quoted market
price of the stock at the grant date (or other measurement date) over the amount
an employee must pay to acquire the stock. Stock options issued under the
Company's stock option plan have no intrinsic value at the grant date and, under
Opinion No. 25, no compensation cost is recognized for them. The Company has
elected to continue with the accounting methodology in Opinion No. 25 and, as a
result, has provided pro forma disclosures of net income and earnings per share
and other disclosures as if the fair value based method of accounting had been
applied.

<TABLE>
<CAPTION>
                                                                                        2002              2001
                                                                                   --------------    --------------
<S>                                                                                <C>               <C>
                                                                                       (Amounts in thousands,
                                                                                       except per share data)
   Net income:
     As reported                                                                   $          627    $          547
       Deduct:   Total stock-based employee compensation
                 expense determined under fair value method
                 for all awards, net of related tax effects                                   210               534
                                                                                   --------------    --------------
     Pro forma                                                                     $          417    $           13
                                                                                   ==============    ==============

   Basic net income per share:
     As reported                                                                   $          .21    $          .23
     Pro forma                                                                                .14               .01

   Diluted net income per share:
     As reported                                                                   $          .21    $          .23
     Pro forma                                                                                .14               .01
</TABLE>

PER SHARE RESULTS

Basic earnings per share represents income available to common stockholders
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflect additional common shares that would
have been outstanding if dilutive potential common shares had been issued, as
well as any adjustment to income that would result from the assumed issuance.
Potential common shares that may be issued by the Company relate to outstanding
stock options and warrants, and are determined using the treasury stock method.

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

<TABLE>
<CAPTION>
                                                                                       2002               2001
                                                                                   -------------     --------------
<S>                                                                                    <C>                <C>

     Weighted average outstanding shares used for basic EPS                            3,006,007          2,403,046

     Plus incremental shares from assumed exercise of:
       Stock options                                                                       6,645              6,455
       Warrants                                                                                -                  -
                                                                                   -------------     --------------

     Weighted average outstanding shares used for diluted EPS                          3,012,652          2,409,501
                                                                                   =============     ==============
</TABLE>


                                    Page 44
<PAGE>

GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

PER SHARE RESULTS (CONTINUED)

There were no adjustments required to be made to net income in the computation
of diluted earnings per share. For the years ended December 31, 2002 and 2001,
there were options of 499,939 and 298,490, respectively, that were antidilutive
since the exercise price exceeded the average market price of the Company's
common stock for the year. In addition, for the years ended December 31, 2002
and 2001 there were warrants to purchase 1,222,070 shares of common stock that
were antidilutive since the exercise price exceeded the average market price of
the Company's common stock for the year. These options and warrants have been
omitted from the calculation of diluted earnings per share for their respective
years.

On May 14, 2002, the Company's Board of Directors declared an 11-for-10 stock
split to be effected in the form of a 10% stock dividend, which was distributed
June 5, 2002 to shareholders of record on May 22, 2002. All references to per
share results and weighted average common and common equivalent shares
outstanding have been adjusted to reflect the effects of this stock split.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. SFAS No. 141 also specifies criteria that
intangible assets acquired in a purchase method business combination must meet
in order to be recognized and reported apart from goodwill. The Company adopted
this statement July 1, 2001. SFAS No. 142 requires that all goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that identifiable
intangible assets with estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. Certain
provisions of SFAS No. 142 relating to business combinations consummated after
June 30, 2001 were adopted by the Company on July 1, 2001. The remaining
provisions were adopted on January 1, 2002. In connection with SFAS No. 142's
transitional goodwill impairment evaluation, the statement required the Company
to perform an assessment of whether there is an indication that goodwill is
impaired as of the date of adoption. The Company completed this assessment
during 2002 and determined that there was no goodwill impairment.

In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This standard
provides guidance on differentiating between long-lived assets to be held and
used, long-lived assets to be disposed of other than by sale and long-lived
assets to be disposed of by sale. SFAS No. 144 supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 144 also supersedes Accounting Principals Board Opinion
No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. This statement was adopted by the Company on
January 1, 2002 and did not have a material impact on the Company's financial
statements.


                                    Page 45
<PAGE>

GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)

In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial
Institutions, which addresses the financial accounting and reporting for the
acquisition of all or part of a financial institution. This standard removes
certain acquisitions of financial institutions from the scope of SFAS No. 72,
Accounting for Certain Acquisitions of Bank or Thrift Institutions. This
statement requires financial institutions to reclassify goodwill arising from a
qualified business acquisition from SFAS No. 72 goodwill to goodwill subject to
the provisions of SFAS No. 142. The reclassified goodwill will no longer be
amortized but will be subject to an annual impairment test, pursuant to SFAS No.
142. The Company adopted SFAS No. 147 in the fourth quarter of 2002. At the time
of adoption, the Company had $1,278,571 in unamortized SFAS No. 72 goodwill that
arose from the acquisition of two branches in 2000. Amortization expense of
Statement 72 goodwill amounting to $28,205 for the nine months ended September
30, 2002 was removed from expense in connection with the adoption of SFAS No.
147. Retroactively restated operating results for the three quarters ended
September 30, 2002 are presented in Note S.

In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"). FIN 45 requires a liability to
be recognized at the time a company issues a guarantee for the fair value of the
obligations assumed under certain guarantee agreements. Additional disclosures
about guarantee agreements are also required in the interim and annual financial
statements. The disclosure provisions of FIN 45 are effective for the Company on
December 31, 2002. The provisions for initial recognition and measurement of
guarantee agreements are effective on a prospective basis for guarantees that
are issued or modified after December 31, 2002. The Company is in the process of
assessing the impact of FIN 45 on its consolidated financial statements.

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

RECLASSIFICATIONS

Certain amounts for 2001 and 2000 have been reclassified to conform to the
classifications adopted for 2002. These reclassifications had no effect on net
income or stockholders' equity as previously reported.


                                    Page 46
<PAGE>

GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------

NOTE C - INVESTMENT SECURITIES

The following is a summary of the securities portfolio by major classification:

<TABLE>
<CAPTION>
                                                                         December 31, 2002
                                                -------------------------------------------------------------------
                                                                      Gross             Gross
                                                   Amortized       Unrealized        Unrealized           Fair
                                                     Cost             Gains            Losses             Value
                                                -------------     -------------    --------------    --------------
<S>                                             <C>               <C>              <C>               <C>
Securities available-for-sale:
   U. S. government securities and obligations
    of U. S. government agencies                $  24,020,616     $     292,750    $            -    $   24,313,366
   Corporate debt securities                        1,396,828            41,651                 -         1,438,479
   Mortgage-backed securities                      18,495,724           354,934             1,521        18,849,137
                                                -------------     -------------    --------------    --------------

                                                $  43,913,168     $     689,335    $        1,521    $   44,600,982
                                                =============     =============    ==============    ==============

                                                                         December 31, 2001
                                                -------------------------------------------------------------------
                                                                      Gross             Gross
                                                   Amortized       Unrealized        Unrealized           Fair
                                                     Cost             Gains            Losses             Value
                                                -------------     -------------    --------------    --------------
Securities available-for-sale:
   U. S. government securities and obligations
    of U. S. government agencies                $  16,807,235     $      93,405     $      64,312    $   16,836,328
   Corporate debt securities                          377,219                 -             1,747           375,472
   Mortgage-backed securities                      13,843,576           170,660                 -        14,014,236
                                                -------------     -------------    --------------    --------------

                                                $  31,028,030     $     264,065    $       66,059    $   31,226,036
                                                =============     =============    ==============    ==============
</TABLE>

Proceeds from maturities, sales and calls of investment securities during the
years ended December 31, 2002 and 2001 were $32.5 million and $21.3 million,
respectively. From those transactions, the Company realized gross gains of
$265,859 and $186,638 and gross losses of $0 and $6,110 in 2002 and 2001,
respectively.

The amortized cost and fair values of securities available-for-sale at December
31, 2002 by contractual maturity are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.

<TABLE>
<CAPTION>
                                                                                     Amortized            Fair
                                                                                       Cost               Value
                                                                                  --------------    ---------------
<S>                                                                               <C>               <C>

         Due within one year                                                      $            -    $             -
         Due after one year through five years                                        15,767,849         16,084,579
         Due after five years through ten years                                       15,766,103         15,884,782
         Due after ten years                                                          12,379,216         12,631,621
                                                                                  --------------    ---------------

                                                                                  $   43,913,168    $    44,600,982
                                                                                  ==============    ===============
</TABLE>

For purposes of the maturity table, mortgage-backed securities, which are not
due at a single maturity date, have been allocated over maturity groupings based
on the weighted-average contractual maturities of underlying collateral. The
mortgage-backed securities may mature earlier than their weighted-average
contractual maturities because of principal prepayments.


                                    Page 47
<PAGE>

GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------

NOTE C - INVESTMENT SECURITIES (CONTINUED)

Securities with an amortized cost of $40,016,000 and $26,643,000 and a fair
value of $40,660,000 and $26,845,000 at December 31, 2002 and 2001,
respectively, were pledged to secure FHLB advances and public monies on deposit
as required by law.


NOTE D - LOANS

A summary of the balances of loans follows:

<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                                  ---------------------------------
                                                                                      2002                2001
                                                                                  --------------    ---------------
<S>                                                                               <C>               <C>
                                                                                       (Dollars in thousands)

         Commercial                                                               $       78,428    $        61,364
         Real estate - construction                                                       22,861             10,050
         Real estate - commercial mortgage                                                32,932             15,401
         Real estate - 1-4 family mortgage                                                 6,932              7,074
         Consumer                                                                         12,501              7,692
         Home equity lines of credit                                                       7,834              5,659
                                                                                  --------------    ---------------

         Subtotal                                                                        161,488            107,240

         Less:  Allowance for loan losses                                                 (1,721)            (1,435)
                                                                                  --------------    ---------------

         Net loans                                                                $      159,767    $       105,805
                                                                                  ==============    ===============
</TABLE>

Loans are primarily made in Northeastern North Carolina, principally Pasquotank,
Camden and Washington Counties, and the Tidewater area of Southeastern Virginia.
Real estate loans can be affected by the condition of the local real estate
market. Commercial and industrial loans and loans to individuals can be affected
by the local economic conditions. Impaired loans at December 31, 2002 consisted
of loans of approximately $1,328,000 that were more than 90 days delinquent and
on which the accrual of interest had ceased. Interest income that would have
been recorded on nonaccrual loans totaled $100,008 for the year ended December
31, 2002. There were no nonaccrual, restructured or impaired loans at December
31, 2001.

The Company grants loans to directors and executive officers of the Bank and
their related interests. Such loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other borrowers and, in management's opinion, do
not involve more than the normal risk of collectibility. All loans to directors
and executive officers or their related interests are submitted to the Board of
Directors for approval.

A summary of related party loan transactions is as follows:

<TABLE>
<CAPTION>
                                                                                      2002
                                                                                  --------------
<S>                                                                               <C>
         Balance at beginning of year                                             $    7,385,564
         Additions                                                                     5,143,646
         Loan repayments                                                              (4,293,656)
                                                                                  --------------

         Balance at end of year                                                   $    8,235,554
                                                                                  ==============
</TABLE>

At December 31, 2002, the Company had pre-approved but unused lines of credit
totaling $1.6 million to directors, executive officers and their related
interests. At December 31, 2002, the Company had made no commitments to extend
credit to directors, executive officers and their related interests.


                                    Page 48
<PAGE>

GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------

NOTE D - LOANS (CONTINUED)

An analysis of the allowance for loan losses follows:

<TABLE>
<CAPTION>
                                                                    2002               2001               2000
                                                               --------------     --------------    ---------------

<S>                                                            <C>                <C>               <C>
         Balance at beginning of year                          $    1,435,185     $    1,027,834    $       462,483
                                                               --------------     --------------    ---------------

         Provision charged to operations                              480,000            440,000            482,000
                                                               --------------     --------------    ---------------

         Allowance for loan losses on loans purchased                       -                  -             90,531
                                                               --------------     --------------    ---------------

         Charge-offs                                                 (194,694)           (36,447)            (7,180)
         Recoveries                                                       261              3,798                  -
                                                               --------------     --------------    ---------------
         Net charge-offs                                             (194,433)           (32,649)            (7,180)
                                                               --------------     --------------    ---------------

         Balance at end of year                                $    1,720,752     $    1,435,185    $     1,027,834
                                                               ==============     ==============    ===============
</TABLE>


NOTE E - PREMISES AND EQUIPMENT

Following is a summary of premises and equipment at December 31, 2002 and 2001:

<TABLE>
<CAPTION>
                                                                                       2002               2001
                                                                                  --------------    ---------------

<S>                                                                               <C>               <C>
         Land                                                                     $    1,782,092    $     1,736,082
         Furniture and equipment                                                       2,477,195          1,248,642
         Vehicles                                                                        180,273            151,933
         Buildings and improvements                                                    6,443,752          2,808,970
         Construction in progress                                                        414,033            393,598
         Accumulated depreciation                                                       (832,667)          (546,500)
                                                                                  --------------    ---------------

         Total                                                                    $   10,464,678    $     5,792,725
                                                                                  ==============    ===============
</TABLE>

Depreciation and amortization amounting to $357,371 and $237,988 for the years
ended December 31, 2002 and 2001, respectively, is included in occupancy and
equipment expense.

The Company leases, under separate agreements, land on which the permanent
headquarters and adjacent parking lot are located. The Company also leases land
on which its Chesapeake, Virginia branch is located, as well as, its operations
facility and branch facilities in Virginia Beach, Virginia and Edenton, North
Carolina. These leases expire at various dates through December 31, 2019. Future
rentals under these leases are as follows:

                2003                          $      252,494
                2004                                 264,299
                2005                                 247,094
                2006                                 185,156
                2007                                 110,051
             Thereafter                              908,666
                                              --------------

                                              $    1,967,760
                                              ==============

Rental expense amounted to $255,989 and $204,192 during the years ended December
31, 2002 and 2001, respectively.


                                    Page 49
<PAGE>

GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------

NOTE E - PREMISES AND EQUIPMENT (CONTINUED)

Certain leases contain options to extend for up to three consecutive five-year
terms. The Company has an option to purchase the land on which its permanent
headquarters are affixed at the end of the twenty-year lease term for a cost of
$300,000.


NOTE F - DEPOSITS

The weighted average cost of time deposits was 3.17% and 4.20% at December 31,
2002 and 2001, respectively.

Time deposits in denominations of $100,000 or more were $44.9 million and $34.2
million at December 31, 2002 and 2001, respectively. Interest expense on such
deposits aggregated $2.1 million in 2002 and $2.1 million in 2001. At December
31, 2002, the scheduled maturities of time deposits are as follows:

<TABLE>
<CAPTION>
                                                                  $100,000             Under
                                                                  and Over           $100,000             Total
                                                               --------------     --------------    ---------------
         <S>                                                   <C>                <C>               <C>

         2003                                                  $   32,319,472     $   40,364,361    $    72,683,833
         2004                                                       9,500,265         22,049,066         31,549,331
         2005                                                       2,087,828          8,370,786         10,458,614
         2006                                                         766,533            874,826          1,641,359
         2007                                                         186,103            216,729            402,832
         Thereafter                                                         -              2,949              2,949
                                                               --------------     --------------    ---------------


         Total                                                 $   44,860,201     $   71,878,717    $   116,738,918
                                                               ==============     ==============    ===============
</TABLE>


NOTE G - ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER BORROWINGS

Advances from the Federal Home Loan Bank of Atlanta consisted of the following
at December 31, 2002 and 2001:

<TABLE>
<CAPTION>
                                                   Interest
               Maturity                              Rate                              2002               2001
         --------------------                   --------------                    --------------    ---------------
         <S>                                           <C>                        <C>               <C>
         November 6, 2002                              2.43%                      $            -    $     5,000,000
         December 26, 2002                             4.30%                                   -          5,000,000
         February 20, 2003                             1.34%                           5,000,000                  -
         May 21, 2003                                  1.51%                           5,000,000                  -
         December 19, 2003                             1.80%                           5,000,000                  -
         February 27, 2006                             5.45%                           1,400,000          1,800,000
         March 17, 2010                                5.71%                           1,500,000          1,500,000
         November 10, 2010                             5.43%                           5,000,000          5,000,000
         January 24, 2012                              3.88%                           5,500,000                  -
                                                                                  --------------    ---------------

                                                                                  $   28,400,000    $    18,300,000
                                                                                  ==============    ===============
</TABLE>

Pursuant to collateral agreements with the Federal Home Loan Bank, at December
31, 2002 advances are secured by investment securities available for sale and by
loans with a carrying amount of $5.2 million, which approximates market value.
The Company has a maximum borrowing availability from FHLB equal to 25% of total
assets.


                                    Page 50
<PAGE>

GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------

NOTE G - ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER BORROWINGS (CONTINUED)

The Company may purchase federal funds through unsecured federal funds lines of
credit totaling $34.7 million. This line is intended for short-term borrowings
and is subject to restrictions limiting the frequency and term of advances. This
line of credit is payable on demand and bears interest based upon the daily
federal funds rate. The Company had $3.0 million outstanding on this line of
credit as of December 31, 2002. The maximum amount outstanding under this line
of credit at any month-end during 2002 was $4.2 million.


NOTE H - INCOME TAXES

The significant components of the provision for income taxes for the years ended
December 31, 2002 and 2001.

<TABLE>
<CAPTION>
                                                                                       2002               2001
                                                                                  --------------    ---------------
<S>                                                                               <C>               <C>
      Current tax provision                                                       $            -    $             -
      Deferred tax provision                                                             233,000            213,000
                                                                                  --------------    ---------------

             Provision for income tax expense before
              adjustment to deferred tax asset valuation
              allowance                                                                  233,000            213,000

      Decrease in valuation allowance                                                   (233,000)          (213,000)
                                                                                  --------------    ---------------

             Net provision for income taxes                                       $            -    $             -
                                                                                  ==============    ===============
</TABLE>

The difference between the provision for income taxes and the amounts computed
by applying the statutory federal income tax rate of 34% to income before income
taxes is summarized below:

<TABLE>
<CAPTION>
                                                                                       2002               2001
                                                                                  --------------    ---------------
<S>                                                                               <C>               <C>

      Tax computed at the statutory federal rate                                  $      213,000    $       186,000

      Increase (decrease) resulting from:
        State income taxes, net of federal benefit                                        20,000             16,000
        Adjustment to deferred tax asset valuation allowance                            (233,000)          (213,000)
        Other permanent differences                                                            -             11,000
                                                                                  --------------    ---------------

             Provision for income taxes                                           $            -    $             -
                                                                                  ==============    ===============
</TABLE>


                                    Page 51
<PAGE>

GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------

NOTE H - INCOME TAXES (CONTINUED)

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
deferred taxes at December 31, 2002 and 2001 are as follows:

<TABLE>
<CAPTION>
                                                                                       2002               2001
                                                                                  --------------    ---------------
<S>                                                                               <C>               <C>

         Deferred tax assets relating to:
            Allowance for loan losses                                             $      521,000    $       442,000
            Amortization of intangible assets                                                  -             46,000
            Pre-opening costs and expenses                                                47,000             97,000
            Net operating loss carryforwards                                             234,000            309,000
            Other                                                                         91,000             74,000
                                                                                  --------------    ---------------

                  Total deferred tax assets                                              893,000            968,000

         Less valuation allowance                                                       (595,000)          (828,000)
                                                                                  --------------    ---------------

                  Net deferred tax assets                                                298,000            140,000
                                                                                  --------------    ---------------

         Deferred tax liabilities relating to:
            Depreciation                                                                (189,000)           (76,000)
            Deferred loan costs                                                         (107,000)           (64,000)
            Amortization of intangible assets                                             (2,000)                 -
            Unrealized securities gains                                                 (206,300)           (59,400)
                                                                                  --------------    ---------------

                  Total deferred tax liabilities                                        (504,300)          (199,400)
                                                                                  --------------    ---------------

                  Net recorded deferred tax liability                             $     (206,300)   $       (59,400)
                                                                                  ==============    ===============
</TABLE>

The Company has net operating loss carryforwards of approximately $650,000,
expiring at various dates through 2020, which are available to offset future
taxable income.


NOTE I - COMMON STOCK WARRANTS

In connection with the sale of common stock in a secondary stock offering in
2002, the Company issued 1,110,973 warrants for the purchase of the Company's
common stock. Each warrant enables the holder to purchase 1.1 shares of common
stock at $10.09 per share at any time until June 30, 2004.


NOTE J - OTHER NON-INTEREST EXPENSE

The major components of other non-interest expense for the years ended December
31, 2002 and 2001 are as follows:

<TABLE>
<CAPTION>
                                                                                       2002               2001
                                                                                  --------------    ---------------
<S>                                                                               <C>               <C>

         Professional services                                                    $      409,367    $       224,028
         Postage, printing and office supplies                                           450,521            314,986
         Advertising and promotion                                                       138,269             83,136
         Amortization of intangibles                                                      48,705            254,002
         Other                                                                           749,157            511,051
                                                                                  --------------    ---------------

         Total                                                                    $    1,796,019    $     1,387,203
                                                                                  ==============    ===============
</TABLE>



                                    Page 52
<PAGE>

GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------

NOTE K - REGULATORY MATTERS

The Company is subject to various regulatory capital requirements administered
by federal and state banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Company's consolidated financial statements. Quantitative
measures established by regulation to ensure capital adequacy require the
Company to maintain minimum amounts and ratios, as set forth in the table below.
Management believes, as of December 31, 2002, that the Company meets all capital
adequacy requirements to which it is subject. The Company's only significant
asset is its investment in Gateway Bank & Trust Co. Consequently, the
information concerning capital ratios is essentially the same for the Company
and the Bank.

As of December 31, 2002 and 2001, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank must
maintain minimum amounts and ratios, as set forth in the table below. There are
no conditions or events since that notification that management believes have
changed the Bank's category. The Bank's actual capital amounts and ratios are
also presented in the table below as of December 31, 2002:

<TABLE>
<CAPTION>
                                                                                              Minimum to be Well
                                                                                               Capitalized under
                                                                     Minimum for Capital       Prompt Corrective
                                                 Actual               Adequacy Purposes        Action Provisions
                                         -----------------------  -----------------------   -----------------------
                                           Amount        Ratio      Amount        Ratio       Amount        Ratio
                                         ----------   ----------  -----------  ----------   ----------  -----------
<S>                                      <C>              <C>     <C>               <C>     <C>              <C>
                                                                   (Dollars in thousands)

AS OF DECEMBER 31, 2002:

Total Capital (to Risk-Weighted Assets)  $   22,917       12.51%  $    14,659       8.00%   $   18,323       10.00%

Tier I Capital (to Risk-Weighted Assets)     21,196       11.57%        7,329       4.00%       10,994        6.00%

Tier I Capital (to Average Assets)           21,196        9.71%        8,734       4.00%       10,918        5.00%

AS OF DECEMBER 31, 2001:

Total Capital (to Risk-Weighted Assets)  $   21,955       17.89%  $     9,818       8.00%   $   12,273       10.00%

Tier I Capital (to Risk-Weighted Assets)     20,520       16.72%        4,909       4.00%        7,364        6.00%

Tier I Capital (to Average Assets)           20,520       13.74%        5,975       4.00%        7,469        5.00%
</TABLE>


The Bank may not declare or pay a cash dividend, or repurchase any of its
capital stock, if the effect would cause the regulatory net worth of the Bank to
fall to an amount which is less than the minimum required by the FDIC and the
North Carolina Office of the Commissioner of Banks.


NOTE L - OFF-BALANCE SHEET RISK

The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the balance
sheet. The contract or notional amounts of those instruments reflect the extent
of involvement the Company has in particular classes of financial instruments.
The Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.



                                    Page 53
<PAGE>

GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------

NOTE L - OFF-BALANCE SHEET RISK (CONTINUED)

Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of conditions established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank, upon extension of credit is based on management's
credit evaluation of the borrower. Collateral obtained varies but may include
real estate, stocks, bonds, and certificates of deposit.

A summary of the contract amount of the Company's exposure to off-balance sheet
risk as of December 31, 2002 is as follows:

<TABLE>
<CAPTION>
                  Financial instruments whose contract amounts represent credit
                   risk:
                    <S>                                                            <C>
                    Commitments to extend credit                                   $   13,749,000
                    Undisbursed lines of credit                                        36,901,000
                    Standby letters of credit                                           1,059,000
</TABLE>


NOTE M - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS

Financial instruments include cash and due from banks, interest-earning deposits
with banks, investments, loans, stock in the Federal Reserve Bank and the
Federal Home Loan Bank of Atlanta, deposit accounts and borrowings. Fair value
estimates are made at a specific moment in time, based on relevant market
information and information about the financial instrument. These estimates do
not reflect any premium or discount that could result from offering for sale at
one time the Company's entire holdings of a particular financial instrument.
Because no active market readily exists for a portion of the Company's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment and,
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.

The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:

CASH AND DUE FROM BANKS AND INTEREST-EARNING DEPOSITS WITH BANKS

The carrying amounts for cash and due from banks and interest-earning deposits
with banks approximate fair value because of the short maturities of those
instruments.

INVESTMENT SECURITIES

Fair value for investment securities equals quoted market price if such
information is available. If a quoted market price is not available, fair value
is estimated using quoted market prices for similar securities.

LOANS

For certain homogenous categories of loans, such as residential mortgages, fair
value is estimated using the quoted market prices for securities backed by
similar loans, adjusted for differences in loan characteristics. The fair value
of other types of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.



                                    Page 54
<PAGE>

GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------

NOTE M - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)

STOCK IN FEDERAL RESERVE BANK AND FEDERAL HOME LOAN BANK OF ATLANTA

The fair value for FRB and FHLB stock approximates carrying value, based on the
redemption provisions of the Federal Reserve Bank and Federal Home Loan Bank.

DEPOSITS

The fair value of demand, savings, money market and NOW account deposits is the
amount payable on demand at the reporting date. The fair value of time deposits
is estimated based on discounting expected cash flows using the rates currently
offered for instruments of similar remaining maturities.

BORROWINGS

The fair values are based on discounting expected cash flows at the interest
rate for debt with the same or similar remaining maturities and collateral
requirements.

FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

With regard to financial instruments with off-balance sheet risk discussed in
Note L, it is not practicable to estimate the fair value of future financing
commitments.

The carrying amounts and estimated fair values of the Company's financial
instruments, none of which are held for trading purposes, are as follows at
December 31, 2002 and 2001:

<TABLE>
<CAPTION>
                                                               2002                               2001
                                                 -------------------------------    -------------------------------
                                                    Carrying         Estimated         Carrying         Estimated
                                                     Amount         Fair Value          Amount         Fair Value
                                                 -------------     -------------    -------------     -------------
<S>                                              <C>               <C>              <C>               <C>
                                                                           (In thousands)
     Financial assets:
       Cash and due from banks                   $       7,639     $       7,639    $       4,739     $       4,739
       Interest-earning deposits with banks              1,869             1,869            7,900             7,900
       Investment securities                            44,601            44,601           31,226            31,226
       Federal Reserve Bank stock                          467               467              467               467
       Federal Home Loan Bank stock                      1,670             1,670              915               915
       Loans                                           159,767           159,863          105,805           106,415
     Financial liabilities:
       Deposits                                        174,663           175,248          115,717           116,509
       Borrowings                                       31,401            32,077           21,300            21,600
</TABLE>


NOTE N - EMPLOYEE AND DIRECTOR BENEFIT PLANS

401(k) RETIREMENT PLAN

The Company has a 401(k) retirement plan that contains provisions for specified
matching contributions by the Bank. The Company funds contributions as they
accrue. Total 401(k) expense was $147,924 and $118,227 during the years ended
December 31, 2002 and 2001, respectively.


                                    Page 55
<PAGE>

GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------

NOTE N - EMPLOYEE AND DIRECTOR BENEFIT PLANS (CONTINUED)

STOCK OPTION PLANS

During 1999 the Bank adopted, with shareholder approval, an Employee Stock
Option Plan (the "Employee Plan") and a Director Stock Option Plan (the
"Director Plan"). During 2001 the Company increased by 270,000 the number of
shares available under its option plans, including 110,000 incentive stock
options were approved by shareholders at the 2002 shareholder meeting, and made
certain grants of options. All options granted to non-employee directors vested
immediately at the time of grant, while all other options vest over a four-year
period with 20% vesting on the grant date and 20% vesting annually thereafter.
All unexercised options expire ten years after the date of grant.
A summary of the Bank's option plans as of and for the years ended December 31,
2002 and 2001, including activity discussed above which is subject to
shareholder approval, is as follows:

<TABLE>
<CAPTION>
                                                                          Outstanding Options               Exercisable Options
                                                                     ----------------------------       ---------------------------
                                                     Shares                             Weighted                          Weighted
                                                   Available                            Average                           Average
                                    Shares         for Future           Number          Exercise          Number          Exercise
                                   in Plans          Grants          Outstanding          Price         Outstanding         Price
                                -------------      ----------        -----------       ----------       -----------       ---------
<S>                                <C>             <C>               <C>               <C>              <C>               <C>
At December 31, 2000               356,802                15            356,787           $9.13           225,655           $9.22

  Options authorized               297,000           297,000               --              --                --              --
  Options granted/vested              --            (259,597)           259,597            8.18           179,138            8.39
  Options forfeited                   --               2,750             (2,750)           9.09              (880)           9.43
                                  --------          --------           --------           -----          --------           -----

At December 31, 2001               653,802            40,168            613,634            8.73           403,913            8.85

  Options granted/vested              --             (22,000)            22,000            8.68            72,307            8.72
                                  --------          --------           --------           -----          --------           -----


At December 31, 2002               653,802            18,168            635,634           $8.73           476,220           $8.83
                                  ========          ========           ========           =====          ========           =====
</TABLE>

The weighted average remaining life of total options outstanding and options
exercisable as of December 31, 2002 is 7.6 years and 7.9 years, respectively.
The fair value of each option granted in 2002 and 2001 was $3.17 and $2.99,
respectively, and was determined as of the date of grant using the Black-Scholes
option pricing model, assuming a risk-free interest rate of 3%, a dividend yield
of 0%, volatility of 24%, and an expected life of seven years.

EMPLOYMENT CONTRACTS

The Company has entered into employment agreements with its chief executive
officer and five other officers to ensure a stable and competent management
base. The agreements provide for a three-year term, but the agreements may be
extended for an additional year at the end of the first year and annually
thereafter. The agreements provide for benefits as spelled out in the contracts
and cannot be terminated by the Board of Directors, except for cause, without
prejudicing the officers' rights to receive certain vested rights, including
compensation. In the event of a change in control of the Bank and in certain
other events, as defined in the agreements, the Bank or any successor to the
Company will be bound to the terms of the contracts.


                                    Page 56
<PAGE>

GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------

NOTE O - ACQUISITIONS

During the year ended December 31, 2001, the Company Fidelity Insurance
("Fidelity"), an insurance agency. The details of this acquisition, with dollar
amounts presented in thousands, are as follows:

<TABLE>
<CAPTION>
                                                                                                        Fidelity
                                                                                                    ---------------
<S>                                                                                                 <C>

         Acquisition date                                                                             January 2001

         Business segment                                                                               Insurance

         Interest acquired                                                                                100%

         Method of accounting                                                                           Purchase


         Consideration paid                                                                         $           600
                                                                                                    ===============


         Assets acquired:
            Cash and equivalents                                                                    $            11
            Premises and equipment                                                                               19
                                                                                                    ---------------
                  Total assets acquired                                                                          30
                                                                                                    ---------------
         Liabilities assumed:
            Accounts payable and accrued expenses                                                               109
                                                                                                    ---------------
              Fair value of identifiable net liabilities acquired                                               (79)
            Goodwill                                                                                            679
                                                                                                    ---------------
                  Cash consideration paid                                                           $           600
                                                                                                    ===============
</TABLE>

The Company did not complete any acquisitions or divestitures during 2002.



                                    Page 57
<PAGE>

GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------

NOTE P - PARENT COMPANY FINANCIAL DATA

Gateway Financial Holdings, Inc. became the holding company for Gateway Bank &
Trust Co. effective October 1, 2001. Following are condensed financial
statements of Gateway Financial Holdings, Inc. as of and for the year ended
December 31, 2002 and three months ended December 31, 2001, presented in
thousands.

                            CONDENSED BALANCE SHEETS
                           DECEMBER 31, 2002 AND 2001

<TABLE>
<CAPTION>
                                                                                       2002               2001
                                                                                  --------------    ---------------
<S>                                                                               <C>               <C>
         Asset - investment in subsidiaries                                       $       23,968    $        22,998
                                                                                  ==============    ===============

         Stockholders' equity:
            Common stock                                                          $       24,788    $        24,788
            Accumulated deficit                                                           (1,302)            (1,929)
            Accumulated other comprehensive income                                           482                139
                                                                                  --------------    ---------------

                                                                                  $       23,968    $        22,998
                                                                                  ==============    ===============
</TABLE>

                       CONDENSED STATEMENTS OF OPERATIONS
                     YEARS ENDED DECEMBER 31, 2002 AND 2001

<TABLE>
<CAPTION>
                                                                                       2002               2001
                                                                                  --------------    ---------------
<S>                                                                               <C>               <C>
         Equity in net income of subsidiaries and net income                      $          627    $           547
                                                                                  ==============    ===============
</TABLE>


NOTE Q - BUSINESS SEGMENT REPORTING

In addition to its banking operations, the Bank has two other reportable
segments, Gateway Investment Services, Inc., whose principal activity is to
engage in brokerage services as an agent for non-bank investment products and
services, and Gateway Insurance Services, Inc., an independent insurance agency.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Set forth below is certain financial
information for each segment and in total:

<TABLE>
<CAPTION>
                                                       At or for the Year Ended December 31, 2002
                                     ------------------------------------------------------------------------------
                                     Consolidated     Adjustments        Banking        Brokerage        Insurance
                                     ------------    ------------     ------------    ------------     ------------
<S>                                  <C>             <C>              <C>             <C>              <C>
Total interest income                $     10,311    $         (2)    $     10,313    $          -     $          -
Total interest expense                      4,819              (2)           4,819               -                2
                                     ------------    ------------     ------------    ------------     ------------
   Net interest income                      5,492               -            5,494               -               (2)
Provision for loan losses                     480               -              480               -                -
                                     ------------    ------------     ------------    ------------     ------------
   Net interest income after
     provision for loan losses              5,012               -            5,014               -               (2)
Non-interest income                         2,825            (111)           1,364             193            1,379
Non-interest expense                        7,210            (115)           5,751             196            1,378
                                     ------------    ------------     ------------    ------------     ------------
   Income before income taxes                 627               4              627              (3)              (1)
Provision for income taxes                      -               -                -               -                -
                                     ------------    ------------     ------------    ------------     ------------
   Net income                        $        627    $          4     $        627    $         (3)    $         (1)
                                     ============    ============     ============    ============     ============

Period end total assets              $    231,053    $       (893)    $    230,867    $         33     $      1,046
                                     ============    ============      ===========    ============     ============
</TABLE>


                                    Page 58
<PAGE>

GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------

NOTE Q - BUSINESS SEGMENT REPORTING (CONTINUED)

<TABLE>
<CAPTION>
                                                       At or for the Year Ended December 31, 2001
                                     ------------------------------------------------------------------------------
                                     Consolidated     Adjustments        Banking        Brokerage        Insurance
                                     ------------    ------------     ------------    ------------     ------------
<S>                                  <C>             <C>              <C>             <C>              <C>
Total interest income                $      9,126    $         (3)    $      9,129    $          -     $          -
Total interest expense                      5,059              (3)           5,056               -                6
                                     ------------    ------------     ------------    ------------     ------------
   Net interest income                      4,067               -            4,073               -               (6)
Provision for loan losses                     440               -              440               -                -
                                     ------------    ------------     ------------    ------------     ------------
   Net interest income after
     provision for loan losses              3,627               -            3,633               -               (6)
Non-interest income                         2,420             (39)             904             303            1,252
Non-interest expense                        5,500             (40)           3,990             304            1,246
                                     ------------    ------------     ------------    ------------     ------------
   Income before income taxes                 547               1              547              (1)               -
Provision for income taxes                      -               -                -               -                -
                                     ------------    ------------     ------------    ------------     ------------
   Net income                        $        547    $          1     $        547    $         (1)    $          -
                                     ============    ============     ============    ============     ============

Period end total assets              $    160,832    $     (1,099)    $    160,861    $         37     $      1,033
                                     ============    ============      ===========    ============     ============
</TABLE>


NOTE R - INTANGIBLE ASSETS

The following is a summary of intangible assets as of December 31, 2002 and
2001. Amounts presented include the effects of the fourth quarter 2002 adoption
of SFAS No. 147, as discussed in Note B.

<TABLE>
<CAPTION>
                                                                                      2002               2001
                                                                                  --------------    ---------------
<S>                                                                               <C>               <C>
                                                                                           (In thousands)
 Intangibles assets subject to future amortization:
     Core deposit intangibles - gross                                             $          488    $           488
       Less accumulated amortization                                                        (138)               (89)
                                                                                  --------------    ---------------
     Core deposit intangibles - net                                               $          350    $           399
                                                                                  ==============    ===============

 Intangible assets not subject to future amortization:
     Goodwill - banking segment                                                   $        1,307    $         1,307
     Goodwill - insurance segment                                                            634                634
                                                                                  --------------    ---------------
                                                                                  $        1,941    $         1,941
                                                                                  ==============    ===============
</TABLE>

The following table presents the estimated amortization expense (in thousands)
for intangible assets for each of the five years ending December 31, 2007 and
the estimated amount amortizable thereafter. These estimates are subject to
change in future periods to the extent management determines it is necessary to
make adjustments to the carrying value or estimated useful life of amortizing
intangible assets.

            2003                               $           49
            2004                                           49
            2005                                           49
            2006                                           49
            2007                                           49
            Thereafter                                    105
                                               --------------

                                               $          350
                                               ==============



                                    Page 59
<PAGE>

GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------

NOTE R - INTANGIBLE ASSETS (CONTINUED)

The following tables present the adjusted effect on net income and on basic and
diluted earnings per share of excluding the amortization of goodwill for the
year ended December 31, 2002 and 2001:


<TABLE>
<CAPTION>
                                                                                       Year Ended December 31,
                                                                                  ---------------------------------
                                                                                      2002               2001
                                                                                  --------------    ---------------
<S>                                                                               <C>               <C>
         Net income                                                               $      627,276    $       546,898
         Add back goodwill amortization                                                        -            205,297
                                                                                  --------------    ---------------
            Adjusted net income                                                   $      627,276    $       752,195
                                                                                  ==============    ===============

         Basic net income per share                                               $          .21    $           .23
         Add back goodwill amortization                                                        -                .09
                                                                                  --------------    ---------------
            Adjusted basic net income per share                                   $          .21    $           .31
                                                                                  ==============    ===============

         Diluted net income per shares                                            $          .21    $           .23
         Add back goodwill amortization                                                        -                .09
                                                                                  --------------    ---------------
            Adjusted diluted net income per share                                 $          .21    $           .31
                                                                                  ==============    ===============
</TABLE>


NOTE S - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following table sets forth, for the periods indicated, certain consolidated
quarterly financial information. This information is derived from unaudited
financial statements, which include, in the opinion of the Company's management,
all normal recurring adjustments which management considers necessary for a fair
presentation of the results for such periods. This information includes the
restatement of 2002 quarterly operating results required by SFAS No. 147, as
discussed in Note B.

<TABLE>
<CAPTION>
                                                                    Year Ended December 31, 2002
                                                 ------------------------------------------------------------------
                                                     Fourth            Third            Second            First
                                                     Quarter          Quarter           Quarter          Quarter
                                                 -------------     -------------    -------------     -------------
                                                                (In thousands, except per share data)
<S>                                              <C>               <C>              <C>               <C>
         Interest income                         $       2,873     $       2,708    $       2,474     $       2,256
         Interest expense                                1,295             1,251            1,156             1,117
                                                 -------------     -------------    -------------     -------------

         Net interest income                             1,578             1,457            1,318             1,139
         Provision for loan losses                         125               155              125                75
                                                 -------------     -------------    -------------     -------------

         Net interest income after provision
           for loan losses                               1,453             1,302            1,193             1,064
         Non-interest income                               887               726              662               551
         Non-interest expense                            2,167             1,848            1,700             1,496
                                                 -------------     -------------    -------------     -------------

         Income before income taxes                        173               180              155               119
         Income taxes                                        -                 -                -                 -
                                                 -------------     -------------    -------------     -------------

         Net income                              $         173     $         180    $         155     $         119
                                                 =============     =============    =============     =============

         Net income per share:
           Basic                                 $        0.06     $        0.06    $        0.05     $        0.04
           Diluted                                        0.06              0.06             0.05              0.04
</TABLE>



                                    Page 60
<PAGE>

GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------

NOTE S - QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)

<TABLE>
<CAPTION>
                                                                    Year Ended December 31, 2001
                                                 ------------------------------------------------------------------
                                                     Fourth            Third            Second            First
                                                     Quarter          Quarter           Quarter          Quarter
                                                 -------------     -------------    -------------     -------------
<S>                                              <C>               <C>              <C>               <C>
                                                                (In thousands, except per share data)

         Interest income                         $       2,215     $       2,357    $       2,305     $       2,249
         Interest expense                                1,169             1,275            1,320             1,295
                                                 -------------     -------------    -------------     -------------

         Net interest income                             1,046             1,082              985               954
         Provision for loan losses                          75               105              120               140
                                                 -------------     -------------    -------------     -------------

         Net interest income after provision
           for loan losses                                 971               977              865               814
         Non-interest income                               636               535              641               608
         Non-interest expense                            1,478             1,362            1,368             1,292
                                                 -------------     -------------    -------------     -------------

         Income before income taxes                        129               150              138               130
         Income taxes                                        -                 -                -                 -
                                                 -------------     -------------    -------------     -------------

         Net income                              $         129     $         150    $         138     $         130
                                                 =============     =============    =============     =============

         Net income per share:
           Basic                                 $        0.04     $        0.05    $        0.08     $        0.07
           Diluted                                        0.04              0.05             0.08              0.07
</TABLE>



                                    Page 61
<PAGE>

      ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                            AND FINANCIAL DISCLOSURE

None.

                                    PART III

     ITEM 9 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE
                               WITH SECTION 16(a)

Incorporated by reference from the Company's definitive proxy statement, to be
filed with the Securities and Exchange Commission with respect to the Annual
Meeting of Shareholders to be held on April 30, 2003.

                        ITEM 10 - EXECUTIVE COMPENSATION

Incorporated by reference from the Company's definitive proxy statement, to be
filed with the Securities and Exchange Commission with respect to the Annual
Meeting of Shareholders to be held on April 30, 2003.

    ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Incorporated by reference from the Company's definitive proxy statement, to be
filed with the Securities and Exchange Commission with respect to the Annual
Meeting of Shareholders to be held on April 30, 2003.

The following table sets forth equity compensation plan information at December
31, 2002.

<TABLE>
<CAPTION>
                                       EQUITY COMPENSATION PLAN INFORMATION
   --------------------------- ------------------------- ------------------------- ------------------------------
                                                                                       NUMBER OF SECURITIES
                                 NUMBER OF SECURITIES                                 REMAINING AVAILABLE FOR
                                     TO BE ISSUED            WEIGHTED-AVERAGE          FUTURE ISSUANCE UNDER
                                   UPON EXERCISE OF         EXERCISE PRICE OF        EQUITY COMPENSATION PLANS
                                 OUTSTANDING OPTIONS,      OUTSTANDING OPTIONS,        (EXCLUDING SECURITIES
   PLAN CATEGORY                 WARRANTS AND RIGHTS       WARRANTS AND RIGHTS        REFLECTED IN COLUMN(A))
   --------------------------- ------------------------- ------------------------- ------------------------------
                                         (a)                       (b)                          (c)
   --------------------------- ------------------------- ------------------------- ------------------------------
<S>                                    <C>                        <C>                         <C>

   Equity compensation
   plans approved by
   security holders                    635,634                    $8.73                       18,168

   --------------------------- ------------------------- ------------------------- ------------------------------
   Equity compensation plans
   not approved by security
   holders                                NA                        NA                          NA

   --------------------------- ------------------------- ------------------------- ------------------------------
   Total                               635,634                    $8.73                       18,168
   --------------------------- ------------------------- ------------------------- ------------------------------
</TABLE>

A description of the Company's equity compensation plans is presented in Note N
to the accompanying consolidated financial statements.

            ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated by reference from the Company's definitive proxy statement, to be
filed with the Securities and Exchange Commission with respect to the Annual
Meeting of Shareholders to be held on April 30, 2003.



                                    Page 62
<PAGE>

                   ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K

(a)(3)   Exhibits. The exhibits required by Item 601 of Regulation S-K are
         listed below.

EXHIBIT NO.       DESCRIPTION
-----------       -----------

Exhibit 3.1:      Articles of Incorporation (incorporated by reference to
                  Exhibit 3(i) to the Current Report on Form 8K dated October 1,
                  2001)

Exhibit 3.2:      Bylaws (incorporated by reference to Exhibit 3(ii) to the
                  Current Report on Form 8K dated October 1, 2001)

Exhibit 4.1:      Specimen Certificate for Common Stock of Gateway Financial
                  Holdings, Inc. (incorporated by reference to Exhibit 4.1 of
                  Amendment No. 1 to the Registration Statement on Form S-3
                  filed September 20, 2001)

Exhibit 4.2:      Warrant Agreement (incorporated by reference to Exhibit 4.2 of
                  Amendment No. 1 to the Registration Statement on Form S-3
                  dated September 20, 2001.)

Exhibit 4.3:      Specimen of Warrant Certificate (incorporated by reference to
                  Exhibit 4.3 to the Registration Statement on Form S-3 dated
                  August 13, 2001.)

Exhibit 10.1:     1999 Incentive Stock Option Plan of Gateway Financial
                  Holdings, Inc. (incorporated by reference to Exhibit 10.1 to
                  the Annual Report on Form 10K for the year ended December 31,
                  2001 ("2001 Annual Report"))

Exhibit 10.2:     1999 Non-Statutory Stock Option Plan of Gateway Financial
                  Holdings, Inc. (incorporated by reference to Exhibit 10.2 to
                  the 2001 Annual Report)

Exhibit 10.3:     2001 Non-Statutory Stock Option Plan of Gateway Financial
                  Holdings, Inc. (incorporated by reference to Exhibit 10.3 to
                  the 2001 Annual Report)

Exhibit 21:       Subsidiaries of the Registrant

Exhibit 23:       Consent of Dixon Odom PLLC

Exhibit 99.1:     Certification Pursuant to Section 906 of the Sarbanes-Oxley
                  Act of 2002

(b)      Current Reports on Form 8-K filed during the fourth quarter of 2002.

         None.

                        ITEM 14 - CONTROLS AND PROCEDURES

Within the 90 days prior to the date of this report, the Company carried out an
evaluation under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Securities Exchange Act Rule
13a-14. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company required to be included in the Company's periodic SEC
Filings. There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation.


                                    Page 63
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
behalf of the undersigned, thereunto duly authorized.

                                   GATEWAY FINANCIAL HOLDINGS, INC.

Date: March 19, 2003                By: /s/ D. Ben Berry
                                        ----------------------------------------
                                           D. Ben Berry
                                           President and Chief Executive Officer

Date: March 19, 2003                By: /s/ Mark A. Holmes
                                        ----------------------------------------
                                           Mark A. Holmes
                                           Senior Executive Vice President and
                                           Chief Financial Officer

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

<TABLE>
<CAPTION>
NAME                                        TITLE                                                DATE
---------                                   -----                                                ----
<S>                                         <C>                                                  <C>

 /s/ D. Ben Berry
-------------------------------
        D. Ben Berry                        President and Chief Executive Officer                March 19, 2003

/s/ Mark A. Holmes
-------------------------------
        Mark A. Holmes                      Chief Financial Officer                              March 19, 2003

/s/ Richard W. Whiting
-------------------------------
        Richard W. Whiting                  Chairman of the Board                                March 19, 2003

/s/ William Brumsey III
-------------------------------
        William Brumsey III                 Director                                             March 19, 2003

/s/ Jimmie Dixon, Jr.
-------------------------------
        Jimmie Dixon, Jr.                   Director                                             March 19, 2003

/s/ James H. Ferebee, Jr.
-------------------------------
        James H. Ferebee, Jr.               Director                                             March 19, 2003

/s/ Robert Willard Luther, III
-------------------------------
        Robert Willard Luther, III          Director                                             March 19, 2003

/s/ Frances Morrisette Norrell
-------------------------------
        Frances Morrisette Norrell          Director                                             March 19, 2003

/s/ W. C. Owens, Jr.
-------------------------------
        W. C. Owens, Jr.                    Director                                             March 19, 2003

/s/ Ollin B. Sykes
-------------------------------
        Ollin B. Sykes                      Director                                             March 19, 2003

/s/ Russell E. Twiford
-------------------------------
        Russell E. Twiford                  Director                                             March 19, 2003

/s/ Frank T. Williams
-------------------------------
        Frank T. Williams                   Director                                             March 19, 2003

/s/ Jerry T. Womack
-------------------------------
        Jerry T. Womack                     Director                                             March 19, 2003
</TABLE>


                                    Page 64
<PAGE>

                  CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

            PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, D. Ben Berry, certify that:

(1)      I have reviewed this annual report on Form 10-KSB of Gateway Financial
         Holdings, Inc., a North Carolina bank (the "registrant");

(2)      Based on my knowledge, this annual report does not contain any untrue
         statement of a material fact or omit to state a material fact necessary
         to make the statements made, in light of the circumstances under which
         such statements were made, not misleading with respect to the period
         covered by this annual report;

(3)      Based on my knowledge, the financial statements, and other financial
         information included in this annual report, fairly present in all
         material respects the financial condition, results of operations and
         cash flows of the registrant as of, and for, the periods presented in
         this annual report;

(4)      The registrant's other certifying officer and I are responsible for
         establishing and maintaining disclosure controls and procedures (as
         defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
         have:

         (a)      designed such disclosure controls and procedures to ensure
                  that material information relating to the registrant, is made
                  known to us by others within those entities, particularly
                  during the period in which this annual report is being
                  prepared;

         (b)      evaluated the effectiveness of the registrant's disclosure
                  controls and procedures as of a date within 90 days prior to
                  the filing date of this annual report (the "Evaluation Date");
                  and

         (c)      presented in this annual report our conclusions about the
                  effectiveness of the disclosure controls and procedures based
                  on our evaluation as of the Evaluation Date;

(5)      The registrant's other certifying officer and I have disclosed, based
         on our most recent evaluation, to the registrant's auditors and the
         audit committee of the registrant's board of directors (or persons
         performing the equivalent functions):

         (a)      all significant deficiencies in the design or operation of
                  internal controls which could adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial data and have identified for the registrant's
                  auditors any material weaknesses in internal controls; and

         (b)      any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal controls; and

(6)      The registrant's other certifying officer and I have indicated in this
         annual report whether or not there were significant changes in internal
         controls or in other factors that could significantly affect internal
         controls subsequent to the date of our most recent evaluation,
         including any corrective actions with regard to significant
         deficiencies and material weaknesses.


Date: March 19, 2003                By:  /s/ D. Ben Berry
                                        ---------------------------------------
                                        D. Ben Berry
                                        President and Chief Executive Officer



                                    Page 65
<PAGE>

                  CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

            PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Mark A. Holmes, certify that:

(1)      I have reviewed this annual report on Form 10-KSB of Gateway Financial
         Holdings, Inc., a North Carolina bank (the "registrant");

(2)      Based on my knowledge, this annual report does not contain any untrue
         statement of a material fact or omit to state a material fact necessary
         to make the statements made, in light of the circumstances under which
         such statements were made, not misleading with respect to the period
         covered by this annual report;

(3)      Based on my knowledge, the financial statements, and other financial
         information included in this annual report, fairly present in all
         material respects the financial condition, results of operations and
         cash flows of the registrant as of, and for, the periods presented in
         this annual report;

(4)      The registrant's other certifying officer and I are responsible for
         establishing and maintaining disclosure controls and procedures (as
         defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
         have:

         (a)      designed such disclosure controls and procedures to ensure
                  that material information relating to the registrant, is made
                  known to us by others within those entities, particularly
                  during the period in which this annual report is being
                  prepared;

         (b)      evaluated the effectiveness of the registrant's disclosure
                  controls and procedures as of a date within 90 days prior to
                  the filing date of this annual report (the "Evaluation Date");
                  and

         (c)      presented in this annual report our conclusions about the
                  effectiveness of the disclosure controls and procedures based
                  on our evaluation as of the Evaluation Date;

(5)      The registrant's other certifying officer and I have disclosed, based
         on our most recent evaluation, to the registrant's auditors and the
         audit committee of the registrant's board of directors (or persons
         performing the equivalent functions):

         (a)      all significant deficiencies in the design or operation of
                  internal controls which could adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial data and have identified for the registrant's
                  auditors any material weaknesses in internal controls; and

         (b)      any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal controls; and

(6)      The registrant's other certifying officer and I have indicated in this
         annual report whether or not there were significant changes in internal
         controls or in other factors that could significantly affect internal
         controls subsequent to the date of our most recent evaluation,
         including any corrective actions with regard to significant
         deficiencies and material weaknesses.


Date: March 19, 2003                    By:  /s/ Mark A. Holmes
                                            -----------------------------------
                                            Mark A. Holmes
                                            Senior Executive Vice President and
                                            Chief Financial Officer



                                    Page 66