SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    Form 10-K

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 2002

                          Commission File No. 000-16461


                           COMMUNITY BANCSHARES, INC.
             (Exact name of registrant as specified in its charter)

                               Delaware 63-0868361
      (State or other jurisdiction of (I.R.S. Employer Identification No.)
                         incorporation or organization)

                                68149 Main Street
                           Blountsville, Alabama 35031
                    (Address of principal executive offices)

                                 (205) 429-1000
                         (Registrant's telephone number)

           Securities Registered Pursuant to Section 12(b) of the Act:

Title of each class                    Name of each exchange on which registered
      None                                               None

           Securities Registered Pursuant to Section 12(g) of the Act:

                          Common Stock, $.10 Par Value
                                (Title of Class)

     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 pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best  of  the  registrant's   knowledge,  in  definitive  proxy  of  information
statements  incorporated  by  reference  to Part  III of this  Form  10-K or any
amendment to this Form 10-K. |_|

     Indicate by check mark whether the registrant is an  accelerated  filer (as
defined in Exchange Act Rule 12b-2):

                                 yes |_| no |X|

     As of March 31, 2003, the aggregate market value of the registrant's voting
stock held by  non-affiliates  was $27,000,000 based upon a sale price of $10.00
per share on March 31, 2003.

     As of March 31,  2003,  there  were  4,637,314  shares of the  registrant's
common stock, $.10 par value shares, outstanding.

<PAGE>

PART 1

Item 1 - Business

General

Community Bancshares,  Inc. (the "Company") is a Delaware corporation and a bank
holding  company  registered  with the Board of Governors of the Federal Reserve
System (the  "Federal  Reserve")  under the Bank Holding Act of 1956, as amended
(the  "Bank  Holding  Company  Act").  The  Company  was  organized  in 1983 and
commenced business in 1985. The Company has one bank subsidiary,  Community Bank
("Community Bank" or "the Bank"), an Alabama banking  corporation which conducts
a general  commercial  banking  business in north and west-central  Alabama.  At
December  31,  2002,  the  Company  and its  subsidiaries  had  total  assets of
approximately  $567,596,000,   deposits  of  approximately   $459,464,000,   and
shareholders'  equity of approximately  $40,311,000.  The Company  maintains its
principal executive offices at 68149 Main Street,  Blountsville,  Alabama 35031,
and its telephone number is (205) 429-1000.

Subsidiary Bank

At December 31, 2002,  Community Bank conducted business through 20 locations in
seven counties in north Alabama,  and two counties in west-central  Alabama.  It
offers a wide range of commercial and retail banking services, including savings
and time  deposit  accounts,  personal  and  commercial  loans and  personal and
commercial  checking  accounts.  The majority of loans by Community  Bank are to
individuals and small to mid-sized  businesses in Alabama.  Community Bank seeks
to provide  superior service to its customers and to become a vital component of
each of the communities it serves.

Community Bank operates in small non-urban communities. At December 31, 2002 the
Bank had locations in Blountsville, Cleveland, Oneonta, Snead and West Blount in
Blount County, Alabama;  Rogersville in Lauderdale County,  Alabama;  Elkmont in
Limestone County, Alabama; Gurley, Meridianville and New Hope in Madison County,
Alabama;  Demopolis  in Marengo  County,  Alabama;  Hamilton  in Marion  County,
Alabama;  Falkville and Hartselle in Morgan County, Alabama;  Uniontown in Perry
County,  Alabama; and Double Springs and Haleyville in Winston County,  Alabama.
At December 31, 2002, Community Bank operated 18 full service offices as well as
two paying and receiving offices located within Wal-Mart stores, which primarily
open deposit accounts, cash checks and receive deposits and loan payments.

In the  first  half of 2002,  Community  Bank  sold its two  Pulaski,  Tennessee
offices,  its Rainsville and Ft. Payne, Alabama offices and its Marshall County,
Alabama locations.  The Marshall County locations included one banking office in
Boaz,  Alabama,  one in Albertville,  Alabama,  two in Arab,  Alabama and two in
Guntersville,  Alabama.  Two of the  total ten  offices  sold  were  paying  and
receiving offices located in Wal-Mart stores, one in Ft. Payne,  Alabama and one
in Guntersville, Alabama.

Subsidiaries of Community Bank

1st Community Credit  Corporation  currently operates 12 finance company offices
in 12 Alabama communities,  including Albertville,  Arab, Athens, Boaz, Cullman,
Decatur,  Gadsden,  Hartselle,  Huntsville,  Fort  Payne,  Jasper  and  Oneonta,
Alabama.  1st Community  Credit  Corporation  provides loans to a market segment
traditionally  not  pursued  by  Community  Bank.  These  loans  have  typically
generated higher yields and involved greater risk than standard  commercial bank
loans. At December 31, 2002, 1st Community Credit  Corporation's  loan portfolio
totaled approximately $27,937,000.

Community  Insurance  Corp.  serves as an agent in the sale of title,  property,
casualty and life insurance  products to individuals  and businesses  through an
office  in  Huntsville,  Alabama.  Community  Insurance  Corp.  owns 100% of the
outstanding  shares of capital  stock of  Southern  Select  Insurance,  Inc.,  a
managing  general  agency which brokers  agricultural,  commercial  and personal
insurance   products.   Both  Community  Insurance  Corp.  and  Southern  Select
Insurance, Inc. are located in Huntsville,  Alabama.

                                       1

<PAGE>

Community  Appraisals,  Inc., a subsidiary  of Community  Bank,  operates a real
estate   appraisal   business  through  its  office  located  at  the  Company's
headquarters  complex  in  Blountsville,   Alabama.   This  subsidiary  provides
appraisal  services in connection with the lending  activities of Community Bank
and 1st Community Credit Corporation.

Market Areas

At December 31, 2002, the Company's principal market areas were located in north
Alabama  (Blount,  Cullman,  DeKalb,  Etowah,  Lauderdale,  Limestone,  Madison,
Marshall and Morgan Counties),  northwest Alabama (Marion and Winston Counties),
and  west-central  Alabama  (Marengo and Perry  Counties).  All of the Company's
banking and finance  company  offices are located in relatively  rural areas and
place an emphasis on personal service.

With the exception of Blount,  Marengo,  Marion,  Perry and Winston  Counties in
Alabama,   the  markets  in  which  the  Company   operates   share  one  common
characteristic:  each is close enough to  Huntsville,  Alabama,  to share in the
economic and employment benefits of that city.  Huntsville is located in Madison
County.  Unemployment  for Madison County was 3.8% for December 2002 as compared
to 5.8% for Alabama during that period, as reported by the Alabama Department of
Industrial  Relations.  The  Huntsville  Metropolitan  Statistical  Area ("MSA")
possesses a diverse  economic base with  employers that include the military and
aerospace industries, manufacturers of durable goods, machinery, transportation,
as well  as  retailers  and  service  industries.  Agriculture,  in the  form of
soybeans, hay, corn, cotton, tobacco, dairy and poultry farming, also makes up a
significant portion of the Huntsville MSA's economy.

Similarly, Blount County is close enough to Birmingham, Alabama, to share in the
economic  and  employment  benefits  of that city.  Jefferson  County,  in which
Birmingham is located, had a 4.5% unemployment rate for December 2002, according
to the Alabama  Department of Industrial  Relations.  The Birmingham  area still
retains some of the steel and related manufacturers that built the city, but the
economy is now more diverse with the University of Alabama in Birmingham and the
healthcare industry providing many jobs.

Marion and Winston  Counties  lie in  northwest  Alabama,  near the  Mississippi
border. In both counties the manufacturing  sector provides more jobs and higher
sales or receipts than the wholesale,  retail and service sectors.  Manufactured
housing and furniture production are two prominent industries in these counties,
and both industries have experienced  recent economic  slowdowns.  Marion County
was reported to have an unemployment rate of 10.6% for December 2002,  according
to the Alabama Department of Industrial  Relations.  Winston County was reported
to have an unemployment rate of 9.4% for December 2002, according to the Alabama
Department of Industrial Relations.

Marengo and Perry Counties are located in  west-central  Alabama.  Manufacturing
provides  more jobs in these  counties  than the  wholesale,  retail and service
sectors.  In addition,  catfish  farming and the timber  industry are  important
components in the economy of these counties.  Marengo County's unemployment rate
reported by the Alabama Department of Industrial Relations for December 2002 was
4.4%.  Perry  County  was  reported  to have an  unemployment  rate of 10.0% for
December 2002, as reported by the Alabama Department of Industrial Relations.

While  certain  markets have  experienced  an economic  downturn,  overall,  the
Company remains optimistic about current economic prospects in its market areas,
and the  Company  attempts to assist  those local  economies  by  returning  the
deposits of its customers to the communities from which they come in the form of
loans.

Lending Activities

Community Bank's lending activities include commercial, real estate and consumer
loans.  Community Bank's commercial loan services include  term-loans,  lines of
credit and agricultural  loans. A broad range of short to medium term commercial
loans, both secured and unsecured,  are made available to businesses for working
capital,  business  expansion  and the  purchase  of  equipment  and  machinery.
Community  Bank's real estate  lending  activities  include fixed and adjustable
rate residential  mortgage loans,  construction  loans,  second mortgages,  home
improvement  loans and home equity lines of credit.  Community  Bank's  consumer
lending services include loans for automobiles,  recreation  vehicles and boats,
as well as personal (secured and unsecured) and deposit account secured loans.

                                       2

<PAGE>

Competition

The banking  business in Alabama is highly  competitive  with  respect to loans,
deposits  and other  financial  services  and is  dominated by a number of major
banks and bank holding  companies  which have  numerous  offices and  affiliates
operating  over wide  geographic  areas.  Community  Bank competes for deposits,
loans and other  business  with  these  banks as well as with  savings  and loan
associations,  credit unions, mortgage companies,  insurance companies and other
local financial  institutions.  Many of the major  commercial banks operating in
Community Bank's service areas offer services such as international  banking and
investment  and  trust  services,  which  are not  offered  by  Community  Bank.
Additionally,  the  competitive  environment  for both the Company and Community
Bank may be  materially  affected  by the  enactment  of the  Gramm-Leach-Bliley
Financial  Services  Modernization  Act  (the  "GLBA").  This  law  modified  or
eliminated many barriers  between  investment  banking,  commercial  banking and
insurance  underwriting  and sales.  See  "Supervision  and  Regulation".  These
changes in the law have created and may continue to create  greater  competition
for the  Company  and  Community  Bank by  increasing  the  number  and types of
competitors  and by  encouraging  increased  consolidation  within the financial
services industry.

Employees

At December 31, 2002, the Company and its  subsidiaries  had  approximately  307
full-time  equivalent  employees.  The  Company and its  subsidiaries  provide a
variety of group  life,  health and  accident  insurance,  retirement  and stock
ownership  plans and other  benefit  programs for their  employees.  The Company
maintains continuing education and training programs for its employees, designed
to  prepare  the  employees  for  positions  of  increasing   responsibility  in
management  or  operations.   Membership  and   participation  by  employees  in
professional  and industry  organizations  is  encouraged  and  supported by the
Company.

Supervision and Regulation

The  following is a brief  summary of the  regulatory  environment  in which the
Company  and its  subsidiaries  operate  and is not  designed  to be a  complete
discussion of all statutes and regulations affecting such operations,  including
those federal and state statutes and regulations  specifically mentioned herein.
Changes  in  the  laws  and  regulations  applicable  to  the  Company  and  its
subsidiaries  can  affect  the  operating  environment  of the  Company  and its
subsidiaries  in  substantial  and   unpredictable   ways.  The  Company  cannot
accurately  predict  whether  legislation  will  ultimately be enacted,  and, if
enacted,  the ultimate effect that it or implementing  regulations would have on
its or its subsidiaries financial condition or results of operations.

The Company is a bank holding company and is registered as such with the Federal
Reserve.  The Company is subject to regulation  and  supervision  by the Federal
Reserve and is required to file with the Federal Reserve annual reports and such
other  information as the Federal Reserve may require.  The Federal Reserve also
conducts examinations of the Company.

The Federal  Reserve takes the position that a bank holding  company is required
to serve as a source of financial and managerial strength to its subsidiary bank
and may not conduct its operations in an unsafe or unsound manner.  In addition,
it is the Federal Reserve's position that, in serving as a source of strength to
its subsidiary  bank, a bank holding company should stand ready to use available
resources  to provide  adequate  capital  funds to its  subsidiary  bank  during
periods of financial  stress or  adversity  and should  maintain  the  financial
flexibility  and capital  raising  capacity to obtain  additional  resources for
assisting its subsidiary bank.

Community  Bank is  incorporated  under the laws of the State of Alabama  and is
subject to the applicable  provisions of Alabama  banking laws and to regulation
and examination by the Alabama State Banking Department.  Examinations include a
review of Community Bank's  condition and resources,  its mode of conducting and
managing its affairs, the actions of its directors, the investment of its funds,
the safety and prudence of its  management,  compliance with its charter and law
in the  administration  of its affairs  and other  aspects of  Community  Bank's
operations.  State  statutes  in  Alabama  relate  to  such  matters  as  loans,
mortgages, consolidations, required reserves, allowable investments, issuance of
securities, payment of dividends,  establishment of branches, filing of periodic
reports and other matters affecting the business of Community Bank.

                                       3

<PAGE>

Deposits in Community Bank are insured,  up to applicable limits, by the Federal
Deposit  Insurance  Corporation (the "FDIC") and,  therefore,  Community Bank is
subject to provisions of the Federal Deposit  Insurance Act ("FDIA").  Community
Bank's primary federal regulator is the FDIC, and as a result, Community Bank is
subject to  examination  and  regulation by the FDIC.  The FDIC is authorized to
terminate the deposit insurance of any depository institution, such as Community
Bank,  whose  deposits are insured by the FDIC if the FDIC  determines,  after a
hearing,  that the  institution  or its directors have engaged or is engaging in
unsafe or unsound  practices,  is in an unsafe or unsound  condition to continue
operations  as an insured  institution,  or has  violated  any  applicable  law,
regulation,  order,  condition imposed in writing by the FDIC in connection with
the granting of any  application or other request by the depository  institution
or any written agreement entered into with the FDIC.

Each federal banking regulatory agency is authorized to issue a cease and desist
order to any financial institution or institution-affiliated party for which the
agency is the primary federal banking  regulator (which in the case of Community
Bank,  is the FDIC and, in the case of the Company,  is the Federal  Reserve) if
the   agency   determines,   after  a   hearing,   that   the   institution   or
institution-affiliated  party has engaged, is engaging or is reasonably believed
to be about to  engage,  in unsafe or unsound  practices,  or has  violated,  is
violating  or is  reasonably  believed  to be about to  violate  a law,  rule or
regulation, or any condition imposed in writing by the agency in connection with
the  granting of any  application  or other  request by the  institution  or any
written agreement  entered into with the agency.  The cease and desist order may
require the institution or institution-affiliated party to cease and desist from
the   violation  or   practice,   including   requiring   the   institution   or
institution-affiliated  party to make restitution or reimbursement against loss,
restrict  the  institution's  growth,   dispose  of  loans  or  assets,  rescind
agreements or contracts,  employ qualified  officers or employees and take other
actions determined to be appropriate by the agency. The order may also limit the
activities of the institution.

The Company and  Community  Bank are  subject to the  provisions  of the Federal
Deposit  Insurance  Corporation  Improvement  Act  of  1991  ("FDICIA").  FDICIA
expanded the  regulatory  powers of federal  banking  agencies to permit  prompt
corrective  actions  to resolve  problems  of  insured  depository  institutions
through the  regulation of banks and their  affiliates,  including  bank holding
companies.  The  provisions  are  designed to  minimize  the  potential  loss to
depositors  and to FDIC  insurance  funds if financial  institutions  default on
their  obligations  to  depositors  or become in danger of default.  Among other
things,  FDICIA  provides a framework for a system of supervisory  actions based
primarily on the capital levels of financial institutions.

FDICIA also provides for a risk-based deposit insurance premium  structure.  The
FDIC is an  independent  federal  agency  established  originally  to insure the
deposits,  up to prescribed  statutory limits, of federally insured banks and to
preserve the safety and soundness of the banking  industry.  The FDIC  maintains
two separate  insurance  funds:  the Bank Insurance Fund ("BIF") and the Savings
Association  Insurance Fund  ("SAIF").  Community  Bank's  deposit  accounts are
insured  by the FDIC  under  the BIF to the  maximum  extent  permitted  by law.
Community Bank pays deposit insurance premiums to the FDIC based on a risk-based
assessment system established by the FDIC for all BIF-member institutions.

Under FDIC regulations, institutions are assigned to one of three capital groups
for insurance  premium purposes (well  capitalized,  adequately  capitalized and
undercapitalized).  These three groups are then divided into subgroups which are
based on supervisory evaluations by the institution's primary federal regulator,
resulting in nine assessment  classifications.  Assessment  rates vary depending
upon the  assessment  classification.  In addition,  regardless of the potential
risk  to the  insurance  fund,  federal  law  requires  the  FDIC  to  establish
assessment  rates that will maintain each insurance  fund's ratio of reserves to
insured deposits at 1.25%.  During 2001 and for the first semiannual  assessment
period of 2002, assessment rates for BIF-insured  institutions ranged from 0% of
insured  deposits  for  well-capitalized  institutions  with  minor  supervisory
concerns to .27% of insured  deposits  for  undercapitalized  institutions  with
substantial  supervisory  concerns.  The assessment  rate schedule is subject to
change by the FDIC and,  accordingly,  the  assessment  rate could  increase  or
decrease in the future.

In addition to deposit insurance assessments,  the FDIC is authorized to collect
assessments  against  insured  deposits  to be paid to the  Finance  Corporation
("FICO") to service FICO debt incurred in the 1980s. The FICO assessment rate is
adjusted  quarterly.  The average annual  assessment rate in 2002 was 1.75 cents
per $100 of  assessable  deposits.  For the  first  quarter  of  2003,  the FICO
assessment rate for such deposits will be 1.65 cents per $100.  Community Bank's
assessment  expense for the year ended  December 31, 2002 equaled  approximately
$631,000.

                                       4
<PAGE>

The  federal  banking  regulatory  agencies  have  adopted  a set of  guidelines
prescribing  safety and soundness  standards  pursuant to FDICIA. The guidelines
establish  general  standards  relating to  internal  controls  and  information
systems,  internal  audit  systems,  loan  documentation,  credit  underwriting,
interest rate exposure,  asset growth and  compensation,  fees and benefits.  In
general,  the guidelines  require,  among other things,  appropriate systems and
practices  to  identify  and manage  the risks and  exposures  specified  in the
guidelines.  The guidelines  prohibit  excessive  compensation  as an unsafe and
unsound  practice and describe  compensation  as excessive when the amounts paid
are unreasonable or  disproportionate  to the services performed by an executive
officer, employee,  director or principal stockholder. In addition, the agencies
adopted  regulations  that authorize an agency to order an institution  that has
been given notice by an agency that it is not  satisfying any of such safety and
soundness  standards to submit a compliance  plan. If the  institution  fails to
submit an acceptable compliance plan or fails to implement an accepted plan, the
agency must issue an order  directing  action to correct the  deficiency and may
issue an order directing  other actions be taken,  including  restricting  asset
growth,  restricting interest rates paid on deposits,  and requiring an increase
in the bank's ratio of tangible  equity to assets.  If an  institution  fails to
comply with such an order, the agency may seek to enforce such order in judicial
proceedings and to impose civil money penalties.

FDICIA  establishes a system of prompt corrective action to resolve the problems
of  undercapitalized  institutions.  Under  this  system,  the  federal  banking
regulatory agencies are required to rate supervised institutions on the basis of
five   capital   categories   (well   capitalized,    adequately    capitalized,
undercapitalized,     significantly     undercapitalized,     and     critically
undercapitalized)  and to take certain mandatory  supervisory  actions,  and are
authorized to take other discretionary  actions, with respect to institutions in
the three under-capitalized  categories,  the severity of which will depend upon
the  capital  category  in  which  the  institution  is  placed.  Under  certain
circumstances,  an  institution  may be downgraded to a category lower than that
warranted by its capital levels,  and subjected to the supervisory  restrictions
applicable to institutions in the lower capital category.  Generally, subject to
a narrow  exception,  FDICIA  requires a federal  banking  regulatory  agency to
appoint  a  receiver  or  conservator  for an  institution  that  is  critically
undercapitalized.  The federal  banking  regulatory  agencies have  specified by
regulation the relevant capital level for each category.

FDICIA  generally  prohibits a  depository  institution  from making any capital
distribution  (including  payment of a dividend) or paying any management fee to
its  holding  company  if  the  depository   institution   would  thereafter  be
undercapitalized.   Undercapitalized  depository  institutions  are  subject  to
restrictions  on  borrowing  from  the  Federal  Reserve  System.  In  addition,
undercapitalized  depository  institutions are subject to growth limitations and
are required to submit capital  restoration  plans.  A depository  institution's
holding  company must  guarantee  the capital plan, up to an amount equal to the
lesser of 5% of the depository institution's total assets at the time it becomes
undercapitalized   or  the  amount  necessary  to  bring  the  institution  into
compliance with all applicable  capital standards.  If a depository  institution
fails to submit an  acceptable  plan,  it is treated  as if it is  significantly
undercapitalized.  Significantly undercapitalized depository institutions may be
subject to a number of requirements and  restrictions,  including orders to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
total assets and  cessation  of receipt of deposits  from  correspondent  banks.
Critically  undercapitalized  depository institutions are subject to appointment
of a receiver or  conservator.  At December  31, 2002,  Community  Bank was well
capitalized for prompt corrective action purposes.

The  Company  is  required  to comply  with the  risk-based  capital  guidelines
established by the Federal Reserve, and other tests relating to capital adequacy
which the Federal Reserve adopts from time to time. Under the risk-based capital
assessment  system,  assets  are  weighted  by a  risk  factor  and a  ratio  is
calculated by dividing the qualifying capital by the risk-weighted  assets. Tier
I capital generally includes common stock and retained  earnings.  Total capital
is  comprised  of Tier I capital and Tier II  capital,  which  includes  certain
allowances for loan losses and certain  subordinated  debt. The Company's Tier I
and total capital ratios exceeded the required minimum levels as of December 31,
2002.

The  Company  is a  legal  entity  which  is  separate  and  distinct  from  its
subsidiaries.  There  are  various  legal  limitations  on the  extent  to which
Community Bank may extend credit, pay dividends or otherwise supply funds to the
Company or its affiliates.  In particular,  Community Bank is subject to certain
restrictions  imposed by federal law on any  extensions of credit to the Company
or, with certain exceptions, other affiliates.

                                       5

<PAGE>

The primary source of funds for dividends paid to the Company's  shareholders is
dividends paid to the Company by Community Bank.  Various federal and state laws
limit the amount of dividends that Community Bank may pay to the Company without
regulatory approval. Under Alabama law, an Alabama state bank, such as Community
Bank,  may not pay a  dividend  in excess of 90% of its net  earnings  until the
bank's  surplus is equal to at least 20% of its capital.  Community Bank is also
required by Alabama law to obtain the prior  approval of the  Superintendent  of
the Alabama State Banking  Department in order to pay a dividend if the total of
all the  dividends  declared by Community  Bank in any calendar year will exceed
the total of Community Bank's net earnings (as defined by statute) for that year
and its retained net earnings  for the  preceding  two years,  less any required
transfers  to  surplus.  At December  31,  2002,  Community  Bank could not have
declared or paid any dividend without such approval.  In addition,  no dividends
may be paid from Community  Bank's surplus without the prior written approval of
the  Superintendent  of the Alabama  State  Banking  Department.  Under  FDICIA,
Community Bank may not pay any dividends,  if after paying the dividend it would
be undercapitalized under applicable capital requirements. The FDIC also has the
authority to prohibit  Community Bank from engaging in business  practices which
the FDIC  considers to be unsafe or unsound,  which,  depending on the financial
condition of Community Bank, could include the payment of dividends.

In addition,  the Federal  Reserve has the  authority to prohibit the payment of
dividends  by a bank  holding  company,  such  as the  Company,  if its  actions
constitute  unsafe or unsound  practices.  In 1985, the Federal Reserve issued a
policy  statement on the payment of cash  dividends  by bank holding  companies,
which outlined the Federal  Reserve's  view that a bank holding  company that is
experiencing  earnings  weaknesses or other financial  pressures  should not pay
cash  dividends  that  exceed its net  income,  that are  inconsistent  with its
capital  position or that could only be funded in ways that weaken its financial
health,  such as by borrowing or selling assets.  The Federal Reserve  indicated
that, in some  instances,  it may be appropriate  for a bank holding  company to
eliminate its dividends.

The federal Riegle-Neal  Interstate Banking and Branching Efficiency Act of 1994
("IBBEA") permits  adequately  capitalized and managed bank holding companies to
acquire  control of banks in states  other than  their home  states,  subject to
federal  regulatory  approval,  without  regard to whether such a transaction is
prohibited by the laws of any state. IBBEA permits states to continue to require
that an acquired bank have been in existence for a certain  minimum time period,
which may not exceed five years.  A bank holding  company may not,  following an
interstate  acquisition,  control more than 10% of the nation's  total amount of
bank  deposits or 30% of bank  deposits in the relevant  state (unless the state
enacts  legislation to raise the 30% limit).  States retain the ability to adopt
legislation to effectively lower the 30% limit.  Federal banking  regulators may
approve merger transactions involving banks located in different states, without
regard to laws of any state prohibiting such transactions;  except that, mergers
may not be approved with respect to banks located in states that,  prior to June
1, 1997, enacted legislation  prohibiting mergers by banks located in such state
with  out-of-state  institutions.  Also,  states may continue to require that an
acquired bank have been in existence for a certain minimum period of time, which
may not exceed five years. Federal banking regulators may permit an out-of-state
bank to open new branches in another state if such state has enacted legislation
permitting  interstate  branching.  Affiliated  institutions  are  authorized to
accept deposits for existing accounts, renew time deposits and close and service
loans for affiliated  institutions  without being deemed an impermissible branch
of the affiliate.

The federal  Community  Reinvestment  Act of 1977  ("CRA") and its  implementing
regulations are intended to encourage regulated  financial  institutions to meet
the credit needs of their local  community  or  communities,  including  low and
moderate income  neighborhoods,  consistent with the safe and sound operation of
such  financial  institutions.  The  regulations  provide  that the  appropriate
regulatory authority will assess CRA reports in connection with applications for
establishment of domestic  branches,  acquisitions of banks or mergers involving
bank holding  companies.  An  unsatisfactory  CRA rating may serve as a basis to
deny an  application  to acquire or  establish  a new bank,  to  establish a new
branch or to expand  banking  services.  At December 31, 2002, the Company had a
"satisfactory" CRA rating.

The federal  Gramm-Leach-Bliley Act of 1999 (the "GLBA") eliminated prohibitions
in the  Glass-Steagall  Act against a bank  associating  with a company  engaged
principally  in  securities  activities.  The GLBA also  permits a bank  holding
company to elect to become a "financial holding company," which would expand the
powers  of the bank  holding  company.  The  repeal  of the  Glass-Steagall  Act
provisions  and the  availability  of financial  holding  company  powers became
effective  on March  11,  2000.  Financial  holding  company  powers  relate  to
financial  activities that are determined by the Federal Reserve to be financial
in  nature,   incidental  to  an  activity  that  is  financial  in  nature,  or
complementary to

                                       6

<PAGE>

a financial activity  (provided that the complementary  activity does not pose a
safety and  soundness  risk).  The GLBA itself  defines  certain  activities  as
financial in nature,  including  lending  activities,  underwriting  and selling
insurance,  providing financial or investment advice, underwriting,  dealing and
making  markets in  securities  and merchant  banking.  In order to qualify as a
financial holding company, a bank holding company's depository subsidiaries must
be both well capitalized and well managed, and must have at least a satisfactory
rating under the CRA. The bank holding  company must also declare its  intention
to become a financial  holding  company to the Federal  Reserve and certify that
its depository subsidiaries meet the capitalization and management requirements.
The GLBA establishes the Federal Reserve as the umbrella  regulator of financial
holding companies, with subsidiaries of the financial holding company being more
specifically regulated by other regulatory  authorities,  such as the Securities
and Exchange  Commission,  the Commodity  Futures  Trading  Commission and state
securities and insurance  regulators,  based upon the  subsidiaries'  particular
activities.  The GLBA also provides for minimum federal  standards of privacy to
protect the  confidentiality of personal financial  information of customers and
to regulate use of such  information by financial  institutions.  A bank holding
company  that does not  elect to  become a  financial  holding  company  remains
subject to the Bank Holding Company Act. The Company has not determined  whether
it will elect to become a financial holding company.

The Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept  and Obstruct  Terrorism  Act (the "USA Patriot Act") which was signed
into law by President  Bush on October 26, 2001, is designed to deny  terrorists
and others the ability to obtain access to the United States  financial  system.
Title III of the USA Patriot Act is the International Money Laundering Abatement
and Anti-Terrorist Financing Act of 2001. Among its provisions,  the USA Patriot
Act  mandates or will require  financial  institutions  to implement  additional
policies and  procedures  with  respect to, or  additional  measures,  including
additional  due diligence and  recordkeeping,  designed to address any or all of
the following matters, among others: money laundering; suspicious activities and
currency transaction reporting;  and currency crimes. The U.S. Department of the
Treasury  in  consultation  with the  Federal  Reserve  Board and other  federal
financial   institution   regulators  has  promulgated   rules  and  regulations
implementing the USA Patriot Act which (i) prohibit U.S.  correspondent accounts
with  foreign  banks that have no physical  presence in any  jurisdiction;  (ii)
require  financial  institutions to maintain  certain records for  correspondent
accounts of foreign  banks;  (iii)  require  financial  institutions  to produce
certain records relating to anti-money laundering compliance upon request of the
appropriate  federal banking agency;  (iv) require due diligence with respect to
private banking and correspondent banking accounts;  (v) facilitate  information
sharing  between the  government  and financial  institutions;  and (vi) require
financial institutions to have in place a money laundering program. In addition,
an implementing  regulation under the USA Patriot Act regarding  verification of
customer  identification by financial  institutions has been proposed,  although
such regulation has not yet been finalized. The Company has implemented and will
continue to implement the provisions of the USA Patriot Act, as such  provisions
become effective.  The Company currently maintains and will continue to maintain
policies and procedures to comply with the USA Patriot Act requirements. At this
time,  the  Company  does not  expect  that  the USA  Patriot  Act  will  have a
significant impact on the financial position of the Company.

On July 30,2002,  President Bush signed into law the  Sarbanes-Oxley Act of 2002
(the "Sarbanes-Oxley Act"), which is intended to address systemic and structural
weaknesses of the capital  markets in the United  States that were  perceived to
have  contributed  to the recent  corporate  scandals.  The  Sarbanes-Oxley  Act
creates the Public Company  Accounting  Oversight Board (the "Board") to oversee
the conduct of audits of public  companies.  The duties of the Board include (i)
registering   public   accounting   firms  that  prepare  audit  reports,   (ii)
establishing auditing, quality control, ethics, independence and other standards
for the preparation of audit reports, (iii) conducting inspections of registered
public accounting firms and (iv) otherwise promoting high professional standards
among, and improving the quality of audit services offered by auditors of public
companies.  The Board will be funded from  assessments  on public  companies and
will be subject to the oversight of the Securities and Exchange  Commission.  In
addition,  the  Sarbanes-Oxley  Act attempts to strengthen the  independence  of
public company auditors by, among other things,  (i) prohibiting  public company
auditors from providing certain non-audit services to their audit clients,  (ii)
requiring a company's  audit  committee to  preapprove  all audit and  non-audit
services being provided by its independent auditor, (iii) requiring the rotation
of audit  partners and (iv)  prohibiting  an auditor from auditing a client that
has as its chief executive officer,  chief financial  officer,  chief accounting
officer or  controller  a person that was  employed  by the  auditor  during the
previous year.

                                       7

<PAGE>

The  Sarbanes-Oxley Act also attempts to enhance the responsibility of corporate
management by, among other things, (i) requiring the chief executive officer and
chief financial officer of public companies to provide certain certifications in
their periodic reports regarding the accuracy of the periodic reports filed with
the Securities and Exchange Commission,  (ii) prohibiting officers and directors
of public companies from fraudulently  influencing an accountant  engaged in the
audit of the company's  financial  statements,  (iii)  requiring chief executive
officers and chief financial officers to forfeit certain bonuses in the event of
a misstatement of financial  results,  (iv)  prohibiting  officers and directors
found  to be  unfit  from  serving  in a  similar  capacity  with  other  public
companies,  (v) prohibiting officers and directors from trading in the company's
equity  securities  during  pension  blackout  periods  and (vi)  requiring  the
Securities and Exchange  Commission to issue standards of  professional  conduct
for attorneys representing public companies. In addition, public companies whose
securities  are listed on a national  securities  exchange or  association  must
satisfy the following additional requirements: (i) the company's audit committee
must  appoint  and  oversee  the  company's  auditors,  (ii) each  member of the
company's  audit  committee  must be  independent,  (iii)  the  company's  audit
committee  must  establish   procedures  for  receiving   complaints   regarding
accounting,  internal  accounting controls and audit-related  matters,  (iv) the
company's audit committee must have the authority to engage independent advisors
and (v) the company must provide appropriate funding to its audit committee,  as
determined by the audit committee.

The  Sarbanes-Oxley  Act  contains  several  provisions  intended to enhance the
quality of financial disclosures of public companies,  including provisions that
(i)  require  that  financial   disclosures   reflect  all  material  correcting
adjustments identified by the company's auditors, (ii) require the disclosure of
all material  off-balance sheet  transactions,  (iii) require the Securities and
Exchange  Commission to issue rules regarding the use by public companies of pro
forma financial information, (iv) with certain limited exceptions,  including an
exception for  financial  institutions  making loans in compliance  with federal
banking regulations, prohibit public companies from making personal loans to its
officers and directors, (v) with certain limited exceptions,  require directors,
officers and principal  shareholders  of public  companies to report  changes in
their  ownership in the  company's  securities  within two business  days of the
change,  (vi)  require  a  company's  management  to  provide  a  report  of its
assessment  of  internal  controls of the  company in its annual  report,  (vii)
require public companies to adopt codes of conduct for senior financial officers
and (viii) require  companies to disclose  whether the company's audit committee
has a financial expert as a member.

Under the Sarbanes-Oxley Act, the Securities and Exchange Commission is directed
to adopt rules designed to protect the independence of research  analysts and to
require  research  analysts to disclose  conflicts  of  interest  and  potential
conflicts of interest.  The Sarbanes-Oxley Act also directs that certain studies
be  conducted  by the  Comptroller  General  and  the  Securities  and  Exchange
Commission,  including  studies regarding the function of credit rating agencies
and the role of investment  banks and financial  advisors in the manipulation of
earnings.  The  Sarbanes-Oxley  Act imposes criminal liability for certain acts,
including  altering  documents  involving  federal  investigations,   bankruptcy
proceedings  and  corporate  audits and  increases  the  penalties  for  certain
offenses,  including mail and wire fraud. In addition,  the  Sarbanes-Oxley  Act
gives  added  protection  to  corporate  whistle-blowers.  Although  the Company
anticipates  that it  will  incur  additional  expense  in  complying  with  the
provisions of the  Sarbanes-Oxley  Act and the  regulations  promulgated  by the
Securities and Exchange Commission thereunder,  the Company does not expect that
such compliance will have a material impact on the Company's financial condition
or results of operations.

Community  Bank is  subject  to  regulatory  oversight  under  various  consumer
protection  and fair  lending  laws.  These laws  govern,  among  other  things,
truth-in-lending disclosure, equal credit opportunity and fair credit reporting.

Community  Insurance Corp. is a licensed  insurance agent and broker for various
insurance  companies,  and is subject to  regulation  by the  Alabama  Insurance
Commission.

The Federal  Reserve  regulates  money,  credit and interest rate  conditions in
order to influence  general economic  conditions,  primarily through open market
operations in U.S. Government securities,  changes in the discount rate, reserve
requirements on member banks' deposits and funds availability  regulations.  The
earnings  and growth of the  Company  and its  subsidiaries  are  subject to the
influence  of  economic  conditions  generally  and to the  monetary  and

                                       8

<PAGE>

fiscal policies of the United States and its agencies,  particularly the Federal
Reserve.  The nature and timing of any changes in such  conditions and  policies
and their impact on the Company cannot be predicted.

On April 9, 2001, the Company's Board of Directors  entered into a Memorandum of
Understanding  (the  "Memorandum") with the Federal Reserve Bank of Atlanta (the
"Reserve  Bank"),  which outlines  actions to be taken by the Company to address
concerns  identified by the Reserve Bank. In the Memorandum,  the Company agreed
that,  without the prior  written  approval of the  Reserve  Bank,  it would not
declare or pay any dividends,  repurchase shares of its common stock,  incur any
additional  indebtedness,  alter the terms of existing  indebtedness or increase
the  amount of  management  fees  paid to the  Company  by  Community  Bank.  In
addition,  the Company agreed to maintain a quarterly Tier I leverage ratio (the
ratio of Tier I capital  to  average  assets,  less  goodwill)  of at least 6.5%
during the period in which the  Memorandum  is in  effect,  and to  periodically
update the  Company's  plan for  maintaining  capital  and  earnings at adequate
levels.  The Company also agreed to establish a policy that  provides for target
levels  of  capital  and  guidelines  for  payment  of  dividends  and a plan to
strengthen the Company's internal audit program. The Company further agreed that
a committee of non-employee  directors of the Company would review and report on
the appropriateness of the compensation  provided under the employment agreement
of Kennon R.  Patterson,  Sr.,  who was then the  Chairman  of the Board,  Chief
Executive Officer and President of the Company. In addition,  the Company agreed
to provide the Reserve Bank with a  contingency  plan for  conserving or raising
cash and  information  about loans  extended  by  Community  Bank to  facilitate
purchases of the Company's common stock, and to periodically provide the Reserve
Bank with certain  financial and other information and a report of actions taken
by the Company to ensure  compliance with the Memorandum.  On March 8, 2002, the
Reserve Bank  requested that the Company agree to an amendment of the Memorandum
that would  disallow  the Company  from making any  distributions  of  interest,
principal or other sums on subordinated debentures or trust preferred securities
without the prior written  approval of the Reserve Bank.  The Company  agreed to
the  amendment.  The  Company  elected  to defer the March  and  September  2002
interest payments on its junior subordinated deferrable interest debentures. See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations,  Borrowed Funds - Maturities of Long-term  Debt".  Management of the
Company  cannot  currently  estimate  the period  during  which the Company will
remain subject to the terms of the  Memorandum,  or the effect of the Memorandum
on the Company's financial condition, liquidity and results of operations.

On April 18,  2001,  the Board of  Directors  of  Community  Bank entered into a
Memorandum of Understanding  (the "Bank  Memorandum") with the Regional Director
of the FDIC's Atlanta Regional Office and the Alabama State Banking  Department.
Major  provisions  of  the  Bank  Memorandum  include   requirements  to  reduce
classified assets,  restrict  expansion,  adopt revised policies in the areas of
lending,  liquidity,  interest rate risk,  loan  documentation,  asset/liability
management  and ethics,  review  duties and  responsibilities  of key  officers,
review  compliance with  investment,  liquidity and funds  management  policies,
reconstitute membership of its Board of Directors,  develop internal loan review
and internal audit  functions,  maintain  capital ratio  requirements,  restrict
dividend  payments,   provide  to  the  regulators  updates  on  the  status  of
litigation,  other financial and managerial  information and quarterly  progress
reports   detailing  efforts  to  comply  with  the  requirements  of  the  Bank
Memorandum.

Based on an  examination  as of June 30,  2001,  the FDIC and the Alabama  State
Banking  Department  requested the Community  Bank Board of Directors to adopt a
Safety and Soundness  Compliance  Plan  ("Plan").  The Board adopted the Plan on
March 5, 2002.  The Plan  (initiated by the FDIC)  replaced the Bank  Memorandum
(initiated by the Alabama State Banking Department).

Pursuant  to  the  terms  of  the  Plan,   the  Board  must  review  the  Bank's
organizational  structure  and  staffing  requirements  and hire and  train  any
additional  personnel needed to comply with the Plan. Also the Board must review
and revise the bank's loan policy and  underwriting  standards,  loan collection
plan, allowance for loan losses methodology, interest rate risk policy and asset
liability management policy. The Plan also provides that the Board must adopt an
internal  audit  program,  an  internal  controls  program,  a  plan  to  reduce
classified   assets  and  internal  and  external  loan   documentation   review
procedures. Also, pursuant to the Plan, the Board must engage an outside firm to
perform the loan review function and must adopt an internal loan review program.
The Plan also places  restrictions  on extending  credit to  borrowers  who have
classified  loans with the bank.  Under the Plan, prior to submission of Reports
of Condition and Income, the Board must review the adequacy of the allowance for
loan  losses and  provide for an  adequate  balance.  Under the Plan,  the Board
committed to maintaining a Tier I capital ratio of at least 7% and to obtain the
prior approval of the regulators before paying dividends.  In addition, the Plan
requires the  submission  of a budget and profit plan and the  engagement  of an
outside  accounting  firm to perform the bank's  internal audit function and the
formation of a bank  administration  department to strengthen internal controls.
Finally,  the Plan requires  management to make monthly  reports to the Board of
Directors  regarding the status in meeting the  requirements of the Plan, and to
submit quarterly progress reports to the regulators.

                                       9
<PAGE>

On December 10, 2002,  the Board of Directors of Community  Bank entered into an
agreement with the Alabama State Banking Department. The agreement provided that
the Board of Directors would take certain actions regarding (i) an investigation
into payments made in connection with several construction projects of the Bank,
(ii) approval and management of payments and loans involving directors, officers
and employees and (iii) expense controls and review of financial statements.

With respect to the  investigation  of construction  payments,  the Bank's Audit
Committee,  with the assistance of  independent  accountants  and counsel,  must
determine whether any directors, officers or employees improperly benefited from
payments made by the Bank for construction  projects.  If improper benefits were
received, the Audit Committee must determine the amount of such benefits, fix an
appropriate  rate of  interest  due to the Bank on the  principal  amount of any
benefit, require restitution of the amount of the benefit, plus accrued interest
and  investigate  any apparent  negligence  on the part of Bank  employees  with
regard  to  improper  payments.  The Bank has  reported  the  Audit  Committee's
progress and findings to the Alabama State Banking Department for its review.

The Board has  agreed,  among other  things,  to require  Board  approval of all
extensions  of credit to  insiders,  as defined in  Regulation O of the Board of
Governors of the Federal Reserve System.  The Board has also agreed to implement
certain   procedures  for  managing   existing  loans  to  insiders,   including
limitations on renewals,  methods of collection of adversely classified loans to
certain insiders and obtaining  current  appraisals on collateral  securing such
adversely  classified  loans. In addition,  the Board has agreed to limit future
extensions of credit and any payments  other than ordinary  compensation  to any
director,  officer  or  employee  who,  after  investigation,  is  deemed to owe
restitution  to the Bank or whose  loans  have  been  adversely  classified,  to
consult  with the Alabama  State  Banking  Department  regarding  settlement  of
litigation  and to obtain  prior  approval  for sales or transfers of the Bank's
assets benefiting any director, officer or employee deemed to owe restitution.

As a part of an effort to control the Bank's  expenses,  the Board has  directed
the Audit Committee to review for adequacy and appropriateness bills paid by the
Bank for  professional  services  from  1998 to the  present,  to  recover  fees
improperly  paid,  if any,  for the benefit of third  parties  and to  establish
additional internal controls for the payment of future bills.

On March 4, 2003,  the Board of Directors of Community Bank and the FDIC entered
into a  Stipulation  and Consent to the Issuance of an Order to Cease and Desist
(the "Consent Agreement"). The Order was effective 10 days after March 12, 2003,
the date of its issuance. The FDIC alleged in the Order to Cease and Desist (the
"Order") deficiencies relating to the Board's supervision over active management
of Community  Bank,  supervision and control of lending to insiders and accurate
maintenance of Community Bank's books and records.  The FDIC characterizes these
deficiencies as unsafe and unsound banking practices. The Board consented to the
Order without admitting or denying those allegations. Pursuant to the Order, the
Board of Community  Bank agreed to cease and desist from conduct  giving rise to
the noted deficiencies and to:

     (i)  develop  within 30 days of the  effective  date of the Order a written
          plan  specifying  the  responsibilities  and  lines of  authority  for
          Community Bank's executive officers and outlining internal controls to
          ensure compliance with the plan;

     (ii) refrain  from making,  renewing or  modifying  any loans to current or
          former executive  officers or directors  without prior approval of the
          FDIC and the Alabama State Banking Department;

     (iii)amend  Community  Bank's books and records to reflect the actual value
          of bank premises and fixed assets; and

     (iv) supply a copy of the Order to the Company and provide the Company with
          a summary of the Order for inclusion in the Company's next shareholder
          communication.

                                       10

<PAGE>

Statistical Disclosure

Statistical and other information regarding the following items are set forth in
"Item 7 -  Management's  Discussion  and  Analysis of  Financial  Condition  and
Results of Operations" on the pages indicated below.

<TABLE>
<CAPTION>
                                                                                                          Page(s)

<S>                                                                                                          <C>
Loan Portfolio and Selected Loan Maturity........................................................             21
Investment Portfolio.............................................................................             22
Investment Portfolio Maturity Schedule...........................................................             23
Average Deposit Balances and Rates Paid..........................................................             24
Maturities of Large Time Deposits................................................................             24
Short-term Borrowings............................................................................             25
Maturities of Long-term Debt.....................................................................             26
Interest Sensitivity.............................................................................             28
Capital Adequacy Ratios and Capital Growth "Reduction Ratios"....................................             29
Yields, Rates, Interest Rate Spread and Net Interest Margin......................................             31
Consolidated Average Balances, Interest Income/Expense and Yields/Rates..........................             32
Rate/Volume Variance Analysis....................................................................             33
Summary of Loan Loss Experience..................................................................             35
Allocation of the Allowance for Loan Losses......................................................             36
Nonperforming Assets.............................................................................             37
Noninterest Income...............................................................................             38
Noninterest Expense..............................................................................             39
</TABLE>


Item 2 - Properties

The corporate headquarters of the Company is owned by Community Bank and located
at 68149 Main Street (U.S.  Highway  231) in  Blountsville,  Alabama.  Community
Bank's administrative, operational, accounting and legal functions are housed in
three  buildings  constructed  in 1997,  all of which  are  located  on the same
property as the corporate headquarters.

The main  banking  office of  Community  Bank is located  at 69156 Main  Street,
Blountsville, Alabama. The premises are owned by Community Bank.

At December 31, 2002, Community Bank owned or leased buildings that were used in
the normal  course of business in nine  counties in Alabama,  including  Blount,
Lauderdale,  Limestone,  Madison,  Marengo,  Marion,  Morgan,  Perry and Winston
Counties.  1st Community Credit  Corporation owned or leased buildings that were
used in the normal  course of  business in ten  counties  in Alabama,  including
Blount, Cullman, Marshall, Morgan, Limestone,  Lawrence, Etowah, Madison, DeKalb
and Walker  Counties.  Community  Insurance Corp. and its  subsidiary,  Southern
Select  Insurance,  Inc.,  owned a building that is used in the normal course of
business in Madison County, Alabama.

For  information  about the amounts at which bank premises,  equipment and other
real estate are recorded in the Company's  financial  statements and information
relating to commitments under leases, see the Company's  Consolidated  Financial
Statements  and the  accompanying  notes to  Consolidated  Financial  Statements
included elsewhere in this Report.

Item 3 - Legal Proceedings

Background

At a meeting of Community Bank's Board of Directors on June 20, 2000, a director
brought to the attention of the Board the total amount of money  Community  Bank
had paid  subcontractors  in connection with the construction of a new

                                       11

<PAGE>

Community  Bank  office in  Guntersville,  Alabama.  Management  of the  Company
commenced an  investigation of the  expenditures.  At the request of management,
the  architects and  subcontractors  involved in the  construction  project made
presentations  to the Boards of Directors of the Company and  Community  Bank on
July 15 and July 18,  2000,  respectively.  At the July 18, 2000  meeting of the
Board of Directors of Community Bank,  another  director  alleged that Community
Bank had been overcharged by  subcontractors  on that  construction  project and
another current construction  project. On July 18, 2000, the Boards of Directors
of the Company and  Community  Bank  appointed a joint  committee  comprised  of
independent  directors of the Company and of Community Bank to  investigate  the
alleged overcharges.  The joint committee retained independent legal counsel and
an independent  accounting firm to assist the committee in its investigation and
has made its report to the Boards of Directors.  The directors of Community Bank
who alleged  the  construction  overcharges  have made  similar  charges to bank
regulatory  agencies and law enforcement  authorities.  Management believes that
these agencies and authorities are currently conducting investigations regarding
this matter.

Benson Litigation

On July 21, 2000, three shareholders of the Company,  M. Lewis Benson,  Doris E.
Benson and John M. Packard,  Jr.,  filed a lawsuit in the state Circuit Court of
Marshall County, Alabama against the Company,  Community Bank, certain directors
and officers of the Company and Community  Bank,  an employee of Community  Bank
and two  construction  subcontractors.  The  plaintiffs  purported  to file  the
lawsuit  as a  shareholder  derivative  action,  which  relates  to the  alleged
construction overcharges being investigated by the joint committee of the Boards
of Directors of the Company and Community  Bank. The complaint  alleges that the
directors,  officers and employee named as defendants in the complaint  breached
their fiduciary duties,  failed to properly supervise officers and agents of the
Company and Community Bank, and permitted waste of corporate assets by allegedly
permitting  the  subcontractor   defendants  to  overcharge  Community  Bank  in
connection  with the  construction  of two new Community  Bank  offices,  and to
perform the construction work without written  contracts,  budgets,  performance
guarantees and assurances of indemnification. In addition, the complaint alleges
that Kennon R.  Patterson,  Sr., the  Chairman,  President  and Chief  Executive
Officer of the Company,  breached his fiduciary  duties by allegedly  permitting
the two  named  subcontractors  to  overcharge  for  work  performed  on the two
construction  projects in exchange  for  allegedly  discounted  charges for work
these  subcontractors  performed  in  connection  with the  construction  of Mr.
Patterson's   residence.   The  complaint  further  alleges  that  the  director
defendants  knew or should have known of this  alleged  arrangement  between Mr.
Patterson and the subcontractors. The complaint also alleges that Mr. Patterson,
the Community  Bank  employee and the two  subcontractor  defendants  made false
representations  and suppressed  information  about the alleged  overcharges and
arrangement between Mr. Patterson and the subcontractors.

On August 15, 2000, the  plaintiffs  filed an amended  complaint  adding Andy C.
Mann, a shareholder of the Company,  as a plaintiff and adding a former director
of the  Company  and  Community  Bank  as a  defendant.  The  amended  complaint
generally reiterates the allegations of the original complaint. In addition, the
amended   complaint   alleges  that  Community  Bank  was   overcharged  on  all
construction  projects from January 1997 to the present.  The amended  complaint
also alleges that the defendants  breached their fiduciary duties and are guilty
of gross financial mismanagement, including allegations concerning the making or
approval of certain loans and taking  allegedly  improper actions to conceal the
fact that certain loans were uncollectible. On September 18, 2000 the plaintiffs
filed a  second  amended  complaint.  The  second  amended  complaint  generally
reiterates  the  allegations  of the original and first amended  complaints.  In
addition,  the  second  amended  complaint  alleges  that  the  plaintiffs  were
improperly  denied  their  rights to  inspect  and copy  certain  records of the
Company and Community  Bank. The second amended  complaint also alleges that the
directors of the Company  abdicated  their roles as directors  either by express
agreement or as a result of wantonness and gross negligence.  The second amended
complaint asserts that the counts involving  inspection of corporate records and
director  abdication are individual,  non-derivative  claims. The second amended
complaint seeks, on behalf of the Company, an unspecified amount of compensatory
damages in excess of $1 million,  punitive  damages,  disgorgement  of allegedly
improperly paid profits and  appropriate  equitable  relief.  Upon motion of the
defendants,  the case was  transferred  to the  state  Circuit  Court in  Blount
County,  Alabama by order dated  September  21, 2000,  as amended on October 12,
2000.

On August  24,  2000,  the Board of  Directors  of the  Company  designated  the
directors  of the Company who serve on the joint  investigative  committee  as a
special  litigation  committee to investigate  and evaluate the  allegations and
issues  raised in this  lawsuit  and to arrive at such  decisions  and take such
action as the special litigation  committee deems appropriate.  On June 8, 2001,
the special litigation  committee filed its report under seal with the court. On
June 18, 2001, the court entered an order affirming the  confidentiality  of the
special  committee's  report. On June 28, 2001, the Company,  Community Bank and
various  other  defendants  filed a motion with the court to adopt the report of
the special  committee,  for partial summary judgment and to realign the Company
and Community Bank as plaintiffs in the lawsuit.

                                       12
<PAGE>

Following  a hearing on August  29,  2001,  the court  denied  these  motions on
November  8, 2001.  The court also ruled that the  plaintiffs  were  entitled to
conduct  discovery except as it related to one of the  subcontractor  defendants
and  granted  the  plaintiffs'  motion  to  unseal  the  report  of the  special
litigation committee. On November 14, 2001, the directors of the Company filed a
motion for the court to alter, amend, or vacate its November 8, 2001 rulings. On
February 7, 2002,  the Company and  Community  Bank filed a motion to disqualify
Maynard,  Cooper & Gale, P.C., the law firm representing the plaintiffs,  due to
conflicts of interest. The court held a hearing on these motions on February 22,
2002 and the  parties  are  awaiting a ruling.  A  tentative  settlement  of the
lawsuit was  announced in  December,  2002,  but was not carried  through and is
unlikely to be under present circumstances. One of the subcontractors named as a
defendant in this action,  Morgan City  Construction,  Inc., and its principals,
Mr. and Mrs. Dewey  Hamaker,  have been tried and convicted in the United States
District Court for the Northern District of Alabama and are awaiting sentencing.

Because of the inherent  uncertainties of the litigation process, the Company is
unable at this time to predict the outcome of this lawsuit and its effect on the
Company's financial condition and results of operations.

Packard Derivative Litigation

On April 4, 2003, a group composed of the same  plaintiffs as in the Benson case
filed another derivative action against Sheffield Electrical Contractors,  Inc.,
Steve Sheffield, Jay Bolden, Dudley,  Hopton-Jones,  Sims & Freeman, PLLP, Glynn
Debter,  Kennon R. Patterson,  Jr., Robert O. Summerford,  Jimmie Trotter,  John
Lewis, Jr., Merritt Robbins, Stacey Mann, B. K. Walker, Jr., Denny Kelly, Roy B.
Jackson, Loy McGruder, and Hodge Patterson. The complaint in this new derivative
lawsuit,  besides  adding  defendants  known  during but not named in the Benson
lawsuit,  is based upon the same allegations as in the Benson case but bases its
claims against the  director-defendants  not "for what they did (and did not do)
before learning of the over billing [sic.] allegations against Patterson [Kennon
R.  Patterson,  Sr., the Company's  former  Chairman and CEO] in July 2000" but,
instead "only for what they have done (and failed to do) after the filing of the
Benson  lawsuit--  that  is,  after  they  learned  of the  allegations  against
Patterson in July 2000." [Emphasis in the original.]

The time for answering  the complaint in this case has not yet expired.  Because
of the inherent  uncertainties of the litigation process,  the Company is unable
at this time to  predict  the  outcome  of this  lawsuit  and its  effect on the
Company's financial condition and results of operations.

Towns Derivative Litigation

The lawsuit  filed by Mr.  William  Towns,  a  shareholder  of the  Company,  on
November 19, 1998, as a shareholder  derivative  action against the directors of
the  Company in the Circuit  Court of Blount  County,  Alabama,  was settled and
dismissed  during 2002.  The  settlement  did not have a material  effect on the
financial condition of the company.

Corr Family Litigation

On September 14, 2000,  Bryan A. Corr and six other  shareholders of the Company
related  to Mr.  Corr  filed an action in the  Circuit  Court of Blount  County,
Alabama, against the Company, Community Bank, and certain directors and officers
of the  Company  and  Community  Bank.  The  plaintiffs  have  alleged  that the
directors   of  the  Company   actively   participated   in  or   ratified   the
misappropriation of corporate income. The action was not styled as a shareholder
derivative action. On January 3, 2001, the defendants filed a motion for summary
judgment on the basis that these claims are  derivative  in nature and cannot be
brought  on behalf of  individual  shareholders.  The court has not ruled on the
motion.  Although management currently believes that this action will not have a
material  adverse  effect on the  Company's  financial  condition  or results of
operations,  regardless  of the  outcome,  the  action  could  be  costly,  time
consuming, and a diversion of management's attention.

                                       13

<PAGE>

Auto Loan Litigation

The action  filed by the  Company in the United  States  District  Court for the
Northern  District of Alabama against Carl Gregory Ford L-M, Inc., an automobile
dealership located in Ft. Payne,  Alabama,  Carl Gregory and Doug Broaddus,  the
owners  of  the  dealership,  several  employees  and  former  employees  of the
dealership and Gerald Scot Parrish,  a former  employee of Community  Bank, with
respect to certain loans  originated  during 1998 in Community  Bank's  Wal-Mart
office in Ft. Payne,  Alabama,  has been settled as to all defendants other than
G. S.  Parrish,  the former  employee of the Bank.  The Bank has one year within
which to re-file its claims against Mr. Parrish.

Employee Litigation

The lawsuit  filed by Messrs.  Michael W. Alred and Michael A. Bean,  two former
directors and executive  officers of Community Bank,  against  Community Bank in
the United States District Court for the Northern  District of Alabama  alleging
that  their  employment  was  wrongfully   terminated  for  allegedly  providing
information  to bank  regulatory  and  law  enforcement  authorities  concerning
possible violations of laws and regulations, gross mismanagement, gross waste of
funds and abuse of authority  by Community  Bank,  its  directors,  officers and
employees was settled and dismissed  during 2002. The terms of the settlement of
this  litigation were deemed  confidential  and are included in the statement of
income as an increase to litigation expense.

Lending Acts Litigation

On October 11, 2002,  William Alston,  Murphy Howard,  and Jason Tittle filed an
action against Community Bank, Community  Bancshares,  Inc.,  Holsombeck Motors,
Inc.,  Lee Brown d/b/a Alabama Bond &  Investigation  a/k/a ABI Recovery,  Chris
Holmes d/b/a Alabama Bond & Investigation a/k/a ABI Recovery, Regina Holsombeck,
Kennon "Ken" Patterson,  Sr., Hodge Patterson,  James Timothy "Tim" Hodge, Ernie
Stephens, and the State of Alabama Department of Revenue. The plaintiffs in this
class  action  allege  that  Community   Bank  and  others   conspired  or  used
extortionate methods to effect a lending scheme of "churning phantom loans", and
that profits from the scheme were used to secure an interest in and/or to invest
in an enterprise that affects  interstate  commerce.  The allegations state that
Community  Bank used various  methods to get  uneducated  customers with fair to
poor credit to sign numerous "phantom loans" when the customers only intended to
sign for one loan.  Claims include  racketeering  activity within the meaning of
the  Racketeer  Influnced  and  Corrupt  Organization  act of 1970,  conspiracy,
spoliation, conversion, negligence, wantonness, outrage, and civil conspiracy.

The  Company  and  Community  Bank  intend to defend the action  vigorously  and
currently are conducting discovery to ascertain what substance, if any, there is
to the claims.  Although management currently believes that this action will not
have a material adverse effect on the Company's  financial  condition or results
of  operations,  regardless  of the outcome,  the action  could be costly,  time
consuming, and a diversion of management's attention.

Conspiracy Litigation

On November 6, 2001 the Company and Community Bank filed a lawsuit in the United
States  District  Court for the Northern  District of Alabama  against  Bryan A.
Corr, Doris J. Corr,  individually and as executrix of the Estate of R. C. Corr,
Jr., Tina M. Corr, Corr, Inc.,  George M. Barnett,  Michael A. Bean,  Michael W.
Alred, R. Wayne Washam,  M. Lewis Benson,  Doris E. Benson,  John M. Packard and
Andy Mann seeking damages in excess of $50 million.  The complaint alleges that,
by knowingly making false  statements and unsupported  allegations to regulatory
and law enforcement  authorities and in certain  lawsuits  discussed  above, the
defendants abused the civil legal process to further their plan to discredit and
dislodge the directors and management of the Company and Community Bank and gain
control of those  companies.  The complaint  further alleges that certain of the
defendants who are former directors and/or executive  officers of Community Bank
breached  their  fiduciary  duties to Community  Bank by  participating  in, and
taking action in the  furtherance  of, the  conspiracy.  Finally,  the complaint
alleges  that the  defendants  failed to make  filings  that are required by the
Federal  securities  laws to  disclose  that the group is acting in  concert  to
acquire control of the Company.  The complaint seeks  compensatory  and punitive
damages as well as an order barring the  defendants  from voting their shares of
Company  stock,  purchasing  additional  Company stock,  soliciting  proxies and
submitting shareholder proposals for at least three years.

                                       14

<PAGE>

On December 5, 2001,  the Company,  Community  Bank and R. Wayne Washam  entered
into a  stipulation  pursuant  to  which  Mr.  Washam  would be  dismissed  as a
defendant.  The court granted the  stipulation  on December 6, 2001.  During the
time between  December 3 and December 7, 2001 the other defendants filed various
motions to dismiss,  abate or stay the lawsuit.  On January 29, 2002 the Company
and Community Bank filed an amended  complaint to reflect the dismissal of Wayne
Washam as a  defendant  and to add a claim  for  defamation  against  two of the
defendants.  The lawsuit presently is in the discovery phase. As a result of the
inherent  uncertainties of the litigation process, the Company is unable at this
time to predict  the  outcome of this  lawsuit  and its effect on the  Company's
financial  condition  and  results of  operations.  Regardless  of the  outcome,
however,  this  lawsuit  could be  costly,  time-consuming  and a  diversion  of
management's attention.

Patterson Litigation

On April 9, 2003 Kennon R. Patterson, Sr., former Chairman,  President and Chief
Executive  Officer of the Company,  filed an adversary  proceeding in the United
States  Bankruptcy Court for the Northern District of Alabama in connection with
his petition for  protection  under Chapter 11 of the United  States  Bankruptcy
Code.  Defendants of the adversary  proceeding are the Company,  Community Bank,
five  directors  of the Company and  Community  Bank and the law firm of Powell,
Goldstein,  Frazer and  Murphy,  LLP which  represents  Community  Bank's  Audit
Committee.  The  complaint  alleges  that the Company  breached  its  employment
agreement with Mr.  Patterson by terminating  his employment on January 27, 2003
and failed to pay him for compensation and benefits which had allegedly  accrued
prior to his  termination.  The  complaint  also  alleges that  Community  Bank,
members of Community Bank's Audit Committee,  the Audit Committee's  independent
counsel  and the  Company's  current  Chairman,  President  and Chief  Executive
Officer  conspired  to  interfere  with Mr.  Patterson's  contract  and business
relationship with the Company.  The suit seeks damages in excess of $150 million
for, among other things,  lost  compensation and benefits,  mental anguish,  and
damage to Mr. Patterson's reputation.  The Company believes that this lawsuit is
without merit and intends to defend the action vigorously.  Although  management
currently  believes that this action will not have a material  adverse effect on
the Company's  financial  condition or results of operations,  regardless of the
outcome,  the  action  could  be  costly,  time  consuming  and a  diversion  of
management's attention.

Indemnification and Routine Proceedings

The  Company's   Certificate   of   Incorporation   provides  that,  in  certain
circumstances,  the Company will indemnify and advance expenses to its directors
and officers for judgments, settlements, and legal expenses incurred as a result
of their  service as officers and  directors of the  Company.  Community  Bank's
Bylaws contain a similar provision for indemnification of directors and officers
of Community Bank.

The Company and its  subsidiaries  are from time to time  parties to other legal
proceedings arising from the ordinary course of business.  Management  believes,
after consultation with legal counsel, that no such proceedings, if resulting in
an outcome unfavorable to the Company,  will,  individually or in the aggregate,
have a material adverse effect on the Company's  financial  condition or results
of operations.

Item 4 - Submission of Matters to a Vote of Security Holders

No matter was submitted to a vote of security holders by solicitation of proxies
or otherwise during the fourth quarter of 2002.

                                       15

<PAGE>

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive  officers of the Company,  their ages,  the positions held by them
with the Company and certain of its subsidiaries and their principal occupations
for the last five years are as follows:

<TABLE>
<CAPTION>
 Name, Age and Position Currently Held with the
          Company and its Subsidiaries                                       Principal Experience During Past Five Years

<S>                <C>                                                 <C>
Patrick M. Frawley (51)                                                 Chairman, President, and Chief Executive Officer of the
Chairman, President and Chief Executive Officer of the                  Company (2003 - Present); Chairman and Chief Executive
Company; Chairman and Chief Executive Officer of                        Officer of Community Bank (2003 - Present); Senior Vice
Community Bank; Chairman of 1st Community Credit Corporation,           President of Community Bank (2002 - 2003); Director
Community Appraisals, Inc., Community Insurance Corporation, and        of Regulatory Relations for Bank of America
Southern Select Insurance, Inc.                                         (1991 - 2002)

Kerri C. Kinney (33) *                                                  Chief Financial Officer of the Company and Community
Chief Financial Officer of the Company and Community Bank               Bank (2001-Present); Senior Risk Consultant for Compass
                                                                        Bank, Birmingham, Alabama (2001); Chief Accounting
                                                                        Officer of Frontier National Corporation, Sylacauga,
                                                                        Alabama (1998-2000); Chief Financial Officer of Frontier
                                                                        National Bank, Lanett, Alabama (1997-2000); Vice President
                                                                        and Controller of The County Bank, Greenwood, South
                                                                        Carolina (1993-1997)

Kennon R. Patterson, Sr. (60) **                                        Chairman, President and Chief Executive Officer of the
Chairman, President and Chief Executive Officer of the                  Company (1985-2003); Chairman and Chief Executive
Company; Chairman and Chief Executive Officer of                        Officer of Community Bank (1993-2003)
Community Bank; Chairman of 1st Community Credit Corporation;
Vice Chairman of Community Appraisals, Inc.;
Director of Community Insurance Corp., and Southern
Select Insurance, Inc.

Loy McGruder (61) ***                                                   President of Community Bank (2002-Present);
Director of the Company; Director and President of Community Bank       Executive Vice President of Community Bank (1994-2002);
                                                                        City President of Community Bank-Blountsville (1994-1997);
                                                                        Senior Vice President of Community Bank (1993-1994)

<FN>
*    On April 14,  2003,  Jim  Kinney,  Ms.  Kinney's  husband,  will  become an
     employee of Community Bank at an annual salary of $75,000.  Mr. Kinney will
     be the project manager of a specific  project for the operations  division.
     It  is  anticipated  that  Mr.  Kinney's  employment  will  terminate  upon
     completion of the project in approximately 12 months.

**   In  January  2003,  the  Board  of  Directors  terminated  Mr.  Patterson's
     employment  with the Company and Community  Bank, and appointed Mr. Frawley
     to replace him. On February 8, 2003, the Board of Directors  announced that
     Mr.  Patterson would no longer serve on the Board of Directors of Community
     Bank.  The  Board of  Directors  of the  Company  does  not have the  legal
     authority  to remove a director  of the  Company,  although a director  may
     resign.  Mr. Patterson has not resigned as a director of the Company and is
     currently a director of the Company.

***  Mr.  McGruder began a medical leave of absence on February 3, 2003 and will
     retire on June 6, 2003.  Stacey W. Mann (50),  Executive  Vice President of
     Community Bank since 1997 and Chief Operating  Officer since 2001, has been
     appointed by the Board of Directors as Interim President pending regulatory
     approval.
</FN>
</TABLE>

The Company's Bylaws provide that the term of office of an executive  officer of
the  Company is as  provided  in the  officer's  employment  agreement  with the
Company or, if the officer is not a party to an  employment  agreement or if the
officer's  employment agreement does not specify a term of office, as determined
by the Company's Board of Directors and until the officer's successor is elected
and qualified or until the officer's earlier resignation or removal.

                                       16

<PAGE>

                                     PART II

Item 5 - Market for Registrant's Common Equity and Related Shareholder Matters

Shares of the common  stock (the  "Common  Stock") of the  Company  were held by
approximately  2,325  shareholders  of record as of March 10, 2003.  There is no
established  trading  market for the Common Stock,  which has been purchased and
sold infrequently in private transactions. Therefore, no reliable information is
available  as to trades of the Common  Stock,  or as to the prices at which such
Common  Stock has  traded.  Management  has  reviewed  the  limited  information
available  to the Company as to the ranges at which  shares of the Common  Stock
has been sold.  The following  data  regarding the Common Stock are provided for
information  purposes only, and should not be viewed as indicative of the actual
or market value of the Common Stock.

<TABLE>
<CAPTION>

                                                                                     Estimated Price Range
                                                                                           Per Share
                                                                                      High          Low
2002:
<S>                                                                                 <C>          <C>
         First Quarter..........................................................    $  15.00     $   15.00
         Second Quarter.........................................................       20.00         15.00
         Third Quarter .........................................................       15.00         15.00
         Fourth Quarter.........................................................       15.00         15.00

2001:
         First Quarter..........................................................    $  22.00     $   15.00
         Second Quarter.........................................................       22.00         15.00
         Third Quarter..........................................................       15.00         15.00
         Fourth Quarter.........................................................       18.00         12.00

2000:
         First Quarter..........................................................    $  25.00     $   24.00
         Second Quarter.........................................................       25.00         19.00
         Third Quarter..........................................................       25.00         20.00
         Fourth Quarter.........................................................       26.00         20.00
</TABLE>


Annual dividends were neither declared nor paid in 2002. Generally,  the payment
of dividends  on the Common  Stock is subject to the prior  payment of principal
and interest on the  Company's  long-term  debt,  the  retention  of  sufficient
earnings and capital in the  Company's  operating  subsidiaries  and  regulatory
restrictions. Currently, the Company is under a memorandum of understanding with
the Federal Reserve that, among other restrictions, disallows the declaration or
payment of any  dividends  without  the prior  written  approval  of the Federal
Reserve.  The Board of  Directors  does not  currently  anticipate  declaring or
paying a dividend in 2003.  There can be no assurance  that the Company will pay
any dividends in the  foreseeable  future.  See "Item 1 - Business - Supervision
and Regulation,"  "Item 7 - Management's  Discussion of Financial  Condition and
Results  of  Operations  -  Liquidity  Management"  and Note 12 in the  Notes to
Consolidated Financial Statements included elsewhere in this Report.

                                       17

<PAGE>

Item 6 - Selected Financial Data

The following table sets forth selected  financial data for the last five years.
All averages are daily averages.

<TABLE>
<CAPTION>
                                                                  Years ended December 31,
                                               ---------------------------------------------------------------
                                                  2002         2001         2000          1999         1998
                                               -----------  -----------  -----------  -----------  -----------
                                                            (Dollars in thousands except per share data)

<S>                                            <C>          <C>           <C>         <C>          <C>
Net interest income........................    $    23,504  $    22,853   $   22,418  $    26,672  $    21,672
Provision for loan losses..................         10,033        6,096        7,573        4,459          885
Net income (loss) from continuing operations        (5,023)      (2,381)      (2,853)          **           **
Net income (loss) from discontinued operations.      5,927          958         (167)          **           **
Net income (loss)..........................            904       (1,423)      (3,019)       1,658        3,579

Per Share Data:
   Earnings (loss) per share from
     continuing operations - basic.........    $     (1.08) $     (0.52) $     (0.64) $        **  $        **
   Earnings (loss) per share from
     continuing operations - diluted.......          (1.08)       (0.52)       (0.61)          **           **
   Earnings per share - basic..............           0.19        (0.31)       (0.68)        0.37         0.90
   Earnings per share - diluted............           0.19        (0.31)       (0.65)        0.36         0.88
   Cash dividends..........................           -            -            0.75         0.60         0.50

Balance Sheet:
   Loans, net of unearned income...........    $   359,184  $   501,520  $   528,316  $   498,726  $   433,853
   Deposits................................        459,464      617,706      600,901      573,261      538,586
   FHLB long-term debt.....................         38,000       38,000       38,000       40,000            -
   Other long-term debt....................          3,578        4,667        5,675        6,637        7,569
   Trust preferred securities..............         10,000       10,000       10,000            -            -
   Average equity..........................         42,848       42,938       41,776       44,203       37,318
   Average assets..........................        629,481      725,461      710,915      632,713      538,470

Ratios:
   Return on average assets................           0.14%       (0.20)%      (0.42)%       0.26%        0.67%
   Return on average equity................           2.11        (3.31)       (7.23)        3.75         9.59
   Average equity to average assets........           6.81         5.92         5.88         6.99         6.93

<FN>
**   1999 and 1998  data do not  reflect  separate  net  income  components  for
     discontinued operations of certain branches divested in 2002.
</FN>
</TABLE>

                                       18

<PAGE>

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

Item 7a - Quantitative and Qualitative Disclosures about Market Risk

The purpose of this  discussion  is to focus on the  significant  changes in the
financial   condition   and  results  of  operations  of  the  Company  and  its
subsidiaries  during  2000,  2001 and 2002.  This  discussion  and  analysis  is
intended to  supplement  and  highlight  information  contained in the Company's
consolidated  financial  statements and related notes and the selected financial
data presented elsewhere in this Report.

Forward-Looking Statements

This  report,  including  Management's  Discussion  and  Analysis  of  Financial
Condition  and  Results of  Operations,  and  documents  incorporated  herein by
reference,  may contain certain statements relating to the future results of the
Company  based upon  information  currently  available.  These  "forward-looking
statements"  (as defined in Section 21E of The  Securities  and  Exchange Act of
1934)  are  typically  identified  by  words  such  as  "believes",   "expects",
"anticipates",  "intends",  "estimates",  "projects",  and similar  expressions.
These forward-looking statements are based upon assumptions the Company believes
are  reasonable  and may relate to, among other  things,  the allowance for loan
loss adequacy,  simulation of changes in interest rates and litigation  results.
Such  forward-looking  statements are subject to risks and uncertainties,  which
could  cause the  Company's  actual  results  to differ  materially  from  those
included in these statements. These risks and uncertainties include, but are not
limited to, the following: (1) changes in political and economic conditions; (2)
interest rate fluctuations; (3) competitive product and pricing pressures within
the  Company's  markets;  (4) equity and fixed income market  fluctuations;  (5)
personal and corporate customers' bankruptcies;  (6) inflation; (7) acquisitions
and integration of acquired businesses;  (8) technological  changes; (9) changes
in law; (10) changes in fiscal,  monetary,  regulatory  and tax  policies;  (11)
monetary  fluctuations;  (12)  success  in  gaining  regulatory  approvals  when
required; and (13) other risks and uncertainties listed from time to time in the
Company's SEC reports and announcements.


Critical Accounting Policies

The  Company's  significant  accounting  policies are presented in Note 1 to the
consolidated  financial statements.  These policies,  along with the disclosures
presented in the other footnotes,  provide information on how significant assets
and liabilities are valued in the financial  statements and how those values are
determined.  Those  accounting  policies  involving  significant  estimates  and
assumptions by management,  which have, or could have, a material  impact on the
carrying value of certain assets and impact comprehensive income, are considered
critical accounting  policies.  The Company recognizes the following as critical
accounting policies: Accounting for Allowance for Loan Losses and Accounting for
Income Taxes.

Accounting for Allowance for Loan Losses. Management's ongoing evaluation of the
adequacy and allocation of the allowance  considers both impaired and unimpaired
loans and takes into  consideration the Bank's past loan loss experience,  known
and inherent  risks in the  portfolio,  adverse  situations  that may affect the
borrowers' ability to repay, estimated value of any underlying  collateral,  the
reviews of  regulators  and an analysis of current  economic  conditions.  While
management   believes  that  it  has  exercised  prudent  judgment  and  applied
reasonable  assumptions  which  have  resulted  in  an  allowance  presented  in
accordance  with  generally  accepted  accounting  principles,  there  can be no
assurance  that  in  the  future,   adverse   economic   conditions,   increased
nonperforming  loans,  regulatory  concerns,  or other  factors will not require
further  increases in, or  reallocation  of the  allowance.  Further  discussion
regarding the Company's  accounting for allowance for loan losses is included in
Notes 1 and 4 to the consolidated financial statements.

Accounting for Income Taxes.  The Company uses the asset and liability method of
accounting for income taxes. Determination of the deferred and current provision
requires analysis by management of certain transactions and the related tax laws
and regulations.  Management  exercises  significant  judgment in evaluating the
amount and timing of  recognition of the resulting tax  liabilities  and assets.
Those  judgments  and  estimates  are  re-evaluated  on  a  continual  basis  as
regulatory  and  business  factors  change.  Further  discussion  regarding  the
Company's  accounting  for  income  taxes is  included  in Notes 1 and 20 to the
consolidated financial statements.

                                       19

<PAGE>

Net Income and Earnings per share

The  Company's  net income of  approximately  $904,000  for 2002  represented  a
$2,327,000 increase from its net loss of approximately $1,423,000 for 2001 which
represented  a  $1,596,000  increase  from  2000's  net  loss  of  approximately
$3,019,000.  When stated as changes in basic earnings per share,  the 2002 basic
earnings per share of $0.19  represented  a $0.50  increase  from the 2001 basic
loss per share of $0.31,  which represented a $0.37 increase from the 2000 basic
loss per share of $0.68.

Both 2000 and 2001  Consolidated  Statements  of Income  have been  restated  to
appropriately  reflect earnings and losses from both continuing and discontinued
operations  as a result of branch  divestitures  that  occurred  in 2002.  These
statements have also been restated to reflect results of an  investigation  that
commenced in the fourth  quarter of 2002 into  allegations  that the Company had
been overcharged on various construction projects. The Company has appropriately
recorded  impairment  losses on premises and  equipment  and charged them to the
period in which the overcharge occurred.  Any overcharge which occurred prior to
the year ended  December  31, 2000 has been  appropriately  reflected as a prior
period adjustment in Retained  Earnings.  See Note 22 - Prior Period Adjustments
in the Notes to Consolidated Financial Statements.

Loss  from  continuing   operations   increased   approximately   $2,642,000  to
approximately  $5,023,000 at December 31, 2002 from approximately  $2,381,000 at
December  31, 2001 which was a decrease in loss from  continuing  operations  of
approximately  $472,000  from  approximately  $2,853,000  at December  31, 2000.
Although net interest income increased  approximately  $652,000 to approximately
$23,505,000 at December 31, 2002 from approximately  $22,853,000 at December 31,
2001, an increase in provision for loan losses of approximately  $3,937,000 more
than offset that positive and was the primary  cause for  increased  losses from
continuing operations for 2002. Basic loss from continuing operations per common
share was $1.08 for the year ended December 31, 2002 as compared to a basic loss
from continuing operations per common share for the year ended December 31, 2001
of $0.52. Discontinued operations, net of tax, provided approximately $5,927,000
of net income for the year ended  December 31, 2002 or $1.27 basic  earnings per
share.  This includes a pretax gain of approximately  $8,072,000 on the divested
branches.  Discontinued operations,  net of tax, provided approximately $958,000
of income for the year ended December 31, 2001, but lost approximately  $167,000
during the year ended December 31, 2000.

Earning Assets

The Company's  average total assets in 2002 decreased 13.2% below that for 2001,
primarily  as a result of branch  divestitures.  Earning  assets  accounted  for
approximately 83.6% of the Company's average total assets for 2002.

Average loans, excluding those associated with discontinued  operations,  net of
unearned income,  represented  72.6%,  75.1% and 78.6% of average earning assets
during  2002,  2001  and  2000,  respectively.   Average  investment  securities
represented  22.2% of average earning assets in 2002,  compared to 21.5% in 2001
and  20.5% in 2000.  The  change  in the mix of loans  and  securities  has been
attributable to a decrease in loans.  Average federal funds sold as a percent of
average  earning  assets  was  4.6%,  3.4%  and 0.7% for  2002,  2001 and  2000,
respectively. The other earning asset categories accounted for less than 3.0% of
average earning assets for all three periods.

Loans

Total loans, net of unearned income,  decreased approximately  $142,335,000,  or
28.4%, to approximately  $359,184,000 at December 31, 2002, from $501,519,000 at
December 31, 2001, which  represented an increase of $26,796,000,  or 5.1%, from
$528,316,000 at December 31, 2000. Commercial,  financial and agricultural loans
decreased by approximately $44,369,000,  or 30.3%, to approximately $101,841,000
at December  31, 2002,  from  approximately  $146,210,000  at December 31, 2001,
which  represented  a  decrease  of  approximately  $5,437,000,  or  3.9%,  from
approximately  $140,773,000  at December 31,  2000.  Commercial,  financial  and
agricultural  loans  represented  28.3% of total  loans at  December  31,  2002,
compared to 29.1% at December  31, 2001 and 26.6% at  December  31,  2000.  Real
estate - mortgage loans  decreased by  approximately  $58,441,000,  or 25.1%, to
approximately  $174,775,000 at December 31, 2002, from  $233,216,000 at December
31, 2001,  which  represented a decrease of approximately  $3,376,000,  or 1.4%,
from  approximately  $236,592,000 at December 31, 2000. As a percentage of total
loans,  real

                                       20

<PAGE>

estate - mortgage loans  increased to 48.7% at December 31, 2002,  from 46.5% at
December 31, 2001 and 44.8% at December 31, 2000.  Consumer  loans  decreased by
approximately  $38,435,000,  or 32.3%, to approximately  $80,596,000 at December
31,  2002,  from   approximately   $119,031,000  at  December  31,  2001,  which
represented   a  decrease  of   approximately   $26,642,000,   or  18.3%,   from
approximately $145,673,000 at December 31, 2000. As a percentage of total loans,
consumer loans  decreased to 22.4% at December 31, 2002,  from 23.8% at December
31, 2001 and 27.6% at  December  31,  2000.  Real  estate -  construction  loans
decreased by approximately  $1,109,000, or 35.5%, to approximately $2,017,000 at
December 31, 2002,  from  approximately  $3,126,000 at December 31, 2001,  which
represented a decrease of approximately $2,302,000, or 42.4%, from approximately
$5,429,000 at December 31, 2000.  As a percentage of total loans,  real estate -
construction  loans  stayed  level at 0.6% at December  31,  2002,  from 0.6% at
December 31, 2001 and decreased  from 1.0% at December 31, 2000. The Company has
experienced  general  decreases  in loans  because of  economic  downturns,  the
tightening of the Company's credit  standards and increased charge-offs of loans
originated in previous years, but has  specifically  experienced a large decline
in loans in 2002 due to the sale of branches earlier in the year.

The  following  table  shows the  classification  of loans by major  category at
December 31, 2002, and at the end of each of the preceding four years.

<TABLE>
<CAPTION>

                                                                      LOAN PORTFOLIO

                                                                        December 31,
                           ------------------------------------------------------------------------------------------------------
                                   2002                 2001                 2000                 1999                 1998
                           ------------------   ------------------   ------------------   ------------------   ------------------
                                      Percent              Percent              Percent              Percent              Percent
                            Amount of  Total     Amount of  Total    Amount of   Total    Amount of   Total     Amount of  Total
                           ---------- -------   ---------- -------   ---------- -------   ---------- -------   ---------- -------
                                                                 (Dollars in Thousands)
<S>                        <C>           <C>    <C>           <C>    <C>           <C>    <C>           <C>    <C>           <C>
Commercial, financial and
   agricultural.......     $  101,841    28.3%  $  146,210    29.1%  $  140,773    26.6%  $  124,245    24.9%  $   94,057    21.7%
Real estate - construction      2,017     0.6        3,126     0.6        5,429     1.0        6,470     1.3        6,153     1.4
Real estate -mortgage.        174,775    48.7      233,216    46.5      236,592    44.8      224,129    44.9      205,457    47.4
Consumer..............         80,596    22.4      119,031    23.8      145,673    27.6      144,453    28.9      129,334    29.8
Less: unearned income.             45       -           64       -          151       -          571       -        1,148      .3
                           ---------- -------   ---------- -------   ---------- -------   ---------- -------   ---------- -------
Loans, net of
   unearned income            359,184   100.0%     501,519   100.0%     528,316   100.0%     498,726   100.0%     433,853   100.0%
Allowance for loan losses       9,784                7,292                7,107                2,603                2,971
                           ----------           ----------            ---------           ----------           ----------
Net loans.............     $  349,400           $  494,227            $ 521,209           $  496,123           $  430,882
                           ==========           ==========            =========           ==========           ==========
</TABLE>


The following table provides  maturities of certain loan  classifications and an
analysis of these loans maturing in over one year as of December 31, 2002.

<TABLE>
<CAPTION>

              SELECTED LOAN MATURITY AND INTEREST RATE SENSITIVITY

                                                                                     Rate Structure for Loans
                                                Maturity                               Maturing Over One Year
                                 --------------------------------------              -------------------------
                                                Over One
                                      One         Year         Over                  Predetermined Floating or
                                    Year or      Through       Five                     Interest    Adjustable
                                     Less      Five Years      Years         Total        Rate         Rate
                                 -----------   -----------  -----------  ----------- ------------  -----------
                                                                 (In thousands)
<S>                              <C>           <C>          <C>          <C>          <C>          <C>
Commercial, financial and
   agricultural................  $    38,891   $    20,309  $    42,642  $   101,842  $    21,279  $    41,672
Real estate - construction.....        1,414           119          483        2,016          119          483
                                 -----------   -----------  -----------  -----------  -----------  -----------
   Total.......................  $    40,305   $    20,428  $    43,125  $   103,858  $    21,398  $    42,155
                                 ===========   ===========  ===========  ===========  ===========  ===========
</TABLE>

Investment Portfolio

The composition of the Company's  investment  securities  portfolio reflects the
Company's investment strategy of maximizing portfolio yields subject to risk and
liquidity  considerations.  The  Company's  entire  portfolio is  classified  as

                                       21

<PAGE>

available for sale. The primary objectives of the Company's  investment strategy
are to maintain an  appropriate  level of liquidity and provide a tool to assist
in  controlling  the Company's  interest  rate  position  while at the same time
producing adequate levels of interest income.  Management of the maturity of the
portfolio is necessary to provide  liquidity and to control  interest rate risk.
During  2002,  gross  investment  securities  sales,  calls and pay  downs  were
approximately   $88,623,000  and  maturities  were  approximately   $15,000,000,
compared  to  gross  investment  securities  sales  of  $86,418,000  in 2001 and
approximately  $16,230,000 in 2000 and maturities of approximately $2,500,000 in
2001 and  approximately  $25,210,000  in 2000.  Net gains  realized on the sales
totaled approximately $653,000 during 2002, compared to approximately $1,284,000
in 2001 and approximately $5,000 in 2000. At December 31, 2002, gross unrealized
gains in the portfolio were approximately $2,749,000,  compared to approximately
$486,000 at December 31, 2001 and approximately $1,419,000 at December 31, 2000,
while gross unrealized losses amounted to approximately $227,000 at December 31,
2002, compared to approximately  $893,000 at December 31, 2001 and approximately
$756,000 at December 31, 2000. These  fluctuations in the gross unrealized gains
and  losses  in the  Company's  investment  portfolio  resulted  primarily  from
changing bond prices.

Mortgage-backed  securities  have  varying  degrees  of  risk of  impairment  of
principal,  as opposed to U.S. Treasury and U.S.  government agency obligations,
which are  considered  to  contain  virtually  no default  or  prepayment  risk.
Impairment   risk  is  primarily   associated  with   accelerated   prepayments,
particularly  with  respect  to longer  maturities  purchased  at a premium  and
interest-only  strip  securities.   The  Company's  mortgage-backed   securities
portfolio as of December 31, 2002 and 2001 contained no interest-only strips and
the amount of unamortized premium on mortgage-backed  securities at December 31,
2002,  was  approximately  $1,672,000,  compared  to  approximately  $929,000 at
December  31,  2001.  The   recoverability   of  the  Company's   investment  in
mortgage-backed  securities  is  reviewed  periodically  by  management,  and if
necessary, appropriate adjustments for impaired value are made to income.

The  carrying  amount of  investment  securities  at the end of each of the last
three years is set forth in the following table:

<TABLE>
<CAPTION>
                                     INVESTMENT PORTFOLIO

                                                                                December 31,
                                                                   2002             2001              2000
                                                              -------------     -------------    -------------
                                                                               (In thousands)
<S>                                                           <C>               <C>              <C>
U. S. Treasury and U.S. Government agencies...............    $       6,523     $      16,948    $      46,830
Mortgage-backed securities................................          107,534            90,647           31,341
State and municipal securities............................            7,056            11,684           19,499
Federal Home Loan Bank Stock..............................            2,788             2,400            3,900
                                                              -------------     -------------    -------------
   Total investment securities............................    $     123,901     $     121,679    $     101,570
                                                              =============     =============    =============
</TABLE>

Total investment  securities increased  approximately  $2,222,000,  or 1.83%, to
approximately  $123,901,000  at December  31,  2002,  compared to  approximately
$121,679,000 at December 31, 2001 and approximately $101,570,000 at December 31,
2000. During 2002,  non-taxable  investment securities decreased $4,628,000,  or
39.6%, to approximately  $7,056,000 from $11,684,000 at December 31, 2001, which
represented an increase of $7,815,000 or 40.1%, from $19,499,000 at December 31,
2000. Taxable investment securities increased approximately  $6,850,000, or 6.2%
during 2002 to  $116,845,000  from  approximately  $109,995,000  at December 31,
2001, which  represented an increase of $27,924,  or 34.0%,  from  approximately
$82,071,000  at December 31, 2000.  The Company saw increases in the  investment
portfolio  in 2002 as loan  volumes  continued  to decline and excess funds were
invested in securities.  The composition of the investment  securities portfolio
changed during 2001  primarily as excess funds were invested in  mortgage-backed
securities.  At  December  31,  2002,  U.S.  government  and  agency  securities
represented 92.1% of the total investment securities portfolio compared to 88.4%
at year-end 2001, while state and municipal securities represented 5.7% and 9.6%
of the investment securities portfolio at year-end 2002 and 2001,  respectively.
In 2002 and 2001, as investable  funds  increased due to diminished  loan demand
and bonds  redeemed  prior to maturity,  Community Bank invested more heavily in
mortgage-backed securities to enhance cash flow and maximize yield.

The  maturities and weighted  average yields of the  investments in the year-end
2002  portfolio  of  investment  securities  are  presented  below.  The average
maturity of the investment portfolio was 6.21 years at year-end 2002 compared to
5.20 years at year-end 2001 with an average yield of 5.54% and 6.22% at December
31, 2002 and 2001, respectively.

                                       22

<PAGE>

Mortgage-backed  securities  have been included in the maturity table based upon
the guaranteed payoff date of each security.

                     INVESTMENT PORTFOLIO MATURITY SCHEDULE

<TABLE>
<CAPTION>
                                                                       Maturing
                                      -------------------------------------------------------------------------------
                                            Within          After One But       After Five But            After
                                           One Year       Within Five Years    Within Ten Years         Ten Years
                                      -----------------   -----------------   ------------------   ------------------
                                       Amount    Yield     Amount    Yield     Amount     Yield     Amount     Yield
                                      --------  -------   --------  -------   --------   -------   --------   -------
December 31, 2002:                                               (Dollars in thousands)

SECURITIES - ALL AVAILABLE-FOR-SALE:
<S>                                   <C>          <C>    <C>                 <C>           <C>    <C>           <C>
   U. S. Government agencies.....     $    206     5.05%  $      -        -%  $  6,317      5.70%  $107,535      5.41%
   State and municipal securities          239     4.92        180     5.90        369      4.43      6,267      5.07
   Equity securities ............            -        -          -        -          -         -      2,788         -
                                      --------            --------            --------             --------
                                      $    445     4.98   $    180     5.90   $  6,686      5.63   $116,590      5.39
                                      ========            ========            ========             ========
</TABLE>

With the exception of some securities issued by U.S.  Government  agencies,  the
Company held one municipal bond issued by Hartselle  Utilities,  whose amortized
cost of  $4,680,547  exceeded 10% of the  Company's  consolidated  shareholders'
equity on December 31, 2002.

Federal funds sold decreased 19.9% during 2002, from $30,000,000 at December 31,
2001 to $24,030,000 at December 31, 2002. This decrease resulted mostly from the
branch divestitures.

The balance of  interest-bearing  deposits with other banks remained at $200,000
at December 31, 2002 and 2001.

Deposits

Community  Bank's  primary  source  of funds  is its  deposits.  Dividends  from
Community  Bank  are  the  Company's  primary  source  of  funds.  Historically,
continued  enhancement  of existing  products,  emphasis  upon  better  customer
service and expansion  into new market areas have fueled the growth in Community
Bank's  deposit  base.  The  Company  does  not  presently   anticipate  further
geographic  expansion.  Rather emphasis has been placed upon attracting consumer
deposits and the  Company's  intent is to expand its consumer base in its market
areas in order to continue to fund future asset growth.

During 2002,  the  Company's  average  total  deposits  increased  approximately
$4,435,000,   or  1.0%,  to  approximately   $467,538,000   from   approximately
$463,103,000 in 2001, which represented an increase of approximately $1,088,000,
or 0.2%,  from  approximately  $462,015,000  in 2000. At December 31, 2002,  the
Company's  total  deposits  were  approximately  $459,464,000,   a  decrease  of
approximately  $158,242,000,   or  25.6%,  from  approximately  $617,706,000  at
December 31, 2001.

                                       23

<PAGE>

The following table presents the average deposit  balances and the average rates
paid for each of the major  classifications of deposits for the 12 month periods
ending  December 31, 2002, 2001 and 2000 and excludes  averages  associated with
discontinued operations:

<TABLE>
<CAPTION>

                                                             Average Deposit Balances and Rates Paid
                                           -----------------------------------------------------------------------
                                                    2002                      2001                    2000
                                           ---------------------     ---------------------    --------------------
                                                        Average                   Average                 Average
                                              Average     Rate         Average      Rate        Average     Rate
                                              Balance     Paid         Balance      Paid        Balance     Paid
                                           ----------   --------     ---------    --------    ---------   --------
                                                                     (Dollars in thousands)
<S>                                        <C>             <C>       <C>             <C>      <C>            <C>
Noninterest-bearing demand..............   $   56,994      0.00%     $  57,347       0.00%    $  56,674      0.00%
Interest-bearing demand.................       79,386      2.17         73,301       4.42        81,920      4.82
Savings.................................       56,606      2.04         48,884       4.14        46,586      4.55
Time....................................      274,552      3.81        283,571       5.37       276,835      5.90
                                           ----------                ---------                ---------
   Total (1)............................   $  467,538      3.25      $ 463,103       5.05     $ 462,015      5.52
                                           ==========                =========                =========
------------------
<FN>
(1)  The rate paid on total average  deposits  represents the rate paid on total
     average interest-bearing deposits only.
</FN>
</TABLE>

The Company's average  interest-bearing  deposits  increased by 1.2% and 0.1% in
2002 and 2001, respectively.  Average interest-bearing demand deposits increased
8.3%   compared  to  a  decrease  of  10.5%  during  2001  from  an  average  of
approximately  $81,920,000  in 2000.  Average  savings and average time deposits
increased  15.8% and  decreased  3.2%,  respectively,  during  2002  compared to
increases   of   4.9%   and   2.4%,    respectively,    during   2001.   Average
noninterest-bearing  demand  deposits  decreased 0.6% during 2002 compared to an
increase of 1.2% during 2001 from an average of $56,674,000  during 2000.  Total
average  deposits  increase 1.0% in 2002 and 0.2% in 2001. The two categories of
lowest cost deposits,  noninterest-bearing  demand deposits and interest-bearing
demand deposits,  comprised the following  percentages of total average deposits
during 2002, 2001 and 2000, respectively: (i) Average noninterest-bearing demand
deposits - 12.2%,  12.4%,  and 12.3%; and (ii) average  interest-bearing  demand
deposits - 17.0%, 15.8% and 17.7%.  Community Bank experienced a slight shift in
its deposit  mix during 2002 as  interest-bearing  demand  deposits  and savings
increased while certificates of deposits decreased $9,019,000, or 3.2%. Of total
time deposits at December 31, 2002,  approximately 31.3% were large denomination
certificates  of deposit and other time  deposits  of $100,000 or more,  up from
31.5% at December 31, 2001.

The  maturities of the time  certificates  of deposit and other time deposits of
$100,000 or more issued by the Company at December  31, 2002 are  summarized  in
the table below.

<TABLE>
<CAPTION>
                 MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE

                                                                                    December 31, 2002
                                                                         ----------------------------------------
                                                                             Time         Other
                                                                         Certificates      Time
                                                                          of Deposit     Deposits        Total
                                                                         ------------  ------------  ------------
                                                                                      (In thousands)
<S>                                                                      <C>           <C>           <C>
Maturing in three months or less..................................       $      7,977  $     15,290  $     23,267
Maturing in over three through six months.........................             13,200             -        13,200
Maturing in over six through twelve months........................             16,972             -        16,972
Maturing in over twelve months....................................             32,478             -        32,478
                                                                         ------------  ------------  ------------
       Total......................................................       $     70,627  $     15,290  $     85,917
                                                                         ============  ============  ============
</TABLE>

                                       24

<PAGE>

Borrowed Funds

Community Bank also uses borrowed funds as a source of funds for asset growth in
excess of deposit  growth and for  short-term  liquidity  needs.  The mixture of
borrowed  funds  and  deposits  as  sources  of funds  depends  on the  relative
availability and costs of those funds and Community Bank's need for funding.

Borrowed funds consist primarily of short-term  borrowings,  borrowings from the
Federal Home Loan Bank of Atlanta,  Georgia ("FHLB-Atlanta") and long-term debt.
Short-term  borrowings at year-end 2002 and 2001 consisted of the U. S. Treasury
Tax and Loan Note  Option  account  and  securities  sold  under  agreements  to
repurchase. Community Bank had $5,000,000 at year end 2002 and 2001 in available
lines to purchase  Federal Funds on a secured  basis from a commercial  bank. At
December 31, 2002 and 2001,  Community Bank had no funds advanced  against these
lines. In May 2001,  Community Bank borrowed funds of $8,000,000  under the FHLB
"fixed rate credit"  plan.  The advance was for six months  bearing  interest at
4.15% and matured in November 2001.

The following table sets forth, for the periods indicated,  certain  information
about the Company's short-term borrowings:

                              SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
                                            At December 31,
                                      ----------------------------
                                                         Weighted                                      Maximum
                                                          Average      Average           Average    Outstanding  At
                                        Balance            Rate        Balance            Rate       Any Month End
                                      -----------       ----------   -----------       ----------   ---------------
                                                                (Dollars in thousands)

2002:
<S>                                   <C>                     <C>    <C>                     <C>    <C>
   Federal funds purchased..........  $         -             0.00%  $         -             0.00%  $             -
   Short-term FHLB  borrowings......            -             0.00             -             0.00                 -
   Securities sold under
     agreement to
     repurchase.....................            -             0.00         1,369             1.90             2,905
   U.S. treasury tax and loan,
     note option....................        1,725             1.10           757             1.39             1,963
                                      -----------                    -----------                    ---------------
       Total........................  $     1,725             1.10   $     2,126             1.69   $         4,868
                                      ===========                    ===========                    ===============

2001:
   Federal funds purchased..........  $         -             0.00%  $        74             6.11%  $         3,000
   Short-term FHLB borrowings.......            -             0.00         3,967             4.30             8,000
   Securities sold under agreement to
     repurchase.....................        2,538             2.13         2,272             3.59               391
   U.S. treasury tax and loan, note
     option.........................        1,822             1.51         1,021             3.21               814
                                      -----------                    -----------                    ---------------
       Total........................  $     4,360             1.87   $     7,334             3.95   $        12,205
                                      ===========                    ===========                    ===============
</TABLE>

Community Bank is a member of the  FHLB-Atlanta and was approved to borrow under
various  short-term and long-term  programs offered by the  FHLB-Atlanta.  These
borrowings  are secured  under a blanket lien  agreement  on certain  qualifying
mortgage  instruments  in Community  Bank's loan and investment  portfolios.  At
December 31, 2002,  Community  Bank had no available  credit  through the FHLB -
Atlanta.

Since June 1999,  Community  Bank has  borrowed  funds under the  FHLB-Atlanta's
"Convertible  Advance  Program."  Community Bank had $38,000,000  outstanding at
both December 31, 2002 and 2001 under the  FHLB-Atlanta's  "Convertible  Advance
Program".  This obligation has a final maturity of March 1, 2010 (120 months), a
call feature every quarterly payment date during the life of the obligation, and
a fixed  interest rate of 5.93% per annum.  The first call date for this advance
was March 1, 2001; the advance was not called on that date nor has been since.

                                       25

<PAGE>

Advances obtained by Community Bank under the "Convertible  Advance Program" are
subject to the terms of an agreement  for Advances and Security  Agreement  with
Blanket Floating Lien. Among other things,  this agreement provides that upon an
event of default,  the FHLB may declare all or any part of the  indebtedness and
accrued interest  thereon,  including any prepayment fees, to be immediately due
and  payable.  Included  in the list of  "events of  default"  is where the FHLB
reasonably  and in good  faith  determines  that a material  adverse  change has
occurred in the financial condition of Community Bank from that disclosed at the
time of the making of any advance or from the  condition  of  Community  Bank as
most recently disclosed to the FHLB.

Long-term debt consisted of various  commitments with scheduled  maturities from
one to 20 years.  The following  table sets forth  expected debt service for the
next five years based on interest rates and repayment  provisions as of December
31, 2002. A more detailed  explanation  of long-term debt is included in Note 11
to the Company's  Consolidated  Financial  Statements included elsewhere in this
Report.

                          MATURITIES OF LONG-TERM DEBT
<TABLE>
<CAPTION>

                                         2003            2004           2005           2006            2007
                                      -----------    -----------     -----------    -----------    -----------
                                                                   (In thousands)
<S>                                   <C>            <C>             <C>            <C>            <C>
Interest on indebtedness............  $       184    $       164     $       143    $       121    $        97
Repayment of principal..............          408            428             449            472            495
                                      -----------    -----------     -----------    -----------    -----------
                                      $       592    $       592     $       592    $       593    $       592
                                      ===========    ===========     ===========    ===========    ===========
</TABLE>

In March 2000,  the Company formed a wholly-owned  Delaware  statutory  business
trust, Community (AL) Capital Trust I (the "Trust"), which issued $10,000,000 of
guaranteed preferred securities  representing  undivided beneficial interests in
the assets of the Trust ("Capital Securities").  All of the common securities of
the  Trust are owned by the  Company.  The  proceeds  from the  issuance  of the
Capital Securities  ($10,000,000) and common securities  ($310,000) were used by
the Trust to purchase  $10,310,000 of junior  subordinated  deferrable  interest
debentures of the Company which carry an annual interest rate of 10.875%.  Under
the terms of the indenture,  the Company may elect to defer payments of interest
for up to ten semiannual payment periods. The Company elected to defer its March
and September 2002 interest payments. The balance of accrued interest payable on
the  debentures  was  $1,541,872 at December 31, 2002.  For the duration of such
deferral period, the Company is restricted from paying dividends to shareholders
or paying debt that is junior to the  debentures.  The debentures  represent the
sole asset of the Trust. The debentures and related income statement effects are
eliminated in the Company's  consolidated  financial statements.  The Company is
entitled to treat the aggregate  liquidation  amount of the debentures as Tier I
capital under Federal Reserve guidelines.

The Capital  Securities accrue and pay  distributions  semiannually at a rate of
10.875%  per  annum of the  stated  liquidation  value  of  $1,000  per  capital
security.   The  Company  has  entered  into  an   agreement   which  fully  and
unconditionally  guarantees  payment of: (i)  accrued  and unpaid  distributions
required to be paid on the Capital  Securities;  (ii) the redemption  price with
respect to any Capital  Securities called for redemption by the Trust; and (iii)
payments  due  upon  a  voluntary  or  involuntary  liquidation,  winding  up or
termination of the Trust.

The Capital  Securities  are  mandatorily  redeemable  upon the  maturity of the
debentures  on March 8, 2030,  or upon  earlier  redemption  as  provided in the
indenture  pursuant to which the  debentures  were  issued.  The Company has the
right to redeem the debentures  purchased by the Trust: (i) in whole or in part,
on or after  March  8,  2010;  and  (ii) in whole  (but not in part) at any time
within 90 days  following the occurrence  and during the  continuation  of a tax
event,  capital treatment event or investment  company event (each as defined in
the  indenture).  As specified in the indenture,  if the debentures are redeemed
prior to maturity,  the  redemption  price will be a percentage of the principal
amount, ranging from 105.438% in 2010 to 100.00% in and after 2020, plus accrued
but unpaid interest.

Liquidity Management

Liquidity is defined as the ability of a company to convert  assets into cash or
cash  equivalents  without  significant  loss.   Liquidity  management  involves
maintaining the Company's  ability to meet the day-to-day cash flow requirements
of Community Bank's customers,  whether they are depositors  wishing to withdraw
funds or borrowers  requiring  funds to

                                       26

<PAGE>

meet their credit needs. Without proper liquidity management,  the Company would
not be able to perform the primary  function  of a  financial  intermediary  and
would,  therefore,  not be able to meet the  production  and growth needs of the
communities it serves.

The primary  function of asset and  liability  management  is not only to assure
adequate  liquidity  in order for the Company to meet the needs of its  customer
base, but to maintain an appropriate balance between  interest-sensitive  assets
and  interest-sensitive  liabilities  so that  the  Company  can  also  meet the
investment  objectives of its shareholders.  Daily monitoring of the sources and
uses of funds is necessary to maintain an  acceptable  cash  position that meets
both  its  customers'  needs  and its  shareholders'  objectives.  In a  banking
environment,  both assets and  liabilities  are considered  sources of liquidity
funding and both are, therefore, monitored on a daily basis.

The asset portion of the balance sheet provides liquidity primarily through loan
principal  repayments  or sales,  maturities,  calls and pay downs of investment
securities. Real estate-construction and commercial,  financial and agricultural
loans that  mature in one year or less  totaled  approximately  $40,305,000,  or
11.2% of loans,  net of unearned  income,  at December 31, 2002,  and investment
securities maturing in one year or less totaled approximately  $445,000, or 0.4%
of the investment  portfolio,  at December 31, 2002.  Other sources of liquidity
include  cash on deposit  with other banks and  short-term  investments  such as
federal funds sold and maturing interest-bearing deposits with other banks.

The liability  portion of the balance sheet provides  liquidity  through various
customers'  interest-bearing and noninterest-bearing deposit accounts. Funds are
also available through the purchase of federal funds from other commercial banks
and  borrowings  against  Community  Bank's  credit  availability   through  the
FHLB-Atlanta.  Liquidity management involves the daily monitoring of the sources
and uses of funds to maintain an acceptable Company cash position.

Dividends paid by Community  Bank are the primary  source of funds  available to
the Company for debt  repayment,  payment of dividends to its  shareholders  and
other needs.  Certain restrictions exist regarding the ability of Community Bank
to  transfer  funds  to the  Company  in the  form of cash  dividends,  loans or
advances. The approval of the State of Alabama Banking Department is required to
pay  dividends  in excess of  Community  Bank's net earnings in the current year
plus  retained  net  earnings  for the  preceding  two years  less any  required
transfers  to  surplus.  At December  31,  2002,  Community  Bank could not have
declared any dividends without approval of regulatory  authorities.  See Note 12
to the Company's  Consolidated Financial Statements elsewhere in this Report and
"Item 1 - Business - Supervision and Regulation."

The Company  relies on dividends  from  Community Bank in order to pay expenses,
service  debt  and  pay  dividends  to  shareholders.  Although  dividends  from
Community Bank are the primary source of funding, the Company also receives cash
from Community  Bank in the form of management fee income and generally  retains
cash for its  portion of tax  benefit on  intercompany  income tax  settlements.
Without  dividends or management  fee income from  Community  Bank,  the Company
would not be able to pay expenses or service debt. Management fees for 2002 were
$300,000 and no dividends were paid for 2002.  Community Bank is unable to pay a
dividend to the Company without prior approval of the regulatory authorities nor
is the Company able to increase  the  management  fee charged to Community  Bank
without  the  prior  written  approval  of the  Federal  Reserve.  See "Item 1 -
Business - Supervision and Regulation."

Interest Rate Sensitivity

Community  Bank's  net  interest  income  and the fair  value  of its  financial
instruments are influenced by changes in the level of interest rates.  Community
Bank manages its exposure to  fluctuations  in interest  rates through  policies
established  by  its  Asset/Liability   Committee   ("ALCO").   The  ALCO  meets
periodically to monitor its interest rate risk exposure and implement strategies
that might improve its balance sheet  positioning  and/or  earnings.  Management
utilizes an interest rate  simulation  model to estimate the  sensitivity of the
Bank's net  interest  income and net income to changes in interest  rates.  Such
estimates are based upon a number of assumptions  for each  scenario,  including
balance sheet growth, deposit repricing characteristics and prepayment rates.

                                       27

<PAGE>

The estimated impact on Community Bank's net interest income  sensitivity over a
one year time horizon at December 31, 2002 is shown below. Such analysis assumes
an  immediate  and a  parallel  shift in  interest  rates  based on  correlation
analysis of market prices and the Company's estimates of deposit rate changes in
alternate scenarios.

                            INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>

                                                                         -100                          +100
                                                                         Basis                         Basis
                                                                        Points         Level          Points
                                                                     -----------    -----------    -----------
December 31, 2002:                                                            (Dollars in thousands)
<S>                                                                        <C>             <C>            <C>
Prime rate....................................................              3.25%          4.25%          5.25%

Interest income...............................................       $    34,342    $    35,983    $    37,500
Interest expense..............................................            13,109         14,131         15,352
                                                                     -----------    -----------    -----------
     Net interest income......................................       $    21,233    $    21,852    $    22,148
                                                                     ===========    ===========    ===========

Dollar change from level......................................       $      (619)                  $       296

Percentage change from level..................................             (2.83)%                        1.35%

December 31, 2001:

Prime rate....................................................              3.75%          4.75%          5.75%

Interest income...............................................       $    47,508    $    50,612    $    53,156
Interest expense..............................................            18,102         20,094         21,679
                                                                     -----------    -----------    -----------
     Net interest income......................................       $    29,406    $    30,518    $    31,477
                                                                     ===========    ===========    ===========

Dollar change from level......................................       $    (1,112)                  $       959

Percentage change from level..................................             (3.64)%                        3.14%
</TABLE>

As shown above, in a 100 basis point rising rate  environment,  the net interest
margin should increase 1.35% and in a 100 basis point falling rate  environment,
the net interest margin should  decrease  2.83%.  This is a positive change from
2001  variances  of 3.14%  and  (3.64)%,  meaning  net  interest  income is less
sensitive to  fluctuations  in interest rates when compared to  sensitivity  for
2001. These percent changes from a level rate scenario fall  comfortably  within
The Company's ALCO policy limit of +/-7.00%.

Capital Resources

A strong capital position is vital to the continued profitability of the Company
because it promotes  depositor and  shareholder  confidence and provides a solid
foundation for future growth of the  organization.  In 1993,  1995 and 1998, the
Company raised capital through the sale of shares of its Common Stock. All three
offerings  were  closed upon being fully  subscribed.  In the fourth  quarter of
1998, the Company sold to the public and the Company's  Employee Stock Ownership
Plan (the  "ESOP")  500,000  newly  issued  shares of Common Stock at a price of
$19.00 per share, raising approximately  $9,467,000 after reduction for offering
expenses.  The net proceeds  from all  offerings  have been  available  for debt
reduction, capital enhancement,  growth and expansion of the Company and general
corporate purposes.

In March 2000,  the Company formed a wholly-owned  Delaware  statutory  business
trust, Community (AL) Capital Trust I (the "Trust"), which issued $10,000,000 of
guaranteed preferred securities  representing  undivided beneficial interests in
the assets of the Trust ("Capital Securities").  All of the common securities of
the  Trust are owned by the  Company.  The  proceeds  from the  issuance  of the
Capital Securities  ($10,000,000) and common securities  ($310,000) were used by
the Trust to purchase  $10,310,000 of junior  subordinated  deferrable  interest
debentures of the Company which carry an annual interest rate of 10.875%.

                                       28

<PAGE>

The debentures represent the sole asset of the Trust. The debentures and related
income statement effects are eliminated in the Company's consolidated financial
statements. The Company is entitled to treat the aggregate liquidation amount of
the debentures as Tier I capital under Federal Reserve guidelines. See "Borrowed
Funds -- Maturities of Long-term Debt."

Bank regulatory  authorities have issued risk-based capital guidelines that take
into  consideration  risk factors  associated with various categories of assets,
both on and off the balance sheet.  Under the  guidelines,  capital  strength is
measured in two tiers, which are used in conjunction with  risk-adjusted  assets
to determine the risk-based capital ratios. The Company's Tier I capital,  which
includes common stock, retained earnings and Trust preferred securities amounted
to  approximately  $46,817,000 at December 31, 2002,  compared to  approximately
$46,359,000  at  December  31,  2001.   Tier  II  capital   components   include
supplemental  capital components,  such as qualifying  allowance for loan losses
and  qualifying  subordinated  debt.  Tier I  capital  plus the Tier II  capital
components are referred to as total risk-based capital,  which was approximately
$52,885,000, $54,074,000 at year-end 2002 and 2001, respectively. The percentage
ratios,  as calculated  under the  guidelines,  for Tier I and total  risk-based
capital were 12.98% and 14.66%, respectively,  at December 31, 2002, compared to
9.46% and 11.03%, respectively, at year-end 2001.

Another  important  indicator of capital adequacy in the banking industry is the
leverage  ratio.  The tier I  leverage  ratio is  defined  as the ratio that the
Company's  Tier I capital  bears to total  average  assets minus  goodwill.  The
Company's  Tier I leverage  ratios were 8.20% and 6.33% at December 31, 2002 and
2001, respectively.

The following  table  illustrates  the Company's  regulatory  capital  ratios at
December 31, 2002, 2001 and 2000:

                             CAPITAL ADEQUACY RATIOS
<TABLE>
<CAPTION>

                                                                                   December 31,
                                                                        2002           2001            2000
                                                                     -----------    -----------    -----------
                                                                               (Dollars in thousands)
<S>                                                                  <C>            <C>            <C>
Tier I capital................................................       $    46,817    $    46,359    $    44,008
Tier II capital...............................................             6,068          7,715          7,790
                                                                     -----------    -----------    -----------
     Total qualifying capital.................................       $    52,885    $    54,074    $    51,798
                                                                     ===========    ===========    ===========

Risk-weighted total assets (including off-balance-sheet
     exposures)...............................................       $   360,709    $   490,224    $   510,161
                                                                     ===========    ===========    ===========

Tier I risk-based capital ratio...............................             12.98%          9.46%          8.63%

Total risk-based capital ratio................................             14.66          11.03          10.15

Leverage ratio................................................              8.20           6.33           6.17
</TABLE>

In addition to regulatory  requirements,  a certain level of capital growth must
be  achieved  to  maintain  appropriate  ratios of equity to total  assets.  The
following table  summarizes the equity-to  assets and dividend payout ratios for
each of the last three years:

                        CAPITAL GROWTH (REDUCTION) RATIOS
<TABLE>
<CAPTION>

                                                                                 Year Ended December 31,
                                                                         2002          2001            2000
                                                                       ---------     ---------      ---------
<S>                                                                           <C>           <C>      <C>
Dividend payout ratio.........................................                0%            0%       (102.9)%
Average equity to average assets ratio........................             6.81          5.92          5.88
</TABLE>

                                       29

<PAGE>

The Company's return on average assets ratio,  which is computed by dividing net
income (loss) by average assets was 0.14,  (0.20) and (0.42) for 2002,  2001 and
2000,  respectively.  The  increase  in  2002  was  due to  the  net  income  of
approximately  $904,000  in  2002,  compared  to a  net  loss  of  approximately
$1,423,000 in 2001 and a net loss of approximately  $3,019,100 in 2000,  coupled
with  a  13.2%  decrease  in  average   assets  during  2002  to   approximately
$629,481,000,  compared to average assets of approximately  $725,461,000  during
2001 and $710,915,000 during 2000.

The Company's return on average equity ratio,  which is computed by dividing net
income (loss) by average shareholders' equity,  increased in 2002 to 2.11%, from
(3.31)% in 2001.  The  increase  in 2002 was due to net income of  approximately
$904,000 made by the Company in 2002,  compared to the net loss of approximately
$1,423,000 in 2001 and a net loss of approximately $3,019,000 in 2000, which was
coupled with a slight decrease in average  shareholders' equity to approximately
$42,848,000 during 2002,  compared to approximately  $42,938,000 during 2001 and
approximately $41,776,000 during 2000.

The Company's  dividend payout ratio is determined by dividing the dividends per
share by the basic net earnings or loss per share for the relevant  period.  The
Company  did not pay  dividends  in 2002 or 2001.  During  2000,  the  Company's
dividend  payout  ratio was  (102.9)%  due to an  increase in the amount of cash
dividends  paid per share  coupled with a basic net loss per share  reported for
the period.  During 2000, the amount of cash dividends paid per share  increased
$0.15,  or 25%,  to $0.75 from $0.60 in 1999.  In  addition,  during  2000,  the
Company  reported  a basic  net loss per  share of $0.68  compared  to basic net
earnings per share of $0.37 for 1999.

The  Company's  average  equity to average  assets  ratio,  which is computed by
dividing  average  shareholders'  equity by average  assets,  was 6.81% in 2002,
5.92%  in 2001,  and  5.88% in  2000.  The  increase  in 2002 was due to a 13.2%
decrease in average  assets  during 2002 to  approximately  $629,481,000,  while
average shareholders' equity decreased by only 0.2%.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income is usually the principal source of a financial institution's
earnings stream and represents the difference or spread between  interest income
generated  from  earning  assets and the  interest  expense paid on deposits and
borrowed funds. Fluctuations in interest rates as well as volume and mix changes
in earning assets and interest-bearing liabilities impact net interest income.

Net interest  income for 2002  increased  approximately  $651,000,  or 2.8%,  to
approximately $23,504,000 from approximately $22,853,000 in 2001, compared to an
increase  of  approximately  $435,000,  or  1.9%,  in  2001  from  approximately
$22,418,000 in 2000. The Company experienced a decline in average earning assets
and growth in average interest-bearing liabilities during 2002; however, a shift
occurred in deposits as a result of decreases in time  deposits and increases in
demand and savings.  The  "Rate/Volume  Variance  Analysis" table in the section
below provides  information  about changes in interest income,  interest expense
and net interest income due to changes in average balances and rates.

The Company's interest income decreased approximately  $6,830,000,  or 14.4%, to
$40,657,000  in 2002  from  $47,487,000  in  2001,  compared  to a  decrease  of
approximately  $1,418,000,  or 2.9%, in 2001 from  approximately  $48,905,000 in
2000.  The decrease in 2002 was due to a 122 basis points decrease  in the yield
on average  earning  assets  during  2002 along with a decrease in the volume of
average  earning  assets.  The  2001  decrease  was due to the 76  basis  points
decrease in the yield on average  earning  assets.  The interest income on loans
decreased  16.1% during 2002, due to both a decrease of 4.1% in the average loan
balances  outstanding  and a decrease in the yield on loans of 125 basis points.
During 2001, the interest income on loans  decreased 5.2%,  primarily due to the
decrease  in the  yield on loans of 62 basis  points.  The  interest  income  on
investment  securities  decreased  2.4%  during  2002,  compared  to  2001,  and
increased  6.4% during  2001,  compared  to 2000,  due to changes in the average
investment security balances outstanding.

During 2002, the Company's interest expense decreased approximately  $7,481,000,
or 30.4%, to approximately  $17,153,000 from approximately  $24,634,000 in 2001,
as average  interest-bearing  liabilities outstanding during 2002

                                       30

<PAGE>

decreased 0.5% but the average rate paid on interest-bearing  liabilities during
2002  decreased  157  basis  points.  In  2001,   interest  expenses   decreased
approximately   $1,853,000,   or  7.0%,  to   approximately   $24,634,000   from
approximately   $26,487,000  in  2000,   despite  a  1.5%  increase  in  average
interest-bearing  liabilities  in 2001,  due to the  effect of a 48 basis  point
increase in the average  rate paid in 2001.  Interest-bearing  deposits  are the
major component of interest  bearing  liabilities,  representing  87.6% in 2002,
86.1% in 2001 and 87.3% in 2000 of average  total  interest-bearing  liabilities
outstanding.  While average interest-bearing deposits outstanding increased 1.2%
and 0.1%  during  2002 and 2001,  respectively,  the rate paid on these  average
balances  reflected a decrease  of 180 basis  points  during 2002  compared to a
decrease of 47 basis  points  during 2001.  The decrease in interest  expense on
short-term borrowings during 2002 primarily resulted from a 36.9% decline in the
average balance.  The decrease in interest expense on long-term debt during 2002
occurred  despite an increase in the average rate paid of 37 basis points due to
a 9.8%  decline in the  average  balance  for 2002 . The  decrease  in  interest
expense on FHLB borrowings during 2002 was due to a 9.5% decrease in the average
balance of borrowings  outstanding  during 2002 even though the average interest
rate paid on these borrowings  increased 8 basis points during 2002. The average
capitalized  lease  obligations   outstanding  during  2002  were  approximately
$4,096,000,   which   represented   0.9%   of  the   Company's   average   total
interest-bearing liabilities.

The trend in net interest  income is also  evaluated  in terms of average  rates
using the net  interest  margin and the interest  rate spread.  The net interest
margin, or the net yield on earning assets, is computed by dividing net interest
income by average earning assets.  This ratio represents the difference  between
the average yield  returned on average  earning assets and the average rate paid
for funds used to support those earning assets,  including both interest-bearing
and noninterest-bearing  sources. The Company's net interest margin for 2002 was
4.47%, compared to 4.31% and 4.45% for 2001 and 2000, respectively.

The interest rate spread  measures the  difference  between the average yield on
earning assets and the average rate paid on  interest-bearing  sources of funds.
The interest rate spread eliminates the impact of noninterest-bearing  funds and
gives a more direct perspective to the effect of market interest rate movements.
The net  interest  spread for 2002  increased  35 basis points to 4.07% from the
Company's 2001 spread of 3.72% as the cost of interest-bearing  sources of funds
decreased 157 basis points,  but the yield on earning assets  decreased only 122
basis points. The net interest spread for 2000 was 4.00%. See the tables in this
section below entitled "Consolidated Average Balances,  Interest Income/Expenses
and Yields/Rates" and "Rate/Volume Variance Analysis" for more information.

The  following  tabulation  presents  certain net  interest  income data without
modification for assumed tax equivalency:

<TABLE>
<CAPTION>

                                                                 Years Ended December 31,
                                          --------------------------------------------------------------------
                                           2002             2001           2000            1999          1998
                                          ------           ------         ------          ------        ------
<S>                                        <C>              <C>            <C>             <C>           <C>
Rate earned on earning assets.......       7.73%            8.95%          9.71%           9.40%         9.26%
Rate paid on borrowed funds.........       3.66             5.23           5.71            5.00          5.23
Interest rate spread................       4.07             3.72           4.00            4.40          4.03
Net interest margin.................       4.47             4.31           4.45            4.86          4.52
</TABLE>

During 2002, the banking industry saw the prime interest rate move from 4.75% to
4.25%. This decrease resulted as the prime interest rate fell by 50 basis points
in November  2002.  This is in contrast to the 450 basis point  increase  during
2001.

The "Consolidated Average Balances,  Interest  Income/Expenses and Yields/Rates"
and the  "Rate/Volume  Variance  Analysis" tables are presented on the following
four pages.  The  Consolidated  Average  Balances/Interest  Income/Expenses  and
Yields/Rates  table  presents,  for the periods  shown,  the average  balance of
certain  balance sheet items,  the dollar amount of interest income from average
earning  assets and  resultant  yields,  the  interest  expense and rate paid on
average   interest-bearing   liabilities,   and  the  net-interest  margin.  The
Rate/Volume  Variance Analysis table presents an analysis of changes in interest
income,  interest  expense and net interest  income  attributable  to changes in
volume and interest rate.

                                       31

<PAGE>


     CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES
                            Taxable Equivalent Basis
<TABLE>
<CAPTION>

                                                                   Years Ended December 31,
                                              2002                            2001                             2000
                                              ----                            ----                             ----
                                  Average    Income/    Yield/    Average    Income/   Yield/      Average    Income/   Yield/
                                  Balance    Expense    Rate      Balance    Expense    Rate       Balance    Expense   Rate
                                 ---------  ---------  -------   ---------  ---------  -------    ---------  ---------  -------
                                                                   (Dollars in thousands)
Assets (3)
   Earning assets:
   Loans, net of unearned
<S>          <C>                 <C>        <C>           <C>    <C>        <C>          <C>      <C>        <C>          <C>
      income (1)(2)............  $ 382,126  $  33,506     8.77%  $ 398,490  $  39,938    10.02%   $ 395,958  $  42,121    10.64%
   Investment securities:
      Taxable..................    107,566      6,280     5.84     100,599      6,209     6.17       87,745      5,644     6.43
      Tax exempt...............      9,028        456     5.05      13,468        693     5.15       15,366        840     5.47
                                 ---------  ---------            ---------  ---------             ---------  ---------
      Total investment securities  116,594      6,736     5.78     114,067      6,902     6.05      103,111      6,484     6.29
   Interest bearing deposits
      in other banks...........      2,899         29     1.00         344         44    12.79          915         66     7.21
   Federal funds sold .........     24,406        386     1.58      17,816        603     3.38        3,635        234     6.44
                                 ---------  ---------            ---------  ---------             ---------  ---------
      Total earning assets.....    526,025     40,657     7.73     530,717     47,487     8.95      503,619     48,905     9.71
   Noninterest-earning assets:
      Cash and due from banks..     20,927                          21,160                           24,006
Premises and equipment              34,133                          31,433                           29,549
      Accrued interest and
        other assets...........     13,315                          15,563                           18,618
      Allowance for loan losses.    (7,511)                         (5,328)                          (2,691)
   Average balances associated with
      discontinued operations..     42,592                         131,916                          137,814
                                 ---------                       ---------                        ---------
      Total assets.............  $ 629,481                       $ 725,461                        $ 710,915
                                 =========                       =========                        =========

Liabilities and Shareholders' Equity (3)
   Interest-bearing liabilities:
      Demand deposits..........  $  79,386      1,725     2.17   $  73,301      3,237     4.42    $  81,920      3,950     4.82
      Savings deposits.........     56,606      1,154     2.04      48,884      2,023     4.14       46,586      2,120     4.55
      Time deposits............    274,552     10,474     3.81     283,571     15,227     5.37      276,835     16,322     5.90
                                 ---------  ---------            ---------  ---------             ---------  ---------
                                   410,544     13,353     3.25     405,756     20,487     5.05      405,341     22,392     5.52
   Short-term borrowings.......      2,126         36     1.69       3,367         37     1.10        2,589        112     4.33
   FHLB long-term debt.........     38,000      2,266     5.96      41,967      2,468     5.88       38,000      2,248     5.92
   Capitalized lease obligations     4,096        225     5.49       4,746        288     6.07        3,579        327     9.14
   Other long-term debt........     13,965      1,273     9.12      15,478      1,354     8.75       14,716      1,408     9.57
                                 ---------  ---------            ---------  ---------             ---------  ---------
      Total interest-bearing
        liabilities ...........    468,731     17,153     3.66     471,314     24,634     5.23      464,225     26,487     5.71
                                            ---------  -------              ---------  -------               ---------  -------
   Noninterest-bearing liabilities:
      Demand deposits..........     56,994                          57,347                           56,674
      Accrued interest and
        other liabilities......      6,846                           4,363                            6,170
      Shareholders' equity.....     42,848                          42,938                           41,776
   Average balances associated with
      discontinued operations..     54,062                         149,499                          142,070
                                 ---------                       ---------                        ---------
      Total liabilities and
        shareholders' equity...  $ 629,481                       $ 725,461                        $ 710,915
                                 =========                       =========                        =========
Net interest income/net interest spread        23,504     4.07%                22,853     3.72%                 22,418     4.00%
                                            ---------  =======              ---------  =======               ---------  =======
Net interest margin............                           4.47%                           4.31%                            4.45%
                                                       =======                         =======                          =======

<FN>
(1)  Average  loans  include  nonaccrual  loans.  All  loans  and  deposits  are
     domestic.

(2)  Income on loans, net of unearned income, includes loan fees of $2,980,000.

(3)  All yields  are  computed  on  income/expense  and  average  balances  from
     continuing operations.
</FN>
</TABLE>

                                       32
<PAGE>


                          RATE/VOLUME VARIANCE ANALYSIS
                            TAXABLE EQUIVALENT BASIS
<TABLE>
<CAPTION>

                                               Average Volume             Change in Volume          Average Rate
                                      -------------------------------   --------------------   ----------------------
                                        2002       2001        2000     2002-2001  2001-2000    2002    2001    2000
                                      ---------  ---------  ---------   ---------  ---------   ------  ------  ------
                                                                      (Dollars in thousands)
Earning Assets:
<S>                                   <C>        <C>        <C>         <C>        <C>           <C>    <C>     <C>
Loans, net of unearned income....     $ 382,126  $ 398,490  $ 395,958   $ (16,364) $   2,532     8.77%  10.02%  10.64%
Investment securities:
   Taxable.......................       107,566    100,599     87,745       6,967     12,854     5.84    6.17    6.43
   Tax exempt....................         9,028     13,468     15,366      (4,440)    (1,898)    5.05    5.15    5.47
                                      ---------  ---------  ---------   ---------  ---------
      Total investment securities       116,594    114,067    103,111       2,527     10,956     5.78    6.05    6.29
Interest-bearing deposits with
   other banks..................          2,899        344        915       2,555       (571)    1.00   12.79    7.21
Federal funds sold...............        24,406     17,816      3,635       6,590     14,181     1.58    3.38    6.44
                                      ---------  ---------  ---------   ---------  ---------
      Total earning assets.......     $ 526,025  $ 530,717  $ 503,619   $  (4,692) $  27,098     7.73    8.95    9.71
                                      =========  =========  =========   =========  =========

Interest-Bearing Liabilities:
Deposits:
   Demand........................     $  79,386  $  73,301  $  81,920   $ 6,085    $  (8,619)    2.17    4.42    4.82
   Savings ......................        56,606     48,884     46,586     7,722        2,298     2.04    4.14    4.55
   Time..........................       274,552    283,571    276,835    (9,019)       6,736     3.81    5.37    5.90
                                      ---------  ---------  ---------   -------    ---------
      Total interest-bearing deposits   410,544    405,756    405,341     4,788          415     3.25    5.05    5.52
Short-term borrowings............         2,126      3,367      2,589    (1,241)         778     1.69    1.10    4.33
FHLB long-term debt..............        38,000     41,967     38,000    (3,967)       3,967     5.96    5.88    5.92
Capitalized lease obligations....         4,096      4,746      3,579      (650)       1,167     5.49    6.07    9.14
Other long-term debt.............        13,965     15,478     14,716    (1,513)         762     9.12    8.75    9.57
                                      ---------  ---------  ---------   -------    ---------
      Total interest-bearing
         liabilities.............     $ 468,731  $ 471,314  $ 464,225   $(2,583)   $   7,089     3.66    5.23    5.71
                                      =========  =========  =========   =======    =========   ------  ------  ------

Net interest income/net interest spread.                                                         4.07%   3.72%   4.00%
                                                                                               ======  ======  ======

Net yield on earning assets......                                                                4.47%   4.31%   4.45%
                                                                                               ======  ======  ======
</TABLE>

<TABLE>
<CAPTION>

                                                                                      Variance Attributed to (1)

                                     Interest Income/Expense            Variance              2002              2001
                                    ----------------------------  ---------------------  ----------------  ----------------
                                      2002      2001      2000    2002-2001   2001-2000  Volume    Rate    Volume    Rate
                                    --------  --------  --------  ---------   ---------  -------  -------  -------  -------
                                                               (Dollars in thousands)
Earning Assets:
<S>                                 <C>       <C>       <C>       <C>         <C>        <C>      <C>      <C>      <C>
Loans, net of unearned income....   $ 33,506  $ 39,938  $ 42,121  $  (6,432)  $  (2,183) $(1,593) $(4,839) $   270  $(2,453)
Investment securities:
   Taxable.......................      6,280     6,209     5,644         71         565      415     (344)     800     (235)
   Tax exempt....................        456       693       840       (237)       (147)    (224)     (13)    (100)     (47)
                                    --------  --------  --------  ---------   ---------  -------  -------  -------  -------
        Total investment securities    6,736     6,902     6,484       (166)        418      191     (357)     700     (282)
Interest-bearing deposits
   with other banks..............         29        44        66        (15)        (22)      59      (74)     (55)      33
Federal funds sold ..............        386       603       234       (217)        369      174     (391)     527     (158)
                                    --------  --------  --------  ---------   ---------  -------  -------  -------  -------
        Total earning assets.....   $ 40,657  $ 47,487  $ 48,905  $  (6,830)  $  (1,418) $(1,169) $(5,661) $ 1,442  $(2,860)
                                    ========  ========  ========  =========   =========  =======  =======  =======  =======

Interest-Bearing Liabilities:
Deposits:
   Demand........................   $  1,725  $  3,237   $ 3,950  $  (1,512)  $    (713) $   250  $(1,762) $  (399) $  (314)
   Savings.......................      1,154     2,023     2,120       (869)        (97)     281   (1,150)     101     (198)
   Time..........................     10,474    15,227    16,322     (4,753)     (1,095)    (469)  (4,284)     392   (1,487)
                                    --------  --------  --------  ---------   ---------  -------  -------  -------  -------
        Total interest-bearing
           deposits..............     13,353    20,487    22,392     (7,134)     (1,905)      62   (7,196)      94   (1,999)
Short-term borrowings............         36        37       112         (1)        (75)     (17)      16       26     (101)
FHLB long-term debt..............      2,266     2,468     2,248       (202)        220     (235)      33      235      (15)
Capitalized lease obligations....        225       288       327        (63)        (39)      (7)     (56)     135     (174)
Other long-term debt.............      1,273     1,354     1,408        (81)        (54)    (136)      55       71     (125)
                                    --------  --------  --------  ---------   ---------  -------  -------  -------  -------
        Total interest-bearing
           liabilities...........     17,153    24,634    26,487     (7,481)     (1,853)    (333)  (7,148)     561   (2,414)
                                    --------  --------  --------  ---------   ---------  -------  -------  -------  -------
        Net interest income......   $ 23,504  $ 22,853  $ 22,418  $     651   $     435  $  (836) $ 1,487  $   881  $  (446)
                                    ========  ========  ========  =========   =========  =======  =======  =======  =======

<FN>
(1)  The change in interest  due to both rate and volume has been  allocated  to
     volume and rate changes in proportion to the  relationship  of the absolute
     dollar amounts of the change in each.
</FN>
</TABLE>

                                       33

<PAGE>

Provision for Loan Losses, Net Charge-Offs and Allowance for Loan Losses

The Company  maintains an allowance for loan losses to absorb losses inherent in
the loan portfolio.  The allowance is based upon management's estimated range of
those  losses.  Actual losses for these loans may vary  significantly  from this
estimate.

At  December  31,  2002,  the  allowance  for loan losses was  $9,784,000  which
represented  an increase of  $2,492,000,  or 34.2%,  over the  December 31, 2001
amount of $7,292,000.  There was a $185,000,  or 2.6%, increase in the allowance
for loan losses at December  31, 2001 as  compared to December  31,  2000.  This
increase in the overall level of the allowance for loan losses was primarily due
to provisions for loan losses of $10,108,000 and $6,314,000,  including  amounts
related  to  discontinued  operations,  made by the  Company  in 2002 and  2001,
respectively.  As a  percentage  of total  loans,  net of unearned  income,  the
allowance for loan losses  increased to 2.72% at December 31, 2002,  compared to
1.45% at December 31, 2001.  Management  believes  that the  allowance  for loan
losses at December 31, 2002 is adequate to absorb  known risks in the  Company's
loan portfolio based upon the Company's historical experience.  No assurance can
be given,  however,  that increased loan volume,  adverse economic conditions or
other  circumstances  will not result in increased  losses in the Company's loan
portfolio or additional provisions to the allowance for loan losses.

A provision for loan losses is charged  against  current  earnings.  Actual loan
losses,  net of  recoveries,  are  charged  directly to the  allowance  for loan
losses.  The amount of the  provision  for loan losses is based on the growth of
the loan  portfolio,  the amount of net loan losses  incurred  and  management's
estimation of potential  future losses based on an evaluation of the risk in the
loan portfolio.  The provision for loan losses was  $10,108,000,  $6,314,000 and
$9,289,000,  including amounts related to discontinued operations, in 2002, 2001
and 2000, respectively. This represented an increase of $3,794,000, or 60.0%, in
2002 and a decrease of $2,975,000 or 32.0% in 2001.  The provision for loan loss
in 2002 was  significantly  higher due to increased loan charge-offs  during the
year.

In March 2001,  management  of  Community  Bank became aware that an employee in
Community  Bank's Double  Springs,  Alabama  location had improperly  originated
approximately $1,200,000 in loans primarily during 2000 and the first quarter of
2001 in violation of Community Bank's lending policies, and had manipulated loan
payments to make it falsely  appear that payments  under the loans were current.
The bank employee has admitted  wrongdoing in connection  with the loans and his
employment with Community Bank has been terminated.  Management notified federal
and state banking regulatory  authorities,  law enforcement  authorities and the
Company's  fidelity  bond  carrier,  and is  cooperating  with  law  enforcement
authorities  in  their   investigation  of  the  matter.  As  a  result  of  its
investigation  of these loans,  the Company has charged off loans deemed to be a
loss and has  reserved for its future  estimated  losses with a provision to its
allowance for loan losses as necessary.

In September  1998,  Community Bank  determined that $9,360,000 in motor vehicle
loans that were  originated  in Community  Bank's Ft.  Payne,  Alabama  Wal-Mart
location  primarily during a four-month period beginning in May 1998 were not in
compliance with Community Bank's lending policy. By December 31, 1999, borrowers
had defaulted on  approximately  $5,594,000 of these loans.  Community Bank took
into  possession  and resold 362 vehicles  that served as  collateral  for these
loans, which resulted in proceeds of approximately $2,963,000, which was applied
to the  outstanding  balances of the defaulted  loans.  In the fourth quarter of
1999,  management  determined  that these unpaid  balances  were  impaired  and,
therefore,  made a charge of approximately $2,631,000 to the Company's allowance
for loan losses in December 1999. Concurrently,  a provision for loan losses, in
the same amount,  was made in order to return the  allowance  for loan losses to
its balance prior to the charge for the impaired loans.  During 2000,  Community
Bank,  including its subsidiary  1st Community  Credit  Corporation,  charged an
additional  $567,000 to its  allowance  for loan  losses  with  respect to these
defaulted Ft. Payne loans.  On June 20, 2000,  Community Bank filed an action in
the United States District Court for the Northern District of Alabama against an
automobile dealership,  several employees and former employees of the dealership
and a former  employee  of  Community  Bank.  The  lawsuit  seeks  damages of an
unspecified  amount to recover  losses  incurred by Community Bank in connection
with the Ft. Payne loans, along with all costs associated with the legal action.
Community Bank settled this lawsuit in 2002 and treated the amount received as a
recovery  of  legal  expenses.  See  "Item 3 -  Legal  Proceedings  - Auto  Loan
Litigation."

Loan  charge-offs   exceeded   recoveries  by  $6,864,000   during  2002,  which
represented  an increase of $735,000,  or 12.0%,  from  $6,129,000  during 2001,
which  represented an increase of $1,344,000,  or 28.1%,  from $4,785,000 during

                                       34

<PAGE>

2000.  Net  loan  charge-offs  increased  in 2002  from  2001  due to  continued
deterioration of the Bank's loan portfolio. Net loan charge-offs remained at the
same level in 2000 as compared to 1999.

The following table sets forth certain information with respect to the Company's
loans,  net of unearned  income,  and the allowance for loan losses for the five
years ended December 31, 2002.

                         SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>

                                                  2002         2001         2000         1999          1998
                                               ---------     ---------    ---------    ---------    ---------
                                                                 (Dollars in Thousands)
Allowance for loan losses at beginning
<S>                                            <C>           <C>          <C>          <C>          <C>
   of period...............................    $   7,292     $   7,107    $   2,603    $   2,971    $   2,131
Loans charged off:
   Commercial, financial and agricultural..        2,033         1,056          620          282          190
   Real estate - mortgage..................        1,106           726          319           92           50
   Consumer................................        4,169         4,785        4,114        4,814        1,223
                                               ---------     ---------    ---------    ---------    ---------
       Total loans charged off.............        7,308         6,567        5,053        5,188        1,463
                                               ---------     ---------    ---------    ---------    ---------
Recoveries on loans previously charged off:
   Commercial, financial and agricultural..           44             7           10          220           11
   Real estate - mortgage..................           57            40            2            4            -
   Consumer................................          343           391          256          138          126
                                               ---------     ---------    ---------    ---------    ---------
       Total recoveries....................          444           438          268          362          137
Net loans charged off......................        6,864         6,129        4,785        4,826        1,326
Reserves (sold) acquired through
   (branch divestitures) acquisitions......         (752)            -            -            -        1,281
Provision for loan losses included
   in continuing operations................       10,033         6,096        7,573        4,458          885
Provision for loan losses included
   in discontinued operations..............           75           218        1,716            -            -
                                               ---------     ---------    ---------    ---------    ---------
Allowance for loan losses at end of period.    $   9,784     $   7,292    $   7,107    $   2,603    $   2,971
                                               =========     =========    =========    =========    =========

Loans, net of unearned income, at
   end of period..........................     $ 359,184     $ 501,519    $ 528,316    $ 498,726    $ 433,853
                                               =========     =========    =========    =========    =========

Average loans, net of unearned income,
   outstanding for the period (*)..........    $ 419,337     $ 516,954    $ 522,301    $ 463,298    $ 378,189
                                               =========     =========    =========    =========    =========
</TABLE>

<TABLE>
<CAPTION>

                                                  2002         2001         2000         1999          1998
                                               ---------     ---------    ---------    ---------    ---------
Ratios:
   Allowance for loan losses to loans, net of
<S>                                                <C>           <C>          <C>          <C>          <C>
     unearned income, at end of period.....        2.72%         1.45%        1.35%        0.52%        0.68%
   Allowance for loan losses at end of period to
     average loans, net of unearned income (*)     2.33          1.41         1.36         0.56         0.79
   Net charge-offs to average loans, net of
     unearned income (*)...................        1.64          1.19         0.92         1.04         0.35
   Net charge-offs to allowance for loan losses,
     at end of period .....................       70.16         84.05        67.33       185.40        44.63
   Recoveries to prior year charge-offs....        6.76          8.67         5.17        24.74        11.53

<FN>
(*)  Average  loans,   for  this  purpose,   includes  those   associated   with
     discontinued operations.
</FN>
</TABLE>

In assessing the adequacy of the allowance  for loan losses,  management  relies
predominantly  on its ongoing review of the loan portfolio,  which is undertaken
both to ascertain  whether  there are probable  losses which must be charged off
and to assess the risk  characteristics of the portfolio in the aggregate.  This
review  takes  into  consideration  the  judgments  of the  responsible  lending
officers and senior  management,  internal loan review personnel,  external loan
review  professionals and also those of bank regulatory agencies that review the
loan portfolio as part of the regular bank examination process. Loans identified
as having  increased credit risk are classified in accordance with the Company's

                                       35

<PAGE>

loan  policy  and   appropriate   reserves   are   established   for  each  loan
classification  category based on pre-determined  reserve percentages.  Reserves
are  established  for the remaining  unclassified  portion of the loan portfolio
based on actual historical loss factors associated with certain loan types.

In evaluating the allowance,  management also considers the historical loan loss
experience of Community  Bank, the amount of past due and  nonperforming  loans,
current and  anticipated  economic  conditions,  lender  requirements  and other
appropriate information.  Community Bank allocates its allowance for loan losses
to specific loan categories based on an average of net losses for each loan type
during the previous five years.

Management  allocated the allowance for loan losses to specific loan classes, as
of the dates indicated, as follows:

                   ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>

                                                                December 31,
                           ------------------------------------------------------------------------------------
                                2002             2001             2000             1999              1998
                           ---------------  ---------------  --------------   ---------------  ----------------
                                   Percent          Percent          Percent          Percent           Percent
                                      of               of               of               of                of
                            Amount  Total   Amount   Total    Amount  Total    Amount  Total     Amount  Total
                           ------- -------  ------- -------  ------- -------  ------- -------   ------- -------

Domestic loans
   Commercial, financial
<S>                        <C>         <C>  <C>         <C>  <C>         <C>  <C>          <C>  <C>         <C>
      and agricultural     $ 2,678     27%  $   802     11%  $   711     10%  $   234      9%   $   526     18%
   Real estate - mortgage    3,696     38%      583      8       497      7       182      7        357     12
   Consumer ..........       3,410     35%    5,907     81     5,899     83     2,187     84      2,088     70
                           ------- -------  ------- -------  ------- -------  ------- ------    ------- -------
                           $ 9,784    100%  $ 7,292    100%  $ 7,107    100%  $ 2,603    100%   $ 2,971    100%
                           ======= =======  ======= =======  ======= =======  ======= ======    ======= =======
</TABLE>

Nonperforming Assets

Nonperforming assets as of December 31, 2002 increased approximately $9,768,000,
or  78.2%,  to  approximately  $22,260,000  from  approximately  $12,492,000  at
year-end  2001,  which  represented an increase of  approximately  $6,163,000 or
97.4%, from approximately  $6,329,000 at December 31, 2000.  Nonperforming loans
include loans  classified as  nonaccrual or  renegotiated  and those past due 90
days  or  more  for  which  interest  was  still  being  accrued.  During  2002,
nonaccruing  loans  increased  72.4% to $10,099,000 at December 31, 2002,  while
loans past due 90 days or more  decreased  47.1% to  $1,241,000  at December 31,
2002.  The Company has  recognized  its asset quality  problems and has in turn,
increased its credit standards. The Company has also implemented steps needed to
recognize  problem credits more timely.  Loan review  processes were implemented
during 2001 which have led to better  identification  and recognition of problem
credits.  These loan reviews  continued  throughout 2002 and will continue going
forward.  The result has been  increased  recognition  of  problem  credits  and
therefore,  increases  in  nonperforming  assets.  The  Company  also  plans  to
implement a more centralized loan processing function in 2003 intended to ensure
loan policies and procedures are properly  followed during the beginning  stages
of recording a loan rather than identifying  problems in loans soley through the
loan  review  function.   Although,  the  Company  believes  it  has  identified
significant  problems in its loan  portfolio,  it cannot  assure that  continued
deterioration of the loan portfolio will not occur. However, it is the Company's
policy to  adequately  reserve for losses in the loan  portfolio.  During  2001,
nonaccruing  loans  increased  212.2% to $5,859,000 at December 31, 2001,  while
loans past due 90 days or more  decreased  8.8% to  $2,346,000  at December  31,
2001.  Other real estate was  $7,676,000 and $4,287,000 at December 31, 2002 and
2001,   respectively,   which   represented   increases  of  79.1%  and  127.9%,
respectively,  from the prior  year-end.  There were no  commitments to lend any
additional  funds on nonaccrual or renegotiated  loans at December 31, 2002. The
following  table  summarizes the Company's  nonperforming  assets at December 31
during each of the last five years.

                                       36

<PAGE>

                              NONPERFORMING ASSETS
<TABLE>
<CAPTION>

                                                                       December 31,
                                               -------------------------------------------------------------
                                                 2002         2001         2000         1999          1998
                                               --------     --------     --------     --------      --------
                                                                 (Dollars in Thousands)

<S>                                            <C>          <C>          <C>          <C>           <C>
Nonaccruing loans..........................    $ 10,099     $  5,859     $  1,877     $  2,709      $  1,600
Loans past due 90 days or more.............       1,241        2,346        2,571        1,332         2,384
Restructured loans.........................       3,244            -            -            -             -
                                               --------     --------     --------     --------      --------
Total nonperforming loans..................      14,584        8,205        4,448        4,041         3,984
Other real estate..........................       7,676        4,287        1,881          766           699
                                               --------     --------     --------     --------      --------
       Total nonperforming assets..........    $ 22,260     $ 12,492     $  6,329     $  4,807      $  4,683
                                               ========     ========     ========     ========      ========

Ratios:
Allowance for loan losses to total nonperforming
   assets..................................       43.95%       58.37%      112.29%       54.15%        63.44%
Total nonperforming loans to total loans (net
   of unearned income).....................        4.06         1.64         0.84         0.81          0.92
Total nonperforming assets  to total assets        3.92         1.72         0.89         0.71          0.78
</TABLE>

The ratio of allowance for loan losses to total  nonperforming  assets  declined
14.42%  during 2002,  to 43.95% at December  31, 2002,  compared to a decline of
53.92%  during  2001,  to 58.37% at December  31, 2001 and an increase of 58.14%
during 2000 to 112.29% at December 31,  2000.  The  significant  decline in this
ratio for 2002 and 2001 resulted from the substantial  increase in the Company's
nonperforming  assets  during  2002 and 2001.  The ratio of total  nonperforming
loans to total loans,  net of unearned  income,  increased 2.42% during 2002, to
4.06% at December  31,  2002,  compared to 1.64% and 0.84% at year-end  2001 and
2000,  respectively.  The ratio of total  nonperforming  assets to total  assets
increased  2.20%  during  2002 to 3.92% at year-end  2002,  compared to 1.72% at
year-end 2001 and 0.89% at year-end  2000.  The ratios have worsened in 2002 and
2001 as nonperforming loans and other real estate have increased  substantially.
There were no  concentrations  of loans exceeding 10% of total loans,  which are
not  otherwise  disclosed as a category of loans at December 31, 2002,  2001 and
2000.

It is the general policy of Community Bank to stop accruing  interest income and
place  the  recognition  of  interest  on a  cash  basis  when  any  commercial,
industrial  or real estate loan is past due as to  principal or interest and the
ultimate collection of either is in doubt. Normally,  accrual of interest income
on consumer  installment  loans is  suspended  when any payment of  principal or
interest,  or both,  is more than 90 days  delinquent.  When a loan is placed on
nonaccrual status,  any uncollected  interest accrued in a prior year is charged
against the allowance for loan losses and any  uncollected  interest  accrued in
the current year is reversed  against  current  income unless the collateral for
the loan is  sufficient  to cover the accrued  interest  or a guarantor  assures
payment of interest.

Noninterest Income

Noninterest income from continuing  operations for 2002 decreased  approximately
$687,000, or 8.4%, to approximately  $7,446,000 from approximately $8,133,000 in
2001,  which  represented a decrease of  approximately  $445,000,  or 5.2%, from
approximately  $8,578,000 in 2000.  Noninterest income is derived primarily from
service charges on deposit accounts,  insurance  commissions,  bank club dues (a
deposit account  packaged with other financial  services) and debt  cancellation
fees.  Service  charges on deposit  accounts  decreased 6.3%, or $198,000 during
2002 compared to a 3.1% decrease during 2001.  Insurance  commissions  increased
25.0% to  approximately  $2,237,000 in 2002 after  decreasing  during 2001.  The
level of insurance commissions during the past three years is primarily a result
of the activities of Community  Insurance Corp., a subsidiary of Community Bank,
in the areas of property,  casualty and life insurance. Bank club dues decreased
11.5%  during 2002,  to  approximately  $438,000,  compared to a decline of 4.8%
during 2001. Debt cancellation  fees decreased 40.4% to approximately  $233,000,
during  2002  compared  to a 34.6%  decrease  in 2001.  The  decline in 2002 was
primarily due to decreased volume in debt cancellation  coverage associated with
a decline in Community  Bank's loan portfolio.  Other operating income decreased
8.9%, to  approximately  $935,000 from  approximately  $1,026,000 in 2001, which
represented a decrease of approximately  $779,000,  or 43.2%, from approximately
$1,805,000 in 2000.  Components of other operating income  reflecting  decreases
during 2002 were fee

                                       37

<PAGE>

income  associated  with wire  transfers,  safe deposit box  rentals  and  other
miscellaneous  service fees.  The Company also  recognized  gains on the sale of
investment securities during 2002, 2001 and 2000 as shown below.

                               NONINTEREST INCOME
<TABLE>
<CAPTION>

                                                           Year Ended December 31,            Percent Change
                                                   ------------------------------------     --------------------
                                                     2002          2001         2000        2002/2001   2001/2000
                                                   ----------  -----------  -----------     ---------   ---------
                                                          (Dollars in thousands)

<S>                                                <C>          <C>         <C>               <C>         <C>
Service charges on deposits.....................   $    2,950   $    3,148  $     3,250       (6.3)%      (3.1)%
Insurance commissions...........................        2,237        1,789        2,400       25.0       (25.5)
Investment securities gains (losses)............          653        1,284            5      (49.1)          -
Bank club dues..................................          438          495          520      (11.5)       (4.8)
Debt cancellation fees..........................          233          391          598      (40.4)      (34.6)
Other...........................................          935        1,026        1,805       (8.9)      (43.2)
                                                   ----------   ----------  -----------
                                                   $    7,446   $    8,133  $     8,578       (8.4)       (5.2)
                                                   ==========   ==========  ===========
</TABLE>

Noninterest Expenses

Noninterest   expenses  from   continuing   operations   totaled   approximately
$29,071,000 in 2002,  $28,792,000 in 2001 and $28,101,000 in 2000.  These levels
represent  increases  of 1.0% and 2.5% for  2002  and  2001,  respectively.  The
primary  component of  noninterest  expenses is salaries and employee  benefits,
which  increased  $456,000,  or 3.4%,  during 2002 to  $14,455,000,  compared to
$13,977,000  and $16,851,000  for 2001 and 2000,  respectively.  The increase in
salaries and employee  benefits during 2002 resulted  primarily from an increase
in required  funding of the Company's  Employee Stock  Ownership Plan as well as
increased  expense  recognition in the Company's  defined  benefit pension plan.
Director and committee fees were $444,000 in 2002, $436,000 in 2001 and $617,000
in 2000.  This  expense  remained  stable  for 2002 while the  decrease  in 2001
resulted  primarily from not paying a retainer fee to non-employee  directors as
was done in 2000. This represents a 1.8% increase in 2002 compared to a decrease
of 29.3% in 2001.  Since 1999,  employee  directors  have not received  board or
committee fees. Occupancy expense increased 3.9% in 2002 to $2,276,000, compared
to $2,191,000  in 2001 and  $2,059,000  in 2000,  while  furniture and equipment
expenses  decreased  1.0% in 2002 to  approximately  $1,651,000,  as compared to
$1,667,000 in 2001 and $1,678,000 in 2000.  Other operating  expenses  decreased
11.5% in 2002 to approximately $9,200,000, compared to $10,398,000 in 2001 which
represented a 50.0%  increase from  $6,931,000 in 2000.  Professional  and legal
fees incurred as a result of continued  litigation against the Company continues
to keep other operating expense high.

The substantial decrease in certain types of noninterest expenses were offset by
a write-down of approximately  $2,653,000 of unamortized goodwill related to 1st
Community Credit Corporation and Community Insurance Corp., both subsidiaries of
Community  Bank.  Management  deemed  the  write-down  necessary  based  on  its
assessment of each Company's  historical  operating income.  Management believes
that  the  decision  to  recognize   this  expense  was  prudent  under  current
conditions.  Moreover, the large size of the write-down is based on conservative
estimates  of each  subsidiaries  future cash flows and may obviate the need for
further adjustments,  thus leaving the subsidiaries better positioned for future
performance.

                                       38
<PAGE>

                              NONINTEREST EXPENSES

<TABLE>
<CAPTION>
                                                          Year Ended December 31,             Percent Change
                                                   ------------------------------------   ---------------------
                                                      2002         2001         2000      2002/2001    2001/2000
                                                   ----------  -----------  -----------   ---------    ---------
                                                          (Dollars in thousands)

<S>                                                <C>          <C>         <C>               <C>       <C>
Salaries and employee benefits..................   $   14,455   $   13,977  $    16,851        3.4%      (17.1)%
Occupancy expense...............................        2,276        2,191        2,059        3.9         6.4
Furniture and equipment expense.................        1,651        1,667        1,678       (1.0)       (0.7)
Director and committee fees.....................          444          436          617        1.8       (29.3)
Net loss on sale of other real estate owned.....        1,260           57          (11)   2,110.5       618.2
Net loss (gain) on disposal of assets...........         (215)          66          (24)    (425.8)      375.0
Loss on impairment of premises
     and equipment..............................            -            -          439          -      (100.0)
Amortization of intangibles-goodwill............            -          478          470     (100.0)        1.7
Amortization of intangibles-other...............           77           83           83       (7.2)          -
Loss on write-down of goodwill..................            -        2,653            -     (100.0)          -
Advertising.....................................           45           35           79       28.6       (55.7)
Insurance.......................................          832          279          298      198.2         0.6
Legal Fees......................................        1,962        1,853          785        5.9       136.1
Professional fees...............................        1,309        1,201          211        9.0       469.2
Supplies........................................          590          559          418        5.5        33.7
Postage.........................................          289          383          437      (24.5)      (12.4)
Telephone.......................................          598          657          787       (9.0)      (16.5)
Training and Education..........................           35           41           47      (14.6)      (12.8)
Holding cost on other real estate owned.........          253           61           24      314.8       154.2
Other...........................................        3,210        2,115        2,853       51.8       (25.9)
                                                   ----------   ----------  -----------
                                                   $   29,071   $   28,792  $    28,101        1.0         2.5
                                                   ==========   ==========  ===========
</TABLE>

Impact of Inflation and Changing Prices

A bank's asset and liability  structure is substantially  different from that of
an industrial company in that virtually all assets and liabilities of a bank are
monetary in nature.  Management  believes  the impact of  inflation on financial
results depends upon the Company's ability to react to changes in interest rates
and by such reaction to reduce the inflationary impact on performance.  Interest
rates do not necessarily  move in the same direction,  or at the same magnitude,
as the prices of other goods and services. As discussed  previously,  management
seeks  to  manage  the  relationship  between   interest-sensitive   assets  and
liabilities  in  order to  protect  against  wide  interest  rate  fluctuations,
including those resulting from inflation.

Various  information  shown  elsewhere  in  this  Report  should  assist  in  an
understanding  of how well  the  Company  is  positioned  to  react to  changing
interest  rates and  inflationary  trends.  In  particular,  the  summary of net
interest  income,  the maturity  distributions,  the composition of the loan and
security  portfolios  and the data on the  interest  sensitivity  of  loans  and
deposits should be considered.

                                       39

<PAGE>

                    MANAGEMENT'S STATEMENT OF RESPONSIBILITY
                            FOR FINANCIAL INFORMATION

                           COMMUNITY BANCSHARES, INC.

The management of Community Bancshares, Inc. is responsible for the preparation,
integrity,  and objectivity of the consolidated  financial  statements,  related
financial data, and other  information in this annual report.  The  consolidated
financial  statements  are prepared in  accordance  with  accounting  principles
generally   accepted  in  the  United  States  and  include   amounts  based  on
management's   best   estimates  and  judgment  where   appropriate.   Financial
information  appearing  throughout  this annual  report is  consistent  with the
consolidated financial statements.

In meeting  its  responsibility  both for the  integrity  and  fairness of these
statements and  information,  management  depends on the accounting  systems and
related  internal  accounting  controls that are designed to provide  reasonable
assurances that (i)  transactions are authorized and recorded in accordance with
established  procedures,  (ii)  assets  are  safeguarded,  and (iii)  proper and
reliable records are maintained.

The concept of reasonable assurance is based on the recognition that the cost of
internal control systems should not exceed the related benefits.  As an integral
part of internal control systems,  the Company maintains a professional staff of
internal  auditors  who  monitor  compliance  and  assess the  effectiveness  of
internal   control  systems  and  coordinate  audit  coverage  with  independent
certified public accountants.

The responsibility of the Company's  independent certified public accountants is
limited to an expression of their opinion as to the fairness of the consolidated
financial statements presented.  Their opinion is based on an audit conducted in
accordance  with  generally  accepted  auditing  standards as described in their
report.

The Board of Directors is responsible  for insuring that both management and the
independent    certified   public    accountants    fulfill   their   respective
responsibilities with regard to the consolidated financial statements. The Audit
Committee meets periodically with both management and the independent  certified
public accountants to assure that each is carrying out its responsibilities. The
independent  certified public accountants have full and free access to the Audit
Committee  and Board of  Directors  and may meet  with  them,  with and  without
management being present, to discuss auditing and financial reporting matters.

                                       40

<PAGE>

Item 8 - Financial Statements and Supplementary Data

The financial  statements and supplementary  data required by Regulation S-X and
by Item 302 of Regulation S-K are set forth in the pages listed below.

<TABLE>
<CAPTION>

Financial Statements                                                                                    Page(s)

<S>                                                                                                       <C>
Report of Independent Accountants.....................................................................    42

Consolidated Statements of Condition as of December 31, 2002 and 2001.................................    43

Consolidated Statements of Income for the years ended December 31, 2002, 2001
  and 2000............................................................................................    44-45

Consolidated Statements of Shareholders' Equity for the years ended
  December 31, 2002, 2001 and 2000....................................................................    46

Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001
  and 2000............................................................................................    47-48

Notes to Consolidated Financial Statements............................................................    49-87
</TABLE>

                                       41
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders Community Bancshares, Inc.

We  have  audited  the  accompanying  consolidated  statement  of  condition  of
Community  Bancshares,  Inc. and  subsidiaries  as of December 31, 2002, and the
related consolidated  statements of income,  shareholders' equity and cash flows
for the year then ended.  These financial  statements are the  responsibility of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of the Company
as of December 31, 2001 and 2000 were audited by other  auditors  whose  reports
dated April 5, 2002 and ,  respectively,  expressed  an  unqualified  opinion on
those  financial  statements.  As discussed in Note 22, the Company has restated
its 2001 and 2000  financial  statements  during the  current  year to  properly
recognize  impairment  of  premises  and  equipment,   unrecorded   liabilities,
valuation of  repossessed  assets,  and accounts  receivable in conformity  with
generally  accepted  accounting  principles.  The other auditors reported on the
2001 and 2000 financial statements before the restatement.

We conducted  our audit in  accordance  with U.S.  generally  accepted  auditing
standards.  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 audit provides a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,   the  consolidated  financial  position  of  Community
Bancshares,  Inc. and subsidiaries as of December 31, 2002, and the consolidated
results of their  operations  and their cash flows for the year then  ended,  in
conformity with U.S. generally accepted accounting principles.

We also  audited  the  adjustments  described  in Note 22 that were  applied  to
restate the financial statements for the years ended December 31, 2001 and 2000.
In our opinion, such adjustments are appropriate and have been properly applied.

/s/  Carr, Riggs & Ingram, LLC

Montgomery, Alabama

April 15, 2003

                                       42

<PAGE>

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CONDITION
                           DECEMBER 31, 2002 AND 2001
<TABLE>
<CAPTION>

                                                                                 2002                  2001
                                                                           ---------------       ---------------
Assets
<S>                                                                        <C>                   <C>
   Cash and due from banks...............................................  $     15,976,613      $     23,037,008
   Interest-bearing deposits in banks and federal funds sold. ...........        24,230,000            30,200,000
   Securities available for sale ........................................       123,901,469           121,679,303
   Loans (net of unearned income) .......................................       359,183,888           501,519,659
      Allowance for possible loan losses ................................         9,784,269             7,292,370
                                                                           ----------------      ----------------
      Net loans .........................................................       349,399,619           494,227,289
   Capitalized lease receivable..........................................         3,053,542                     -
   Premises and equipment, net ..........................................        25,435,491            37,717,650
   Accrued interest receivable...........................................         4,369,748             7,061,043
   Goodwill and other intangible assets, net.............................         2,713,389             2,629,682
   Other real estate owned ..............................................         7,676,442             4,287,273
   Other assets .........................................................        10,840,086             6,751,759
                                                                           ----------------      ----------------
      Total Assets.......................................................  $    567,596,399      $    727,591,007
                                                                           ================      ================

Liabilities And Shareholders' Equity
   Deposits:
      Noninterest-bearing................................................  $     52,920,683      $     67,695,615
      Interest-bearing...................................................       406,543,121           550,010,415
                                                                           ----------------      ----------------
         Total deposits .................................................       459,463,804           617,706,030
   Other short-term borrowings ..........................................         1,725,133             4,359,927
   Accrued interest payable..............................................         3,622,765             4,400,000
   FHLB long-term debt...................................................        38,000,000            38,000,000
   Capitalized lease obligations ........................................         4,058,169             5,766,076
   Other long-term debt .................................................         3,577,687             4,666,599
   Trust preferred securities ...........................................        10,000,000            10,000,000
   Other liabilities ....................................................         6,837,884             4,297,542
                                                                           ----------------      ----------------
      Total liabilities .................................................       527,285,442           689,196,174
Shareholders' equity
   Preferred stock (par value $.01 per share, 200,000 shares
      authorized, no shares issued)......................................                 -                     -
   Common stock (par value $.10 per share, 20,000,000
      shares authorized, 4,810,089 and 4,808,331 shares
      issued as of December 31, 2002 and 2001, respectively).............           481,009               480,833
   Additional paid in capital............................................        30,806,862            30,753,008
   Retained earnings ....................................................        11,023,962            10,119,764
   Treasury stock (23,803 and 20,803 shares, as of
        December 31, 2002 and 2001, respectively)  ......................          (441,768)             (396,768)
Unearned ESOP shares (148,972 and 174,267 shares
      as of December 31, 2002 and 2001, respectively) ...................        (1,999,858)           (2,317,902)
   Accumulated other comprehensive income (loss), net of taxes ..........           440,750              (244,102)
                                                                           ----------------      ----------------
      Total shareholders' equity ........................................        40,310,957            38,394,833
                                                                           ----------------      ----------------
      Total Liabilities and Shareholders' Equity.........................  $    567,596,399      $    727,591,007
                                                                           ================      ================
</TABLE>

           See accompanying notes to consolidated financial statements

                                       43
<PAGE>

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
<TABLE>
<CAPTION>


                                                                 2002               2001               2000
                                                          -----------------   ---------------    ----------------
 Interest Income
<S>                                                       <C>                 <C>                <C>
   Interest and fees on loans...........................  $      33,505,597   $    39,938,259    $     42,121,252
   Interest on investment securities:
   Taxable securities...................................          6,280,795         6,209,240           5,644,293
   Non taxable securities..............................             455,769           693,065             839,587
   Interest on federal funds sold.......................            386,050           603,072             234,432
   Other interest.......................................             29,148            43,851              65,576
                                                          -----------------   ---------------    ----------------
      Total interest income ............................         40,657,359        47,487,487          48,905,140
                                                          -----------------   ---------------    ----------------
Interest Expense
   Interest on deposits ................................         13,352,690        20,486,605          22,392,416
   Interest on short-term borrowings ...................             36,423            37,318             112,317
   FHLB long-term debt..................................          2,265,919         2,467,829           2,248,055
   Interest on capitalized lease obligations............            224,846           288,095             326,812
   Interest on trust preferred securities...............          1,189,936         1,121,213             839,791
   Interest on other long-term debt.....................             82,918           233,315             567,579
                                                          -----------------   ---------------    ----------------
Total interest expense..................................         17,152,732        24,634,375          26,486,970
                                                          -----------------   ---------------    ----------------
Net interest income. ...................................         23,504,627        22,853,112          22,418,170
   Provision for loan losses ...........................         10,032,545         6,095,629           7,573,160
                                                          -----------------   ---------------    ----------------
Net interest income after provision
   for loan losses......................................         13,472,082        16,757,483          14,845,010
Noninterest Income
   Service charges on deposits .........................          2,949,665         3,148,378           3,250,379
   Insurance commissions. ..............................          2,237,051         1,788,551           2,400,203
   Bank club dues ......................................            437,977           495,208             520,216
   Debt cancellation fees ..............................            233,142           391,104             597,850
   Other operating income ..............................            934,242         1,025,522           1,804,908
   Securities gains, net................................            653,442         1,283,945               4,587
                                                          -----------------   ---------------    ----------------
      Total noninterest income..........................          7,445,519         8,132,708           8,578,143
                                                          -----------------   ---------------    ----------------
Noninterest Expense
   Salaries and employee benefits ......................         14,454,500        13,977,467          16,850,976
   Occupancy expense ...................................          2,275,815         2,191,388           2,058,553
   Furniture and equipment expense......................          1,650,657         1,666,517           1,678,048
   Director and committee fees .........................            443,600           436,199             617,139
   Net loss (gain) on sale or write-down of other
      real estate owned.................................          1,260,312            56,576             (10,794)
   Net loss (gain) on disposal of assets................           (214,614)           66,482             (24,070)
   Other operating expenses ............................          9,200,270        10,397,769           6,930,711
                                                          -----------------   ---------------    ----------------
      Total noninterest expense.........................         29,070,540        28,792,398          28,100,563
                                                          -----------------   ---------------    ----------------
Loss from continuing operations
   BEFORE INCOME TAXES..................................         (8,152,939)       (3,902,207)         (4,677,410)
Applicable income taxes.................................          3,129,806         1,520,856           1,824,753
                                                          -----------------   ---------------    ----------------
      Loss from continuing operations...................         (5,023,133)       (2,381,351)         (2,852,657)
                                                          -----------------   ---------------    ----------------
</TABLE>

           See accompanying notes to consolidated financial statements

                                       44
<PAGE>

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
                  CONSOLIDATED STATEMENTS OF INCOME - CONTINUED
                  YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000

<TABLE>
<CAPTION>

                                                                 2002                2001               2000
                                                          -----------------   -----------------   -----------------
Discontinued Operations:
   Income (loss) from operations of divested branches
<S>                                 <C>                           <C>                 <C>                   <C>
      (includes gain on disposal of $8,071,985).........          8,504,062           1,489,591             (46,341)
   Applicable income taxes..............................         (2,576,731)           (531,124)           (120,277)
                                                          -----------------   -----------------   -----------------
   Net Income (Loss)....................................  $         904,198   $      (1,422,884)  $      (3,019,275)
                                                          =================   =================   =================

OTHER COMPREHENSIVE INCOME:
      Unrealized holding gain arising during period,
         net of income taxes of $1,432,798, $85,962
         and $1,368,797, respectively...................  $       2,149,197   $         128,944   $       2,053,194
      Less: Reclassification adjustment, net of income
         taxes of $261,377, $513,578
         and $1,835, respectively.......................           (392,065)           (770,367)             (2,752)
      Minimum pension liability, net of income taxes
         of  $624,626...................................         (1,072,280)                  -                   -
                                                          -----------------   -----------------   -----------------
Other Comprehensive Income (LOSS).......................            684,852            (641,423)          2,050,442
                                                          -----------------   -----------------   -----------------
COMPREHENSIVE INCOME (LOSS).............................  $       1,589,050   $      (2,064,307)  $        (968,833)
                                                          =================   =================   =================

Earnings (loss) per common share - Income from continuing operations:
      Basic.............................................  $           (1.08)  $           (0.52)  $           (0.64)
      Diluted...........................................  $           (1.08)  $           (0.52)  $           (0.61)

Earnings (loss) per common share - Net Income:
      Basic.............................................  $            0.19   $           (0.31)  $           (0.68)
      Diluted...........................................  $            0.19   $           (0.31)  $           (0.65)

Average number of shares outstanding:
      Basic.............................................          4,642,182           4,572,301           4,460,295
      Diluted...........................................          4,642,182           4,572,301           4,671,430

Dividends per share.....................................  $               -   $               -    $           0.75
</TABLE>


           See accompanying notes to consolidated financial statements

                                       45
<PAGE>

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
                 consolidated statements of shareholders' equity
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
<TABLE>
<CAPTION>

                                                                                   Accumulated
                                                                      Unearned        Other
                                Common      Capital      Retained       ESOP      Comprehensive  Treasury
                                 Stock      Surplus      Earnings      Shares         Income       Stock       Total
                               ---------  -----------  -----------  ------------  -------------  ---------  ------------
Balance at
<S>         <C> <C>            <C>        <C>          <C>          <C>           <C>            <C>        <C>
   December 31, 1999.......... $ 466,551  $29,411,513  $19,038,875  $ (2,788,442) $  (1,653,121) $       -  $ 44,475,376
Prior period adjustment (See Note 22
   in the Notes to Consolidated
   Financial Statements.......         -            -   (1,143,807)            -              -          -    (1,143,807)
Net loss - 2000...............         -            -   (3,019,275)            -              -          -    (3,019,275)
Other comprehensive
   Income, net of tax and
   reclassification adjustments:
     Net change in unrealized
       gains (losses) on securities    -            -            -             -      2,050,442          -     2,050,442
Cash dividends: common .......         -            -   (3,333,145)            -              -          -    (3,333,145)
Stock issued in lieu of cash
   paid for directors' fees
   at $23.50 .................       948      221,856            -             -              -          -       222,804
Release of ESOP shares........         -      171,552            -       214,440              -          -       385,992
Purchase of treasury stock ...         -            -            -             -              -   (396,768)     (396,768)
                               ---------  -----------  -----------  ------------  -------------  ---------  ------------
Balance at
   December 31, 2000 .........   467,499   29,804,921   11,542,648    (2,574,002)       397,321   (396,768)   39,241,619
Net loss  - 2001 .............         -            -   (1,422,884)            -              -          -    (1,422,884)
Other comprehensive
   Income, net of tax and
   reclassification adjustments:
     Net change in unrealized
       gains (losses) on securities    -            -            -             -       (641,423)         -      (641,423)
Stock options exercised.......    32,956    3,708,944            -             -              -          -     3,741,900
Stock used by optionees to
   purchase options when fair
   value was $18 per share....   (20,788)  (3,721,112)           -             -              -          -    (3,741,900)
Tax benefit on stock options..         -      751,556                                                            751,556
Stock issued in lieu of cash
   paid for directors'
    fees at $18...............     1,166      208,699            -             -              -          -       209,865
Release of ESOP shares .......         -            -            -       256,100              -          -       256,100
                               ---------  -----------  -----------  ------------  -------------  ---------  ------------
Balance at
   December 31, 2001 .........   480,833   30,753,008   10,119,764    (2,317,902)     (244,102)   (396,768)   38,394,833
Net income - 2002 ............         -            -      904,198             -              -          -       904,198
Other comprehensive
   income, net of tax and
   reclassification
   adjustments:
     Additional  pension liability     -            -            -             -     (1,072,280)         -    (1,072,280)
     Net change in unrealized
       gains (losses) on securities    -            -            -             -      1,757,132          -     1,757,132
Treasury  stock acquired  through
   debts previously contracted         -            -            -             -              -    (45,000)      (45,000)
Reclassification adjustment for
   inventory of unreleased shares      -      (65,094)           -        65,094              -          -             -
Common stock retired..........    (1,792)           -            -             -              -          -        (1,792)
Stock issued in lieu of cash
   paid for directors' fees
   at $18 ....................     1,968      194,833            -             -              -          -       196,801
Release of ESOP shares .......         -      (75,885)           -       252,950              -          -       177,065
                               ---------  -----------  -----------  ------------  -------------  ---------  ------------
Balance  At
   December 31, 2002.......... $ 481,009  $30,806,862  $11,023,962  $ (1,999,858) $     440,750  $(441,768) $ 40,310,957
                               =========  ===========  ===========  ============  =============  ========== ============
</TABLE>

           See accompanying notes to consolidated financial statements

                                       46
<PAGE>

<TABLE>
<CAPTION>

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
                                                                 2002                2001                2000
                                                           ----------------   -----------------   -----------------
Cash Flows From Operating Activities
<S>                                                        <C>                <C>                 <C>
   Net income (loss)....................................   $        904,198   $      (1,422,884)  $      (3,019,275)
   Adjustments to reconcile net income (loss) to net cash
      provided by operating activities:
   Provision for loan losses ...........................         10,107,671           6,313,940           9,289,362
   Provision for depreciation and amortization .........          1,962,459           2,572,472           3,447,883
   Amortization of investment security premiums
      and accretion of discounts. ......................            350,461             159,957             149,261
   Deferred tax benefit.................................           (573,197)           (914,941)         (2,198,860)
   Loss on write-down of goodwill ......................                  -           2,652,620                   -
   Realized investment security gains. .................           (653,442)         (1,283,945)             (4,587)
   Gain on sale of branches.............................         (8,071,985)
   Loss on sale of premises and equipment ..............           (214,614)             66,482             144,398
   Loss on impairment of premises and equipment.........                  -                   -             823,648
   Net loss or write-down on other real estate owned....          1,260,312
  (Increase) Decrease in accrued interest receivable....          2,038,029           1,371,278          (1,895,207)
   Increase (Decrease) in accrued interest payable......           (121,194)           (975,725)          1,632,119
   Other ...............................................         (5,195,659)          1,225,955          (2,157,701)
                                                           ----------------   -----------------   -----------------
      Net cash provided by operating
         activities ....................................          1,793,039           9,765,209           6,211,041
                                                           ----------------   -----------------   -----------------
 Cash Flows From Investing Activities
   Proceeds from sales, calls and pay downs of securities
      available for sale................................         88,623,292          86,418,413          16,229,953
   Proceeds from maturity of securities
      available for sale ...............................         15,000,000           2,500,000          25,210,217
   Purchase of securities available for sale  ..........       (102,613,924)       (108,972,949)        (42,889,985)
   Cash disbursed in settlement of branch divestitures..        (32,054,765)                  -                   -
   Net decrease (increase) in loans to customers .......         37,327,124          16,968,554         (34,374,869)
   Proceeds from sale of premises and equipment. .......          1,561,134             108,075             162,914
   Capital expenditures ................................           (846,654)         (2,612,433)         (5,986,652)
   Net proceeds from sale of other real estate .........            982,581           1,292,223             853,961
                                                           ----------------   -----------------   -----------------
      Net cash used in investing activities ............          7,978,788          (4,298,117)        (40,794,461)
                                                           ----------------   -----------------   -----------------
Cash Flows From Financing Activities
   Net increase (decrease) in demand deposits,
      NOW accounts, savings and time open deposit accounts       (2,598,896)         21,905,506          (9,214,288)
   Net (decrease) increase in certificates of deposit ..        (16,563,095)         (5,100,244)         36,854,261
   Net increase (decrease) in short-term borrowings ....         (2,634,794)          2,094,696            (228,611)
   Decrease in FHLB long-term debt......................                  -                   -          (2,000,000)
   Net (decrease) increase in capitalized lease obligations         (93,589)            (84,149)          5,850,225
   Repayment of long-term debt .........................           (911,848)           (752,504)           (961,958)
   Issuance of trust preferred securities...............                  -                   -          10,000,000
   Issuance of common stock. ...........................                  -                   -             222,804
   Purchase of treasury stock ..........................                                      -            (396,768)
   Cash dividends. .....................................                  -                   -          (3,333,145)
                                                           ----------------   -----------------   -----------------
      Net cash provided by (used in) financing activities       (22,802,222)         18,063,305          36,792,520
                                                           ----------------   -----------------   -----------------
Net increase (decrease) in cash and
   cash equivalents.....................................        (13,030,395)         23,530,397           2,209,100
Cash and cash equivalents, beginning
      of year...........................................         53,237,008          29,706,611          27,497,511
                                                           ----------------   -----------------   -----------------
Cash and cash equivalents, end of year..................  $      40,206,613   $      53,237,008   $      29,706,611
                                                          =================   =================   =================
</TABLE>

                                       47
<PAGE>

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
               CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

<TABLE>
<CAPTION>

                                                                  2002               2001                2000
                                                           ----------------   -----------------   -----------------

Supplemental cash flow disclosures:
Cash paid for:
<S>                                                       <C>                 <C>                  <C>
   Interest.............................................  $      17,929,967   $      32,563,802    $     35,488,410
   Income taxes.........................................          2,266,517          (1,082,900)            859,978

Schedule of non-cash investing and financing activities:
   Foreclosure of other real estate owned...............   $      4,867,504   $       4,411,029    $      1,824,857
   Foreclosure of other assets..........................   $      3,215,025   $       3,777,599    $      2,975,936
   Loan charge-offs - net of recoveries.................   $      6,863,579   $       6,129,000    $      4,785,060
</TABLE>

           See accompanying notes to consolidated financial statements

              [The remainder of this page intentionally left blank]

                                       48

<PAGE>

                   COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis  of  Presentation:  The  consolidated  financial  statements  include  the
accounts of Community  Bancshares,  Inc. and its wholly owned  subsidiaries (the
"Company"),  Community Bank,  Community  Appraisals,  Inc.,  Community Insurance
Corp. and 1st Community  Credit  Corporation  (collectively,  the "Bank.").  All
significant intercompany balances and transactions have been eliminated.

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

Cash and  Cash  Equivalents:  The  Company  considers  cash  and  highly  liquid
investments  with  maturities of three months or less when purchased as cash and
cash  equivalents.  Cash and cash equivalents  consist primarily of cash and due
from banks, interest-bearing deposits in banks and federal funds sold.

Investment   Securities  and  Securities  Available  for  Sale:  Securities  are
classified as either held to maturity or available for sale. Held to maturity or
investment  securities are  securities for which  management has the ability and
intent to hold on a long-term  basis or until  maturity.  These  securities  are
carried at amortized cost, adjusted for amortization of premiums,  and accretion
of discount to the earlier of the maturity or call date.

Securities available for sale represent those securities intended to be held for
an indefinite period of time,  including  securities that management  intends to
use as part of its asset/liability  strategy, or that may be sold in response to
changes in interest  rates,  changes in  prepayment  risk,  the need to increase
regulatory capital or other similar factors.  Securities  available for sale are
recorded at market value with unrealized gains and losses net of any tax effect,
added or deducted directly from shareholders' equity.

Loans:  Loans are stated at face value, net of unearned income.  Interest income
on  loans  is  recognized  under  the  "interest"   method  except  for  certain
installment  loans where interest income is recognized  under the "Rule of 78's"
(sum of the months digits) method, which does not produce results  significantly
different from the "interest"  method.  Nonrefundable  fees and costs associated
with  originating or acquiring loans are recognized under the interest method as
a yield adjustment over the life of the corresponding loan.

Allowance  for Loan  Losses:  A loan is  considered  impaired,  based on current
information  and events,  if it is probable  that the Company  will be unable to
collect the  scheduled  payments of principal or interest  when due according to
the contractual terms of the loan agreement. Uncollateralized loans are measured
for  impairment  based  on the  present  value of  expected  future  cash  flows
discounted   at   the   historical    effective   interest   rate,   while   all
collateral-dependent  loans are measured for impairment  based on the fair value
of the collateral. Smaller balance homogeneous loans that consist of residential
mortgages  and  consumer  loans are  evaluated  collectively  and  reserves  are
established based on historical loss experience.

Management's  ongoing evaluation of the adequacy of the allowance also considers
unimpaired  loans  and  takes  into  consideration  the  Bank's  past  loan loss
experience  for pools of  homogeneous  loans,  known and  inherent  risks in the
portfolio,  adverse  situations that may affect the borrowers' ability to repay,
and an analysis of current economic  conditions.  While management believes that
it  has  established  the  allowance  in  accordance  with  generally   accepted
accounting principles and has taken into account the views of its regulators and
the current economic  environment,  there can be no assurance that in the future
the Bank's  regulators  or its  economic  environment  will not require  further
increases in, or re-allocation  of the allowance.

The allowance for loan losses is established  through charges to earnings in the
form of a provision  for loan losses.  Increases  and decreases in the allowance
due to changes in the  measurement  of the  impaired  loans are  included in the

                                       49

<PAGE>
             COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

provision for loan losses.  When a loan or portion of a loan is determined to be
uncollectible, the portion deemed uncollectible is charged against the allowance
and subsequent recoveries, if any, are credited to the allowance.

Income Recognition on Impaired and Nonaccrual Loans:  Loans,  including impaired
loans,  are  generally  classified  as  nonaccrual  if they  are  past due as to
maturity or payment of  principal or interest for a period of more than 90 days,
unless such loans are well collateralized and in the process of collection. If a
loan or a portion of a loan is  classified  as doubtful or is partially  charged
off, the loan is generally classified as nonaccrual. At management's discretion,
loans  that are on a  current  payment  status or past due less than 90 days may
also be  classified  as  nonaccrual  if repayment  in full of  principal  and/or
interest is in doubt.

Loans  continue  to be  classified  as impaired  unless  they are brought  fully
current and the  collection  of scheduled  interest and  principal is considered
probable.

While a loan is classified as nonaccrual  and the future  collectibility  of the
recorded  loan balance is doubtful,  collections  of interest and  principal are
generally applied as a reduction to principal outstanding, except in the case of
loans with scheduled amortizations where the payment is generally applied to the
oldest payment due. When the future  collectibility of the recorded loan balance
is expected,  interest  income may be  recognized  on a cash basis.  In the case
where a nonaccrual loan has been partially charged off,  recognition of interest
on a cash  basis is limited to that  which  would  have been  recognized  on the
recorded loan balance at the  contractual  interest rate.  Receipts in excess of
that amount are recorded as  recoveries  to the  allowance for loan losses until
prior charge offs have been fully  recovered.  Interest  income  recognized on a
cash basis was immaterial for the years ended December 31, 2002, 2001 and 2000.

Premises  and  Equipment:  Premises  and  equipment  are  stated  at  cost  less
accumulated  depreciation and amortization.  Depreciation is computed  generally
using the  straight-line  method over the estimated  useful lives of the related
assets.  Leasehold  improvements  are amortized over the terms of the respective
leases or the estimated useful lives of the improvements,  whichever is shorter.
Estimated  useful  lives range from five to forty years for bank  buildings  and
leasehold improvements and three to ten years for furniture and equipment.

Expenditures  for  maintenance  and  repairs  are  charged  against  earnings as
incurred.  Costs of major  additions  and  improvements  are  capitalized.  Upon
disposition or retirement of property, the asset account is relieved of the cost
of the item and the  allowance  for  depreciation  is charged  with  accumulated
depreciation. Any resulting gain or loss is reflected in current income.

Other Real Estate Owned:  Other real estate owned includes real estate  acquired
through  foreclosure  or deed taken in lieu of  foreclosure.  These  amounts are
recorded at the lower of the loan  balance  prior to  foreclosure,  plus certain
costs incurred for  improvements  to the property  ("cost") or market value less
estimated  costs to sell the property.  Any  write-down  from the cost to market
value  required at the time of  foreclosure is charged to the allowance for loan
losses.  Subsequent  write-downs  and gains or losses  recognized on the sale of
these properties are included in noninterest income or expense.

Goodwill and Other  Intangible  Assets:  Goodwill  represents  the excess of the
costs of an acquisition  over the fair value of the net assets  acquired.  Other
intangible assets represent  purchased assets that also lack physical substance,
but can be  distinguished  from goodwill  because of  contractual or other legal
rights or because the asset is capable of being sold or exchanged  either on its
own or in combination with a related contract,  asset, or liability.  On January
1, 2002,  the Company  adopted  SFAS No.  142,  "Goodwill  and Other  Intangible
Assets".  Under the  provisions of SFAS No. 142,  goodwill and other  intangible
assets with indefinite useful lives will no longer be amortized, but instead are
tested for  impairment  as of the date of adoption  and at least  annually.  The
standard  also  requires  that  intangible  assets with finite  useful  lives be
amortized  over  their  respective  estimated  useful  lives to their  estimated
residual values, and be reviewed for impairment if a triggering event occurs, as
described by SFAS No. 144.  Intangible assets that have finite lives continue to
be amortized over their  estimated  useful lives and also continue to be subject
to impairment testing.  All of the Company's other intangible assets have finite
lives and are amortized on a straight-line basis over a 25 year period.

                                       50

<PAGE>
             COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Prior to the adoption of SFAS No. 142, the Company's goodwill was amortized over
a period up to 25 years using the straight-line method or an accelerated method,
as  applicable.  Note 8 includes a summary of the  Company's  goodwill and other
intangible  assets as well as further detail about the impact of the adoption of
SFAS No.142.

Earnings  Per Common  Share:  Basic  earnings  per common  share are computed by
dividing income available to common  shareholders by the weighted average number
of common  shares  outstanding  during the period.  Diluted  earnings per common
share are computed by dividing net income  available to common  shareholders  by
the  weighted  average  number of shares  outstanding  during the period and the
assumed conversions of potentially dilutive common stock equivalents, if any.

Long-Lived   Assets:   The  Company  reviews   long-lived   assets  and  certain
identifiable   intangibles   for  impairment   whenever  events  or  changes  in
circumstances  indicate  that  the  carrying  amount  of the  asset  may  not be
recoverable.  If the future  undiscounted cash flows expected to result from the
use of the asset and its eventual disposition are less than the carrying amounts
of the asset,  an impairment loss is recognized.  Long-lived  assets and certain
intangibles  to be disposed of are  reported at the lower of carrying  amount or
fair value less cost to sell.

Income Taxes:  The Company uses the asset and liability method of accounting for
income  taxes.  Under the asset and  liability  method,  deferred tax assets and
liabilities are recorded at currently enacted tax rates applicable to the period
in which assets or liabilities are expected to be realized or settled.  Deferred
tax assets and  liabilities  are adjusted to reflect  changes in  statutory  tax
rates resulting in income adjustments in the period such changes are enacted.

Credit Related  Financial  Instruments:  In the ordinary  course of business the
Company has entered into off balance sheet financial  instruments  consisting of
commitments  to extend  credit,  commitments  under  credit  card  arrangements,
commercial  letters of credit and  standby  letters  of credit.  Such  financial
instruments are recorded in the financial statements when they are funded.

Debt  Cancellation  Contracts:  The  Company  began  issuing  debt  cancellation
contracts  on certain  loans to  customers  as of October 1, 1995.  The contract
represents  an agreement by the Company to cancel the debt of the borrower  upon
said borrower's death. The Company charges fees equivalent to that authorized by
the state  banking  authorities  and  establishes a reserve  account,  from fees
collected,  to  cover  potential  claims.  The  reserve  for  debt  cancellation
contracts  totaled  $231,764  and  $142,825  at  December  31,  2002  and  2001,
respectively.

Stock-Based   Compensation:   SFAS  No.   123,   "Accounting   for   Stock-Based
Compensation,"  defines a fair value based method of accounting  for an employee
stock  option or  similar  equity  instrument.  However,  SFAS No. 123 allows an
entity to  continue  to measure  compensation  costs for those  plans  using the
intrinsic  value based method of  accounting  prescribed  by APB Opinion No. 25,
Accounting for Stock issued to Employees.  Entities  electing to remain with the
accounting in Opinion No. 25 must make pro forma  disclosures  of net income and
earnings  per share as if the fair value based method of  accounting  defined in
SFAS No. 123 had been applied.  Under the fair value based method,  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.  Under
the intrinsic value based method,  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.  The  Company  has
elected to  continue to measure  compensation  cost for its stock  option  plans
under the  provisions  in APB  Opinion 25 and has  calculated  the fair value of
outstanding  options  for  purposes  of  pro  forma  disclosure   utilizing  the
Black-Scholes method.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded  options  that have no vesting  restrictions  and are fully
transferable.  In addition,  option valuation models require the input of highly
subjective  assumptions  including the expected stock price volatility.  Because
the  Company's  employee  stock  options  have   characteristics   significantly
different from those of traded  options,  and because  changes in the subjective
input  assumptions can materially  affect the fair value estimate,  the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.

                                       51

<PAGE>
             COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The  Company's  options  granted  in  2002,  2001  and  2000  vest  immediately;
therefore,  for  purposes  of pro forma  disclosure,  the  compensation  expense
related to these options has been recognized in the year granted.

The Company's actual pro forma information follows:

<TABLE>
<CAPTION>
                                                                              Year Ended December 31

                                                                      2002              2001             2000
                                                               -----------------  ---------------  ----------------
Net Income:
<S>                                                            <C>                <C>              <C>
     As reported                                               $         904,198  $    (1,422,884) $     (3,019,275)
Deducts:
     Total stock-based employee compensation expense
     determined under fair value based method for all
     awards, net of tax                                                  406,164          382,536            39,138
                                                               -----------------  ---------------  ----------------

Pro forma net income (loss)                                    $         498,034  $    (1,805,420) $     (3,058,413)
                                                               =================  ===============  ================

Basic earnings (loss) per share:
     As reported                                                            0.19            (0.31)           (0.68)
     Pro forma                                                              0.11            (0.39)           (0.69)
Diluted earnings (loss) per share
     As reported                                                            0.19            (0.31)           (0.65)
     Pro forma                                                              0.11            (0.39)           (0.65)
</TABLE>

The fair value of each option  grant is estimated on the date of the grant using
the  Black-Scholes  option-pricing  model  with the  following  weighted-average
assumptions used for grants in 2002, 2001 and 2000, respectively: dividend yield
0%, 2.50% and 2.78%;  expected  volatility of .232, .257 and .250 for 2002, 2001
and 2000;  risk-free interest rates of 2.63%, 4.40% and 5.08% for 2002, 2001 and
2000,  respectively;  and expected lives of 5 years.  The weighted  average fair
values of options  granted  during  2002,  2001 and 2000 were  $1.81,  $2.30 and
$4.12, respectively.

Advertising Costs: Advertising costs are expensed as incurred.

Reclassification:  Certain  amounts in 2001 and 2000 have been  reclassified  to
conform with the 2002 presentation.

Recently Issued Accounting Standards

On June 29, 2001, the Financial  Accounting Standards Board issued SFAS No. 142,
"Intangible  Assets".  This  statement is effective  for fiscal years  beginning
after  December 15, 2001.  SFAS No. 142 requires  that  goodwill and  indefinite
lived intangible assets no longer be amortized, that goodwill will be tested for
impairment  at  least  annually,  that  intangible  assets  deemed  to  have  an
indefinite  life will be  tested  for  impairment  at least  annually,  and that
amortization  period of  intangible  assets with finite  lives will no longer be
limited to forty years.

In June 2001,  the  Financial  Accounting  Standards  Board issued SFAS No. 143,
"Accounting for Asset Retirement  Obligations."  This Statement is effective for
fiscal years beginning after June 15, 2002, with early adoption permitted.  SFAS
No. 143 addresses the recognition and measurement of obligations associated with
the  retirement  of  tangible  long-lived  assets  resulting  from  acquisition,
construction,  development,  or the normal operation of a long-lived asset. SFAS
No.  143  requires  that the fair  value of an asset  retirement  obligation  be
recognized  as a  liability  in the  period in which it is  incurred.  The asset
retirement obligation is to be capitalized as part of the carrying amount of the
long-lived asset and the expense is to be recognized over the useful life of the
long-lived asset. The Standard is effective for the

                                       52

<PAGE>
             COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Company  beginning  January 1, 2003,  and its adoption is not expected to have a
material impact on results of operations, financial position, or liquidity.

In August 2001,  the FASB issued SFAS No. 144,  Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement addresses financial accounting and
reporting for the  impairment or disposal of long-lived  assets.  This statement
supersedes  FASB Statement No. 121,  Accounting for the Impairment of Long-Lived
Assets and for  Long-Lived  Assets to Be  Disposed  Of, and the  accounting  and
reporting   provisions  of  APB  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,  for
the disposal of a segment of a business (as previously defined in that opinion).
This statement also amends  Accounting  Research  Bulletin No. 51,  Consolidated
Financial  Statements,  to  eliminate  the  exception  to  consolidation  for  a
subsidiary  for  which  control  is likely to be  temporary.  The major  changes
resulting from this statement relate to the establishment of a single method for
the  recognition of impairment  losses on long-lived  assets to be held and used
whether from  discontinuance of a business segment or otherwise.  This statement
is effective for financial  statements  issued for fiscal years  beginning after
December 15, 2001. The adoption of this statement did not have a material effect
on the Company's consolidated financial statements.

In April 2002,  the Financial  Accounting  Standards  Board issued SFAS No. 145,
"Rescission of FASB  Statements No. 4, 44 and 64 amendment of FASB Statement No.
13 and  Technical  Corrections".  In April  2002,  the FASB issued SFAS No. 145,
which  updates,   clarifies,   and  simplifies   certain   existing   accounting
pronouncements  beginning  at  various  dates in 2002 and  2003.  The  statement
rescinds SFAS No. 4 and SFAS No. 64, which required net gains or losses from the
extinguishment  of debt to be classified as an extraordinary  item in the income
statement.  These gains and losses will now be classified as extraordinary  only
if they meet the criteria for such classification as outlined in APB Opinion 30,
which  allows  for  extraordinary  treatment  if the item is  material  and both
unusual and  infrequent  in nature.  The  statement  also  rescinds  SFAS No. 44
related to the accounting  for  intangible  assets for motor carriers and amends
SFAS No. 13 to require certain lease  modifications  that have economic  effects
similar to sale-leaseback  transactions to be accounted for as such. The changes
required by SFAS No. 145 are not  expected to have a material  impact on results
of operations, financial position, or liquidity.

In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial
Institutions, an amendment of SFAS No. 72 and 144 and FASB Interpretation No. 9.
Except for  transactions  between two or more mutual  enterprises,  SFAS No. 147
removes acquisitions of financial institutions from the scope of SFAS No. 72 and
Interpretation 9 and requires those  transactions be accounted for in accordance
with SFAS No. 141 and 142.  SFAS No. 147 also  amends SFAS No. 144 to include in
its  scope  long-term  customer-relationship   intangible  assets  of  financial
institutions such as depositor and borrower  relationship  intangible assets and
credit cardholder intangible assets.  Consequently,  those intangible assets are
subject to the same  undiscounted cash flow  recoverability  test and impairment
loss recognition and measurement provisions that SFAS No. 144 requires for other
long-lived  assets  that  are held  and  used.  The  provisions  of SFAS No.  72
requiring the intangible  recognition and subsequent  amortization of any excess
fair value of net  liabilities  assumed in an acquisition  will no longer apply.
SFAS No. 147 is  essentially  effective as of October 1, 2002. As a result,  the
Company  adopted SFAS No. 147 on October 1, 2002, with no material impact on the
Company's consolidated financial statements.

In December  2002,  the FASB issued SFAS No.  148,  Accounting  for  Stock-Based
Compensation - Transition and Disclosure.  This statement amends SFAS No. 123 to
provide alternative methods of transition for an entity that voluntarily changes
to  the  fair  value  based  method  of  accounting  for  stock-based   employee
compensation.  It amends the disclosure  provisions of that Statement to require
prominent  disclosure  about the effects on  reported  net income of an entity's
accounting policy decisions with respect to stock-based  employee  compensation.
This Statement also amends APB Opinion No. 28 to require  disclosure about those
effects in interim  financial  information.  This  Statement  is  effective  for
financial  statements  for fiscal years  ending after  December 15, 2002 and for
financial reports containing  condensed financial statements for interim periods
beginning  after  December 15, 2002. The adoption of SFAS No. 148 did not have a
material impact on the Company's consolidated financial statements.

                                       53

<PAGE>
             COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On November 25,  2002,  the FASB issued FASB  Interpretation  No. 45 ("FIN 45"),
guarantor's  accounting and disclosure  requirement  for  guarantees,  including
indirect  guarantees  of  indebtedness  of others,  and  interpretation  of FASB
Statements No. 5, 57 and 107 and rescission of FASB  Interpretation  No. 34. FIN
45 clarifies  the  requirements  of SFAS No. 5,  Accounting  for  Contingencies,
relating to the  guarantors  accounting  for, and disclosure of, the issuance of
certain types of guarantees. The disclosure provisions of the Interpretation are
effective for financial  statements  that end after December 15, 2002.  However,
the  provisions  for initial  recognition  and  measurement  are  effective on a
prospective  basis for guarantees that are issued or modified after December 31,
2002,   irrespective  of  the  guarantor's  year  end.  See  Note  6,  Financial
Instruments with  Off-Balance-Sheet  Risks, and Note 21, Fair Value of Financial
Instruments in the Notes to Consolidated  Financial  Statements,  for additional
discussion of the Company's  financial  guarantees as of December 31, 2002.  The
initial  adoption  of this  standard  did not have an  impact  on the  financial
condition or results of operations.  Management  does not believe the provisions
of this  standard  will  have a  material  impact on  future  operations  of the
Company.

NOTE 2 - INVESTMENT SECURITIES

At  December  31,  2002  and  2001,  the  Company's  investment  securities  are
categorized  as  available  for sale and, as a result,  are stated at fair value
based  generally on quoted market prices.  Unrealized  holding gains and losses,
net of applicable  deferred taxes,  are included as a component of shareholders'
equity, (accumulated other comprehensive income) until realized.

The  amortized  cost and  market  values of  securities  available  for sale are
summarized as follows:

<TABLE>
<CAPTION>
                                                                        Gross          Gross         Estimated
                                                       Amortized     Unrealized     Unrealized         Fair
                                                         Cost           Gains         Losses           Value
                                                    --------------  -------------   -----------   ---------------
As of December 31, 2002:
   U. S. Government And Agency
<S>                                                 <C>             <C>             <C>           <C>
      securities..................................  $    6,330,000  $     192,832   $         -   $     6,522,832
   State and municipal securities ................       7,176,984         44,616       165,962         7,055,638
   Mortgage-backed securities. ...................     105,084,669      2,511,395        61,165       107,534,899
   Federal Home Loan Bank Stock...................       2,788,100              -             -         2,788,100
                                                    --------------  -------------   -----------   ---------------
   Total .........................................  $  121,379,753  $   2,748,843   $   227,127   $   123,901,469
                                                    ==============  =============   ===========   ===============

As of December 31, 2001:

   U. S. Government and Agency securities.........  $   16,854,383  $      99,368   $     5,234   $    16,948,517
   State and municipal securities ................      11,512,284        220,731        49,372        11,683,643
   Mortgage-backed securities. ...................      91,319,473        166,360       838,690        90,647,143
   Federal Home Loan Bank Stock...................       2,400,000              -             -         2,400,000
                                                    --------------  -------------   -----------   ---------------
   Total .........................................  $  122,086,140  $     486,459   $   893,296   $   121,679,303
                                                    ==============  =============   ===========   ===============
</TABLE>

Securities  with a carrying of $71,663,190  and $87,514,174 at December 31, 2002
and 2001  respectively,  were  pledged  for  various  purposes  as  required  or
permitted by law.

                                       54

<PAGE>

             COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The amortized cost and market values of debt  securities at December 31, 2002 by
contractual maturity are as follows. Expected maturities 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 in one year or less......................................   $           439    $           445
Due after one year through five years........................               180                180
Due after five years through ten years.......................             6,483              6,686
Due after ten years..........................................           111,489            113,802
Other securities.............................................             2,788              2,788
                                                                ---------------    ---------------
Total........................................................   $       121,379    $       123,901
                                                                ===============    ===============
</TABLE>

Mortgage-backed  securities have been included in the maturity tables based upon
the guaranteed payoff date of each security.

Gross realized gains and losses on available for sale securities for each of the
years ended December 31, 2002, 2001 and 2000 were as follows:

<TABLE>
<CAPTION>

                                                                           2002          2001           2000
                                                                      -------------  -------------  ------------
<S>                                                                   <C>            <C>            <C>
Gross realized gains...............................................   $     670,565  $   1,283,945  $     45,362
Gross realized losses..............................................          17,123              -        40,775
</TABLE>

An investment  security  issued by Hartselle  Utilities is carried at a value of
$4,680,547, which exceeds 10% of total stockholder's equity.

NOTE 3 - LOANS

<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                                 2002                  2001
                                                                          ------------------    ------------------
<S>                                                                       <C>                   <C>
Commercial, financial and agricultural.................................   $      101,841,274    $      146,209,839
Real estate - construction.............................................            2,016,539             3,126,592
Real estate - mortgage.................................................          174,774,616           233,216,469
Consumer...............................................................           80,596,466           119,030,750
Unearned income........................................................              (45,007)              (63,991)
                                                                          ------------------    ------------------
Total loans............................................................          359,183,888           501,519,659
Allowance for loan losses..............................................           (9,784,269)           (7,292,370)
Net loans..............................................................   $      349,399,619    $      494,227,289
                                                                          ==================    ==================
</TABLE>

The  Company's  lending  is  concentrated  in North  and  West-Central  Alabama.
Repayment of these loans is in part  dependent  upon the economic  conditions in
these  regions of the state.  Management  does not  believe  the loan  portfolio
contains  concentrations of credits either geographically or by borrower,  which
would expose the Company to unacceptable amounts of risk. Management continually
evaluates the potential risk in all segments of the portfolio in determining the
adequacy of the allowance for loan losses.  Other than  concentrations of credit
risk in commercial,  residential and construction real estate loans,  management
is not aware of any significant concentrations.

The Company evaluates each customer's credit worthiness on a case-by-case basis.
The amount of  collateral  obtained,  if deemed  necessary  by the Company  upon
extension  of  credit,  is  based  on  management's  credit  evaluation  of  the

                                       55
<PAGE>

             COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

counterparty.  Collateral  held  varies  but may  include  accounts  receivable,
inventory,  premises  and  equipment,  residential  houses and  income-producing
commercial  properties.   No  additional  credit  risk  exposure,   relating  to
outstanding loan balances,  is believed to exist beyond the amounts shown in the
consolidated statement of condition at December 31, 2002.

In the normal  course of  business,  loans are made to officers,  directors  and
principal shareholders and to Companies in which they own significant interest.

Loan  activity  to such  parties  during the year ended  December  31,  2002 are
summarized as follows:

<TABLE>
<CAPTION>
                             Balance                                                Balance
                             1/1/02           Additions          Reductions         12/31/02
                          -----------        -----------        ------------      -----------
<S>                       <C>                <C>                <C>               <C>
                          $16,179,032        $ 1,596,182        $(4,327,530)      $13,447,684
                          ===========        ===========        ===========       ===========
</TABLE>

At December 31, 2002 and 2001,  the recorded  investment  in impaired  loans was
approximately  $11,916,157 and $6,186,216,  respectively.  The average  recorded
investment in impaired loans was approximately $9,051,187 and $3,555,108 for the
years ended  December 31, 2002 and 2001,  respectively.  The impaired loans were
measured for impairment  based primarily on the value of underlying  collateral.
The related allowance allocated to impaired loans for 2002 and 2001 was $969,123
and  $726,895,  respectively.  At  December  31,  2002,  impaired  loans with an
associated allowance totaled $1,782,445, while $10,133,712 of impaired loans had
no specific  allowance.  At December 31, 2001, impaired loans with an associated
allowance totaled $5,070,769, while $1,115,447 of impaired loans had no specific
allowance.  The amount of  interest  recognized  on  impaired  loans  during the
portion of the year that they were impaired was not  significant for either 2002
or 2001.

The  Company  uses  several  factors  in  determining  if a  loan  is  impaired.
Generally,  nonaccrual  loans  as well as loans  classified  as  substandard  by
internal  loan  review  are  reviewed  for   impairment.   The  internal   asset
classification  procedures  include a thorough  review of significant  loans and
lending  relationships,  and include the accumulation of related data. This data
includes loan payment status,  borrower's  financial data,  collateral value and
borrower's operating factors such as cash flows, operating income or loss.

NOTE 4 - ALLOWANCE FOR LOAN LOSSES

Changes in the  allowance  for loan losses for each of the years ended  December
31, 2002, 2001 and 2000, were as follows:

<TABLE>
<CAPTION>
                                                                  2002             2001                2000
                                                            ---------------  ----------------    ---------------
<S>              <C>                                        <C>               <C>                <C>
Balance, January 1.......................................   $     7,292,370   $     7,107,430    $     2,603,128
Discontinued operations..................................          (752,193)                -                  -
Charge-offs..............................................        (7,307,862)       (6,567,136)        (5,053,052)
Recoveries...............................................           444,283           438,136            267,992
                                                            ---------------   ---------------    ---------------
Net charge-offs..........................................        (6,863,579)       (6,129,000)        (4,785,060)
Provision for loan losses included in
   continuing operations.................................        10,032,545         6,095,629          7,573,160
Provision for loan losses included in
   discontinued operations...............................            75,126           218,311          1,716,202
                                                            ---------------   ---------------    ---------------
Balance, December 31.....................................   $     9,784,269   $     7,292,370    $      7,107,430
                                                            ===============   ===============    ================
</TABLE>

                                       56

<PAGE>

             COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 - DISCONTINUED OPERATIONS

During  2002,  Community  Bank  consummated  the  sale of the  following  branch
offices: two Pulaski,  Tennessee locations on March 31, 2002, two DeKalb County,
Alabama  locations on May 3, 2002 and six Marshall County,  Alabama locations on
May 31, 2002. The following outlines the total assets sold and total liabilities
released on the transactions.

<TABLE>
<CAPTION>

<S>                                                                        <C>
                  Loans................................................    $    95,130,132
                    Less allowance for loan losses.....................            752,193
                                                                           ---------------
                     Loans, net........................................         94,377,939
                  Premises and equipment, net.........................           8,686,603
                  Accrued interest receivable..........................            653,266
                  Other real estate owned..............................            451,280
                  Other assets.........................................             93,547
                                                                           ---------------
                     Total assets......................................    $   104,262,635
                                                                           ===============
                  Deposits.............................................    $   139,080,234
                  Accrued interest payable.............................            656,041
                  Capitalized lease obligation.........................          1,614,318
                  Other liabilities....................................             19,036
                                                                           ---------------
                     Total liabilities.................................    $   141,369,629
                                                                           ===============
</TABLE>

The  Company  paid  $32,054,765  in  cash on the  transactions  and  recorded  a
capitalized lease receivable of $3,107,157.  The Company  recognized total gains
of $8,071,985  representing the premium received on core deposits less discounts
on loans and fixed assets.

NOTE 6 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

The Company is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financial  needs of its  customers.  These
financial  instruments  include loan commitments,  standby letters of credit and
obligations to deliver and sell mortgage loans.  These instruments  involve,  to
varying  degrees,  elements  of credit and  interest  rate risk in excess of the
amount recognized in the financial statements.

The  Company's  exposure  to credit loss in the event of  nonperformance  by the
other party to the financial instrument for loan commitments, standby letters of
credit and  obligations to deliver and sell mortgage loans is represented by the
contractual  amount  of those  instruments.  The  Company  uses the same  credit
policies  in  making  commitments  and  conditional  obligations  as it does for
on-balance sheet instruments.  The Company has no significant  concentrations of
credit risk with any individual counter-party to originate loans.

The total amounts of financial  instruments  with  off-balance-sheet  risk as of
December 31, 2002 and 2001 are as follows:

<TABLE>
<CAPTION>

                                                                                        Contract Amount
                                                                           ----------------------------------------
                                                                                        (In Thousands)
                                                                                  2002                  2001
                                                                           ------------------    ------------------
<S>                                                                        <C>                   <C>
Loan commitments.......................................................    $           15,476    $           19,788
Standby letters of credit..............................................                   532                 1,299
                                                                           ------------------    ------------------

   Total unfunded commitments..........................................    $           16,008    $           21,087
                                                                           ==================    ==================
</TABLE>

                                       57

<PAGE>

             COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Since many of the loan  commitments  may expire  without  being drawn upon,  the
total commitment amount does not necessarily represent future cash requirements.
The  credit  risk  involved  in  issuing  letters  of credit  and  funding  loan
commitments  is  essentially  the  same  as  that  involved  in  extending  loan
facilities to customers.

Commitments  to extend  credit are  agreements  to lend to  customers as long as
there is no violation of any condition established in the contract.  Commitments
generally  have fixed  expiration  dates or other  termination  clauses  and may
require  payment of a fee. Since many of the  commitments are expected to expire
without  being  drawn  upon,  the total  commitment  amounts do not  necessarily
represent future cash requirements.

Standby letters of credit are commitments issued by the Company to guarantee the
performance  of a customer to a third  party.  These  guarantees  are  primarily
issued  to  support  public  and  private  borrowing   arrangements,   including
commercial  paper,  bond  financing  and similar  transactions.  The credit risk
involved in issuing  letters of credit is essentially  the same as that involved
in  extending  loan  facilities  to  customers.  At  December  31,  2002,  these
commitments are not reflected on the  consolidated  balance sheet.  However,  as
discussed in Note 1, Summary of Significant Accounting Policies, in the Notes to
Consolidated  Financial  Statements,  FIN 45  requires  the fair  value of these
commitments  be recorded as of January 1, 2003. The fair value of the commitment
typically  approximates  the fee  received  from the  customer  for issuing such
commitments.  These fees are deferred  and are  recognized  over the  commitment
period.  The  amount  recorded  as of January  1, 2003 was not  material  to the
Company's  consolidated  balance  sheet.  The Company  holds  various  assets as
collateral   supporting  those   commitments  for  which  collateral  is  deemed
necessary.

NOTE 7 - PREMISES AND EQUIPMENT

Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
                                                                                         December 31,
                                                                             ----------------------------------
                                                                                    2002              2001
                                                                             ----------------   ---------------
<S>                                                                           <C>               <C>
Land.......................................................................   $     2,544,557   $     4,331,352
Bank premises..............................................................        21,380,949        27,195,381
Furniture and fixtures.....................................................        10,060,496        11,846,267
Automobiles................................................................         1,459,002         1,674,691
Leasehold improvements.....................................................           369,402           853,690
                                                                              ---------------   ---------------
                                                                                   35,814,406        45,901,381
Less accumulated depreciation..............................................        10,378,915        10,872,754
                                                                              ---------------   ---------------
                                                                                   25,435,491        35,028,627
Construction in progress...................................................                 -         2,689,023
                                                                              ---------------   ---------------
Premises and equipment, net................................................   $    25,435,491   $    37,717,650
                                                                              ===============   ===============
</TABLE>

Depreciation  expense included in the Consolidated  Statements of Income caption
"occupancy  expense" was  $1,823,520,  $2,058,787  and  $1,998,701 for the years
ended December 31, 2002, 2001 and 2000, respectively. The Company capitalized no
interest costs in 2002 and  capitalized  $242,020 and $244,971 in interest costs
related to building construction in 2001 and 2000, respectively.

                                       58

<PAGE>

             COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 - GOODWILL AND OTHER INTANGIBLE ASSETS

Upon the  adoption  of SFAS No.  142 on  January 1,  2002,  the  Company  ceased
amortizing its goodwill,  which decreased  noninterest expense and increased net
income in 2002 as  compared  to 2001.  The  following  table shows the pro forma
effect of applying SFAS 142 to the 2001 and 2000 periods (in  thousands,  except
per share amounts).

<TABLE>
<CAPTION>

                                                                           Year Ended December 31,
                                                                   2002             2001              2000
                                                              -------------     -------------    -------------
<S>                                                           <C>               <C>              <C>
Reported net income (loss)................................    $     904,918     $  (1,422,884)   $  (3,019,275)
Add back: goodwill amortization...........................                -           478,487          470,210
                                                              -------------     -------------    -------------
Adjusted net income (loss)................................    $     904,198     $    (944,397)   $  (2,549,065)
                                                              =============     =============    =============

Basic earnings per share:
   Reported net income (loss).............................    $        0.19     $      (0.31)    $       (0.68)
   Add back: goodwill amortization........................                -             0.10              0.11
                                                              -------------     ------------     -------------
Adjusted net income (loss)................................    $        0.19     $      (0.21)    $       (0.57)
                                                              =============     ============     =============
Diluted earnings per share:
   Reported net income (loss).............................    $        0.19     $      (0.31)    $       (0.65)
   Add back: goodwill amortization........................                -             0.10              0.10
                                                              -------------     ------------     -------------
Adjusted net income (loss)................................    $        0.19     $      (0.21)    $       (0.55)
                                                              =============     ============     =============
</TABLE>

                                       59

<PAGE>

             COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A summary of goodwill by line of business follows:

<TABLE>
<CAPTION>
                                                 January 1,        Goodwill       Impairment        December 31,
                                                   2002            acquired         Losses             2002
                                               -------------    -------------     -----------      -------------
<S>                                            <C>              <C>               <C>              <C>
Commercial Banking..........................   $   1,792,807    $           -     $         -      $   1,792,807
Parent and other............................               -                -               -                   -
                                               -------------    -------------     -----------      --------------
Total.......................................   $   1,792,807    $           -     $         -      $   1,792,807
                                               =============    =============     ===========      =============
</TABLE>

The Company has finite-lived  intangible assets capitalized on its balance sheet
in the form of core deposits. Amortizable intangible assets at December 31, 2002
and 2001 are as follows:

<TABLE>
<CAPTION>

                                                                                          December 31,
                                                                               ----------------------------------
                                                                                      2002              2001
                                                                               -----------------  ---------------
Core deposits
<S>                                                                            <C>               <C>
     Gross carrying amount.................................................    $     1,985,413   $      1,985,413
       Less: accumulated amortization......................................          1,253,281          1,173,863
                                                                               ---------------   ----------------
     Net carrying amount...................................................            732,132            811,550
                                                                               ---------------   ----------------

Other intangibles
     Gross carrying amount.................................................            188,450             77,898
     Less: accumulated amortization........................................                  -             52,581
                                                                               ---------------   ----------------
     Net carrying amount...................................................            188,450             25,317
                                                                               ---------------   ----------------

Total finite-lived intangibles
     Gross carrying amount.................................................          2,173,863          2,063,311
     Less: accumulated amortization........................................          1,253,281          1,226,444
                                                                               ---------------   ----------------
     Net carrying amount...................................................    $       920,582   $        836,867
                                                                               ===============   ================
</TABLE>

Acquired  goodwill and other intangible assets at December 31, 2002 are detailed
as follows:

<TABLE>
<CAPTION>

                                                                    Gross                                Net
                                                                   Carrying        Accumulated         Carrying
                                                                    Amount         Amortization         Amount
                                                                -------------    ---------------     ------------
<S>                                                             <C>              <C>                <C>
Identifiable amortizing assets...............................   $   2,173,863    $     1,253,281    $     920,582
Nonamortizing goodwill.......................................       2,851,372          1,058,565        1,792,807
                                                                -------------    ---------------     ------------
Total acquired intangible asset..............................   $   5,025,235    $     2,311,846     $  2,713,389
                                                                =============    ===============     ============
</TABLE>

Amortization  expense on  finite-lived  intangible  assets for the periods ended
December  31,  2002,  2001 and 2000  totaled  $76,797,  $561,798  and  $553,521,
respectively.  In 2001,  the  Company  recorded  an  impairment  of  goodwill of
$2,652,620,  which represented the unamortized goodwill related to the Company's
wholly-owned  subsidiaries,  1st  Community  Credit  Corporation  and  Community
Insurance Corp. Aggregate annual amortization expense of currently recorded core
deposits  and other  intangibles  is  expected to be $79,417 for the years ended
December 31, 2003 through 2004.

                                       60

<PAGE>
             COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 - DEPOSITS

The major  classifications  of deposits as of December 31, 2002 and 2001 were as
follows:

<TABLE>
<CAPTION>

                                                                                          December 31,
                                                                                      2002              2001
                                                                                ---------------  ---------------
<S>                                                                            <C>               <C>
Noninterest-bearing demand.................................................    $    52,313,987   $     67,695,615
Interest-bearing demand....................................................         77,528,677        100,094,906
Savings....................................................................         57,727,147         70,479,875
Time.......................................................................        185,882,451        259,899,596
Certificates of deposit of $100,000 or more................................         70,626,542        100,387,582
Other time deposits........................................................         15,385,000         19,148,456
                                                                               ---------------   ----------------
                                                                               $   459,463,804   $    617,706,030
                                                                               ===============   ================
</TABLE>

At December 31, 2002, the scheduled  maturities of certificates of time deposits
were as follows:

<TABLE>
<S>      <C>                                                                                     <C>
         2003.................................................................................   $    172,551,745
         2004.................................................................................         29,961,472
         2005.................................................................................         15,500,477
         2006.................................................................................          4,932,050
         2007.................................................................................         48,736,996
         Thereafter...........................................................................            211,253
                                                                                                 ----------------
         Total................................................................................   $    271,893,993
                                                                                                 ================
</TABLE>

NOTE 10 - SHORT-TERM BORROWINGS

Short-term  borrowings  at  December  31,  2002 and 2001  consisted  of the U.S.
Treasury  Tax and  Loan  Note  Option  account  of  $1,725,133  and  $1,822,420,
respectively,  and  securities  sold under  agreements  to  repurchase of $0 and
$2,537,507,  respectively.  The  Company  had  no  federal  funds  purchased  or
overnight funds purchased from FHLB-Atlanta at December 31, 2002 and 2001.

US Treasury Tax and Loan Note Option and  securities  sold under  agreements  to
repurchase are generally treated as collateralized financing transactions. It is
the Company's policy to deliver underlying  securities to custodian accounts for
customers.

A summary of short-term borrowings follows:

                                                SHORT-TERM BORROWINGS

<TABLE>
<CAPTION>
                                                                               December 31,
                                                                     2002                      2001
                                                              ------------------        ------------------

<S>                                                           <C>                       <C>
       Securities sold under agreements to repurchase         $                -        $        2,538,___
       U.S Treasury tax and loan, note option                          1,725,133                 1,822,___
                                                              ------------------        ------------------
           Total                                              $        1,725,133        $        4,360,___
                                                              ==================        ==================
</TABLE>


NOTE 11 - LONG-TERM DEBT

On December 17, 1992, the Company  entered into a loan agreement with a regional
bank for amounts up to  $6,500,000.  At December 31, 2002,  the loan was paid in
full. At December 31, 2001, the amount  outstanding  was $711,304.  The

                                       61

<PAGE>
             COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

loan was due  December  17,  2002,  bearing  interest at a floating  prime rate,
collateralized by 100% of the common stock of Community Bank. The note agreement
contained  provisions,  which limited the  Company's  right to transfer or issue
shares of Community Bank's stock.  Upon receipt of full payment,  the lender did
not release the Community Bank stock held as collateral on the note. The Company
is  obligated  to this lender as a guarantor  on the ESOP loan  discussed in the
following paragraph. The lender retained the Community Bank stock as security on
the guarantee of the ESOP loan.

On November 3, 1993,  the Trustees of the  Company's  ESOP executed a promissory
note of  $1,200,000 in order to purchase  common stock in the  Company's  public
offering of new common stock.  The note was originally  secured by 80,000 shares
of purchased  stock. The promissory note had been refinanced in years subsequent
to 1993 as  additional  shares were  purchased by the ESOP. On December 1, 1998,
this note was refinanced and an additional 56,682 shares of the Company's common
stock  were  obtained  by the  ESOP.  This  debt,  in  the  original  amount  of
$2,963,842,  was secured by 261,433  shares of the Company's  common stock.  The
note bears interest at a floating rate, with principal and interest payments due
monthly  through  November 16, 2010, with all remaining  principal,  if any, due
upon that date.  The initial  principal  and  interest  payment on this debt was
$31,677.  As  changes  occur  in the  interest  rate  on the  loan,  appropriate
adjustments are made to the monthly principal and interest payments. At December
31, 2002, the monthly payment was $33,852.  The Company has guaranteed this debt
and in accordance  with the applicable  accounting and reporting  guidelines the
debt has been  recognized  on the  Company's  statement  of  condition,  with an
offsetting  charge against equity.  As principal  payments are made by the ESOP,
the debt and offsetting  charge against equity are reduced.  The shares securing
the note are released on a pro-rata  basis by the lender as monthly  payments of
principal  and  interest  are made.  The  outstanding  balance  of this note was
$2,083,342  at December 31,  2002,  secured by 148,972 of  unreleased  shares of
Company stock. (See Note 15)

On  October  4, 1994,  the  Company  entered  into a  twenty-year,  subordinated
installment capital note due October 1, 2014 for the purchase of treasury stock.
Monthly  principal and interest  payments of $15,506 are made on the note, which
bears  interest at the fixed annual rate of 7%. The Company  maintains the right
to  prepay  the  note at its  sole  discretion.  The  balance  of the  note  was
$1,494,345 and $1,572,805 at December 31, 2002 and 2001, respectively.

Since June 1999,  Community  Bank has borrowed funds under the Federal Home Loan
Bank of Atlanta's ("FHLB-Atlanta") "Convertible Advance Program." These advances
have had original  maturities of 10 years,  with stated call features during the
life of the obligation, at fixed interest rates for the life of the obligations.
Principal  is due at final  maturity  or on stated  call  dates,  with  interest
payable each  quarter.  On June 1, 1999,  Community  Bank,  the  Company's  bank
subsidiary,  borrowed $30,000,000 under the FHLB-Atlanta's  "Convertible Advance
Program." This advance had a final maturity of June 1, 2009 (120 months), with a
call feature every three months during the life of the obligation, and carried a
fixed interest rate of 4.62% per annum.  This obligation was called on September
1, 1999 due to an increase in market  interest  rates. As a result of this call,
Community  Bank  refinanced  the  original  advance and  borrowed an  additional
$10,000,000 under the same "Convertible Advance Program." This advance, totaling
$40,000,000 at December 31, 1999, had a final maturity of September 1, 2009 (120
months), with a call feature every six months during the life of the obligation,
and carried a fixed rate of 4.99% per annum.  Due to the call of this obligation
on March 1,  2000,  Community  Bank made a  $2,000,000  reduction  in the amount
advanced under the  FHLB-Atlanta  "Convertible  Advance  Program" and refinanced
$38,000,000.  This new  obligation  has a final  maturity  of March 1, 2010 (120
months),  a call  feature  every  quarterly  payment date during the life of the
obligation,  and a fixed interest rate of 5.93% per annum. At December 31, 2001,
outstanding funds advanced to Community Bank under the FHLB-Atlanta "Convertible
Advance Program" totaled $38,000,000.

In March 2000,  the Company formed a wholly-owned  Delaware  statutory  business
trust, Community (AL) Capital Trust I (the "Trust"), which issued $10,000,000 of
guaranteed preferred securities  representing  undivided beneficial interests in
the assets of the Trust ("Capital Securities").  All of the common securities of
the  Trust are owned by the  Company.  The  proceeds  from the  issuance  of the
Capital Securities  ($10,000,000) and common securities  ($310,000) were used by
the Trust to purchase  $10,310,000 of junior  subordinated  deferrable  interest
debentures  of the Company which carry an annual  interest rate of 10.875%.  The
debentures  represent the sole asset of the Trust.  The  debentures  and related
income

                                       62
<PAGE>
             COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

statement  effects  are  eliminated  in  the  Company's  consolidated  financial
statements. The Company is entitled to treat the aggregate liquidation amount of
the debentures as Tier I capital under Federal Reserve guidelines.

The Capital  Securities accrue and pay  distributions  semiannually at a rate of
10.875%  per  annum of the  stated  liquidation  value  of  $1,000  per  capital
security.   The  Company  has  entered  into  an   agreement   which  fully  and
unconditionally  guarantees  payment of: (i)  accrued  and unpaid  distributions
required to be paid on the Capital  Securities;  (ii) the redemption  price with
respect to any Capital  Securities called for redemption by the Trust; and (iii)
payments  due  upon  a  voluntary  or  involuntary  liquidation,  winding  up or
termination of the Trust.

The Capital  Securities  are  mandatorily  redeemable  upon the  maturity of the
debentures  on March 8, 2030,  or upon  earlier  redemption  as  provided in the
indenture  pursuant to which the  debentures  were  issued.  The Company has the
right to redeem the debentures  purchased by the Trust: (i) in whole or in part,
on or after  March  8,  2010;  and  (ii) in whole  (but not in part) at any time
within 90 days  following the occurrence  and during the  continuation  of a tax
event,  capital treatment event or investment  company event (each as defined in
the  indenture).  As specified in the indenture,  if the debentures are redeemed
prior to maturity,  the  redemption  price will be a percentage of the principal
amount, ranging from 105.438% in 2010 to 100.00% in and after 2020, plus accrued
but unpaid interest.

Under the terms of the  indenture,  the Company  may elect to defer  payments of
interest for up to ten semiannual payment periods.  The Company elected to defer
its March and September 2002 interest payments.  The balance of accrued interest
payable on the  debentures was $1,541,872 at December 31, 2002. For the duration
of such  deferral  period,  the Company is restricted  from paying  dividends to
shareholders or paying debt that is junior to the debentures.

Maturities  and stated calls of  long-term  debt and FHLB  borrowings  following
December 31, 2002, are as follows:

<TABLE>
<CAPTION>
                                                                                                Trust
                                                              Notes             FHLB          Preferred
                                                             Payable         Borrowings      Securities
                                                          -------------    -------------    -------------
<S>     <C>                                               <C>              <C>              <C>
        2003.........................................     $     408,167    $           -    $           -
        2004.........................................           428,292                -                -
        2005.........................................           449,467                -                -
        2006.........................................           471,745                -                -
        2007.........................................           495,193                -                -
        Thereafter...................................         1,324,823       38,000,000       10,000,000
                                                          -------------    -------------    -------------
        Total........................................     $   3,577,687    $  38,000,000    $  10,000,000
                                                          =============    =============    =============
</TABLE>

Community  Bank had  $5,000,000 at year end 2002 and 2001 in available  lines to
purchase federal funds on a secured basis from a commercial bank.

NOTE 12 - REGULATORY MATTERS AND RESTRICTIONS

Dividends paid by Community  Bank are the primary  source of funds  available to
the Company for debt  repayment,  payment of dividends to its  stockholders  and
other needs.  Certain  restrictions  exist  regarding the ability of the Bank to
transfer funds to the Company in the form of cash dividends,  loans or advances.
Under  Alabama  law,  the  approval  of the Alabama  Superintendent  of Banks is
required to pay  dividends  in excess of the Bank's net earnings for the current
year plus  retained net earnings for the  preceding  two years less any required
transfers to surplus.

Effective  March 5, 2002 the Board of  Directors  of  Community  Bank  adopted a
Safety and Soundness  Compliance  Plan pursuant to which Community Bank will not
pay cash  dividends  without the prior  written  consent of the FDIC and Alabama
State Banking Department.

No dividends were declared or paid in 2002 or 2001. Annual dividends of $.75 per
share and $.60 per share were  declared by the  Company's  Board of Directors on
its common stock and paid in January of 2000 and 1999, respectively. The payment
of dividends on common  stock is subject to the prior  payment of principal  and
interest on the Company's long-term debt, maintenance of sufficient earnings and
capital of the subsidiaries, and to regulatory restrictions. (See Note 11).


                                       63

<PAGE>
             COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The Company and its subsidiary  bank are subject to various  regulatory  capital
requirements administered by the state and federal banking agencies.  Failure to
meet minimum capital  requirements can initiate certain mandatory - and possible
additional  discretionary - actions by regulators  that, if taken,  could have a
direct material effect on the consolidated  financial statements.  Under capital
adequacy  guidelines and the regulatory  framework for prompt corrective action,
the  Company and  Community  Bank must meet  specific  capital  guidelines  that
involve quantitative measures of the Company's assets, liabilities,  and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Company's  capital  amounts and  classification  are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the Company and Community  Bank to maintain  minimum  amounts and ratios
(set forth in the table  below) of total and Tier 1 capital  (as  defined in the
regulations)  to  risk-weighted  assets (as defined),  and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2002 and 2001, that the Bank meets all capital adequacy requirements to which it
is subject as set forth in regulation.

At December 31, 2002 and 2001, under applicable banking regulations, the Company
and Community Bank, were considered well capitalized. The Company is entitled to
treat the aggregate  liquidation  amount of the junior  subordinated  deferrable
interest  debentures,  purchased  by Community  (AL) Capital  Trust I, as Tier I
capital under Federal  Reserve  guidelines.  At December 31, 2002, the aggregate
liquidation amount of the debentures included in Tier I capital was $10,000,000.
(See Note 11)

Community  Bank's  allowance for loan losses,  limited to 1.25% of risk-weighted
assets, is a component of Tier II capital under capital adequacy guidelines. The
amount of the allowance for loan losses  included in Tier II capital at December
31,  2002  was  approximately  $6,068,000  for  the  Company  and  approximately
$4,545,000 for Community Bank, compared to approximately $6,142,000 for both the
Company and approximately $6,110,000 for Community Bank at December 31, 2001.

On April 9, 2001, the Company's Board of Directors  entered into a Memorandum of
Understanding  (the  "Memorandum") with the Federal Reserve Bank of Atlanta (the
"Reserve  Bank"),  which outlines  actions to be taken by the Company to address
concerns  identified by the Reserve Bank.  One provision of the agreement  calls
for the Company to  maintain a Tier I leverage  ratio of at least 6.5% while the
Memorandum is in effect.

On March 5, 2002,  Community Bank adopted a Safety and Soundness Compliance Plan
("Plan").  Under the Plan,  the  Bank's  Board  committed  to  maintain a Tier I
leverage  ratio of at least 7% and to obtain  prior  approval of the  regulators
before paying any dividends.

Both the Company and the Bank are in compliance  with the Tier I leverage ratios
requirements  under the Memorandum and the Plan as of December 31, 2002 and fell
slightly short of these requirements as of December 31, 2001.

On December 10, 2002,  the Board of Directors of Community  Bank entered into an
agreement with the Alabama State Banking Department. The agreement provides that
the Board of Directors will take certain actions  regarding (i) an investigation
into payments made in connection with several construction projects of the Bank,
(ii) approval and management of payments and loans involving directors, officers
and employees and (iii) expense controls and review of financial statements.

With respect to the  investigation  of construction  payments,  the Bank's Audit
Committee,  with the assistance of  independent  accountants  and counsel,  must
determine whether any directors, officers or employees improperly benefited from
payments made by the Bank for construction  projects.  If improper benefits were
received, the Audit

                                       64

<PAGE>
             COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Committee must determine the amount of such benefits, fix an appropriate rate of
interest  due to the  Bank  on the  principal  amount  of any  benefit,  require
restitution of the amount of the benefit,  plus accrued interest and investigate
any apparent  negligence on the part of Bank  employees  with regard to improper
payments.  The Bank must  report the Audit  Committee's  findings to the Alabama
State Banking Department for its review and concurrence.

The Board has  agreed,  among other  things,  to require  Board  approval of all
extensions  of credit to  insiders,  as defined in  Regulation O of the Board of
Governors of the Federal Reserve System.  The Board has also agreed to implement
certain   procedures  for  managing   existing  loans  to  insiders,   including
limitations on renewals,  methods of collection of adversely classified loans to
certain insiders and obtaining  current  appraisals on collateral  securing such
adversely  classified  loans. In addition,  the Board has agreed to limit future
extensions of credit and any payments  other than ordinary  compensation  to any
director,  officer  or  employee  who,  after  investigation,  is  deemed to owe
restitution  to the Bank or whose  loans  have  been  adversely  classified,  to
consult  with the Alabama  State  Banking  Department  regarding  settlement  of
litigation  and to obtain  prior  approval for sales or transfers of Bank assets
benefiting any director, officer or employee deemed to owe restitution.

As a part of an effort to control the Bank's  expenses,  the Board has  directed
the Audit Committee to review for adequacy and appropriateness bills paid by the
Bank for  professional  services  from  1998 to the  present,  to  recover  fees
improperly  paid,  if any,  for the benefit of third  parties  and to  establish
additional  internal  controls  for the  payment  of  future  bills.  The  Audit
Committee  requires quarterly and annual reports from its auditors regarding the
adequacy of the Bank's loan loss reserve.

The following  table sets forth the actual  capital  ratios at December 31, 2002
and 2001, for the Company and the Bank, as well as the minimum total risk-based,
Tier 1  risked-based  and Tier 1 leverage  ratios  required to be  classified as
adequately capitalized and well capitalized.

                                       65

<PAGE>

             COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                         For Capital             To Be
                                                       Actual         Adequacy Purposes    Well Capitalized
                                                  Amount    Ratio      Amount    Ratio      Amount    Ratio
                                                 --------  -------    --------  -------    --------  -------
                                                                   (Dollars in Thousands)
As of December 31, 2002:
   Total risk based capital
   (To risk  weighted assets):
<S>                                              <C>         <C>      <C>         <C>      <C>        <C>
   Consolidated...............................   $ 52,885    14.66%   $ 28,857    8.00%    $ 36,071   10.00%
   Community Bank.............................     55,681    15.54      28,668    8.00       35,836   10.00
Tier 1 capital
   (To risk  weighted assets):
   Consolidated...............................     46,817    12.98      14,428    4.00       21,643    6.00
   Community Bank.............................     51,136    14.27      14,334    4.00       21,501    6.00
Tier 1 capital
   (To average assets):
   Consolidated...............................     46,196     8.20      22,836    4.00       28,545    5.00
   Community Bank.............................     50,515     9.00      22,729    4.00       28,412    5.00

As of December 31, 2001: Total risk based capital (to Risk weighted assets):
   Consolidated...............................   $ 54,074    11.03    $ 39,218    8.00     $ 49,023   10.00
   Community Bank.............................     55,830    11.45      39,011    8.00       48,764   10.00
Tier 1 capital (to risk weighted assets):
   Consolidated...............................     46,359     9.46      19,609    4.00       29,414    6.00
   Community Bank.............................     49,720    10.20      19,505    4.00       29,258    6.00
Tier 1 capital (to average assets):
   Consolidated...............................     46,359     6.33      29,315    4.00       36,644    5.00
   Community Bank.............................     49,720     6.80      29,244    4.00       36,555    5.00
</TABLE>

The Company is required by law to maintain noninterest bearing deposits with the
Federal Reserve to meet regulatory  reserve  requirements.  At December 31, 2002
these deposits were not material to the Company's funding requirements.

NOTE 13 - LEASES

The Company has  operating  lease  agreements,  involving  land,  buildings  and
equipment.  The operating leases are  noncancellable and expire on various dates
through the year 2018.  The leases  provide for  renewal  options and  generally
require the Company to pay maintenance, insurance and property taxes. Options to
purchase  are also  included in some  leases.  For the years ended  December 31,
2002,  2001,  and 2000,  rental expense for operating  leases was  approximately
$467,000, 560,000 and $524,000, respectively.

During 2000,  Community  Bank entered into  sale/leaseback  arrangements  on its
Hamilton,  Alabama and Boaz,  Alabama bank  locations.  Due to the  structure of
these  transactions,  the leases  qualified  and have been  accounted  for under
capitalized  lease rules.  On May 31, 2002,  the  purchaser of Community  Bank's
Marshall County branch offices assumed the Company's lease on the Boaz,  Alabama
location.  The balances of the  capitalized  lease asset and  capitalized  lease
obligation assumed by the purchaser were as follows:

<TABLE>
<S>                                                                        <C>
                   Capitalized lease asset.............................    $     1,577,222
                     Less: Accumulated depreciation....................            157,722
                                                                           ---------------
                   Net capitalized lease asset.........................    $     1,419,500
                                                                           ===============

                   Capitalized lease obligation........................    $     1,614,318
                                                                           ===============
</TABLE>

                                       66

<PAGE>

             COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A gain of $194,818 was  recognized  to account for the sale of the asset and the
release of the  obligation  and is netted in "net loss on disposal of assets" on
the Consolidated Statements of Income.

The  following is an analysis of the leased  property  under  capital  leases by
major classes:

<TABLE>
<CAPTION>
                                                                                         Asset Balances at
                                                                                            December 31,
                                                                                  -------------------------------
                                                                                       2002             2001
                                                                                  --------------    -------------
<S>                                                                               <C>               <C>
         Buildings.............................................................   $    3,727,903    $   5,305,125
         Less allowance for depreciation.......................................          321,013          321,613
                                                                                  --------------    -------------
                                                                                  $    3,406,890    $   4,983,512
                                                                                  ==============    =============
</TABLE>

The  following  is a schedule by year of future  minimum  lease  payments  under
capital and operating leases, together with the present value of the net minimum
lease payments as of December 31, 2002. All capitalized  leases are with related
parties.

<TABLE>
<CAPTION>
                                                                   Related Party       Total
                                                                     Operating       Operating      Capitalized
                                                                 --------------   --------------  ---------------
Years Ending December 31,
<S>      <C>                                                     <C>              <C>             <C>
         2003.................................................   $        9,600   $      296,738  $       250,932
         2004.................................................            9,600          264,436          250,932
         2005.................................................            9,600          242,878          250,932
         2006.................................................            2,400          164,722          250,932
         2007.................................................                -          103,550          250,932
         Thereafter...........................................                -          258,359        5,621,765
                                                                 --------------   --------------  ---------------
         Total minimum lease payments.........................   $       31,200   $    1,330,683        6,876,425
                                                                 ==============   ==============
         Less amount representing interest....................                                          2,818,256
                                                                                                  ---------------
         Present value of net minimum lease payments..........                                    $     4,058,169
                                                                                                  ===============

</TABLE>

The purchaser of Community  Bank's Marshall  County branch offices  acquired the
land,  building and land  improvements  located in Albertville,  Alabama under a
sales type lease. The lease agreement calls for 60 payments of $14,000 per month
beginning June 1, 2002. The lease ends on May 31, 2007 and is subject to options
which give the right for the seller to require the  purchaser  to  purchase  the
property and gives the right to the  purchaser to require the seller to sell the
property.  The purchase  price upon option by either party is  $2,621,544.  This
lease/sale qualifies and is accounted for under capitalized lease rules.

The following is a schedule by year of the future  minimum lease  payments to be
received by Community  Bank  together  with the present value of the net minimum
lease payments as of December 31, 2002.

<TABLE>
<CAPTION>
                   Years ending December 31,
<S>                  <C>                                                   <C>
                     2003..............................................    $        168,000
                     2004..............................................             168,000
                     2005..............................................             168,000
                     2006..............................................             168,000
                     2007..............................................           2,691,591
                                                                           ----------------
                   Total minimum lease payments........................           3,363,591
                     Less amount representing interest.................             310,049
                                                                           ----------------
                   Present value of net minimum lease payments.........    $      3,053,542
                                                                           ================
</TABLE>

                                       67
<PAGE>

             COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 14 - PENSION PLAN

The Company has a defined  benefit plan that provides  retirement and disability
benefits for  substantially  all employees of the Company and its  subsidiaries,
and  death  benefits  for  their  beneficiaries.   An  employee  will  become  a
participant  in the  Pension  Plan on  January 1 or July 1 after  completing  12
months of employment  during which the employee works at least 1,000 hours.  All
employees are eligible to become  participants in the Pension Plan regardless of
age on the date they begin employment. In addition,  participants in the Pension
Plan accrue benefits after they have attained the normal retirement age of 65.

Benefits  under the Pension Plan depend upon a  participant's  years of credited
service  with the Company or any of its  subsidiaries  and his  average  monthly
earnings for the highest five consecutive years out of the participants final 10
years of  employment.  An employee who becomes a participant on or after January
1, 1996  will not be vested in any  benefit  until he  completes  five  years of
service at which time the employee will be 100% vested. An employee who became a
participant  before January 1, 1996, is 20% vested in his accrued benefits after
completion of two years of service, 40% vested after three years of service, 60%
vested after four years of service and becomes  fully vested upon  completion of
five years of  service.  An  employee  who  completes  ten years of service  and
attains age 55 is eligible for early  retirement  benefits.  Plan assets consist
primarily of corporate stocks and bonds.

The Company  contributes  amounts to the  pension  funds  sufficient  to satisfy
funding requirements of the Employee Retirement Income Security Act.

Effective January 1, 1995, the Company  established a nonqualified  benefit plan
for  certain  key  executives  called the  Community  Bancshares,  Inc.  Benefit
Restoration  Plan,  the purpose of which is to provide the amount of the benefit
which would otherwise be paid under the Company's  Pension Plan but which cannot
be paid under that plan due to the limitations  imposed by the Internal  Revenue
Code of 1986, as amended.

                                       68

<PAGE>

The following tables set forth the funding status and the amount  recognized for
both  the  Pension  Plan  and the  Benefit  Restoration  Plan  in the  Company's
Consolidated  Statements of Financial Condition and the Consolidated  Statements
of Income.

Pension Plan as of December 31:

<TABLE>
<CAPTION>
                                                                                       2002             2001
                                                                                  --------------  --------------
Change in benefit obligation:
<S>                                                                               <C>             <C>
   Benefit obligation at beginning of year....................................    $    7,891,166  $     7,030,889
   Service cost ..............................................................           506,164          614,252
   Interest cost .............................................................           535,797          495,976
   Actuarial (gain) or loss. .................................................           213,984          (37,271)
   Benefits paid .............................................................          (283,218)        (212,680)
                                                                                  --------------  ---------------
      Benefit obligation at end of year.......................................    $    8,863,893  $     7,891,166
                                                                                  ==============  ===============
Change in plan assets:
   Fair value of plan assets at beginning of year.............................    $    5,442,852  $     5,153,926
   Actual return on plan assets ..............................................          (586,816)        (229,629)
   Employer contribution .....................................................           650,174          731,235
   Benefits paid from plan assets ............................................          (283,218)        (212,680)
                                                                                  --------------  ---------------
      Fair value of plan assets at end of year................................    $    5,222,992  $     5,442,852
                                                                                  ==============  ===============
Funded status of plan:
   Funded status of plan......................................................    $   (3,640,901) $    (2,448,314)
   Unrecognized actuarial (gain) or loss .....................................         3,050,602        1,946,596
   Unrecognized prior service cost ...........................................           188,450           77,337
   Unrecognized transition asset. ............................................                 -           (3,794)
                                                                                  --------------  ---------------
      Accrued benefit cost....................................................    $     (401,849) $      (428,175)
                                                                                  ==============  ===============
Amounts recognized in the balance sheet consists of:
   Prepaid benefit cost.......................................................    $            -  $             -
   Accrued benefit liability..................................................        (2,287,205)        (428,175)
   Intangible asset...........................................................           188,450                -
   Accumulated other comprehensive income.....................................         1,696,906                -
                                                                                  --------------  ---------------
   Net amount recognized......................................................    $     (401,849) $      (428,175)
                                                                                  ==============  ===============
   Other comprehensive income from changes....................................    $    1,696,906  $             -
                                                                                  ==============  ===============

Weighted average rate assumptions used in determining pension cost and the
   projected benefit obligation were:
      Discount rate used to determine present value
         of projected benefit obligation at end of year ......................             6.75%             7.25%
Expected long-term rate of return on plan assets for the year ................             7.50              9.25
   Expected rate of increase in future compensation levels ...................             5.00              6.00

</TABLE>

                                       69
<PAGE>

             COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Components of pension plan net periodic benefit cost:

<TABLE>
<CAPTION>

                                                                   2002               2001              2000
                                                             ---------------     ---------------  ---------------
<S>                                                          <C>                <C>               <C>
Service cost.............................................    $       506,164    $        614,252  $       620,489
Interest cost............................................            535,797             495,976          446,220
Expected return on plan assets...........................           (512,128)           (567,699)        (529,400)
Amortization of prior service cost.......................             22,237              11,699           11,699
Amortization of transitional asset.......................             (3,794)            (16,879)         (16,879)
Recognized actuarial loss................................                  -                   -                -
                                                             ---------------    ----------------  ---------------
Net periodic benefit cost................................    $       548,276    $        537,349  $       532,129
                                                             ===============    ================  ===============

</TABLE>

Benefit Restoration Plan as of December 31:

<TABLE>
<CAPTION>

                                                                                       2002             2001
                                                                                  --------------  --------------
Change in benefit obligation:
<S>                                                                               <C>             <C>
   Benefit obligation at beginning of year....................................    $    3,200,932  $     2,678,166
   Service cost ..............................................................            97,129          157,302
   Interest cost .............................................................           157,344          202,471
   Amendments ................................................................                 -                -
   Actuarial loss. ...........................................................          (922,828)         162,993
   Benefits paid .............................................................            48,053                -
                                                                                  --------------  ---------------
   Benefit obligation at end of year                                         .    $    2,580,630  $     3,200,932
                                                                                  ==============  ===============
Change in plan assets:
   Fair value of plan assets at beginning of year.............................    $            -  $             -
   Actual return on plan assets ..............................................                 -                -
   Employer contribution .....................................................            48,053                -
   Benefits paid from plan assets ............................................           (48,053)              -
                                                                                  --------------  --------------
   Fair value of plan assets at end of year                                  .    $            -  $             -
                                                                                  ==============  ===============
Funded status of plan:
   Funded status of plan......................................................    $   (2,580,630) $    (3,200,932)
   Unrecognized actuarial loss ...............................................           615,810        1,371,808
   Unrecognized prior service cost ...........................................               446           98,439
   Unrecognized transition (asset) or obligation .............................                 -                -
                                                                                  --------------  ---------------
   Accrued benefit cost ......................................................    $   (1,964,374) $    (1,730,685)
                                                                                  ==============  ===============
Amounts recognized in balance sheet consist of:
   Prepaid benefit cost.......................................................    $            -  $             -
   Accrued benefit liability .................................................        (1,964,374)       1,730,685
   Intangible asset ..........................................................                 -                -
   Accumulated other comprehensive income ....................................                 -                -
                                                                                  --------------  ---------------
   Net amount recognized.....................................................     $   (1,964,374) $    (1,730,685)
Other comprehensive income from changes......................................     $            -  $             -
                                                                                  ==============  ===============
Weighted average rate assumptions used in determining pension cost and the
   projected benefit obligation were:
      Discount rate used to determine present value
         of projected benefit obligation at end of year......................              6.75%            7.25%
Expected long-term rate of return on plan assets for the year................              7.50%            9.25%
Expected rate of increase in future compensation levels......................              5.00%            6.00%
</TABLE>

                                       70

<PAGE>
             COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Components of benefit restoration plan net periodic benefit cost:

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

<S>                                                           <C>              <C>               <C>
Service cost..............................................    $       97,129   $       157,302   $        141,048
Interest cost.............................................           157,344           202,471            170,368
Expected return on plan assets............................                 -                 -                  -
Amortization of prior service cost........................               245            34,907             34,907
Amortization of transitional (asset) or obligation........                 -                 -                  -
Recognized actuarial loss.................................            27,024            89,407             63,748
                                                              --------------   ---------------   ----------------
Net periodic benefit cost.................................    $      281,742   $       484,087   $        410,071
                                                              ==============   ===============   ================

</TABLE>

NOTE 15 - EMPLOYEE STOCK OWNERSHIP PLAN

The Company adopted an Employee Stock  Ownership Plan (the "ESOP")  effective as
of January 1, 1985,  which  enables  eligible  employees  of the Company and its
subsidiaries to own Company common stock.  An employee  becomes a participant in
the ESOP on June 30 or  December  31 after  completing  12 months of  employment
during  which the  employee  is  credited  with 1,000 or more hours of  service.
Contributions  to the ESOP are made at the discretion of the Company's  Board of
Directors,  but may not be less  than the  amount  required  to  cover  the debt
service on the ESOP loan.  Employer  contributions  are  allocated  to  eligible
participants  in proportion to their  compensation,  which equals W-2 wages plus
pre-tax  reductions for the Company's  cafeteria plan. The Internal Revenue Code
imposes a limit  ($200,000 in 2002) on the amount of  compensation  which may be
considered under the plan.

On  November  3,  1993,  the  ESOP's  Trustees  executed  a  promissory  note of
$1,200,000 in order to purchase common stock from the Company's  public offering
of new  common  stock.  The note was  originally  secured  by  80,000  shares of
purchased  stock. The promissory note has been refinanced in years subsequent to
1993 as additional shares were purchased by the ESOP. On December 31, 1998, this
note was  refinanced  and an additional  56,682  shares of the Company's  common
stock  were  obtained  by the  ESOP.  This  debt,  in  the  original  amount  of
$2,963,842,  was secured by 261,433  shares of the Company's  common stock.  The
note bears interest at a floating rate, with principal and interest payments due
monthly  through  November 16, 2010, with the remaining  principal,  if any, due
upon that date.  The  initial  principal  and  interest  payment on this debt in
December  1998 was $31,677.  As changes  occur in the interest rate on the loan,
appropriate adjustments are made to the monthly principle and interest payments.
At  December  31,  2002,  the  monthly  payment  was  $33,852.  The  Company has
guaranteed  this  debt and in  accordance  with the  applicable  accounting  and
reporting  guidelines the debt has been recognized on the Company's statement of
condition,  with an offsetting charge against equity. As principal  payments are
made by the ESOP, the debt and offsetting charge against equity are reduced. The
shares  securing  the note are  released  on a pro rata  basis by the  lender as
monthly  payments of principal  and interest are made.  As of December 31, 2002,
there were 148,972  unreleased shares with a fair value, based on an independent
valuation  of $7.00 per share,  of  approximately  $1,042,804.  These shares are
subtracted from outstanding shares for earnings per share calculations.

The  portion  of  payments  made by the  Company  to the ESOP on  behalf  of its
participating  employees  which  are  used  to pay  interest  on the  ESOP  debt
($99,532,  $176,465  and  $251,976  in 2002,  2001 and  2000,  respectively)  is
classified as interest expense on the Company's income statement.

Dividends  paid on  released  ESOP shares are  credited  to the  accounts of the
participants  to whom the shares are allocated.  Dividends on unreleased  shares
may be used to repay debt associated with the ESOP or treated as other income of
the ESOP and allocated to the participants. No dividends were paid in 2002.

At December 31, 2002 and 2001,  the  Company's  financial  statements  reflected
long-term debt related to the ESOP of $2,083,342 and  $2,382,490,  respectively.
The corresponding  contra-equity account was $1,999,858 at December 31, 2002 and
$2,317,902 at December 31, 2001.

                                       71

<PAGE>
             COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Compensation costs recognized amounted to $374,565, $256,101 and $525,743 for
the years ended December 31, 2002, 2001 and 2000, respectively.

NOTE 16 - STOCK PLANS

On  January 7,  1999,  the Board of  Directors  of the  Company  adopted a Share
Purchase  Rights Plan and declared a dividend of one  preferred  share  purchase
right (a "Right") for each  outstanding  share of common stock of the Company to
shareholders  of record on January 7, 1999.  Each Right entitles the stockholder
to purchase  from the Company  one  one-hundredth  of a share of Series A Junior
Participating  Preferred  Stock  of  the  Company  at a  price  of $84  per  one
one-hundredth  of a  preferred  share.  In the event that any person or group of
affiliated or associated persons acquires beneficial ownership of 15% or more of
the outstanding common stock of the Company (an "Acquiring Person"), each holder
of a purchase right,  other than the Acquiring Person,  will thereafter have the
right to receive  upon  exercise  of the Right  that  number of shares of common
stock of the Company  having a market value of two times the  exercise  price of
the Right. If the Company is acquired in a merger or other business  combination
transaction  or 50% or more of its  assets or  earning  power  are sold  after a
person or group has become an Acquiring  Person,  each holder of a Right,  other
than an Acquiring Person,  will thereafter have the right to receive that number
of shares of common  stock of the  acquiring  company  which at the time of such
transaction have a market value of two times the exercise price of the Right. At
any time after a person or group  becomes an  Acquiring  Person and prior to the
acquisition  of 50% or more of the  outstanding  common  stock of the Company by
such person or group,  the Board of  Directors  of the Company may  exchange the
Rights,  other than Rights owned by an Acquiring Person, in whole or in part, at
an exchange ratio of one common share or one  one-hundredth  of preferred share.
The purchase price and the number of shares issuable upon exercise of the Rights
are  subject  to  adjustment  in the  event of a stock  split,  stock  dividend,
reclassification  or certain  distributions with respect to the preferred stock.
The Rights will  expire  January 13, 2009 unless such date is extended or unless
the Rights are redeemed or exchanged prior to such date.

In March 1998,  203,331  options  were issued to  directors  and certain  senior
officers  with an  exercise  price of $15.00  per share,  the  market  value (as
determined by the Board of Directors) of the Company's  common stock at the time
of issuance.  These options are exercisable  through March 25, 2003. In December
1999, an additional  204,000 options were issued to directors and certain senior
officers  with an  exercise  price of $20.00  per share,  the  market  value (as
determined by the Board of Directors) of the Company's  common stock at the time
of issuance.  These options are exercisable  through December 3, 2004. In August
2000, the Company  granted  options to purchase an aggregate of 15,000 shares of
common stock to certain senior officers of Community Bank. Each of these options
has an exercise  price of $18.00 per share,  the market value (as  determined by
the Board of Directors)  of the Company's  common stock at the time of issuance.
These options are  exercisable  through  August 24, 2005. In December  2001, the
Company  granted  options to purchase an aggregate  of 252,000  shares of common
stock to certain senior officers of Community Bank. Each of these options has an
exercise price of $10.00 per share, the market value (as determined by the Board
of Directors) of the Company's common stock at the time of issuance. The options
are  exercisable  through  December 17, 2006. In July 2002, the Company  granted
options to purchase an  aggregate  of 340,000  shares of common stock to certain
officers and directors of Community  Bank. Each of these options has an exercise
price of $7.00  per  share,  the  market  value (as  determined  by the Board of
Directors)  of the Company's  common stock at the time of issuance.  The options
are  exercisable  through July 18, 2007. The Company did not receive any payment
in exchange  for granting  any of such  options,  which were granted in reliance
upon an exemption from registration  under Section 4(2) of the Securities Act of
1933.

                                       72

<PAGE>
             COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following sets forth certain information regarding stock options for the
years ended December 31, 2000, 2001 and 2002:

<TABLE>
<CAPTION>
                                                                                      Number        Wgt. Average
                                                                                     of Shares     Exercise Price
                                                                                   -------------   --------------

<S>               <C> <C>                                                                <C>        <C>
Balance, December 31, 1999.....................................................          691,331    $      14.52

Granted, year ended December 31, 2000. ........................................           15,000           18.00
Expired, year ended December 31, 2000. ........................................           (2,500)         (20.00)
                                                                                   -------------

Balance, December 31, 2000.....................................................          703,831           14.57

Granted, year ended December 31, 2001. ........................................          252,000           10.00
Exercised, year ended December 31, 2001........................................         (329,560)          11.35
Expired, year Ended December 31, 2001. ........................................          (49,666)          15.10
                                                                                   -------------

Balance, December 31, 2001 ....................................................          576,605           14.37

Granted, year ended December 31, 2002. ........................................          340,000            7.00
Exercised, year ended December 31, 2002 .......................................                -              -
Expired, year ended December 31, 2002. ........................................          (86,067)          15.74
                                                                                   -------------

Balance, December 31, 2002.....................................................          830,538           11.00
                                                                                   =============
</TABLE>

<TABLE>
<CAPTION>

                                                                                   Expiration          Options
Exercise Prices                                                     Number            Date           Exercisable
                                                                 -------------   --------------   ---------------
<S>                            <C>                                     <C>             <C>  <C>           <C>
Options with exercise price of $7.00..........................         340,000         7-18-07            340,000
Options with exercise price of $10.00.........................         239,000        12-17-06            239,000
Options with exercise price of $15.00.........................          94,038         3-25-03             94,038
Options with exercise price of $20.00.........................         147,500        12-03-04            147,500
Options with exercise price of $18.00.........................          10,000         8-24-05             10,000
                                                                 -------------                    ---------------
Total outstanding, December 31, 2001..........................         830,538                            830,538
                                                                 =============                    ===============
</TABLE>

The Company permits option holders to tender  previously owned shares in lieu of
cash to pay the exercise price for shares acquired through option exercise. This
technique results in an increase in the number of shares outstanding with little
or no increase in capital account balances. No option holders tendered shares in
2002. During 2001, option holders tendered 207,883 shares in connection with the
exercise of options for 329,560  shares  resulting  in a net increase of 121,667
shares  outstanding.  The excess of the fair market value of the 329,560  shares
over the aggregate  option price  resulted in an income tax benefit of $751,566,
which was credited to capital surplus.

                                       73

<PAGE>
             COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Community Bank has advisory  director boards  established in the various markets
it serves.  These advisory  directors are given the option to receive their fees
in cash or stock.  Common stock  issued in lieu of cash for advisory  directors'
fees is summarized as follows:

<TABLE>
<CAPTION>
                                                                            2002           2001          2000
                                                                       ------------    -----------    -----------
<S>                                                                          <C>            <C>             <C>
         Shares issued...............................................        19,680         11,661          9,481
                                                                       ============    ===========    ===========

         Fair market value on issue date.............................  $    196,801    $   209,865    $   222,804
                                                                       ============    ===========    ===========
</TABLE>

The aggregate fair market value of the shares issued was charged to expense in
each respective period.

NOTE 17 - CONTINGENCIES

Background

At a meeting of Community Bank's Board of Directors on June 20, 2000, a director
brought to the attention of the Board the total amount of money  Community  Bank
had paid  subcontractors  in connection with the construction of a new Community
Bank office in  Guntersville,  Alabama.  Management of the Company  commenced an
investigation of the expenditures.  At the request of management, the architects
and  subcontractors  involved in the construction  project made presentations to
the Boards of  Directors of the Company and  Community  Bank on July 15 and July
18, 2000,  respectively.  At the July 18, 2000 meeting of the Board of Directors
of  Community  Bank,  another  director  alleged  that  Community  Bank had been
overcharged by subcontractors  on that construction  project and another current
construction  project.  On July 18, 2000, the Boards of Directors of the Company
and  Community  Bank  appointed  a  joint  committee  comprised  of  independent
directors  of the  Company  and of  Community  Bank to  investigate  the alleged
overcharges.  The joint  committee  retained  independent  legal  counsel and an
independent accounting firm to assist the committee in its investigation and has
made its report to the Boards of Directors.  The directors of Community Bank who
alleged  the  construction   overcharges  have  made  similar  charges  to  bank
regulatory  agencies and law enforcement  authorities.  Management believes that
these agencies and authorities are currently conducting investigations regarding
this matter.

Benson Litigation

On July 21, 2000, three shareholders of the Company,  M. Lewis Benson,  Doris E.
Benson and John M. Packard,  Jr.,  filed a lawsuit in the state Circuit Court of
Marshall County, Alabama against the Company,  Community Bank, certain directors
and officers of the Company and Community  Bank,  an employee of Community  Bank
and two  construction  subcontractors.  The  plaintiffs  purported  to file  the
lawsuit  as a  shareholder  derivative  action,  which  relates  to the  alleged
construction overcharges being investigated by the joint committee of the Boards
of Directors of the Company and Community  Bank. The complaint  alleges that the
directors,  officers and employee named as defendants in the complaint  breached
their fiduciary duties,  failed to properly supervise officers and agents of the
Company and Community Bank, and permitted waste of corporate assets by allegedly
permitting  the  subcontractor   defendants  to  overcharge  Community  Bank  in
connection  with the  construction  of two new Community  Bank  offices,  and to
perform the construction work without written  contracts,  budgets,  performance
guarantees and assurances of indemnification. In addition, the complaint alleges
that Kennon R.  Patterson,  Sr., the  Chairman,  President  and Chief  Executive
Officer of the Company,  breached his fiduciary  duties by allegedly  permitting
the two  named  subcontractors  to  overcharge  for  work  performed  on the two
construction  projects in exchange  for  allegedly  discounted  charges for work
these  subcontractors  performed  in  connection  with the  construction  of Mr.
Patterson's   residence.   The  complaint  further  alleges  that  the  director
defendants  knew or should have known of this  alleged  arrangement  between Mr.
Patterson and the subcontractors. The complaint also alleges that Mr. Patterson,
the Community  Bank  employee and the two  subcontractor  defendants  made false
representations  and suppressed  information  about the alleged  overcharges and
arrangement between Mr. Patterson and the subcontractors.

                                       74

<PAGE>
             COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On August 15, 2000, the  plaintiffs  filed an amended  complaint  adding Andy C.
Mann, a shareholder of the Company,  as a plaintiff and adding a former director
of the  Company  and  Community  Bank  as a  defendant.  The  amended  complaint
generally reiterates the allegations of the original complaint. In addition, the
amended   complaint   alleges  that  Community  Bank  was   overcharged  on  all
construction  projects from January 1997 to the present.  The amended  complaint
also alleges that the defendants  breached their fiduciary duties and are guilty
of gross financial mismanagement, including allegations concerning the making or
approval of certain loans and taking  allegedly  improper actions to conceal the
fact that certain loans were uncollectible. On September 18, 2000 the plaintiffs
filed a  second  amended  complaint.  The  second  amended  complaint  generally
reiterates  the  allegations  of the original and first amended  complaints.  In
addition,  the  second  amended  complaint  alleges  that  the  plaintiffs  were
improperly  denied  their  rights to  inspect  and copy  certain  records of the
Company and Community  Bank. The second amended  complaint also alleges that the
directors of the Company  abdicated  their roles as directors  either by express
agreement or as a result of wantonness and gross negligence.  The second amended
complaint asserts that the counts involving  inspection of corporate records and
director  abdication are individual,  non-derivative  claims. The second amended
complaint seeks, on behalf of the Company, an unspecified amount of compensatory
damages in excess of $1 million,  punitive  damages,  disgorgement  of allegedly
improperly paid profits and  appropriate  equitable  relief.  Upon motion of the
defendants,  the case was  transferred  to the  state  Circuit  Court in  Blount
County,  Alabama by order dated  September  21, 2000,  as amended on October 12,
2000.

On August  24,  2000,  the Board of  Directors  of the  Company  designated  the
directors  of the Company who serve on the joint  investigative  committee  as a
special  litigation  committee to investigate  and evaluate the  allegations and
issues  raised in this  lawsuit  and to arrive at such  decisions  and take such
action as the special litigation  committee deems appropriate.  On June 8, 2001,
the special litigation  committee filed its report under seal with the court. On
June 18, 2001, the court entered an order affirming the  confidentiality  of the
special  committee's  report. On June 28, 2001, the Company,  Community Bank and
various  other  defendants  filed a motion with the court to adopt the report of
the special  committee,  for partial summary judgment and to realign the Company
and Community Bank as plaintiffs in the lawsuit.

Following  a hearing on August  29,  2001,  the court  denied  these  motions on
November  8, 2001.  The court also ruled that the  plaintiffs  were  entitled to
conduct  discovery except as it related to one of the  subcontractor  defendants
and  granted  the  plaintiffs'  motion  to  unseal  the  report  of the  special
litigation committee. On November 14, 2001, the directors of the Company filed a
motion for the court to alter, amend, or vacate its November 8, 2001 rulings. On
February 7, 2002,  the Company and  Community  Bank filed a motion to disqualify
Maynard,  Cooper & Gale, P.C., the law firm representing the plaintiffs,  due to
conflicts of interest. The court held a hearing on these motions on February 22,
2002 and the  parties  are  awaiting a ruling.  A  tentative  settlement  of the
lawsuit was  announced in  December,  2002,  but was not carried  through and is
unlikely to be under present circumstances. One of the subcontractors named as a
defendant in this action,  Morgan City  Construction,  Inc., and its principals,
Mr. and Mrs. Dewey  Hamaker,  have been tried and convicted in the United States
District Court for the Northern District of Alabama and are awaiting sentencing.

Because of the inherent  uncertainties of the litigation process, the Company is
unable at this time to predict the outcome of this lawsuit and its effect on the
Company's financial condition and results of operations.

Packard Derivative Litigation

On April 4, 2003, a group composed of the same  plaintiffs as in the Benson case
filed another derivative action against Sheffield Electrical Contractors,  Inc.,
Steve Sheffield, Jay Bolden, Dudley,  Hopton-Jones,  Sims & Freeman, PLLP, Glynn
Debter,  Kennon R. Patterson,  Jr., Robert O. Summerford,  Jimmie Trotter,  John
Lewis, Jr., Merritt Robbins,  Stacy Mann, B. K. Walker, Jr., Denny Kelly, Roy B.
Jackson, Loy McGruder, and Hodge Patterson. The complaint in this new derivative
lawsuit,  besides  adding  defendants  known  during but not named in the Benson
lawsuit,  is based upon the same allegations as in the Benson case but bases its
claims against the  director-defendants  not "for what they did (and did not do)
before learning of the over billing [sic.] allegations against Patterson [Kennon
R.  Patterson,  Sr., the Company's  former  Chairman and CEO] in July 2000" but,
instead "only for what they have done (and failed to do) after the filing of the
Benson  lawsuit--  that  is,  after  they  learned  of the  allegations  against
Patterson in July 2000." [Emphasis in the original.]

                                       75

<PAGE>
             COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The time for answering  the complaint in this case has not yet expired.  Because
of the inherent  uncertainties of the litigation process,  the Company is unable
at this time to  predict  the  outcome  of this  lawsuit  and its  effect on the
Company's financial condition and results of operations.

Towns Derivative Litigation

The lawsuit  filed by Mr.  William  Towns,  a  shareholder  of the  Company,  on
November 19, 1998, as a shareholder  derivative  action against the directors of
the  Company in the Circuit  Court of Blount  County,  Alabama,  was settled and
dismissed  during 2002.  The  settlement  did not have a material  effect on the
financial condition of the Company.

Corr Family Litigation

On September 14, 2000,  Bryan A. Corr and six other  shareholders of the Company
related  to Mr.  Corr  filed an action in the  Circuit  Court of Blount  County,
Alabama, against the Company, Community Bank, and certain directors and officers
of the  Company  and  Community  Bank.  The  plaintiffs  have  alleged  that the
directors   of  the  Company   actively   participated   in  or   ratified   the
misappropriation of corporate income. The action was not styled as a shareholder
derivative action. On January 3, 2001, the defendants filed a motion for summary
judgment on the basis that these claims are  derivative  in nature and cannot be
brought  on behalf of  individual  shareholders.  The court has not ruled on the
motion.  Although management currently believes that this action will not have a
material  adverse  effect on the  Company's  financial  condition  or results of
operations,  regardless  of the  outcome,  the  action  could  be  costly,  time
consuming, and a diversion of management's attention.

Auto Loan Litigation

The action  filed by the  Company in the United  States  District  Court for the
Northern  District of Alabama against Carl Gregory Ford L-M, Inc., an automobile
dealership located in Ft. Payne,  Alabama,  Carl Gregory and Doug Broaddus,  the
owners  of  the  dealership,  several  employees  and  former  employees  of the
dealership and Gerald Scot Parrish,  a former  employee of Community  Bank, with
respect to certain loans  originated  during 1998 in Community  Bank's  Wal-Mart
office in Ft. Payne,  Alabama,  has been settled as to all defendants other than
G. S.  Parrish,  the former  employee of the Bank.  The Bank has one year within
which to re-file its claims against Mr. Parrish.

Employee Litigation

The lawsuit  filed by Messrs.  Michael W. Alred and Michael A. Bean,  two former
directors and executive officers of Community Bank, filed suit against Community
Bank in the United States  District  Court for the Northern  District of Alabama
alleging that their employment was wrongfully terminated for allegedly providing
information  to bank  regulatory  and  law  enforcement  authorities  concerning
possible violations of laws and regulations, gross mismanagement, gross waste of
funds and abuse of authority  by Community  Bank,  its  directors,  officers and
employees was settled and dismissed  during 2002. The terms of the settlement of
this  litigation were deemed  confidential  and are included in the statement of
income as an increase to litigation expense.

Lending Acts Litigation

On October 11, 2002,  William Alston,  Murphy Howard,  and Jason Tittle filed an
action against Community Bank, Community  Bancshares,  Inc.,  Holsombeck Motors,
Inc.,  Lee Brown d/b/a Alabama Bond &  Investigation  a/k/a ABI Recovery,  Chris
Holmes d/b/a Alabama Bond & Investigation a/k/a ABI Recovery, Regina Holsombeck,
Kennon "Ken" Patterson,  Sr., Hodge Patterson,  James Timothy "Tim" Hodge, Ernie
Stephens, and the State of Alabama Department of Revenue. The plaintiffs in this
class  action  allege  that  Community   Bank  and  others   conspired  or  used
extortionate methods to effect a lending scheme of "churning phantom loans", and
that profits from the scheme were used to secure an interest in and/or to invest
in an enterprise that affects  interstate  commerce.  The allegations state that
Community  Bank used various  methods to get  uneducated  customers with fair to
poor credit to sign numerous "phantom loans"

                                       76

<PAGE>
             COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

when  the  customers  only  intended  to  sign  for  one  loan.  Claims  include
racketeering activity within the meaning of the Racketeer Influenced and Corrupt
Organizations  Act of  1970,  conspiracy,  spoliation,  conversion,  negligence,
wantonness, outrage, and civil conspiracy.

The  Company  and  Community  Bank  intend to defend the action  vigorously  and
currently are conducting discovery to ascertain what substance, if any, there is
to the claims.  Although management currently believes that this action will not
have a material adverse effect on the Company's  financial  condition or results
of  operations,  regardless  of the outcome,  the action  could be costly,  time
consuming, and a diversion of management's attention.

Patterson Litigation

On April 9, 2003 Kennon R. Patterson, Sr., former Chairman,  President and Chief
Executive  Officer of the Company,  filed an adversary  proceeding in the United
States  Bankruptcy Court for the Northern District of Alabama in connection with
his petition for  protection  under Chapter 11 of the United  States  Bankruptcy
Code.  Defendants of the adversary  proceeding are the Company,  Community Bank,
five  directors  of the Company and  Community  Bank and the law firm of Powell,
Goldstein,  Frazer and  Murphy,  LLP which  represents  Community  Bank's  Audit
Committee.  The  complaint  alleges  that the Company  breached  its  employment
agreement with Mr.  Patterson by terminating  his employment on January 27, 2003
and failed to pay him for compensation and benefits which had allegedly  accrued
prior to his  termination.  The  complaint  also  alleges that  Community  Bank,
members of Community Bank's Audit Committee,  the Audit Committee's  independent
counsel  and the  Company's  current  Chairman,  President  and Chief  Executive
Officer  conspired  to  interfere  with Mr.  Patterson's  contract  and business
relationship with the Company.  The suit seeks damages in excess of $150 million
for, among other things,  lost  compensation and benefits,  mental anguish,  and
damage to Mr. Patterson's reputation.  The Company believes that this lawsuit is
without merit and intends to defend the action vigorously.  Although  management
currently  believes that this action will not have a material  adverse effect on
the Company's  financial  condition or results of operations,  regardless of the
outcome,  the  action  could  be  costly,  time  consuming  and a  diversion  of
management's attention.

General

The Company  and its  subsidiaries  are from time to time also  parties to other
legal  proceedings  arising  in the  ordinary  course  of  business.  Management
believes,  after consultation with legal counsel,  that no such proceedings,  if
resulting in an outcome unfavorable to the Company, will, individually or in the
aggregate,  have a material adverse effect on the Company's  financial condition
or results of operations.

The  Company's   Certificate   of   Incorporation   provides  that,  in  certain
circumstances,  the Company will indemnify and advance expenses to its directors
and officers for judgments,  settlements and legal expenses incurred as a result
of their  service as officers and  directors of the  Company.  Community  Bank's
Bylaws contain a similar provision for indemnification of directors and officers
of Community Bank.


NOTE 18 - RELATED PARTY TRANSACTIONS

The Company,  through  Community Bank, its wholly owned  subsidiary,  offers all
regular full-time  employees,  including executive  officers,  loans at interest
rates which are 1% below the  prevailing  market rate.  As of December 31, 2002,
executive  officers  and  directors  of the  Company and  executive  officers of
Community  Bank and its  subsidiaries,  including  members  of  their  immediate
families and related  interests,  had loans outstanding  pursuant to this policy
with total indebtedness of approximately $47,903.

The Company,  through  Community  Bank,  also offers first  mortgage real estate
loans on the primary  residence,  at a rate of 5%, to employees who are required
to  relocate  in the  course  of their  employment.  As of  December  31,  2002,
executive  officers  and  directors  of the  Company and  executive  officers of
Community  Bank and its  subsidiaries,  including  members  of  their  immediate
families and related  interests,  had relocation  loans  outstanding  with total
indebtedness of approximately $1,063,186.

                                       77

<PAGE>
             COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At  December  31,  2002,  Community  Bank had one real  estate loan to Kennon R.
Patterson,  Sr.,  the former  Chairman  and CEO of the  Company in the amount of
$5,150,000.  During  2002,  the highest  balance  outstanding  for this loan was
$5,150,000.  The loan bears  interest  at 4.25% and is  secured  by real  estate
having an appraised value in excess of the loan amount.

At  December  31,  2002,  Community  Bank  had one  real  estate  loan to  Hodge
Patterson,  former  Executive  Vice  President  of the  Bank  in the  amount  of
$540,401.  During  2002,  the  highest  balance  outstanding  for this  loan was
$552,732. The loan bears interest at 5.00%.

In June 2000,  Community Bank loaned  $1,696,576 to Debter  Properties,  LLC, an
Alabama  limited  liability  company  of which a  director  of the  Company is a
member,  to fund the purchase from  Community Bank of the real property in which
Community Bank's Boaz,  Alabama office was located.  Concurrently with this loan
and the  purchase of the real  property,  Community  Bank  entered  into a lease
agreement,  as the tenant,  with Debter Properties,  LLC to lease back this real
property from Debter  Properties,  LLC. On May 31, 2002  Community Bank sold its
Boaz,  Alabama office to Peoples Bank of North Alabama which assumed the loan to
Debter Properties, LLC and Community Bank's obligations under the lease.

Interior Design:  The Company and the Bank had no service  contracts during 2002
or 2001 with Heritage Interiors, a decorating and design firm owned and operated
by the wife of Kennon R. Patterson,  Sr., a director and officer of the Company.
The Company and the Bank, including the Bank's subsidiaries used the services of
Heritage Interiors during 2000 for the interior design,  furniture,  appliances,
fixtures,  hardware,  carpets, wall coverings, paint, drapes and accessories for
new  facilities  and similar work  associated  with the  renovation  of existing
locations.  Total  payments to Heritage  Interiors  in 2000 were  $407,100.  All
pending projects were completed prior to the end of 2000.

Accounting  Services:  The Company has engaged the  accounting  firm of Schauer,
Taylor, Cox, Vise and Morgan, P.C. to perform certain accounting services.  Doug
Schauer,  a member  of the  firm,  is Kennon  R.  Patterson,  Sr.'s  son-in-law.
Services  performed  by Schauer,  Taylor,  Cox,  Vise and Morgan,  P.C.  for the
Company  in 2002 and 2001 have been  limited  to  preparation  of the  Company's
quarterly tax accruals,  preparation and filing the Company's  federal and state
tax returns, consultation regarding interpretation and application of accounting
standards and EDGAR services in connection  with the Company's  filings with the
Securities  and  Exchange  Commission.  The  Company and its  subsidiaries  paid
Schauer, Taylor, Cox, Vise and Morgan, P.C. $102,684,  $121,707 and $117,898 for
services rendered during 2002, 2001 and 2000, respectively.

Leases: In June 2000, Community Bank entered into a capital lease agreement,  as
the tenant,  with Debter Properties,  LLC, an Alabama limited liability company,
pursuant to which  Community  Bank leased the real  property in which  Community
Bank's Boaz,  Alabama  office is located.  Mr. Glynn  Debter,  a director of the
Company,  is a member of Debter  Properties,  LLC. In connection  with the lease
agreement,  Community Bank loaned funds to Debter Properties, LLC to finance its
purchase of the real property from  Community  Bank. The term of the lease is 20
years;  provided,  however,  that in no event shall the term of the lease expire
prior to the time when the loan  obtained by the lessor to  purchase  the leased
property is paid in full.  The monthly  rent on this lease is an amount equal to
the monthly debt amortization of funds which the lessor borrowed to purchase the
leased  property.  Because the  interest  rate on the loan used to purchase  the
property  adjusts with fluctuation in the prime rate, the monthly lease payments
are  subject to change.  Lease  payments to Debter  Properties,  LLC during 2002
totaled approximately  $55,679. Lease payments totaled $156,651 and $110,747 for
the years ended December 31,2001 and 2000, respectively. This lease was acquired
by the purchaser of the Marshall County offices on May 31, 2002.  Community Bank
no longer has any obligations under this lease.

On March 13,  2001,  Community  Bank  entered  into a ground  lease with Merritt
Robbins,  a director  of the  Company  and  Community  Bank,  pursuant  to which
Community  Bank leases  property in New Hope,  Alabama,  from Mr.  Robbins for a
period of 5 years at a monthly  rent of $800.  Community  Bank has the option to
renew the lease for up to seven

                                       78

<PAGE>
             COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

successive  5-year terms in which event the rent  increases  $200 per month with
each renewal term. At any time during the term of the lease  Community  Bank has
the option to purchase the  property at a price agreed upon by the parties,  or,
if the parties cannot agree,  at a price  determined by averaging  appraisals of
the property performed by two licensed appraisers.

On June 14, 2001,  Community Bank entered into a lease with Michael Robbins, the
son of a director  of the  Company  and  Community  Bank  pursuant  to which Mr.
Robbins  leases  property in Madison  County,  Alabama from Community Bank for a
period of 5 years at a monthly rent of $700. Mr. Robbins has the option to renew
the lease for up to seven  successive  5-year terms. At any time during the term
of the lease Mr.  Robbins  has the option to  purchase  the  property at a price
agreed  upon  by the  parties,  or,  if the  parties  cannot  agree,  at a price
determined  by averaging  appraisals  of the property  performed by two licensed
appraisers.

NOTE 19 - OTHER OPERATING EXPENSES

Other operating expenses consist of the following:

<TABLE>
<CAPTION>
                                                                            Years Ended December 31,
                                                                     2002            2001              2000
                                                              --------------  -----------------  ---------------

<S>                                                           <C>              <C>               <C>
Amortization of intangibles-goodwill........................  $            -   $       478,487   $        470,210
Amortization of intangibles-other...........................          76,797            83,311             83,311
Loss on write-down of goodwill..............................               -         2,652,620                  -
Loss on impairment of premises and equipment................               -                 -            439,353
Insurance...................................................         832,000           279,164            298,052
Legal fees..................................................       1,962,391         1,853,170            785,192
Professional fees...........................................       1,308,782         1,201,107            211,010
Supplies....................................................         590,276           559,449            417,829
Postage.....................................................         288,924           383,048            436,947
Telephone...................................................         598,190           657,014            787,072
Courier services............................................         364,141           389,932            209,212
ATM expense.................................................         164,881           221,360            229,052
Holding costs on other real estate owned....................         252,827            61,430             23,854
Provision for debt cancellation.............................         306,611            95,686            126,781
Other.......................................................       2,454,450         1,481,991          2,412,836
                                                              --------------   ---------------   ----------------
                                                              $    9,200,270   $    10,397,769   $      6,930,711
                                                              ==============   ===============   ================
</TABLE>

NOTE 20 - INCOME TAXES

The  components  of income tax  expense  (benefit)  for each of the years  ended
December 31, 2002, 2001 and 2000 were:

<TABLE>
<CAPTION>

                                                                             2002           2001         2000
                                                                         -------------  -----------  -------------
Currently payable
<S>                                                                      <C>            <C>          <C>
     Federal.......................................................      $     (50,736) $   (64,666) $     501,709
     State.........................................................             70,858      (10,125)        (7,325)
Deferred ..........................................................           (573,197)    (914,941)    (2,198,860)
                                                                         -------------  -----------  -------------
Total    ..........................................................      $    (553,075) $  (989,732) $  (1,704,476)
                                                                         =============  ===========  =============
</TABLE>

                                       79
<PAGE>
             COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The provision for income taxes is presented in the income statement as follows:
<TABLE>
<CAPTION>

                                                                           Years Ended December 31,
                                                                   2002              2001             2000
                                                              --------------  -----------------  ---------------
<S>                                                           <C>              <C>               <C>
Continuing operations.......................................  $  (3,129,806)   $   (1,520,856)   $    (1,824,753)
Discontinued operations.....................................       2,576,731           531,124            120,277
                                                              --------------   ---------------   ----------------
         Total..............................................  $    (553,075)   $     (989,732)   $    (1,704,476)
                                                              ==============   ===============   ================
</TABLE>


Components of the Company's deferred tax asset were as follows:
<TABLE>
<CAPTION>
                                                                                         December 31,
                                                                                    2002              2001
                                                                              ---------------   ---------------
Deferred Tax Assets
     Net unrealized losses (gains) on securities available
<S>                                                                           <C>               <C>
       for sale............................................................   $             -   $       162,735
     Pension expense and benefits..........................................           536,561           540,660
     Provision for loan losses.............................................         3,196,573         1,968,906
     Intangibles...........................................................           604,351           744,463
     Provision for debt cancellation.......................................            84,756            52,378
     Alternative minimum tax credit carryforward...........................            35,143           351,505
     Net operating loss carryforward.......................................            64,010           191,353
     Other real estate owned...............................................           441,106                 -
     Other.................................................................                 -            42,315
                                                                              ---------------   ---------------
     Total deferred tax assets.............................................         4,962,500         4,054,315
                                                                              ---------------   ---------------

Deferred Tax Liabilities
     Net unrealized losses (gains) on securities, available for sale.......        (1,008,687)                -
     Depreciation..........................................................        (1,094,377)       (1,260,335)
     Minimum pension liability.............................................          (624,626)
     Other.................................................................           (52,339)                -
                                                                              ---------------   ---------------
Total deferred tax liabilities.............................................        (2,780,029)       (1,260,335)
                                                                              ---------------   ---------------

     Net Deferred Tax Asset................................................   $     2,182,471   $     2,793,980
                                                                              ===============   ===============
</TABLE>

The net  deferred  tax asset is included as a component  of other  assets in the
Consolidated Statements of Condition.

Realization of deferred tax assets is dependent on future earnings,  if any, the
timing and amount of which is uncertain.  Accordingly,  a valuation allowance in
the amount of $723,132 as of December 31, 2002 has been  established  to reflect
these  uncertainties.  The net deferred tax asset before valuation allowance was
$2,905,603.

The  provision  for federal  income taxes differs from that computed by applying
federal statutory rates to income before federal income tax expense. The primary
reason for this difference is tax-exempt interest income and disallowed interest
expense.

At  December  31,  2002,  for income  tax  purposes,  the  Company  had  federal
alternative minimum tax (AMT) credit carry forwards of $35,143 and $351,505. The
AMT credit carryforwards have no expiration date.

Tax effects of securities  transactions  resulted in an increase in income taxes
for 2002, 2001 and 2000 of $239,616, $470,823 and $1,682, respectively.

                                       80

<PAGE>
             COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS

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 Cash Equivalents: For these short-term instruments, the carrying amount
is a reasonable estimate of fair value.

Investment Securities : For securities and marketable equity securities held for
investment  purposes,  fair values are based on quoted  market  prices or dealer
quotes.  For other  securities  held as  investments,  fair value equals  quoted
market price,  if available.  If a quoted  market price is not  available,  fair
value is estimated using quoted market prices for similar securities.

Loan  Receivables:  For certain  homogeneous  categories of loans,  such as some
residential  mortgages,  other consumer loans, 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.

Deposits: The fair value of demand deposits, savings accounts, and certain money
market  deposits is the amount payable on demand at the reporting date. The fair
value of  fixed-maturity  certificates  of deposit is estimated  using the rates
currently offered for deposit of similar remaining maturities.

Short-term Borrowings: The fair value of the Company's fixed rate borrowings are
estimated  using  discounted  cash  flows,   based  on  the  Company's   current
incremental  borrowing  rates for similar types of borrowing  arrangements.  The
carrying amount of the Company's variable rate borrowing approximates their fair
values.

Commitments  to extend credit and standby  Letters of Credit:  The fair value of
commitments and letters of credit is estimated to be  approximately  the same as
the notional amount of the related commitment.  The estimated fair values of the
Company's financial instruments as of December 31, 2002 and 2001 are as follows:

<TABLE>
<CAPTION>

                                                               2002                            2001
                                                   ---------------------------    ------------------------------
                                                     Carrying          Fair          Carrying           Fair
                                                      Amount           Value          Amount            Value
                                                   -------------  ------------    --------------  --------------
                                                          (In thousands)                  (In thousands)
Financial Assets
<S>                                                <C>            <C>             <C>             <C>
   Cash and short-term investments..............   $      40,207  $     40,207    $       53,237  $       53,237
   Investment securities........................         123,901       123,901           121,679         121,679
   Loans and capitalized lease receivable ......         362,238       368,082           501,520         517,454
   Less: allowance for loan losses. ............           9,784         9,784             7,292           7,292
                                                   -------------  ------------    --------------  --------------
   Loans, net...................................         352,454       358,298           494,228         510,162
                                                   -------------  ------------    --------------  --------------
   Total .......................................   $     516,562  $    522,406    $      669,144  $      685,078
                                                   =============  =============   ==============  ==============

Financial Liabilities
   Deposits.....................................   $     459,464  $    471,738    $      617,706  $      623,334
   Short-term borrowings. ......................           1,725         1,725             4,360           4,360
   Long-term debt..............................           55,636        63,768            58,433          78,066
                                                   -------------  ------------    --------------  --------------
   Total Financial Liabilities..................   $     516,825  $    537,231    $      680,499  $      705,760
                                                   =============  ============    ==============  ==============
</TABLE>

                                       81

<PAGE>
             COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 22 - PRIOR PERIOD ADJUSTMENTS

During the quarter  ended  September 30, 2002,  it was  determined  that certain
items related to the fourth  quarter of the year ended December 31, 2001 had not
been  properly  reported  in  that  period.  The  items  related  to  unrecorded
liabilities,   valuation  of   repossessed   assets  and  accounts   receivable.
Accordingly,  the December 31, 2001 Consolidated  Statement of Condition and the
Consolidated  Statement of Income have been  restated.  Also,  during the fourth
quarter of 2002,  the Audit  Committee  commenced a new  investigation  into the
allegations that Community Bank had been  overcharged by certain  subcontractors
in exchange for  discounted  charges for work done on the personal  residence of
the Company and Bank's former Chief  Executive  Officer.  The  investigation  is
ongoing and is expected to continue during 2003;  however,  the results thus far
are  considered  to be  substantially  complete  and are, in  management's  best
estimation,  the loss incurred due to  overpayments  on the Bank's  construction
projects. The overcharges occurred between 1998 and 2000 and totaled $1,972,712.
The Company is considering  these as an impairment to premises and equipment and
has  reflected  the  appropriate  amounts  as prior  period  adjustments  to the
corresponding  financial  reporting  periods as well as  restating  all  periods
presented  in  the  Consolidated  Statements  of  Financial  Condition  and  the
Consolidated  Statements of Income.  At December 31, 2002 the Company has deemed
these  amounts to be a loss because  potential  recoveries  cannot be reasonably
estimated or known to be collectible  at this time. The Company  intends to seek
recoveries in full.

The schedule below shows all prior period adjustments  discussed above and their
effects on net income and retained earnings for the periods presented:

<TABLE>
<S>                         <C> <C>                                                              <C>
Retained earnings, December 31, 1999, as  previously reported.................................   $    19,038,875
   Prior period adjustments:
      Loss on impairment of premises and equipment............................................        (1,149,064)
Change in depreciation expense................................................................             5,257
                                                                                                 ---------------
Retained earnings, December 31, 1999, as restated.............................................   $    17,895,068
                                                                                                 ===============

Retained earnings, December 31, 2000, as previously reported..................................   $    13,490,799
   Prior period adjustments:
      Loss on impairment of premises and equipment............................................        (1,972,712)
Change in depreciation expense
                                                                                                          24,561
Retained earnings, December 31, 2000, as restated.............................................   $    11,542,648
                                                                                                 ===============

Net loss, for the year ended December 31, 2000, as previously reported........................   $    (2,214,931)
         Loss on impairment of premises and equipment.........................................          (823,648)
         Change in depreciation expense.......................................................            19,304
                                                                                                 ---------------
Net loss, for the year ended December 31, 2000, as restated...................................   $    (3,019,275)
                                                                                                 ===============

Retained earnings, December 31, 2001, as  previously reported.................................   $    12,390,300
   Prior period adjustments:
      Loss on impairment of premises and equipment............................................   $    (1,972,712)
Change in depreciation expense................................................................            63,494
      Unrecorded liabilities..................................................................          (227,985)
      Valuation of repossessed assets.........................................................           (85,986)
      Accounts receivable.....................................................................           (47,347)
                                                                                                 ---------------
   Retained earnings, December 31, 2001, as restated  ........................................   $    10,119,764
                                                                                                 ===============

Net loss, for the year ended December 31, 2001, as previously reported........................   $    (1,100,499)
      Change in depreciation expense..........................................................            38,933
Unrecorded liabilities........................................................................          (227,985)
Valuation of repossessed assets...............................................................           (85,986)
      Accounts receivable.....................................................................           (47,347)
                                                                                                 ---------------
Net loss, for the year ended December 31, 2001, as restated...................................   $    (1,422,884)
                                                                                                 ===============
</TABLE>

                                       82

<PAGE>
             COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 23 - SUBSEQUENT EVENTS

On January  27,  2003,  the Board of  Directors  of the Company  terminated  the
employment of Kennon R.  Patterson,  Sr. Patrick M. Frawley was named  Chairman,
Chief Executive  Officer and President of the Company.  On February 8, 2003, the
Board of Directors of Community  Bank,  the  Company's  wholly-owned  subsidiary
announced Kennon R. Patterson,  Sr. and Kennon R. Patterson, Jr. would no longer
serve on the Board of Directors of Community Bank. The Board of Directors of the
Company  does not have the legal  authority to remove a director of the Company,
although a director may resign.  Mr. Patterson has not resigned as a director of
the Company.(See Note 17 "Patterson Litigation")

Also, on March 4, 2003, the Board of Directors of Community Bank (the "Bank"), a
wholly  owned  subsidiary  of the  Company,  and the Federal  Deposit  Insurance
Corporation  (the "FDIC") entered into a Stipulation and Consent to the Issuance
of an Order to Cease and Desist (the "Consent Agreement"). The Order will become
effective  10 days  from  March 12,  2003,  the date of its  issuance.  The FDIC
alleges in the Order to Cease and Desist (the "Order")  deficiencies relating to
the Board's  supervision  over active  management of the Bank,  supervision  and
control of lending to insiders and accurate  maintenance of the Bank's books and
records. The FDIC characterizes these deficiencies as unsafe and unsound banking
practices.  The Board has  consented to the Order  without  admitting or denying
those  allegations.  Pursuant to the Order,  the Board of the Bank has agreed to
cease and desist from conduct giving rise to the noted deficiencies and to:

(v)  develop  within 30 days of the  effective  date of the Order a written plan
     specifying  the  responsibilities  and lines of  authority  for the  Bank's
     executive  officers and outlining  internal  controls to ensure  compliance
     with the plan;

(vi) refrain from making,  renewing or modifying  any loans to current or former
     officers or directors  without  prior  approval of the FDIC and the Alabama
     State Banking Department;

(vii)amend the  Bank's  books and  records to  reflect  the actual  value of the
     Bank's premises and fixed assets; and

(viii) supply a copy of the Order to the Company and provide the Company  with a
     summary  of the Order  for  inclusion  in the  Company's  next  shareholder
     communication.

                                       83
<PAGE>
             COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 24 - CONDENSED PARENT COMPANY INFORMATION

STATEMENTS OF CONDITION

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                                  -------------------------------
                                                                                       2002            2001
                                                                                  --------------  ---------------
Assets
<S>                                                                               <C>             <C>
   Cash and due from banks.....................................................   $      587,222  $       982,434
   Investment in subsidiaries*.................................................       54,318,635       51,578,654
   Intangible assets, net .....................................................          732,133          836,867
   Deferred tax assets. .......................................................          752,487        1,016,469
   Refundable income taxes-current ............................................          786,927          692,163
   Other assets ...............................................................          445,817          797,078
                                                                                  --------------  ---------------
      Total Assets.............................................................   $   57,623,221  $    55,903,665
                                                                                  ==============  ===============

Liabilities and Shareholders' Equity
   Long-term debt..............................................................   $    3,577,687  $     4,666,599
   Trust preferred securities .................................................       10,310,000       10,310,000
   Other liabilities ..........................................................        4,045,460        2,532,233
      Shareholders' Equity ....................................................       39,690,074       38,394,833
                                                                                  --------------  ---------------
      Total Liabilities and Shareholders' Equity...............................   $   57,623,221  $    55,903,665
                                                                                  ==============  ===============
<FN>
*    Eliminated in consolidation
</FN>
</TABLE>

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                                       84
<PAGE>
             COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


STATEMENTS OF INCOME

<TABLE>
<CAPTION>

                                                                             Year Ended December 31,
                                                                   2002               2001              2000
                                                             ---------------    ----------------  --------------
Income
   From subsidiaries - eliminated in consolidation:
<S>                                                          <C>               <C>                <C>
      Dividends...........................................   $             -   $               -  $     4,878,562
      Management fees.....................................           300,000             300,000          300,000
      Interest............................................            46,385             111,322          169,455
      Other income........................................             1,200              15,007           27,759
                                                             ---------------   -----------------  ---------------
                                                                     347,585             426,329        5,375,776
                                                             ---------------   -----------------  ---------------
Expenses
   Salaries and employee benefits.........................         1,342,569           1,568,160        2,193,107
   Interest...............................................         1,308,043           1,388,241        1,433,404
   Other expenses.........................................           536,289             683,737        1,340,281
                                                             ---------------   -----------------  ---------------
                                                                   3,186,901           3,640,138        4,966,792
                                                             ---------------   -----------------  ---------------
Income (loss) before income taxes and equity in
   undistributed earnings of subsidiaries.................        (2,839,316)         (3,213,809)         408,984
Income taxes..............................................        (1,067,504)         (1,107,020)      (1,506,160)
                                                             ----------------  -----------------  ---------------
Income before equity in undistributed earnings (loss)
   of subsidiaries........................................        (1,771,812)         (2,106,789)       1,915,144
Equity in undistributed earnings (loss)
   of subsidiaries........................................         2,676,010             683,905       (4,934,419)
                                                             ---------------   -----------------  ---------------

Net income (loss).........................................   $       904,198   $      (1,422,884) $    (3,019,275)
                                                             ===============   =================  ===============
</TABLE>

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                                       85
<PAGE>

             COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                             Year Ended December 31,
                                                                    2002             2001               2000
                                                             ---------------  ------------------  --------------
Cash Flows From Operating Activities
<S>                                                          <C>               <C>                <C>
   Net income (loss)......................................   $       904,198   $      (1,422,884) $    (3,019,275)
   Adjustments to reconcile net income (loss)
      to net cash provided by operating activities:
      Equity in undistributed income of subsidiaries......        (2,676,010)           (683,905)       4,934,419
      ESOP expense related to shares released.............           177,065             256,101                -
      Provision for depreciation and amortization.........           107,847              86,707          108,362
      Loss on disposal of assets..........................             2,637                   -                -
      Increase in other assets............................           514,730           1,690,614       (1,547,353)
      Increase in other liabilities.......................         1,468,226            (184,800)       1,291,716
                                                             ---------------   ------------------ ---------------
         Net cash provided by operating
          activities......................................           498,693            (258,167)       1,767,869
                                                             ---------------   ------------------ ---------------
Cash Flows From Investing Activities
   Proceeds from sale of assets...........................                 -                   -           33,431
   Capitalization of subsidiaries.........................                 -          (1,534,000)      (5,940,879)
                                                             ---------------   -----------------  ---------------
         Net cash (used in) provided by
         investing activities.............................                 -          (1,534,000)      (5,907,448)
                                                             ---------------   -----------------  ----------------
Cash Flows From Financing Activities
   Repayment of long-term debt............................        (1,088,914)           (752,504)        (961,958)
   Issuance of Trust preferred securities.................                 -                   -       10,310,000
   Issuance of common stock...............................           196,801             209,865          222,804
   Retirement of common stock.............................            (1,792)                  -                -
   Cash dividends.........................................                 -                   -       (3,333,145)
                                                             ---------------   -----------------  ---------------
      Net cash provided by (used in)
         financing activities.............................          (893,905)           (542,639)       6,237,701
                                                             ----------------- ------------------ ---------------
Net increase (decrease) in cash and
   cash equivalents.......................................          (395,212)         (2,590,907)       2,098,122
Cash and due from banks at beginning of year..............           982,434           3,573,341        1,475,219
                                                             ---------------   -----------------  ---------------
Cash and due from banks at end of year....................   $       587,222   $         982,434  $     3,573,341
                                                             ===============   =================  ===============
</TABLE>

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                                       86
<PAGE>
             COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 25 - QUARTERLY RESULTS (UNAUDITED)

A summary of the unaudited  results of  operations  for each quarter of 2002 and
2001 follows:
<TABLE>
<CAPTION>

                                                                   First         Second          Third
                                                                  Quarter        Quarter         Quarter          Fourth
                                                               (As Restated)   (As Restated)   (As Restated)      Quarter
                                                              --------------  --------------  --------------  --------------
                                                                           (In Thousands Except Per Share Data)
2002:
<S>                                                           <C>              <C>            <C>             <C>
   Total interest income..................................... $       12,307   $       8,640  $       10,029  $        9,681
   Total interest expense ...................................          5,571           3,332           4,279           3,971
Provision for loan losses....................................          1,042           3,012           2,389           3,589
   Net interest income after
     provision for loan losses ..............................          5,694           2,296           3,361           2,121
   Investment securities gains (losses) .....................             17             107             305             224
   Total noninterest income .................................          1,908           1,828           2,007           1,703
   Total noninterest expense. ...............................          7,387           6,416           9,695           5,573
   Income tax expense .......................................            120            (328)         (1,824)         (1,097)
   Income (loss) from continuing operations..................             95          (1,963)         (2,503)           (652)
Income (loss) from discontinued operations...................          1,138           4,790               -               -
Net income (loss)............................................          1,233           2,827          (2,503)           (652)
   Per Common share:
     Basic earnings (loss) from continuing operations........ $         0.02  $        (0.42) $        (0.54) $        (0.14)
     Diluted earnings (loss) from continuing operations.....            0.02           (0.42)          (0.54)          (0.14)
     Basic earnings (loss)...................................           0.27            0.60           (0.54)          (0.14)
     Diluted earnings (loss).................................           0.27            0.60           (0.54)          (0.14)

2001:
   Total interest income..................................... $       14,429  $        9,748   $      11,825  $       11,485
   Total interest expense ...................................          8,367           4,844           6,198           5,224
   Provision for loan losses. ...............................            974           1,281           2,292           1,547
   Net interest income after
     provision for loan losses ..............................          5,088           3,623           3,335           4,714
   Investment securities gains (losses) .....................            353              25             155             751
   Total noninterest income .................................          2,583           1,550           1,760           2,239
   Total noninterest expense. ...............................          6,669           6,167           6,233           9,723
   Income tax expense .......................................            291            (395)            (15)         (1,401)
   Income (loss) from continuing operations .................            711            (599)         (1,123)         (1,370)
   Income (loss) from discontinued operations................             94             443              90             332
   Net income (loss).........................................            805            (156)         (1,033)         (1,038)
   Per Common Share:
     Basic earnings (loss) from continuing operations........ $         0.16  $        (0.13) $        (0.24) $        (0.31)
     Diluted earnings (loss) from continuing operations.....            0.16           (0.13)          (0.24)          (0.31)
     Basic earnings (loss)...................................           0.18           (0.03)          (0.22)          (0.24)
     Diluted earnings (loss).................................           0.18           (0.03)          (0.22)          (0.24)
</TABLE>

In December 2002, the Company  amended the March 31, 2002, June 30, 2002 and the
September 30, 2002 Form 10-Q's to reflect  certain prior period  adjustments and
the appropriate presentation for discontinued operations.

                                       87

<PAGE>

Item 9 -  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
          Financial Disclosure

The Company's discussion of changes in its accountants are disclosed in:

     (i.) The Company's Current Report on Form 8-K filed on May 16, 2000

     (ii.) an amendment thereto on Form 8-K/A filed on May 30, 2000

     (iii.) a Current Report on Form 8-K filed on September 28, 2000

     (iv.) an amendment thereto on Form 8-K/A filed on October 10, 2000

     (v.) a Current Report on Form 8-K filed on February 15, 2001.

     (vi.) a Current Report on Form 8-K filed on October 11, 2002.

     (vii.) An amendment thereto on Form 8-K/A filed on November 5, 2002.

                                    PART III

Item 10 - Directors and Executive Officers of the Registrant

The directors of the Company,  their ages,  the positions  held by them with the
Company and certain of its subsidiaries and their principal  occupations for the
last five years are as follows:

                 Directors with Terms Expiring In 2003 (Class I)
<TABLE>
<CAPTION>

        Name, Age and Positions Held with the                       Director of             Principal Occupation
              Company and Subsidiaries                             Company Since           During Past Five Years
-------------------------------------------------------          -----------------      -----------------------------
<S>            <C>                                                     <C>             <C>
Roy B. Jackson (68)                                                    1999            (Retired) Owner of Jackson
Director of the Company, Community Bank,                                                Farm & Garden Center,
1st Community Credit Corporation;                                                       Minor Hill, Tennessee
Community Appraisals, Inc., Community Insurance Corp.
and Southern Select Insurance, Inc.

Kennon R. Patterson, Jr. (37)                                          2000             Ranch Manager of Heritage
Director of the Company                                                                 Valley Ranch (2000 - Present);
                                                                                        Executive Vice President of
                                                                                        Community Bank (1997-2000);
                                                                                        Senior Vice President of
                                                                                        Community Bank (1996-1997)

Jimmie Trotter (65)                                                    2000            (Retired) Principal of Mortimer
Director of the Company, Community Bank,                                                Jordan High School, Morris,
1st Community Credit Corporation;                                                       Alabama
Community Appraisals, Inc., Community Insurance Corp.
and Southern Select Insurance, Inc.

                                       88
<PAGE>


                Directors with Terms Expiring In 2004 (Class II)

        Name, Age and Positions Held with the                       Director of             Principal Occupation
              Company and Subsidiaries                             Company Since           During Past Five Years
-------------------------------------------------------          -----------------      -----------------------------
Glynn Debter (68)                                                      1996             Owner-operator of Debter
Director of the Company, Community Bank,                                                Farms (cattle breeding),
1st Community Credit Corporation;                                                       Horton, Alabama
Community Appraisals, Inc., Community Insurance Corp.
and Southern Select Insurance, Inc.

John J. Lewis, Jr. (55)                                                1997             Production Planning Manager
Director of the Company, Community Bank,                                                for Tyson Foods, Inc.
1st Community Credit Corporation;                                                      (food processing)
Community Appraisals, Inc., Community Insurance Corp.                                   Blountsville, Alabama
and Southern Select Insurance, Inc.

Loy McGruder (62)                                                      1996             President of Community Bank
Director of the Company.                                                               (2002-Present); Executive Vice
                                                                                        President of Community Bank
                                                                                       (1994-2002)

                                       89

<PAGE>

                Directors with Terms Expiring In 2005 (Class III)

        Name, Age and Positions Held with the                       Director of             Principal Occupation
              Company and Subsidiaries                             Company Since           During Past Five Years
-------------------------------------------------------          -----------------      -----------------------------

Patrick M. Frawley (51)                                                2003             Chairman, President and Chief
Chairman, President and Chief Executive Officer of the                                  Executive Officer of the
Company; Chairman and Chief Executive Officer of                                        Company (2003-Present);
Community Bank; Chairman of 1st Community Credit                                        Chairman and Chief Executive
Corporation, Community Appraisals, Inc., Community                                      Officer of Community Bank
Insurance Corp. and Southern Select Insurance, Inc.                                    (2003-Present); Senior Vice
                                                                                        President of Community Bank
                                                                                       (2002-2003); Director of
                                                                                        Regulatory Relations for Bank
                                                                                        of America (1991-2002).

Denny G. Kelly (63)                                                    1986            (Retired) President of
Director and Vice Chairman of the Company and                                           Community Bank (1993-2002)
Community Bank; Director of 1st Community Credit
Corporation, Community Appraisals, Inc., Community
Insurance Corp. and Southern Select Insurance, Inc.


Kennon R. Patterson, Sr. (60)                                          1983             Chairman, President and Chief
Director of the Company.                                                                Executive Officer of the
                                                                                        Company (1985-2003);
                                                                                        Chairman and Chief Executive
                                                                                        Officer of Community Bank
                                                                                       (1993-2003).

Merritt M. Robbins (65)                                                1996             Piggly Wiggly grocery store
Director of the Company, Community Bank, 1st Community                                  operator and property
Credit Corporation, Community Appraisals, Inc.,                                         developer, New Hope, Alabama

</TABLE>

Kennon R. Patterson, Sr. is the father of Kennon R. Patterson, Jr.

On January 20, 2003,  Kennon R.  Patterson,  Sr. filed a petition for protection
under Chapter 11 of the United States Bankruptcy Code.

Section 16  Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities  Exchange Act of 1934, as amended (the "Exchange
Act")  requires  the  Company's  directors,  executive  officers and persons who
beneficially  own more than 10% of the Common Stock to file with the  Securities
and Exchange  Commission  ("SEC")  initial  reports of ownership  and reports of
changes in ownership of Common Stock. These officers, directors and stockholders
are also required by SEC rules to furnish the Company with copies of all Section
16(a) reports they file.  There are specific dates by which these reports are to
be filed and the  Company  is  required  to report in this Proxy  Statement  any
failure to file reports as required for 2002.

The  Company is not aware of any  instance  during  2002 in which  directors  or
executive  officers of the Company  failed to make  timely  filings  required by
Section   16(a)  of  the  Exchange  Act.  The  Company  has  relied  on  written
representations  of its  directors  and  executive  officers  and  copies of the
reports  that  have  been  filed  in  making  required  disclosures   concerning
beneficial ownership reporting.

                                       90
<PAGE>

Item 11 - Executive Compensation

                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                                                                          Long-Term
                                                                                         Compensation
                                                        Annual Compensation                 Awards
                                             ---------------------------------------     -----------
                                                                            Other         Securities           All
                                                                           Annual         Underlying          Other
Name and Principal Position(1)       Year      Salary        Bonus      Compensation     Options/SAR    Compensation(2)
-----------------------------       -------  ---------     --------     ------------     -----------    --------------
<S>                                  <C>    <C>                                               <C>       <C>
Kennon R. Patterson, Sr.             2002   $  917,000            -                -          80,000    $       21,363
Chairman, President                  2001      917,000            -                -          80,000             6,984
and Chief Executive Officer...       2000    1,017,000            -                -                             8,003

Loy McGruder                         2002   $  273,782            -                -          25,000    $       13,163
President                            2001      220,500            -                -          10,000             8,784
Community Bank................       2000      245,000            -                -               -             9,803

Hodge Patterson, III (3)             2002   $  257,438            -                -          12,500    $       13,163
Executive Vice President             2001      234,000            -                -          10,000             8,784
Community Bank................       2000      260,000            -           29,679 (4)                         9,803

Stacey W. Mann................       2002   $  200,000            -                -          12,500    $       13,163
Executive Vice President             2001      185,852            -                -          10,000             8,784
Community Bank................       2000      185,000            -           18,964 (4)           -             9,803

Patrick M. Frawley                   2002   $  175,782 (5)        -                -               -                 -
Senior Vice President                2001            -            -                -               -                 -
Community Bank................       2000            -            -                -               -                 -

Bishop K. Walker, Jr.                2002   $   29,658            -            9,032 (6)           -    $      300,000
Vice Chairman and                    2001      428,400            -                -               -            10,761
General Counsel                      2000      476,000            -                -               -            11,780

Denny G. Kelly                       2002   $   23,365            -                -          15,000    $      335,757
President                            2001      337,500            -                -          10,000             8,784
Community Bank................       2000      375,000            -                -               -             9,803

<FN>
1.   The position  shown is the position  held during 2002.  Mr.  Walker and Mr.
     Kelly retired from the Company and Community  Bank as of January,  2002. In
     January 2003 the Board of Directors  terminated Kennon R. Patterson,  Sr.'s
     employment  with the Company and  Community  Bank,  and elected  Patrick M.
     Frawley as Chairman,  President and Chief Executive  Officer of the Company
     and Chairman and Chief  Executive  Officer of Community  Bank.  In February
     2003,  Loy McGruder  took a medical leave of absence and Stacey W. Mann was
     elected  Interim  President.  In  April  2003,  Hodge  Patterson,  III left
     Community Bank to pursue other business interests.

2.   Includes life insurance  premiums paid by the Company and  contributions by
     the  Company  to the ESOP  during  2002,  2001 and 2000,  respectively,  as
     follows:  Kennon R. Patterson,  Sr., $21,363,  $6,984 and $8,003; Bishop K.
     Walker,  Jr., $0, $10,761 and $11,780;  Denny G. Kelly,  $8,784 and $9,803;
     Loy McGruder,  $13,163,  $8,784 and $9,803; Hodge Patterson,  III, $13,163,

                                       91
<PAGE>

     $8,784 and $9,803; Stacey W. Mann, $13,163,  $8,874 and $9,803; and Patrick
     M.  Frawley,  $0,  $0 and $0.  ESOP  contributions  for 2002 are  estimated
     because the  allocations  for the 2002 plan year have not been completed by
     the plan  record  keeper.  This column  also  includes,  in the case of Mr.
     Walker,  a $300,000  severance  payment and purchase of an  automobile  for
     $50,957 made in  connection  with his  retirement,  and, in the case of Mr.
     Kelly, a $247,500  severance payment made in connection with his retirement
     and  $37,300  in fees for his  service  during  2002 as a  director  of the
     Company and its subsidiaries following his retirement.

3.   Hodge Patterson is the brother of Kennon R. Patterson, Sr. and the uncle of
     Kennon R. Patterson, Jr.

4.   Includes  for 2000 for Hodge  Patterson  and Stacy W.  Mann,  respectively,
     $2,550 and $2,240 with respect to social club dues, $12,146 and $7,292 with
     respect to usage of a Company-owned automobile, and $14,983 and $9,432 with
     respect to discounted interest rates through participation in the Company's
     employee loan programs.

5.   Mr.  Frawley's  employment  by  Community  Bank was  subject to  regulatory
     approval which was obtained on May 30, 2002. Mr. Frawley was an independent
     contractor  from March 1, 2002 until June 10, 2002. The amount shown in the
     table includes $56,875 paid to Mr. Frawley as an independent contractor and
     $118,907 paid to him as a Community Bank employee.

6.   Includes for 2002 for Bishop K. Walker, Jr. $8,959 with respect to usage of
     Company-owned automobile, and $73 with respect to discounted interest rates
     through participation,  prior to his retirement,  in the Company's employee
     loan programs.
</FN>
</TABLE>

                                       92

<PAGE>

Stock Options

The following table provides information concerning grants of stock options by
the Company to the named executive officers during 2002:

                        Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>

                                                                              Potential realizable value at
                                      Individual                              assumed annual rates of stock
                                                                            ----------------------------------
                                        Grants                              price appreciation for option term
                            ---------------------------------

                                                Percent of
                                Number of      total options
                               securities       granted to
                               underlying      employees in     Exercise or   Expiration
Name                         options granted    fiscal year      base price      date         5%        10%
-------------------------   ----------------- ---------------  -------------  ----------  --------- ----------

<S>                                   <C>              <C>     <C>               <C>  <C> <C>       <C>
Kennon R. Patterson, Sr.              80,000           23.53%  $        7.00     7/18/07  $ 156,000 $  342,400

Bishop K. Walker, Jr.                      0               0%           7.00     7/18/07          0          0

Denny G. Kelly                        15,000            4.41%           7.00     7/18/07     29,250     64,200

Hodge Patterson, III                  12,500            3.68%           7.00     7/18/07     24,375     53,500

Loy McGruder                          25,000            7.35%           7.00     7/18/07     48,750    107,000

Stacey W. Mann                        12,500            3.68%           7.00     7/18/07     24,375     53,500

Patrick M. Frawley                         0               0%           7.00     7/18/07          0          0
</TABLE>

                                       93

<PAGE>

Option Exercises and Holdings

The  following  table  provides  information  concerning  the  exercise of stock
options during 2002 by the named executive  officers and the  unexercised  stock
options held by them at December 31, 2002.

<TABLE>
<CAPTION>

         Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values

                                                               Number of Securities           Value of Unexercised
                                                              Underlying Unexercised               In-the-money
                                                              Options/SARs at FY-End        Options/SARs at FY-End (1)

                                 Shares
                               Acquired on      Value
     Name                       Exercise      Realized     Exercisable    Unexercisable    Exercisable    Unexercisable
     ------------------------  -----------  ------------  -------------  ---------------  -------------  ---------------
<S>                                      <C>                    <C>
     Kennon R. Patterson, Sr.            0  $          0        160,000                -              -                -

     Bishop K. Walker, Jr.               0             0              0                -              -                -

     Denny Kelly                         0             0         35,000                -              -                -

     Hodge Patterson                     0             0         15,000                -              -                -

     Loy McGruder                        0             0         41,667                -              -                -

     Stacey W. Mann                      0             0         27,500                -              -                -

     Patrick M. Frawley                  0             0              0                -              -                -

<FN>
(1)  Represents  market value of underlying  shares of Common Stock of $7.00 per
     share at December 31,2002, as determined by the Board of Directors,  net of
     the exercise price of the options.
</FN>
</TABLE>

                                       94

<PAGE>

Retirement Plan

The  following  table  shows the  estimated  annual  benefits  payable at normal
retirement  age (age 65)  under a  qualified  defined  benefit  retirement  plan
(Community   Bancshares,   Inc.  Revised  Pension  Plan)  as  well  as  under  a
non-qualified  supplemental  retirement plan (Community  Bancshares Inc. Benefit
Restoration Plan). This supplemental plan provides benefits that would otherwise
be denied participants because if Internal Revenue Code limitations on qualified
plan  benefits.  All of the named  executive  officers  except Mr.  Frawley  are
participants in this supplemental plan.

<TABLE>
<CAPTION>

                                                         Pension Plan Table
                                                      Years of Credited Service
                                    -------------------------------------------------------------
 Average Annual
  Compensation                           10              20             30               40
----------------                    -------------  -------------  --------------    -------------
<C>                                 <C>            <C>            <C>               <C>
$         25,000                    $       3,750  $       7,500  $       11,250    $      15,000
          50,000                            7,500         15,000          22,500           30,000
          75,000                           11,250         22,500          33,750           45,000
         100,000                           15,000         30,000          45,000           60,000
         250,000                           37,500         75,000         112,500          150,000
         500,000                           75,000        150,000         225,000          300,000
         750,000                          112,500        225,000         337,500          450,000
       1,000,000                          150,000        300,000         450,000          600,000
       1,250,000                          187,500        375,000         562,500          750,000
</TABLE>


The benefits shown are not subject to any deduction for Social Security benefits
or other offset  amounts.  Benefits shown above are computed as a  straight-line
annuity beginning at age 65.

The amount of  compensation  covered by the  combination  of plans  covering the
named executive officers is total compensation,  including bonuses,  overtime or
other forms of extraordinary compensation.  The amount of the retirement benefit
is determined by the length of the  retiree's  credited  service under the plans
and his average monthly earnings for the five highest  compensated,  consecutive
calendar  years  of the  retiree's  final  ten  consecutive  calendar  years  of
employment  with the  Company and its  subsidiaries.  The full years of credited
service under the plans for the named executive officers as of December 31, 2002
are as follows:  Kennon R. Patterson,  Sr.: 19 years;  Bishop K. Walker, Jr.: 15
years; Denny G. Kelly: 16 years;  Hodge Patterson,  III: 15 years; Loy McGruder:
15  years,   Stacey  W.  Mann:  19  years  and  Patrick  M.  Frawley:   1  year.

Compensation of Directors

During 2002 non-employee  directors of the Company were paid a fee of $1,500 for
each  month  during  which the  director  served.  Non-employee  members  of the
Company's Executive  Committee,  Nominating  Committee,  Executive  Compensation
Committee and Audit Committee  received a fee of $500 per meeting.  Non-employee
directors  of the  Company  who were also  directors  of  Community  Bank or its
subsidiaries  received the following  monthly fees:  Community  Bank - $500; 1st
Community  Credit  Corporation  - $250;  and Community  Insurance  Corp. - $250.
Non-employee directors of Community Appraisals, Inc. received a quarterly fee of
$250.  Non-employee members of Community Bank's committees receive the following
fees:  Audit  Committee  and  Asset  Quality   Committee  -  $500  per  quarter;
Compensation  Committee  and Personnel  Grievance  Committee - $500 per meeting;
Electronic  Data  Processing   Committee  -  $100  per  quarter;  and  Executive
Committee,  Directors Credit Committee and  Construction  Oversight  Committee -
$100 per meeting.

Effective April 1, 2003, non-employee directors of the Company are paid a fee of
$500 for each quarterly meeting. Non-employee members of the Company's Executive
Committee,  Nominating  Committee,  Executive  Compensation  Committee and Audit
Committee  receive  a fee of $250 per  meeting.  Non-employee  directors  of the
Company who are also directors of Community Bank receive a monthly fee of $1,500
plus $500 per meeting for each meeting in excess of two per month.  Non-employee
directors of 1st Community Credit  Corporation,  Community  Appraisal,  Inc. and
Community Insurance Corp. receive a quarterly fee of $250.  Non-employee members
of Community Bank's committees receive $250 per meeting.

                                       95

<PAGE>

Employment Agreements and Change in Control Arrangements

Employment Agreements

Effective April 1, 1996, the Company  entered into an Employment  Agreement with
Kennon R. Patterson,  Sr., which was amended on October 14, 1999. The Employment
Agreement,  as amended,  provided that Mr. Patterson would serve as the Chairman
of the Board of Directors,  President and Chief Executive Officer of the Company
and receive an annual cash compensation of at least $898,600,  the amount of Mr.
Patterson's total cash compensation for 1999, with increases in his compensation
as  determined  by the Board of  Directors  based on the  recommendation  of the
Company's Executive Compensation Committee. Mr. Patterson's Employment Agreement
also provided that he would receive four weeks of paid vacation annually, use of
an automobile for business and personal  purposes,  reimbursement  of reasonable
business and professional  expenses,  memberships in civic and social clubs, and
an annual allowance of $10,000 for the purchase of life insurance.  In the event
that  Mr.  Patterson  was  disabled  to the  extent  that  he was  incapable  of
performing  his duties,  he would have been  entitled to a  continuation  of his
compensation  during the period of  disability,  but not to exceed one year. Mr.
Patterson's  employment  with the Company and Community  Bank was  terminated on
January 27, 2003.  Pursuant to the Employment  Agreement,  Mr. Patterson may not
engage in the  business of banking  within a 25 mile radius of any office of the
Company or its  subsidiaries for a period of two years following the termination
of his employment.

Change in Control Agreements

The Company  entered  into Change in Control  Agreements  with each of the named
executive officers except Mr. Frawley on December 4, 1999. These agreements have
terms of three years and are automatically  renewed unless terminated at the end
of their terms by the Company's Executive Compensation  Committee.  In the event
of a change in control (as defined in the agreements) of the Company,  the named
executive  officer is  entitled  to receive  certain  severance  benefits if his
employment is terminated by the Company within 30 months following the change in
control,  unless  the  termination  is for cause or by  reason of the  officer's
death, disability or retirement on or after age 65. The officer is also entitled
to these  severance  benefits  if the  officer  terminates  employment  with the
Company  within 30 months  following  a change in control  because,  among other
reasons,  the officer's  authority,  duties,  compensation or benefits have been
reduced or the officer is forced to  relocate  more than 50 miles from his place
of employment immediately prior to the change in control. If, during the term of
the agreement, a transaction is proposed which, if consummated, would constitute
a change in control and, the officer's  employment  is thereafter  terminated by
the Company other than for cause or by reason of the officer's death, disability
or retirement on or after age 65, and the proposed  transaction  is  consummated
within one year following the officer's termination of employment, the change in
control will be deemed to have occurred during the term of the agreement and the
officer will be entitled to severance benefits.  The officer is also entitled to
receive severance benefits if the officer  terminates  employment for any reason
during a 30-day period  beginning 12 months after the  occurrence of a change in
control.

The severance  benefits  payable under the Change in Control  Agreements  are as
follows:  (i) a lump sum  payment  equal to the present  value of the  officer's
monthly  salary  which  would  have been  payable  for 30 months  following  the
officer's  termination of employment but for such  termination;  (ii) a lump sum
payment equal to the present value of a monthly  payment  payable for 30 months,
which monthly payment is calculated by taking  one-twelfth of the average of the
bonuses earned by the officer for the two calendar years  immediately  preceding
the  year in  which  the  officer's  termination  of  employment  occurs;  (iii)
continuation of the officer's  health and life insurance  benefits for 30 months
following the officer's  termination  of employment at the same level and on the
same terms as provided to the officer  immediately  prior to his  termination of
employment;  (iv) full vesting and  continued  participation  for a period of 30
months following the officer's  termination of employment in certain  retirement
plans or, if such full  vesting  and  continued  participation  is not  allowed,
payment  by the  Company  of a lump  sum  supplemental  benefit  in lieu of full
vesting and continued  participation  in such plans;  and (v) individual  career
counseling and outplacement  services for a reasonable  period of time following
the officer's termination of employment,  up to a maximum cost to the Company of
$5,000 per officer.

                                       96
<PAGE>

The Change in Control  Agreements with Bishop K. Walker,  Jr. and Denny G. Kelly
were terminated on January 9, 2002. The Change in Control  Agreement with Kennon
R.  Patterson,  Sr. was  terminated  on January 27, 2003.  The Change in Control
Agreements with Hodge Patterson,  III and Loy McGruder are expected to terminate
on April 18,  2003 and June 6,  2003,  respectively.  See  footnote 1 to Summary
Compensation Table above.

Retirement/Consulting and Stock Purchase Agreements

On January 9, 2002 the Company  entered into  agreements  with Bishop K. Walker,
Jr. and Denny G. Kelly in connection  with the  retirement of Mr. Walker and Mr.
Kelly as executive officers of the Company and Community Bank. Pursuant to these
agreements Mr. Walker and Mr. Kelly are to receive  payments from Community Bank
of $600,000 and $495,000,  respectively,  payable in two equal  installments  in
January, 2002 and January, 2003. In addition,  Community Bank agreed to transfer
a bank-owned  vehicle to each of Mr.  Walker and Mr.  Kelly.  Mr. Walker and Mr.
Kelly each  waived all claims  against  the  Company,  Community  Bank and their
respective directors,  officers and employees,  and agreed to provide consulting
services  during  2002 and 2003 as  requested  by  management  and the  Board of
Directors  on matters to include,  but not be limited to,  title  insurance  and
stock transfer, in the case of Mr. Walker, and shareholder  relations,  customer
relations and new customer  development,  in the case of Mr. Kelly.  The Company
agreed to purchase  approximately 270,000 shares of Common Stock from Mr. Walker
and  approximately  77,000  shares of Common  Stock from Mr. Kelly at a price of
$12.00 per share  subject to any required  regulatory  approvals.  Mr.  Walker's
stock is to be purchased no later than January, 2004 and Mr. Kelly's stock is to
be  purchased  no later than  January,  2005.  The Change in Control  Agreements
between the Company and each of Mr. Walker and Mr. Kelly were terminated. In the
event of a change in control of the  Company  prior to the  consummation  of the
stock purchase by the Company,  Mr. Walker and Mr. Kelly each have the option to
decline to sell their stock to the Company and to receive the same consideration
being paid to other stockholders of the Company in connection with the change in
control.

Due to  regulatory  concerns,  the Company did not make the  payments  due under
these contracts in January, 2003. The Company is awaiting regulatory approval of
the payments made in January, 2002.

Compensation Committee Interlocks and Insider Participation

The following directors currently serve as members of the Executive Compensation
Committee of the Company's  Board of Directors and also served on such committee
during 2002:
<TABLE>
<CAPTION>

<S>                               <C>                  <C>
Merritt M. Robbins (Chairman)      Roy B. Jackson       Kennon R. Patterson, Jr.
Jimmie Trotter (Vice Chairman)     Denny G. Kelly
Glynn Debter                       John J. Lewis, Jr.
</TABLE>

Denny G. Kelly is a former executive  officer of the Company and Community Bank.
Kennon R. Patterson, Jr. is a former executive officer of Community Bank and the
son of Kennon R. Patterson, Sr., the Company's Chief Executive Officer.

In June 2000,  Community Bank sold to, and leased back from, Debter  Properties,
LLC, an Alabama  limited  liability  company of which Glynn  Debter is a member,
real  property.  The lease was assigned to Peoples Bank of North  Alabama in May
2002. See "Certain Relationships and Related Transactions" above.

                                       97

<PAGE>

                     EXECUTIVE COMPENSATION COMMITTEE REPORT
                            ON EXECUTIVE COMPENSATION

Overview

The Company's Executive Compensation Committee (the "Compensation Committee") is
responsible  for  establishing  and   administering   the  Company's   executive
compensation  program.  The  Compensation  Committee also makes  recommendations
regarding  executive  compensation  to the Board of  Directors,  which has final
approval of the  compensation  of each  executive  officer,  including the named
executive officers identified in the Summary Compensation Table above. The named
executive  officers do not  participate  in the Board of  Directors'  review and
determination of their  compensation or in the Compensation  Committee's  review
and recommendation of their compensation.

The Company's  executive  compensation  program is designed to attract,  reward,
retain and  motivate  executive  officers  who will  provide  strong  leadership
necessary  for  the  Company  to  achieve  superior  financial  performance  and
stockholder return, and who will be an integral part of the communities that the
Company  serves.  During 2002,  the  Company's  executive  compensation  program
consisted only of base compensation and long-term incentives. Executive officers
also receive various perquisites comparable to those made available to executive
officers  of other  financial  institutions,  as well as  retirement  and  other
employee  benefits that are generally  available to employees of the Company and
its subsidiaries.

Executive Compensation Program

Base Compensation

Base   compensation   provides  the  foundation  for  the  Company's   executive
compensation.  Its purpose is to compensate  the executive  for  performing  the
basic  duties  that he or she is expected to  perform.  Salaries  are  typically
reviewed  and  adjusted  each year.  During 2002 the base  compensation  paid to
Kennon R.  Patterson,  Sr. was subject to the terms of his employment  agreement
with the Company.  Mr. Patterson's  employment  agreement provided for a minimum
base  salary,  is subject  to annual  review in the  discretion  of the Board of
Directors based upon the recommendation of the Compensation Committee

In determining the base  compensation for a particular  executive  officer,  the
Compensation  Committee  performs a  subjective  evaluation  with three  primary
factors in mind: (i) the officer's individual  performance,  (ii) performance of
the Company and  business  unit or units of the Company for which the officer is
responsible,  and (iii) published  compensation data for comparable positions at
other financial  institutions.  The  Compensation  Committee does not assign any
relative or specific  weights to these factors,  and  individual  members of the
Compensation   Committee  may  give  differing  weights  to  different  factors.
Accordingly,  during a particular  year, the base  compensation  of an executive
officer  of the  Company  may  not  necessarily  be  related  to  the  Company's
performance during that year or the prior year.

Individual  Performance.  In determining its recommended  compensation  for each
executive  officer of the Company,  the  Compensation  Committee  considers  the
officer's individual  performance during the prior year. Individual  performance
is  generally   evaluated  by  reference  to  the  executive   officer's  annual
performance  review,  in which the officer is subjectively  graded by his or her
superiors on various specified criteria, such as leadership skill and management
ability.

Company Performance.  The Compensation  Committee also considers the performance
during the prior year of the  Company  and the bank,  branch,  branches or other
business  unit or units of the  Company  for  which  the  executive  officer  is
responsible.  For example,  in determining  the  compensation  for the Chairman,
Chief Executive Officer and President of the Company, the Compensation Committee
reviews  the  performance  of  the  entire  Company,   and  in  determining  the
compensation  for the President of Community  Bank, the  Compensation  Committee
reviews the performance of Community Bank as a whole. The Compensation Committee
subjectively  evaluates the  performance  by the business  units with respect to
criteria that the  Compensation  Committee  believes to be relevant in assessing
the units'  performance.  The  Compensation  Committee has not  established  any
target amounts for these criteria,

                                       98

<PAGE>

which  may  differ  from unit to unit,  depending  on the  nature of the  unit's
business (such as banking,  consumer finance or insurance) and how long the unit
has been in operation, among other factors. The Compensation Committee generally
focuses on the following five criteria,  to the extent applicable,  in assessing
each unit's performance:  (i) growth in loan portfolio; (ii) growth in deposits;
(iii) amount of employee turnover; (iv) net profit; and (v) charge-offs and loan
losses.

Published   Compensation  Data.  The  Company  subscribes  to  several  industry
publications  that  report  compensation  of the  executive  officers  of  other
financial institutions. The Compensation Committee reviews information regarding
the compensation of similarly-situated  executives at comparable institutions in
determining its recommended compensation for a particular executive officer.

Based on these and other factors that the Compensation Committee and its members
may  deem  to be  relevant,  the  Compensation  Committee  determines  the  base
compensation  of each  executive  officer and makes its  recommendations  to the
Board of  Directors.  The Board of Directors  then  considers  the  Compensation
Committee's recommendations,  and may elect to decrease, increase or approve the
compensation  recommended by the Compensation Committee.  During 2002 the annual
base compensation for Kennon R. Patterson,  Sr. remained at $917,000. The annual
base  compensation  of the  following  named  officers was  increased to reflect
additional  duties or positions:  Loy McGruder to $273,782;  Hodge  Patterson to
$257,438;  and Stacey W. Mann to $200,000.  Bishop K.  Walker,  Jr. and Denny G.
Kelly retired in January 2002 and Patrick M. Frawley was hired during 2002.

Annual Bonuses

The  Company  has,  to a  limited  extent,  provided  short-term  incentives  to
executive  officers  in the  form of  annual  cash  bonuses  in  recognition  of
outstanding individual  performance and/or business unit performance.  The Board
of Directors did not award  bonuses to any executive  officer of the Company for
2002, based on the Board's  determination  that the officers' base  compensation
provided adequate compensation based on the Company's performance during 2002.

Long-Term Incentives

The  purpose of  long-term  incentives  is to  provide  incentives  and  rewards
recognizing the performance of the Company over time and to motivate  long-term,
strategic  thinking among  executives.  During 2002,  the Company  granted stock
options to its  directors  and certain of its officers as  long-term  incentives
because,  among other reasons, the Compensation Committee believes stock options
properly align executive pay with  stockholders'  interests.  The grant of stock
options is a common method of incentive  compensation for financial institutions
and other publicly held companies and allows the Company to be competitive  with
other employers. The number of options granted to a particular executive officer
generally reflects the officer's  position within the Company,  the Compensation
Committee's  subjective evaluation of the officer's performance and contribution
to the Company,  and the Compensation  Committee's  analysis of the value of the
options awarded (using a standard methodology for valuing options). During 2002,
the Company  granted options to Kennon R.  Patterson,  Sr., Loy McGruder,  Hodge
Patterson,  Stacey Mann,  Denny Kelly and certain  other senior  officers of the
Company,  with an exercise  price equal to 100% of the fair market  value of the
Common Stock on the date that the options were  granted,  as  determined  by the
Board of Directors.

Chief Executive Officer Compensation

Effective April 1, 1996, the Company  entered into an employment  agreement with
Kennon R. Patterson,  Sr., the Chief Executive Officer of the Company, which was
amended on October 14,  1999.  Compensation  for Mr.  Patterson  during 2002 was
determined  in  accordance  with the terms of his  employment  agreement and the
Board of Directors'  subjective  evaluation of Mr.  Patterson's  performance and
that of the Company,  as well as the other factors and criteria  described above
for other executive  officers of the Company.  For 2002 Mr.  Patterson's  annual
base  salary  remained  at  $917,000,  the amount of his 2001 base  salary.  Mr.
Patterson's  cash  compensation  for 2001 had been  reduced  by 10% as part of a
program    to    decrease     non-interest     expenses    at    the    Company.

Mr. Patterson's employment with the Company and Community Bank was terminated on
January 27, 2003.

                                       99

<PAGE>

By the Executive Compensation Committee:

<TABLE>
<S>                              <C>                   <C>
Merritt M. Robbins (Chairman)     Roy B. Jackson        Kennon R. Patterson, Jr.
Jimmie Trotter (Vice Chairman)    Denny G. Kelly
Glynn Debter                      John J. Lewis, Jr.
</TABLE>

                                      100

<PAGE>

                                PERFORMANCE GRAPH

Set  forth  below is a graph  comparing  the  yearly  percentage  change  in the
cumulative  total return of the Common Stock against the cumulative total return
of the NASDAQ  Stock  Market Bank Index and the American  Stock  Exchange  Major
Market  Index  for the  last  five  years.  It  assumes  that  the  value of the
investment  in the  Common  Stock  and in each  index was  $100.00  and that all
dividends were reinvested. There is no established trading market for the Common
Stock and, therefore,  no reliable  information is available as to the prices at
which such Common Stock has traded.  To the extent that cumulative  total return
data  provided  in the graph  below is based in part on the price of the  Common
Stock  at  the  dates  indicated,  such  information  should  not be  viewed  as
indicative of the actual or market value of the Common Stock.

                               [GRAPHIC OMITTED]

<TABLE>
<CAPTION>
                          1997      1998      1999      2000      2001      2002
                       --------  --------  --------  --------  --------  --------
<S>                    <C>       <C>       <C>       <C>       <C>       <C>
Community Bancshares   $ 100.00  $ 137.78  $ 170.29  $ 146.35  $ 109.76  $ 109.76
AMEX                     100.00    120.32    144.04    135.75    132.29    116.37
NASDAQ                   100.00     99.36     95.51    108.95    117.97    120.61
</TABLE>

Index 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02

Community Bancshares, Inc. 100.00 137.78 170.29 146.35 109.76 109.76
AMEX Major Markets 100.00 120.32 144.04 135.75 132.29 116.37
NASDAQ Bank Index* 100.00 99.36 95.51 108.95 117.97 120.61
Source : SNL Financial L.C.

The information  provided under the headings "Executive  Compensation  Committee
Report on Executive Compensation" and "Performance Graph" shall not be deemed to
be "soliciting  material" or tobe "filed" with the SEC, or subject to Regulation
14A or 14C,  other  than  as  provided  in Item  402 of  Regulation  S-K,  or to
liabilities of Section 18 of the Exchange Act and, unless specific  reference is
made therein to such  headings,  shall not be  incorporated  by reference to any
filings under the Securities Act of 1933 or the Exchange Act.

                                      101

<PAGE>

Item 12 - Security Ownership of Certain Beneficial Owners and Management

The following table sets forth certain  information,  as of March 31, 2003, with
respect  to  ownership  of  shares  of  Common  Stock  by each of the  Company's
directors,  all directors, and executive officers of the Company as a group, and
each other  person or group that is known by the  Company,  based  solely upon a
review of filings made with the SEC, to be the beneficial  owner of more than 5%
of the outstanding shares of Common Stock.

<TABLE>
<CAPTION>

                                    Shares of Common Stock Beneficially Owned (1)            Percentage of
                                    ---------------------------------------------
                                                                                             Total Shares
Person, Group or Entity             Sole Power (2)    Shared Power (3)      Aggregate         Outstanding
-----------------------             --------------    ----------------      ---------         -----------

I.  Directors, Nominees and
    Executive Officers

<S>                                   <C>      <C>          <C>                <C>
Glynn Debter                          25,400   (4)          21,611             47,011                *
Patrick M. Frawley                    75,500   (5)         174,267            250,267             5.20
Roy B. Jackson                        26,500   (6)           6,600             33,100                *
Denny G. Kelly                        45,500   (7)          60,208            105,708             2.20
John J. Lewis, Jr.                    68,390   (8)         175,467            243,857             5.07
Loy McGruder                          46,367   (9)          32,084             78,501             1.63
Kennon R. Patterson, Sr.              41,435  (10)         552,442            593,877            12.35
Kennon R. Patterson, Jr.              31,699  (11)          70,588            102,287             2.13
Merritt M. Robbins                   198,427  (12)         179,337            377,764             7.85
Jimmie Trotter                        27,000  (13)         178,281            205,281             4.27
All Company directors,
nominees for directors and
executive officers as a group
(11 persons)                         601,718               857,496          1,459,764            30.35

II. Others

U.S. Trust Company, N.A. as
   Trustee of the Community
   Bancshares, Inc. Employee
   Stock Ownership Plan (14)               -               518,742  (15)      518,742 (15)       10.78

Doris S. Corr, Bryan A. Corr, Sr.
   Tina M. Corr, Joan M. Currier,
   John David Currier, Sr.,
   Christy C. Chandler, John
   David Currier, Jr., and Corr,
   Inc., as a group, 600 Third
   Avenue East, Oneonta,
   AL 35121 (16)                     181,278              200,071            381,349              7.93

Bishop K. Walker, Jr.                214,229               57,749            271,978              5.65

<FN>
(1)  The  number of shares  reflected  is shares  which,  under  applicable  SEC
     regulations,  are deemed to be beneficially  owned,  including shares as to
     which,   directly  or  indirectly,   through  any  contract,   arrangement,
     understanding, relationship or otherwise, either voting power or investment
     power is held or shared.  In addition,  in  computing  the number of shares
     beneficially owned by a person and the percentage ownership of that person,
     shares of Common  Stock  subject to options  held by that person  which are
     currently  exercisable,  or which will  become  exercisable  within 60 days
     following  March 31,  2003,  are  deemed to be  outstanding.  Such  shares,
     however,  are not deemed  outstanding  for the  purposes of  computing  the
     percentage  ownership  of any  other  person.  The  total  number of shares
     beneficially owned is divided, where applicable,  into two categories:  (i)
     shares as to which  voting/investment power is held solely, and (ii) shares
     as to which voting/investment power is shared.

                                      102

<PAGE>

(2)  Unless  otherwise  specified in the  following  footnotes,  if a beneficial
     owner is shown as having sole  power,  the owner has sole voting as well as
     sole investment  power, and if a beneficial owner is shown as having shared
     power,  the  owner has  shared  voting  power as well as shared  investment
     power.  Some  individuals are shown as beneficial  owners of shares held by
     the  Company's  ESOP.  The  individual  has sole  power to direct  the ESOP
     trustee  as to the manner in which  shares  allocated  to the  individual's
     account under the ESOP are to be voted.  The individual has no direct power
     of  disposition  with  respect  to  shares  allocated  to the  individual's
     account,  except to request a distribution under the terms of the ESOP. The
     ESOP record  keeper has not  completed  the  allocation  as of December 31,
     2002, so the number of shares shown as allocated to an individual's account
     are as of December 31, 2001.

(3)  This column may include shares held in the name of, among others, a spouse,
     minor  children  or certain  other  relatives  sharing the same home as the
     director,  nominee,  executive  officer or 5% stockholder.  In the cases of
     Messrs.  Frawley,  Lewis,  Robbins and Trotter this column includes 174,267
     shares which are held by the ESOP and which have not been  allocated to any
     participant   account.   These   individuals   serve  as   members  of  the
     Administrative Committee of the ESOP and have investment authority over the
     unallocated shares, but each individual  disclaims any beneficial ownership
     with respect to such unallocated shares.

(4)  Includes  25,500  shares which could be acquired  within 60 days  following
     March 31, 2003 pursuant to stock options.

(5)  Includes  75,000  shares which could be acquired  within 60 days  following
     March 31, 2003 pursuant to stock options.

(6)  Includes  25,000  shares which could be acquired  within 60 days  following
     March 31, 2003 pursuant to stock options.

(7)  Includes  25,000  shares which could be acquired  within 60 days  following
     March 31, 2003 pursuant to stock options and 17,528 shares allocated to Mr.
     Kelly's ESOP account as of December 31, 2001.

(8)  Includes  25,000  shares which could be acquired  within 60 days  following
     March 31,  2003  pursuant  to stock  options  and 19,868  shares held by an
     estate of which Mr. Lewis is the executor and a beneficiary.

(9)  Includes  35,000  shares which could be acquired  within 60 days  following
     March 31, 2003 pursuant to stock options and 11,367 shares allocated to Mr.
     McGruder's ESOP account as of December 31, 2001.

(10) Includes  41,335 shares  allocated to Mr. Kennon R.  Patterson,  Sr.'s ESOP
     account as of December 31, 2001.

(11) Includes  25,000  shares which could be acquired  within 60 days  following
     March 31, 2003 pursuant to stock options.

(12) Includes  25,000  shares which could be acquired  within 60 days  following
     March 31, 2003 pursuant to stock options.

(13) Includes  25,000  shares which could be acquired  within 60 days  following
     March 31, 2003 pursuant to stock options.

(14) The address of North Star Trust Company is 500 West Madison  Street,  Suite
     3630, Chicago, Illinois 60661.

                                      103

<PAGE>

(15) Participants  in the ESOP have the power to direct the ESOP  trustee how to
     vote shares allocated to their individual accounts. Any unallocated shares,
     and any allocated shares with respect to which voting  instructions are not
     received  from  a  participant,  will  be  voted  by the  appropriate  ESOP
     fiduciary in its discretion.

(16) Information  about  this  group  was  obtained  from a  Schedule  13D,  and
     amendments thereto, filed by such group with the SEC.
</FN>
</TABLE>

Item 13 - Certain Relationships and Related Transactions

Community  Bank has from time to time made loans to certain of its directors and
executive  officers,  and members of their immediate  families.  Except as noted
below,  all  such  loans  are  made  in  the  ordinary  course  of  business  on
substantially the same credit terms, including interest rates and collateral and
do not  represent  more  than a  normal  risk of  collection  or  present  other
unfavorable  features.  Community Bank  maintains a program  whereby each of its
full-time  employees  is  eligible  for a 1%  discount  in the rate of  interest
charged  on a loan from  Community  Bank.  Federal  banking  regulations  permit
executive  officers  of  Community  Bank  to  participate  in this  program.  In
addition, Community Bank maintains a program for executive officers and other of
its employees who are required by Community  Bank to relocate  within its market
area in  connection  with  their  employment  with  Community  Bank.  Under this
program,  each of these  employees is eligible for a 5% annual  interest rate on
first  mortgage,  real estate loans from Community  Bank. The largest  aggregate
amount of loans to directors and  executive  officers of the Company and members
of their immediate families  outstanding at any time during 2002 under these two
programs  was  approximately  $2.1  million.  As of April  10,  2003,  the total
outstanding  balance  of loans by  Community  Bank to  directors  and  executive
officers of the Company and members of their immediate  families under these two
programs was approximately $1.1 million.

As of March 28, 2003,  Community Bank has  outstanding  to Kennon R.  Patterson,
Sr., a director of the Company a real-estate  loan in the amount of  $5,372,050.
During 2002, the highest balance  outstanding for this loan was $5,150,000,  and
its balance at year end was  $5,150,000.  The loan bears  interest at 4.25%.  On
January 20, 2003, Mr. Patterson filed a petition for protection under Chapter 11
of the United States  Bankruptcy  Code, and this loan is currently on nonaccrual
status.

As of March 28, 2003, Community Bank has outstanding to Hodge Patterson,  former
Executive  Vice  President of  Community  Bank a  real-estate  loan of $538,350.
During 2002, the highest balance outstanding for this loan was $552,732, and its
balance at year end was $540,401. The loan bears interest at 5.00%.

As of March 28,  2003,  Community  Bank has  outstanding  to Denny G.  Kelly,  a
director of the Company and Community Bank:

(i)  a real  estate loan in the amount of  $305,402.  During  2002,  the highest
     balance  outstanding for this loan was $305,402 and its balance at year end
     was $305,402. The loan bears interest at 5.5%.

(ii) a loan  in the  amount  of  $630,150.  During  2002,  the  highest  balance
     outstanding  for this loan was  $580,000  and its  balance  at year end was
     $580,000.  The loan bears interest at 4.25% and is secured by 61,670 shares
     of Company common stock. This loan is currently on nonaccrual status.

(iii)An  unsecured  loan in the amount of  $101,377.  During  2002,  the highest
     balance  outstanding  for this loan was $97,500 and its balance at year end
     was  $97,500.  The  loan  bears  interest  at  4.25%  and is  currently  on
     nonaccrual status.

The Company has engaged the accounting  firm of Schauer,  Taylor,  Cox, Vise and
Morgan, P.C. to perform certain accounting  services.  Doug Schauer, a member of
the firm,  is Kennon R.  Patterson,  Sr.'s  son-in-law.  Services  performed  by
Schauer,  Taylor,  Cox, Vise and Morgan,  P.C. for the Company in 2002 have been
limited to preparation of the Company's quarterly tax accruals,  preparation and
filing the  Company's  federal  and state tax  returns,  consultation  regarding
interpretation  and  application  of accounting  standards and EDGAR services in

                                      105
<PAGE>

connection  with  the  company's   filings  with  the  Securities  and  Exchange
Commission. The Company and its subsidiaries paid Schauer, Taylor, Cox, Vise and
Morgan, P.C. $102,684 for services rendered during 2002.

In June 2000,  Community Bank loaned  $1,696,576 to Debter  Properties,  LLC, an
Alabama  limited  liability  company  of which a  director  of the  Company is a
member,  to fund the purchase from  Community Bank of the real property in which
Community Bank's Boaz,  Alabama office was located.  Concurrently with this loan
and the  purchase of the real  property,  Community  Bank  entered  into a lease
agreement,  as the tenant,  with Debter Properties,  LLC to lease back this real
property from Debter  Properties,  LLC. On May 31, 2002  Community Bank sold its
Boaz,  Alabama office to Peoples Bank of North Alabama which assumed the loan to
Debter Properties, LLC and Community Bank's obligations under the lease.

At December 31, 2002, the total outstanding balance of indebtedness  incurred by
the ESOP to purchase shares of Common Stock was approximately  $2,083,342.  This
indebtedness,  which is owed to a third  party  and is  secured  by a pledge  of
148,972  shares of Common  Stock that have not been  allocated  by the ESOP,  is
guaranteed by the Company.

Item 14 - Controls and Procedures

(a)  Evaluation of disclosure controls and procedures.

     The Company has evaluated the effectiveness of its disclosure  controls and
     procedures  pursuant to Securities Exchange Act Rule 13a-14. The evaluation
     was  performed  under  the  supervision  and  with  the   participation  of
     management,  including the chief executive  officer and the chief financial
     officer,  within 90 days  prior to the date of the  filing  of this  annual
     report.  Based on this  evaluation,  the chief executive  officer and chief
     financial   officer  have  concluded  that  the  disclosure   controls  and
     procedures are effective in ensuring that all material information required
     to be disclosed in this annual  report has been  communicated  to them in a
     manner appropriate to allow timely decisions regarding required disclosure.

(b)  Changes in internal controls.

     Subsequent  to the  date of their  evaluation,  there  were no  significant
     changes in internal  controls  or other  factors  that could  significantly
     affect internal  controls,  including any corrective actions with regard to
     significant deficiencies and material weaknesses.

                                      105
<PAGE>

                                     PART IV

Item 15 - Exhibits, Financial Statement Schedules and Reports on Form 8-K

     (a)  Index of documents filed as part of this report:

<TABLE>
<CAPTION>
Community Bancshares, Inc. and Subsidiaries
Financial Statements                                                                                      Page(s)

<S>                                                                                                        <C>
Report of Independent Accountants....................................................................      42
Consolidated Statements of Financial Condition as of
   December 31, 2002 and 2001........................................................................      43

Consolidated Statements of Income for the years ended
   December 31, 2002, 2001 and 2000..................................................................      44-45

Consolidated Statements of Shareholders' Equity for the years ended
   December 31, 2002, 2001 and 2000..................................................................      46

Consolidated Statements of Cash Flows for the years ended
   December 31, 2002, 2001 and 2000..................................................................      47-48

Notes to Consolidated Financial Statements - December 31, 2002, 2001 and 2000........................      49-87
</TABLE>


     (b)  Reports on Form 8-K

          The Company  filed four reports on Form 8-K during the fourth  quarter
          of 2002:

          October 11, 2002 - Changes in Registrant's Certifying Accountant.

          November 5, 2002 - (8-K/A) to include letter from previous  accountant
          in the changes in Registrant's Certifying Accountant.

          November 29, 2002 - Proposed settlement of Benson litigation.

          December 16, 2002 - Consent  Agreement  with the Alabama State Banking
          Department.

     (c)  Exhibits

        3.1    Certificate  of  Incorporation,  as amended and restated May 2000
               (1)

        3.2    By-Laws of Registrant, as amended and restated May 2000 (2)

        4.1    Rights Agent Agreement, dated January 13, 1999, between Community
               Bancshares, Inc. and the Bank of New York (3)

        4.2    Indenture,  dated  March  23,  2000,  by  and  between  Community
               Bancshares, Inc. and The Bank of New York (4)

        10.1   Promissory Note, Guaranty and Pledge Agreement, dated December 1,
               1998,  by and between  Community  Bancshares,  Inc.  and Colonial
               Bank, N.A. (5)

        10.2   Plan  document  for  the  Community   Bancshares,   Inc.  Benefit
               Restoration  Plan adopted  April 12, 1994,  effective  January 1,
               1995 (6) (*)

        10.3   Subordinated  Promissory  Note,  dated  October 4, 1994,  between
               Community  Bancshares,  Inc. as borrower and Jeffrey K. Cornelius
               as holder (7)

        10.4   Employment Agreement,  dated March 28, 1996 by and between Kennon
               R. Patterson, Sr. and Community Bancshares, Inc. (8) (*)

                                      106
<PAGE>

        10.5   Amendment to Employment Agreement, dated October 14, 1999, by and
               between Kennon R. Patterson,  Sr. and Community Bancshares,  Inc.
               (9) (*)

        10.6   Stock Option Agreement  between  Community  Bancshares,  Inc. and
               Denny Kelly, dated March 26, 1998 (10) (*)

        10.7   Stock Option Agreement between Community Bancshares, Inc. and Loy
               McGruder, dated March 26, 1998 (11) (*)

        10.8   Form of Stock Option Agreement between Community Bancshares, Inc.
               and grantees, dated March 26, 1998 (12) (*)

        10.9   Form of Change in Control Agreement between Community Bancshares,
               Inc. and each of Kennon R. Patterson,  Sr. and Loy McGruder dated
               December 4, 1999 (13) (*)

        10.10  Form  of  Stock  Option  Agreement  for  Non-Employee   Directors
               between Community Bancshares, Inc., and each of Glynn Debter, Roy
               B. Jackson,  John J. Lewis,  Jr.,  Merritt  Robbins and Robert O.
               Summerford, dated December 4, 1999 (14) (*)

        10.11  Form of Stock Option  Agreement for Employees  between  Community
               Bancshares, Inc., and each of Kennon R. Patterson, Sr., Bishop K.
               Walker,  Jr.,  Denny Kelly,  and Loy McGruder,  dated December 4,
               1999 (15) (*)

        10.12  Amended and Restated  Declaration of Trust, dated March 23, 2000,
               by and between The Bank of New York  (Delaware),  The Bank of New
               York, Community Bancshares, Inc. and Community (AL) Capital Trust
               I (16)

        10.13  Guarantee  Agreement,  dated  March  23,  2000,  by  and  between
               Community Bancshares, Inc. and The Bank of New York (17)

        10.14  Placement  Agreement,  dated March 23,  2000,  between  Community
               (AL)  Capital  Trust I,  Community  Bancshares,  Inc. and Salomon
               Smith Barney, Inc. (18)

        10.15  Lease  Agreement,  dated  May 31,  2000,  between  REM,  LLC,  as
               lessor, and Community Bank, as lessee (19)

        10.16  Addendum to Lease  Agreement  and Loan  Agreement,  dated May 31,
               2000, between REM, LLC and Community Bank (20)

        10.17  Lease Agreement,  dated June 1, 2000,  between Debter Properties,
               LLC, as lessor, and Community Bank, as lessee (21)

        10.18  Addendum to Lease  Agreement  and Loan  Agreement,  dated June 1,
               2000, between Debter Properties, LLC and Community Bank (22)

        10.19  Form  of  Amendment  to  Nonqualified   Stock  Option  Agreement,
               between Community  Bancshares,  Inc. and grantee,  dated December
               12, 2000 (23) (*)

        10.20  Change in Control  Agreement,  dated September 18, 2001,  between
               Community Bancshares, Inc. and Kerri C. Newton (24)(*)

        10.21  Form of Stock  Option  Agreement  between  Community  Bancshares,
               Inc. and each of Kennon R. Patterson,  Sr., Glynn Debter,  Roy B.
               Jackson, Denny Kelly, John J. Lewis, Jr., Loy McGruder, Kennon R.
               Patterson,  Jr.,  Merritt Robbins,  Robert O. Summerford,  Jimmie
               Trotter and Kerri Newton dated December 18, 2001 (25)(*)

        10.22  Stock Purchase  Agreement dated January,  2002 between  Community
               Bancshares, Inc. and Denny G. Kelly and Arlene S. Kelly (26)(*)

        10.23  Stock Purchase  Agreement dated January,  2002 between  Community
               Bancshares, Inc. and Bishop K. Walker and Wanda W. Walker (27)(*)

        10.24  Severance  Agreement  dated the 9th day of  January,  2002 by and
               between  Denny  G.  Kelly  and  Community  Bancshares,  Inc.  and
               Community Bank (28)(*)

        10.25  Severance  Agreement  dated the 9th day of  January,  2002 by and
               between  Bishop K.  Walker and  Community  Bancshares,  Inc.  and
               Community Bank (29)(*)

        10.26  Acquisition  Agreement dated December 21, 2001 by and among First
               Farmers and  Merchants  Corporation,  First Farmers and Merchants
               National   Bank  of  Columbia,   Community   Bank  and  Community
               Bancshares, Inc. (30)

        10.27  Supplemental  Agreement  dated  January  23, 2002  between  First
               Farmers and  Merchants  Corporation,  First Farmers and Merchants
               National   Bank  of  Columbia,   Community   Bank  and  Community
               Bancshares, Inc. (31)

        10.28  Acquisition  Agreement  dated the 25th day of  February,  2002 by
               and between First Southern National Bank and Community Bank (32)

        10.29  Acquisition  Agreement  dated the 25th day of  February,  2002 by
               and between Peoples Bank of North Alabama and Community Bank (33)

                                      107

<PAGE>

        10.30  Amendment to Subordinated  Promissory Note, dated March 26, 2002,
               between Community Bancshares, Inc. and Jeffrey K. Cornelius (34)

        10.31  Form of Stock  Option  Agreement  between  Community  Bancshares,
               Inc. and each of Kennon R. Patterson,  Sr., Glynn Debter,  Roy B.
               Jackson,  Denny Kelly, John J. Lewis, Merritt Robbins,  Robert O.
               Summerford and Jimmie Trotter dated July 19, 2002 (*)

        10.32  Form of Stock  Option  Agreement  between  Community  Bancshares,
               Inc.  and each of Patrick M.  Frawley and Kerri C.  Kinney  dated
               February 6, 2003 (*)

        11     Statement of computation of per share earnings

        16     Letter re: change in Certifying Accountant (35)

        21     Subsidiaries of the Registrant

                                      108
<PAGE>

Notes to Exhibits:

(1)  Filed as Exhibit 3.2 to Form 10-Q for the quarter ended June 30, 2000,  and
     incorporated herein by reference

(2)  Filed as Exhibit 3.1 to Form 10-Q for the quarter ended June 30, 2000,  and
     incorporated herein by reference

(3)  Filed as Exhibit 4.1 to Form 8-A, filed January 21, 1999, and  incorporated
     herein by reference

(4)  Filed as Exhibit 4.4 to Form 10-Q for the quarter ended March 31, 2000, and
     incorporated herein by reference

(5)  Filed as Exhibit  10.2 to Form 10-K for the year ended  December  31, 1998,
     and incorporated herein by reference

(6)  Filed as Exhibit  10.13 to Form 10-K for the year ended  December 31, 1995,
     and incorporated herein by reference

(7)  Filed as Exhibit  10.15 to Form 10-K for the year ended  December 31, 1995,
     and incorporated herein by reference

(8)  Filed as Exhibit 10.1 to Form 10-Q/A-2 for the quarter ended  September 30,
     1998, and incorporated herein by reference

(9)  Filed as Exhibit  10.2 to Form 10-Q for the  quarter  ended  September  30,
     1999, and incorporated herein by reference

(10) Filed as Exhibit  10.38 to Form 10-K for the year ended  December 31, 1998,
     and incorporated herein by reference

(11) Filed as Exhibit  10.40 to Form 10-K for the year ended  December 31, 1998,
     and incorporated herein by reference

(12) Filed as Exhibit  10.41 to Form 10-K for the year ended  December 31, 1998,
     and incorporated herein by reference

(13) Filed as Exhibit  10.32 to Form 10-K for the year ended  December 31, 1999,
     and incorporated herein by reference

(14) Filed as Exhibit  10.33 to Form 10-K for the year ended  December 31, 1999,
     and incorporated herein by reference

(15) Filed as Exhibit  10.34 to Form 10-K for the year ended  December 31, 1999,
     and incorporated herein by reference

(16) Filed as Exhibit  10.1 to Form 10-Q for the quarter  ended March 31,  2000,
     and incorporated herein by reference

(17) Filed as Exhibit  10.2 to Form 10-Q for the quarter  ended March 31,  2000,
     and incorporated herein by reference

(18) Filed as Exhibit  10.4 to Form 10-Q for the quarter  ended March 31,  2000,
     and incorporated herein by reference

(19) Filed as Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 2000, and
     incorporated herein by reference

(20) Filed as Exhibit 10.2 to Form 10-Q for the quarter ended June 30, 2000, and
     incorporated herein by reference

(21) Filed as Exhibit 10.3 to Form 10-Q for the quarter ended June 30, 2000, and
     incorporated herein by reference

(22) Filed as Exhibit 10.4 to Form 10-Q for the quarter ended June 30, 2000, and
     incorporated herein by reference

(23) Filed as Exhibit  10.45 to Form 10-K for the year ended  December 31, 2000,
     and incorporated herein by reference

(24) Filed as Exhibit  10.1 to Form 10-Q for the  quarter  ended  September  30,
     2001, and incorporated herein by reference

(25) Filed as Exhibit  10.22 to Form 10-K for the year ended  December 31, 2001,
     and incorporated herein by reference

(26) Filed as Exhibit  10.23 to Form 10-K for the year ended  December 31, 2001,
     and incorporated herein by reference

(27) Filed as Exhibit  10.24 to Form 10-K for the year ended  December 31, 2001,
     and incorporated herein by reference

(28) Filed as Exhibit  10.25 to Form 10-K for the year ended  December 31, 2001,
     and incorporated herein by reference

(29) Filed as Exhibit  10.26 to Form 10-K for the year ended  December 31, 2001,
     and incorporated herein by reference

                                      109

<PAGE>

(30) Filed as Exhibit  10.27 to Form 10-K for the year ended  December 31, 2001,
     and incorporated herein by reference

(31) Filed as Exhibit  10.28 to Form 10-K for the year ended  December 31, 2001,
     and incorporated herein by reference

(32) Filed as Exhibit  10.29 to Form 10-K for the year ended  December 31, 2001,
     and incorporated herein by reference

(33) Filed as Exhibit  10.30 to Form 10-K for the year ended  December 31, 2001,
     and incorporated herein by reference

(34) Filed as Exhibit  10.31 to Form 10-K for the year ended  December 31, 2001,
     and incorporated herein by reference

(35) Filed as Exhibit 16 to Form 8-K/A dated October 4, 2002,  and  incorporated
     herein by reference


(*)  Management contract or compensation plan or arrangement

     Certain  financial  statements,  schedules  and exhibits  have been omitted
     because they are not applicable.

                                      110

<PAGE>

SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  Registrant  has duly  caused  this report to be signed on its
behalf  by  the  undersigned,   hereunto  duly   authorized,   in  the  city  of
Blountsville,  State of  Alabama,  on April 15,  2003.  Each of the  undersigned
certifies that:

     1.   The Report fully  complies with the  requirements  of section 13(a) or
          15(d) of the Securities Exchange Act of 1934; and

     2.   The  information  contained  in the  Report  fairly  presents,  in all
          material respects,  the financial  condition and results of operations
          of the Company.


                                                      COMMUNITY BANCSHARES, INC.

                                         By: /s/ PATRICK M. FRAWLEY
                                            ------------------------------------
                                            Patrick M. Frawley
                                            Chairman and Chief Executive Officer


                                         By: /s/ KERRI C. KINNEY
                                            ------------------------------------
                                            Kerri C. Kinney
                                            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 capacities and on the dates indicated.

                                    Signature

/s/ PATRICK M. FRAWLEY
---------------------------------------
Patrick M. Frawley                          Chairman of the Board, President,
                                            Chief Executive Officer, Director
                                           (principal executive officer)

/s/ KERRI C. KINNEY
---------------------------------------
Kerri C. Kinney                             Chief Financial Officer (principal
                                            accounting officer)

/s/ GLYNN DEBTOR
---------------------------------------
Glynn Debter                                Director

/s/ ROY B. JACKSON
---------------------------------------
Roy B. Jackson                              Director

/s/ DENNY KELLY
---------------------------------------
Denny Kelly                                 Director

/s/ JOHN J. LEWIS, JR.
---------------------------------------
John J. Lewis, Jr.                          Director

/s/ LOY MCGRUDER
---------------------------------------
Loy McGruder                                Director

                                      111

<PAGE>

---------------------------------------
Kennon R. Patterson, Jr.                    Director


---------------------------------------
Merritt Robbins                             Director


---------------------------------------
Kennon R. Patterson, Sr.                    Director

/s/ JIMMIE TROTTER
---------------------------------------
Jimmie Trotter                              Director

                                      112

<PAGE>

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


     In connection with Community Bancshares,  Inc. ("Company") Quarterly Report
on Form 10-K for the period  ended  December  31, 2002  ("Report"),  each of the
undersigned certify that:

     1.   The Report fully  complies with the  requirements  of Section 13(a) or
          15(d) of the Securities Exchange Act of 1934; and


     2.   The  information  contained  in the  Report  fairly  presents,  in all
          material respects,  the financial  condition and results of operations
          of the Company.



Date:  April 15, 2003          By:  /s/ Patrick M. Frawley
       ---------------           -----------------------------------------------
                                 Patrick M. Frawley
                                 Chairman, Chief Executive Officer and President




Date:  April 15, 2003          By:  /s/ Kerri C. Kinney
       ---------------           -----------------------------------------------
                                 Kerri C. Kinney
                                 Chief Financial Officer

                                      113

<PAGE>
                    CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I,   Patrick M. Frawley, Chief Executive Officer, certify that:

     1.   I  have  reviewed  this  annual  report  on  form  10-K  of  Community
          Bancshares, Inc;

     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  officers 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,  including its
               consolidated  subsidiaries,  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");

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

     5.   The registrant's other certifying officers and I have disclosed, based
          on our most recent  evaluation,  to the registrant's  auditors and the
          audit  committee  of  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  officers and I have indicated in
          this annual report whether 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: April 15, 2003                  /s/ Patrick M. Frawley
     ----------------                -------------------------------------------
                                     Patrick M. Frawley, Chief Executive Officer


                                      114
<PAGE>
                    CERTIFICATION OF CHIEF FINANCIAL OFFICER

I,   Kerri C. Kinney, Chief Financial Officer, certify that:

     1.   I  have  reviewed  this  annual  report  on  form  10-K  of  Community
          Bancshares, Inc;

     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  officers 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,  including its
               consolidated  subsidiaries,  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");

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

     5.   The registrant's other certifying officers and I have disclosed, based
          on our most recent  evaluation,  to the registrant's  auditors and the
          audit  committee  of  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  officers and I have indicated in
          this annual report whether 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: April 15, 2003                   /s/ KERRI C. KINNEY
     ----------------                -------------------------------------------
                                     Kerri C. Kinney, Chief Financial Officer



                                      115

<PAGE>

                                  EXHIBIT 10.31




Form of Stock Option Agreement  between Community  Bancshares,  Inc. and each of
Kennon R. Patterson,  Sr., Glynn Debter,  Roy B. Jackson,  Denny Kelly,  John J.
Lewis,  Merritt Robbins,  Robert O. Summerford and Jimmie Trotter dated July 19,
2002




                                      116

<PAGE>
                           COMMUNITY BANCSHARES, INC.
                    2003 NONQUALIFIED STOCK OPTION AGREEMENT

     THIS  AGREEMENT  is made  and  entered  into as of July 19,  2002,  between
grantor Community  Bancshares,  Inc., a Delaware corporation (the "Corporation")
and grantee, ______________, (the "Grantee").

                              W I T N E S S E T H:

     The Board of Directors of the  Corporation  (the  "Board") on July 19, 2002
approved  the grant to  Grantee  of awards  under  the  Corporation's  long-term
incentive  program and established  the terms and conditions of such awards,  as
contained in this Agreement.

     NOW, THEREFORE, the parties hereto agree as follows:

1.   Grant of Option. Grantee shall have the right and option to purchase on the
     terms and conditions  set forth herein,  all or any part of an aggregate of
     ____________ shares ("Option Shares") of the $.10 par value common stock of
     the  Corporation  (the "Common  Stock") at the purchase  price of $7.00 per
     share (the  "Option  Price").  The Option  Price is 100% of the fair market
     value of the Common  Stock on July 19,  2002,  the date of the grant of the
     option covered by this Agreement.

2.   Terms and Conditions. It is understood and agreed that the option evidenced
     hereby is subject to the following terms and conditions:

     (a)  Expiration Date. The option shall expire five (5) years after the date
          of grant (the  "Expiration  Date").  After the  Expiration  Date,  the
          parties shall have no further rights or obligations hereunder.

     (b)  Exercise  of Option.  The  option  covered  by this  Agreement  may be
          exercised  by Grantee from time to time,  in whole or in part,  at any
          time  prior to the  Expiration  Date  subject to the  restrictions  in
          Section 2(d), (e) and (f) and Section 7.

     (c)  Method of Exercise and Payment of Purchase  Price Upon  Exercise.  The
          Grantee may elect to exercise the option by giving  written  notice of
          such  election  to the  Corporation,  in such  form as the  Board  may
          require, accompanied by payment in cash or in such other manner as may
          be approved  by the Board,  of the full  purchase  price of the Option
          Shares for which the election is made. As determined by the Board,  in
          its sole discretion, payment of the Option Price shall be made in cash
          or Common Stock that was acquired at least six (6) months prior to the
          exercise  of the  option,  or a  combination  thereof.  To the  extent
          permitted  by  applicable  law,  the option may be  exercised  and the
          exercise  price paid pursuant to  arrangements  with  brokerage  firms
          permitted under Regulation T of the Federal Reserve Board or successor
          regulations  or  statutes.   Any  federal  or  state  tax  withholding
          requirements  can be  satisfied  by shares of  Common  Stock  acquired
          pursuant to the option exercise.

     (d)  Exercise Upon Death. In the event that Grantee ceases to be affiliated
          with the  Corporation  or its  subsidiaries  (either as an employee or
          director) by reason of death,  the option may  thereafter be exercised
          as to all shares subject to the option by the legal  representative of
          the estate or by the person or persons  entitled  to the option  under
          the  Grantee's  will  or the  laws of  descent  and  distribution,  as
          appropriate,  until the  earlier of (i) the  expiration  of the stated
          term of the  option or (ii) the first  anniversary  of the date of the
          Grantee's death.

     (e)  Exercise Upon  Termination of Affiliation by Reason of Disability.  In
          the event that Grantee ceases to be affiliated with the Corporation or
          its  subsidiaries  (either as an  employee or  director)  by reason of
          Disability (as defined below),  the option may thereafter be exercised
          as to all shares  subject to the option  until the  earlier of (i) the
          expiration  of the  stated  term  of the  option  or  (ii)  the  first
          anniversary of the date that Grantee is determined by the  Corporation
          to be disabled.

                                      117
<PAGE>

     (f)  Exercise Upon Termination of Affiliation by Reason Other than Death or
          Disability.  The  option or any  unexercised  portions  thereof  shall
          expire  upon the earlier of (i) the  expiration  of the stated term of
          the  option or (ii) the 90th day after the  termination  of  Grantee's
          affiliation  with the  Corporation  and its  subsidiaries  (both as an
          employee  and as a  director)  for any  reason  other  than  death  or
          Disability.   Provided,  however,  if  the  Grantee's  affiliation  is
          terminated  for Cause (as defined  below),  the option shall expire on
          the date of the termination of the Grantee's affiliation.

3.   No Rights as  Shareholder  or to Employment or to  Directorship.  No option
     granted  hereunder  shall  entitle  the  holder  thereof to any rights as a
     shareholder  in the  Corporation  with  respect  to any shares to which the
     option  relates  until such  shares  have been paid for in full and issued.
     Furthermore,  the option  shall not confer  upon the  Grantee any rights of
     employment with the Corporation or any of its subsidiaries or any rights to
     be a director of the  Corporation or any of its  subsidiaries or affect the
     right of the  Corporation or its  subsidiaries to terminate the affiliation
     of the Grantee at any time, with or without cause.

4.   Restrictions  on Transfer of Shares.  Grantee  hereby agrees for himself or
     herself and his or her legal representative,  heirs and distributees,  that
     if a registration  statement  covering the shares issuable upon exercise of
     any option  hereunder is not effective under the Securities Act of 1933, as
     amended  (the  "Act"),  at the  time of  such  exercise,  or if some  other
     exemption from the provisions of the Act is not available,  then all shares
     of Common Stock then  received or  purchased  upon such  exercise  shall be
     acquired for investment,  and that the notice of exercise  delivered to the
     Corporation shall be accompanied by a representation in writing  acceptable
     in scope and form to  counsel to the  Corporation  and signed by Grantee or
     Grantee's legal representative,  heirs or distributees, as the case may be,
     to the  effect  that the  shares  are  being  acquired  in good  faith  for
     investment  and not with a view to  distribution  thereof.  Any  shares  so
     acquired may be deemed restricted  securities under Rule 144 as promulgated
     by the  Securities and Exchange  Commission  under the Act, and as the same
     may be amended or replaced and subject to  restrictions  upon sale or other
     disposition.

5.   Registration  of Shares.  If at any time the Board shall determine that the
     listing,  registration or qualification of any shares subject to the option
     upon any  securities  exchange,  or under any state or federal  law, or the
     consent or approval of any  governmental or regulatory body is necessary or
     desirable as a condition of or in connection  with the issuance or purchase
     of shares  hereunder,  the option may not be  exercised in whole or in part
     unless such listing, registration,  qualification, consent, or approval has
     been  effected or obtained  free of any  conditions  not  acceptable to the
     Board.

6.   Transfer of Rights.  This option is not  transferable  except by will or by
     the laws of  descent  and  distribution  and  shall be  exercisable  during
     Grantee's lifetime only by Grantee. After the death of Grantee, this option
     may be  exercised  only by  Grantee's  estate or by the  person or  persons
     entitled  to the option  under  Grantee's  will or the laws of descent  and
     distribution, as appropriate. In the event the option is transferred to the
     Grantee's  estate,  the option may be  exercised  by the estate only to the
     extent that the Grantee  would have been  entitled  had the option not been
     transferred.

7.   Competition  with Employer - Covenant Not to Compete.  In  consideration of
     the  grant  by the  Corporation  of the  option,  Grantee  agrees  with the
     Corporation as follows:

     (a)  While Grantee is affiliated with the Corporation or one or more of its
          subsidiaries  (hereinafter  collectively referred to as the "Company")
          either as an employee or a  director,  Grantee  will devote his or her
          entire  time,  energy and skills to the  service of the  Company.  Any
          employment  shall be at the pleasure of the board of directors of each
          employing  corporation.  Except as  provided  in Section 2 hereof,  no
          option  granted  under this  Agreement  shall be  exercised  after the
          termination  of  Grantee's  affiliation  (both  as an  employee  and a
          director) with the Company.

                                      118

<PAGE>

     (b)  Grantee will not, during the term of his or her affiliation (either as
          an  employee or  director)  with the  Company,  or for a period of two
          years after  termination for any reason of his or her affiliation with
          the  Company,  directly or  indirectly,  either  individually  or as a
          stockholder  (except for passive  investments of less than one percent
          of the outstanding shares), director, officer, consultant, independent
          contractor,  employee,  agent,  member or  otherwise of or through any
          corporation, partnership, association, joint venture, firm, individual
          or otherwise (hereinafter "Firm"), or in any other capacity:

          (i)  Carry on or engage in a business  like or similar to any business
               engaged in by the  Company  either (A) in the county in which the
               Grantee has primarily been employed by the Company at the time of
               termination  of employment or (B) within a 25-mile  radius of the
               location  where the Grantee has  primarily  been  employed by the
               Company at the time of termination of employment; or

          (ii) Solicit or do business  (like or similar to any business  engaged
               in by the Company) with any customer of the Company  either (A)in
               the county in which the Grantee has  primarily  been  employed by
               the  Company  at the time of  termination  of  employment  or (B)
               within a 25-mile  radius of the  location  where the  Grantee has
               primarily been employed by the Company at the time of termination
               of employment; or


          (iii)Solicit,  directly or indirectly,  any employee of the Company to
               leave their  employment  with the  Company  for any  reason.  For
               purposes of this  Agreement,  the Company and Grantee  agree that
               Grantee  shall  be  deemed  to have  solicited  any  employee  in
               violation of this  Agreement if such employee is hired by Grantee
               or his or her Firm within six (6) months of  Grantee's  last date
               of  affiliation  (either as an employee  or a director)  with the
               Company.

     If Grantee is a  nonemployee  director,  the  restrictions  in (i) and (ii)
above  shall apply with  respect to either (A) the county in which the  director
resides at the time he ceases to be a director,  or (B) within a 25-mile  radius
of the  location  where  the  director  resides  at the time he  ceases  to be a
director.

     The above  two-year  period  shall be extended by any period of time during
which Grantee is in default of the covenants contained in this Agreement.

     (c)  During the term of his or her affiliation  (either as an employee or a
          director) with the Company and thereafter,  Grantee shall not divulge,
          or furnish or make accessible to any third party, company, corporation
          or other  organization  (including,  but not  limited  to,  customers,
          competitors or governmental agencies), without the Corporation's prior
          written  consent,  any  trade  secrets,  customer  lists,  information
          regarding customers, or other confidential  information concerning the
          Company or its business,  including without  limitation,  confidential
          methods of operation and  organization,  trade  secrets,  confidential
          matters related to pricing, markups, commissions and customer lists.

     (d)  In the event of a breach or threatened breach by Grantee of all or any
          part of the provisions of  subdivisions  (b) or (c) of this Section 7,
          the Company  shall be entitled to an  injunction  restraining  Grantee
          from  such  breach  without  limiting  any other  rights  or  remedies
          available to the Company for such breach or threatened breach.

     (e)  Grantee specifically recognizes and affirms that each of the covenants
          contained in subdivisions  (b) and (c) of this Section 7 is a material
          and important term of this Agreement  which has induced the Company to
          provide  for the award of the option  granted  hereunder,  and Grantee
          further  agrees  that  should  all  or  any  part  or  application  of
          subdivisions  (b) or (c) of  Section  7 of this  Agreement  be held or
          found invalid or unenforceable for

                                      119

<PAGE>

          any  reason  whatsoever  by a court of  competent  jurisdiction  in an
          action  between  Grantee and the  Company,  the  Corporation  shall be
          entitled to receive (but not  obligated  to acquire)  from Grantee all
          Common Stock held by Grantee  which was obtained by Grantee under this
          Agreement  (including  all  shares  obtained  by  virtue  of any stock
          dividend or  distribution,  recapitalization,  merger,  consolidation,
          split-up,  combination,  exchange  of  shares,  or other  transaction,
          hereinafter  "stock dividends") by returning to Grantee for each share
          received  the  Option  Price paid by Grantee  (as  adjusted  for stock
          dividends). If Grantee has sold, transferred, or otherwise disposed of
          Common  Stock  obtained  under this  Agreement  (including  all shares
          obtained by virtue of any stock  dividend),  the Corporation  shall be
          entitled to receive  from  Grantee the  difference  between the Option
          Price paid by Grantee  and the fair market  value of the Common  Stock
          (including  all shares  obtained by virtue of any stock  dividends) on
          the date of sale transfer or other disposition.

     (f)  Notwithstanding  any  provision  to  the  contrary  herein  contained,
          Section  7(b)  shall  not  apply:  (i)  Upon  the  termination  of the
          Grantee's affiliation with the Corporation (either as an employee or a
          director)  other than for Cause within one (1) year following a Change
          in Control of the Corporation; or

          (ii) Upon the voluntary  termination of Grantee's affiliation with the
          Corporation  (either  as an  employee  or a  director)  for any reason
          within the thirty (30) day period  immediately  after the one (1) year
          period following a Change in Control of the Corporation.

8.   Definitions.  For the purposes of this Agreement, the following terms shall
     have the definitions set forth below:

     (a)  "Cause"  means  (i) any act (A) that  constitutes,  on the part of the
          Grantee, fraud,  dishonesty, a felony or gross malfeasance of duty and
          (B) that directly results in a material injury to the Corporation;  or
          (ii) conduct by the Grantee in his office with the Corporation that is
          grossly  inappropriate  and  demonstrably  likely to lead to  material
          injury  to  the  Corporation,   as  determined  by  the  Board  acting
          reasonably and in good faith;  provided,  however, that in the case of
          (ii) above,  such conduct shall not constitute  Cause unless the Board
          shall  have  delivered  to  the  Grantee  notice  setting  forth  with
          specificity (A) the conduct deemed to qualify as Cause, (B) reasonable
          action that would remedy such  objection,  and (C) a  reasonable  time
          (not  less  than 30 days)  within  which  the  Grantee  may take  such
          remedial  action,  and the Grantee shall not have taken such specified
          remedial action within such specified reasonable time.

     (b)  "Change  in  Control of the  Corporation"  means (i) the  acquisition,
          directly  or  indirectly,  by any  "person"  (within  the  meaning  of
          Sections  13(d) or 14(d) of the  Securities  Exchange Act of 1934,  as
          amended  (the  "Exchange  Act")  within  any  twelve-month  period  of
          securities  of the  Corporation  representing  an  aggregate of twenty
          percent   (20%)  or  more  of  the   combined   voting  power  of  the
          Corporation's then outstanding  securities;  or (ii) during any period
          of two  consecutive  years,  individuals  who at the beginning of such
          period constitute the Board of Directors of the Corporation, cease for
          any  reason to  constitute  at least a  majority  thereof,  unless the
          election of each new  director was approved in advance by a vote of at
          least a  majority  of the  directors  then  still in  office  who were
          directors at the beginning of the period;  or (iii)  consummation of a
          merger  or  consolidation   or  other  business   combination  of  the
          Corporation with any other person, other than a merger,  consolidation
          or business  combination which would result in the outstanding  Common
          Stock  immediately  prior thereto  continuing to represent  (either by
          remaining  outstanding or by being  converted into common stock of the
          surviving  entity or a parent or  affiliate  thereof)  at least  sixty
          percent (60%) of the  outstanding  common stock of the  Corporation or
          such  surviving  entity  or parent of  affiliate  thereof  outstanding
          immediately after such merger,  consolidation or business combination;
          or  (iv) a plan  of  complete  liquidation  of the  Corporation  or an
          agreement for the sale or  disposition  by the  Corporation  of all or
          substantially all of the  Corporation's  assets; or (v) the occurrence
          of any other event or circumstance which is not covered by (i) through
          (iv)  above  which  the  Board  determines   affects  control  of  the
          Corporation and, in order to implement the purposes of this agreement,
          adopts a  resolution  that such event or  circumstance  constitutes  a
          Change in Control for purposes of this agreement.

                                      120

<PAGE>

     (c)  "Disability" means total and permanent  disability as determined under
          the Corporation's long-term disability plan.

     (d)  "Retirement"  means  termination of employment under  circumstances in
          which the  Grantee is  entitled  to a benefit  from the  Corporation's
          defined benefit pension plan.

9.   Disposition of Shares. Grantee agrees to notify the Corporation promptly of
     the  disposition of any shares of Common Stock  purchased  pursuant to this
     option which are disposed of within one year after  transfer of such shares
     to  Grantee,  or within two years of the date of the grant of such  option.
     For  purposes of such  notification,  "disposition"  shall have the meaning
     assigned to it in Section 425(c) of the Code.

10.  Adjustment   of  Awards.   In  the  event  of  any   change  in   corporate
     capitalization,  such as stock split, or a corporate transaction, such as a
     merger,  consolidation,  separation  or  other  distribution  of  stock  or
     property  of the  Corporation,  any  reorganization  (whether  or not  such
     reorganization  comes  within the  definition  of such term in Code Section
     368) or any  partial  or  complete  liquidation  of the  Corporation,  such
     adjustment  shall be made in the  number  and class of and/or  price of the
     Option Shares as may be determined to be  appropriate  and equitable by the
     Corporation's  Board of  Directors,  in its  sole  discretion,  to  prevent
     dilution or enlargement of the benefits or potential  benefits  intended to
     be  available  under  this  agreement;  provided  that the number of Option
     Shares shall always be a whole number.

11.  Interpretation.  Any  question of  interpretation  or  application  of this
     Agreement shall be resolved by the Corporation's Board of Directors and its
     determination shall be final and binding on the Corporation and Grantee.

12.  Notices.  All  notices  hereunder  shall  be in  writing  and,  if  to  the
     Corporation, shall be delivered personally to the Chairman or mailed to the
     Corporation's  principal  office at P.O.  Box 1000,  Blountsville,  Alabama
     35031, addressed to the attention of the Chairman; and if to Grantee, shall
     be delivered  personally  or mailed to him at the address for Grantee found
     in the Corporation's  records. Such addresses may be changed at any time by
     notice from one party to the other.

13.  Binding  Effect.  This Agreement shall bind and inure to the benefit of the
     parties  hereto,  the  successors  and assigns of the  Corporation  and the
     person to whom the rights of Grantee are transferred by will or the laws of
     descent and distribution.

14.  Amendment.  This  Agreement  may be amended from time to time by the Board,
     but no such  amendment  shall impair the rights of the Grantee  without the
     Grantee's consent.

     IN WITNESS  WHEREOF,  the parties hereto have executed this Agreement as of
the date first written above.

                                                      COMMUNITY BANCSHARES, INC.

                                   By:__________________________________________

WITNESS:                           GRANTEE:

---------------------------        ---------------------------------------------
                                   Signature

                                      121

<PAGE>

                                  EXHIBIT 10.32

Form of Stock Option Agreement  between Community  Bancshares,  Inc. and each of
Patrick M. Frawley and Kerri C. Kinney dated February 6, 2003.


                                      122

<PAGE>

                           COMMUNITY BANCSHARES, INC.
                    2003 NONQUALIFIED STOCK OPTION AGREEMENT

     THIS  AGREEMENT  is made and entered  into as of February 6, 2003,  between
grantor Community  Bancshares,  Inc., a Delaware corporation (the "Corporation")
and grantee, ______________, (the "Grantee").

                              W I T N E S S E T H:

     The Board of Directors of the Corporation (the "Board") on February 6, 2003
approved  the grant to  Grantee  of awards  under  the  Corporation's  long-term
incentive  program and established  the terms and conditions of such awards,  as
contained in this Agreement.

     NOW, THEREFORE, the parties hereto agree as follows:

1.   Grant of Option. Grantee shall have the right and option to purchase on the
     terms and conditions  set forth herein,  all or any part of an aggregate of
     ____________ shares ("Option Shares") of the $.10 par value common stock of
     the  Corporation  (the "Common  Stock") at the purchase  price of $7.00 per
     share (the  "Option  Price").  The Option  Price is 100% of the fair market
     value of the Common Stock on February 6, 2003, the date of the grant of the
     option covered by this Agreement.

2.   Terms and Conditions. It is understood and agreed that the option evidenced
     hereby is subject to the following terms and conditions:

     (a)  Expiration Date. The option shall expire five (5) years after the date
          of grant (the  "Expiration  Date").  After the  Expiration  Date,  the
          parties shall have no further rights or obligations hereunder.

     (b)  Exercise  of Option.  The  option  covered  by this  Agreement  may be
          exercised  by Grantee from time to time,  in whole or in part,  at any
          time  prior to the  Expiration  Date  subject to the  restrictions  in
          Section 2(d), (e) and (f) and Section 7.

     (c)  Method of Exercise and Payment of Purchase  Price Upon  Exercise.  The
          Grantee may elect to exercise the option by giving  written  notice of
          such  election  to the  Corporation,  in such  form as the  Board  may
          require, accompanied by payment in cash or in such other manner as may
          be approved  by the Board,  of the full  purchase  price of the Option
          Shares for which the election is made. As determined by the Board,  in
          its sole discretion, payment of the Option Price shall be made in cash
          or Common Stock that was acquired at least six (6) months prior to the
          exercise  of the  option,  or a  combination  thereof.  To the  extent
          permitted  by  applicable  law,  the option may be  exercised  and the
          exercise  price paid pursuant to  arrangements  with  brokerage  firms
          permitted under Regulation T of the Federal Reserve Board or successor
          regulations  or  statutes.   Any  federal  or  state  tax  withholding
          requirements  can be  satisfied  by shares of  Common  Stock  acquired
          pursuant to the option exercise.

     (d)  Exercise Upon Death. In the event that Grantee ceases to be affiliated
          with the  Corporation  or its  subsidiaries  (either as an employee or
          director) by reason of death,  the option may  thereafter be exercised
          as to all shares subject to the option by the legal  representative of
          the estate or by the person or persons  entitled  to the option  under
          the  Grantee's  will  or the  laws of  descent  and  distribution,  as
          appropriate,  until the  earlier of (i) the  expiration  of the stated
          term of the  option or (ii) the first  anniversary  of the date of the
          Grantee's death.

     (e)  Exercise Upon  Termination of Affiliation by Reason of Disability.  In
          the event that Grantee ceases to be affiliated with the Corporation or
          its  subsidiaries  (either as an  employee or  director)  by reason of
          Disability (as defined below),  the option may thereafter be exercised
          as to all shares  subject to the option  until the  earlier of (i) the
          expiration  of the  stated  term  of the  option  or  (ii)  the  first
          anniversary of the date that Grantee is determined by the  Corporation
          to be disabled.

                                      123

<PAGE>

     (f)  Exercise Upon Termination of Affiliation by Reason Other than Death or
          Disability.  The  option or any  unexercised  portions  thereof  shall
          expire  upon the earlier of (i) the  expiration  of the stated term of
          the  option or (ii) the 90th day after the  termination  of  Grantee's
          affiliation  with the  Corporation  and its  subsidiaries  (both as an
          employee  and as a  director)  for any  reason  other  than  death  or
          Disability.   Provided,  however,  if  the  Grantee's  affiliation  is
          terminated  for Cause (as defined  below),  the option shall expire on
          the date of the termination of the Grantee's affiliation.

3.   No Rights as  Shareholder  or to Employment or to  Directorship.  No option
     granted  hereunder  shall  entitle  the  holder  thereof to any rights as a
     shareholder  in the  Corporation  with  respect  to any shares to which the
     option  relates  until such  shares  have been paid for in full and issued.
     Furthermore,  the option  shall not confer  upon the  Grantee any rights of
     employment with the Corporation or any of its subsidiaries or any rights to
     be a director of the  Corporation or any of its  subsidiaries or affect the
     right of the  Corporation or its  subsidiaries to terminate the affiliation
     of the Grantee at any time, with or without cause.

4.   Restrictions  on Transfer of Shares.  Grantee  hereby agrees for himself or
     herself and his or her legal representative,  heirs and distributees,  that
     if a registration  statement  covering the shares issuable upon exercise of
     any option  hereunder is not effective under the Securities Act of 1933, as
     amended  (the  "Act"),  at the  time of  such  exercise,  or if some  other
     exemption from the provisions of the Act is not available,  then all shares
     of Common Stock then  received or  purchased  upon such  exercise  shall be
     acquired for investment,  and that the notice of exercise  delivered to the
     Corporation shall be accompanied by a representation in writing  acceptable
     in scope and form to  counsel to the  Corporation  and signed by Grantee or
     Grantee's legal representative,  heirs or distributees, as the case may be,
     to the  effect  that the  shares  are  being  acquired  in good  faith  for
     investment  and not with a view to  distribution  thereof.  Any  shares  so
     acquired may be deemed restricted  securities under Rule 144 as promulgated
     by the  Securities and Exchange  Commission  under the Act, and as the same
     may be amended or replaced and subject to  restrictions  upon sale or other
     disposition.

5.   Registration  of Shares.  If at any time the Board shall determine that the
     listing,  registration or qualification of any shares subject to the option
     upon any  securities  exchange,  or under any state or federal  law, or the
     consent or approval of any  governmental or regulatory body is necessary or
     desirable as a condition of or in connection  with the issuance or purchase
     of shares  hereunder,  the option may not be  exercised in whole or in part
     unless such listing, registration,  qualification, consent, or approval has
     been  effected or obtained  free of any  conditions  not  acceptable to the
     Board.

6.   Transfer of Rights.  This option is not  transferable  except by will or by
     the laws of  descent  and  distribution  and  shall be  exercisable  during
     Grantee's lifetime only by Grantee. After the death of Grantee, this option
     may be  exercised  only by  Grantee's  estate or by the  person or  persons
     entitled  to the option  under  Grantee's  will or the laws of descent  and
     distribution, as appropriate. In the event the option is transferred to the
     Grantee's  estate,  the option may be  exercised  by the estate only to the
     extent that the Grantee  would have been  entitled  had the option not been
     transferred.

7.   Competition  with Employer - Covenant Not to Compete.  In  consideration of
     the  grant  by the  Corporation  of the  option,  Grantee  agrees  with the
     Corporation as follows:

     (a)  While Grantee is affiliated with the Corporation or one or more of its
          subsidiaries  (hereinafter  collectively referred to as the "Company")
          either as an employee or a  director,  Grantee  will devote his or her
          entire  time,  energy and skills to the  service of the  Company.  Any
          employment  shall be at the pleasure of the board of directors of each
          employing  corporation.  Except as  provided  in Section 2 hereof,  no
          option  granted  under this  Agreement  shall be  exercised  after the
          termination  of  Grantee's  affiliation  (both  as an  employee  and a
          director) with the Company.

                                      124

<PAGE>

     (b)  Grantee will not, during the term of his or her affiliation (either as
          an  employee or  director)  with the  Company,  or for a period of two
          years after  termination for any reason of his or her affiliation with
          the  Company,  directly or  indirectly,  either  individually  or as a
          stockholder  (except for passive  investments of less than one percent
          of the outstanding shares), director, officer, consultant, independent
          contractor,  employee,  agent,  member or  otherwise of or through any
          corporation, partnership, association, joint venture, firm, individual
          or otherwise (hereinafter "Firm"), or in any other capacity:

          (i)  Carry on or engage in a business  like or similar to any business
               engaged in by the  Company  either (A) in the county in which the
               Grantee has primarily been employed by the Company at the time of
               termination  of employment or (B) within a 25-mile  radius of the
               location  where the Grantee has  primarily  been  employed by the
               Company at the time of termination of employment; or

          (ii) Solicit or do business  (like or similar to any business  engaged
               in by the Company) with any customer of the Company  either (A)in
               the county in which the Grantee has  primarily  been  employed by
               the  Company  at the time of  termination  of  employment  or (B)
               within a 25-mile  radius of the  location  where the  Grantee has
               primarily been employed by the Company at the time of termination
               of employment; or

          (iii)Solicit,  directly or indirectly,  any employee of the Company to
               leave their  employment  with the  Company  for any  reason.  For
               purposes of this  Agreement,  the Company and Grantee  agree that
               Grantee  shall  be  deemed  to have  solicited  any  employee  in
               violation of this  Agreement if such employee is hired by Grantee
               or his or her Firm within six (6) months of  Grantee's  last date
               of  affiliation  (either as an employee  or a director)  with the
               Company.

     If Grantee is a  nonemployee  director,  the  restrictions  in (i) and (ii)
above  shall apply with  respect to either (A) the county in which the  director
resides at the time he ceases to be a director,  or (B) within a 25-mile  radius
of the  location  where  the  director  resides  at the time he  ceases  to be a
director.

     The above  two-year  period  shall be extended by any period of time during
which Grantee is in default of the covenants contained in this Agreement.

     (c)  During the term of his or her affiliation  (either as an employee or a
          director) with the Company and thereafter,  Grantee shall not divulge,
          or furnish or make accessible to any third party, company, corporation
          or other  organization  (including,  but not  limited  to,  customers,
          competitors or governmental agencies), without the Corporation's prior
          written  consent,  any  trade  secrets,  customer  lists,  information
          regarding customers, or other confidential  information concerning the
          Company or its business,  including without  limitation,  confidential
          methods of operation and  organization,  trade  secrets,  confidential
          matters related to pricing, markups, commissions and customer lists.

     (d)  In the event of a breach or threatened breach by Grantee of all or any
          part of the provisions of  subdivisions  (b) or (c) of this Section 7,
          the Company  shall be entitled to an  injunction  restraining  Grantee
          from  such  breach  without  limiting  any other  rights  or  remedies
          available to the Company for such breach or threatened breach.

     (e)  Grantee specifically recognizes and affirms that each of the covenants
          contained in subdivisions  (b) and (c) of this Section 7 is a material
          and important term of this Agreement  which has induced the Company to
          provide  for the award of the option  granted  hereunder,  and Grantee
          further  agrees  that  should  all  or  any  part  or  application  of
          subdivisions  (b) or (c) of  Section  7 of this  Agreement  be held or
          found invalid or unenforceable

                                      126

<PAGE>

          for any reason  whatsoever by a court of competent  jurisdiction in an
          action  between  Grantee and the  Company,  the  Corporation  shall be
          entitled to receive (but not  obligated  to acquire)  from Grantee all
          Common Stock held by Grantee  which was obtained by Grantee under this
          Agreement  (including  all  shares  obtained  by  virtue  of any stock
          dividend or  distribution,  recapitalization,  merger,  consolidation,
          split-up,  combination,  exchange  of  shares,  or other  transaction,
          hereinafter  "stock dividends") by returning to Grantee for each share
          received  the  Option  Price paid by Grantee  (as  adjusted  for stock
          dividends). If Grantee has sold, transferred, or otherwise disposed of
          Common  Stock  obtained  under this  Agreement  (including  all shares
          obtained by virtue of any stock  dividend),  the Corporation  shall be
          entitled to receive  from  Grantee the  difference  between the Option
          Price paid by Grantee  and the fair market  value of the Common  Stock
          (including  all shares  obtained by virtue of any stock  dividends) on
          the date of sale transfer or other disposition.

     (f)  Notwithstanding  any  provision  to  the  contrary  herein  contained,
          Section  7(b)  shall  not  apply:  (i)  Upon  the  termination  of the
          Grantee's affiliation with the Corporation (either as an employee or a
          director)  other than for Cause within one (1) year following a Change
          in Control of the Corporation; or

          (ii) Upon the voluntary  termination of Grantee's affiliation with the
          Corporation  (either  as an  employee  or a  director)  for any reason
          within the thirty (30) day period  immediately  after the one (1) year
          period following a Change in Control of the Corporation.

8.   Definitions.  For the purposes of this Agreement, the following terms shall
     have the definitions set forth below:

     (a)  "Cause"  means  (i) any act (A) that  constitutes,  on the part of the
          Grantee, fraud,  dishonesty, a felony or gross malfeasance of duty and
          (B) that directly results in a material injury to the Corporation;  or
          (ii) conduct by the Grantee in his office with the Corporation that is
          grossly  inappropriate  and  demonstrably  likely to lead to  material
          injury  to  the  Corporation,   as  determined  by  the  Board  acting
          reasonably and in good faith;  provided,  however, that in the case of
          (ii) above,  such conduct shall not constitute  Cause unless the Board
          shall  have  delivered  to  the  Grantee  notice  setting  forth  with
          specificity (A) the conduct deemed to qualify as Cause, (B) reasonable
          action that would remedy such  objection,  and (C) a  reasonable  time
          (not  less  than 30 days)  within  which  the  Grantee  may take  such
          remedial  action,  and the Grantee shall not have taken such specified
          remedial action within such specified reasonable time.

     (b)  "Change  in  Control of the  Corporation"  means (i) the  acquisition,
          directly  or  indirectly,  by any  "person"  (within  the  meaning  of
          Sections  13(d) or 14(d) of the  Securities  Exchange Act of 1934,  as
          amended  (the  "Exchange  Act")  within  any  twelve-month  period  of
          securities  of the  Corporation  representing  an  aggregate of twenty
          percent   (20%)  or  more  of  the   combined   voting  power  of  the
          Corporation's then outstanding  securities;  or (ii) during any period
          of two  consecutive  years,  individuals  who at the beginning of such
          period constitute the Board of Directors of the Corporation, cease for
          any  reason to  constitute  at least a  majority  thereof,  unless the
          election of each new  director was approved in advance by a vote of at
          least a  majority  of the  directors  then  still in  office  who were
          directors at the beginning of the period;  or (iii)  consummation of a
          merger  or  consolidation   or  other  business   combination  of  the
          Corporation with any other person, other than a merger,  consolidation
          or business  combination which would result in the outstanding  Common
          Stock  immediately  prior thereto  continuing to represent  (either by
          remaining  outstanding or by being  converted into common stock of the
          surviving  entity or a parent or  affiliate  thereof)  at least  sixty
          percent (60%) of the  outstanding  common stock of the  Corporation or
          such  surviving  entity  or parent of  affiliate  thereof  outstanding
          immediately after such merger,  consolidation or business combination;
          or  (iv) a plan  of  complete  liquidation  of the  Corporation  or an
          agreement for the sale or  disposition  by the  Corporation  of all or
          substantially all of the  Corporation's  assets; or (v) the occurrence
          of any other event or circumstance which is not covered by (i) through
          (iv)  above  which  the  Board  determines   affects  control  of  the
          Corporation and, in order to implement the purposes of this agreement,
          adopts a  resolution  that such event or  circumstance  constitutes  a
          Change in Control for purposes of this agreement.

                                      126

<PAGE>

     (c)  "Disability" means total and permanent  disability as determined under
          the Corporation's long-term disability plan.

     (d)  "Retirement"  means  termination of employment under  circumstances in
          which the  Grantee is  entitled  to a benefit  from the  Corporation's
          defined benefit pension plan.

9.   Disposition of Shares. Grantee agrees to notify the Corporation promptly of
     the  disposition of any shares of Common Stock  purchased  pursuant to this
     option which are disposed of within one year after  transfer of such shares
     to  Grantee,  or within two years of the date of the grant of such  option.
     For  purposes of such  notification,  "disposition"  shall have the meaning
     assigned to it in Section 425(c) of the Code.

10.  Adjustment   of  Awards.   In  the  event  of  any   change  in   corporate
     capitalization,  such as stock split, or a corporate transaction, such as a
     merger,  consolidation,  separation  or  other  distribution  of  stock  or
     property  of the  Corporation,  any  reorganization  (whether  or not  such
     reorganization  comes  within the  definition  of such term in Code Section
     368) or any  partial  or  complete  liquidation  of the  Corporation,  such
     adjustment  shall be made in the  number  and class of and/or  price of the
     Option Shares as may be determined to be  appropriate  and equitable by the
     Corporation's  Board of  Directors,  in its  sole  discretion,  to  prevent
     dilution or enlargement of the benefits or potential  benefits  intended to
     be  available  under  this  agreement;  provided  that the number of Option
     Shares shall always be a whole number.

11.  Interpretation.  Any  question of  interpretation  or  application  of this
     Agreement shall be resolved by the Corporation's Board of Directors and its
     determination shall be final and binding on the Corporation and Grantee.

12.  Notices.  All  notices  hereunder  shall  be in  writing  and,  if  to  the
     Corporation, shall be delivered personally to the Chairman or mailed to the
     Corporation's  principal  office at P.O.  Box 1000,  Blountsville,  Alabama
     35031, addressed to the attention of the Chairman; and if to Grantee, shall
     be delivered  personally  or mailed to him at the address for Grantee found
     in the Corporation's  records. Such addresses may be changed at any time by
     notice from one party to the other.

13.  Binding  Effect.  This Agreement shall bind and inure to the benefit of the
     parties  hereto,  the  successors  and assigns of the  Corporation  and the
     person to whom the rights of Grantee are transferred by will or the laws of
     descent and distribution.

14.  Amendment.  This  Agreement  may be amended from time to time by the Board,
     but no such  amendment  shall impair the rights of the Grantee  without the
     Grantee's consent.

     IN WITNESS  WHEREOF,  the parties hereto have executed this Agreement as of
the date first written above.

                                                      COMMUNITY BANCSHARES, INC.

                                   By:__________________________________________

WITNESS:                           GRANTEE:

---------------------------        ---------------------------------------------
                                   Signature

                                      127
<PAGE>

Exhibit 11 - Statements Re:  Computation of Per Share Earnings

                           Community Bancshares, Inc.
                   Computation of Net Income per Common Share

The following  tabulation  presents the  calculation  of basic and fully diluted
earnings per common share for the years ended December 31, 2002, 2001 and 2000.

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

<S>                                                       <C>                <C>                 <C>
Reported income (loss) from continuing operations         $      (5,023,133) $     (2,381,351)   $       (2,852,657)
                                                          =================  ================    ==================
Reported income (loss) from discontinued operations       $       5,927,331  $        958,467    $         (166,618)
                                                          =================  ================    ==================
Earnings (losses) on common shares                        $         904,198  $     (1,422,884)   $       (3,019,275)
                                                          =================  ================    ==================


Weighted average common shares outstanding - basic                4,642,182         4,572,301             4,460,295
                                                          =================  ================    ==================

Earnings per common share- basic
   Income (loss) from continuing operations               $           (1.08) $         (0.52)    $           (0.64)
                                                          =================  ===============     =================
   Net income (loss)                                      $            0.19  $         (0.31)    $           (0.68)
                                                          =================  ===============     =================


Weighted average common shares outstanding - diluted              4,642,182         4,572,301             4,671,430
                                                          =================  ================    ==================

Earnings per common share- diluted
   Income (loss) from continuing operations               $           (1.08)  $         (0.52)    $           (0.61)
                                                          =================   ===============     =================
   Net income (loss)                                      $            0.19   $         (0.31)    $           (0.65)
                                                          =================   ===============     =================
</TABLE>


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                                      128
<PAGE>
Exhibit 21 - Subsidiaries of the Registrant

<TABLE>
<CAPTION>

<S>                                                                                    <C>
Subsidiaries - Direct / wholly-owned                                                    State of Incorporation
   Community Bank.....................................................................  Alabama
   Community (AL) Capital Trust I.....................................................  Delaware

Subsidiaries - Indirect / wholly-owned by Community Bank
   Community Appraisals, Inc..........................................................  Alabama
   1st Community Credit Corporation...................................................  Alabama
   Community Insurance Corp...........................................................  Alabama

Subsidiaries - Indirect / wholly-owned by Community Insurance Corp.
   Southern Select Insurance, Inc.....................................................  Alabama
</TABLE>


                                      129