SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                 --------------
                                    FORM 10-K
                        FOR ANNUAL AND TRANSITION REPORTS
                     PURSUANT TO SECTIONS 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

(Mark One)
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934

For the fiscal year ended            December 31, 1998                        
                         ------------------------------------------------------
                                       or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934

For the transition period from                        to                
                              ----------------------        ----------------
                         Commission file Number 0-17939

                         CAROLINA FIRST BANCSHARES, INC.
             (Exact name of registrant as specified in its charter)
         North Carolina                                         56-1655882     
-------------------------------                             --------------------
(State or other jurisdiction of                                (I.R.S. Employer
 incorporation or organization)                              Identification No.)

236 East Main Street, Lincolnton, N.C.                                 28092   
--------------------------------------------------------------------------------
(Address of principal executive office)                             (Zip Code)

Registrant's telephone number, including area code     (704) 732-2222         
                                                    ----------------------------
Securities registered pursuant to Section 12(b) of the Act:

     Title of each class              Name of each exchange on which registered
------------------------------      --------------------------------------------
Securities registered pursuant to Section 12(g) of the Act:

                     Common Stock, par value $2.50 per share
                     ---------------------------------------
                                (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 registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

     The  aggregate  market  value of the $2.50 par value  common  stock held by
non-affiliates of registrant as of January 31, 1999:  $142,292,850  based on the
last sale  price on January  31,  1999,  using the  beneficial  ownership  rules
adopted pursuant to Section 13 of the Securities Exchange Act of 1934 to exclude
voting stock owned by directors and certain executive officers, some of whom may
not be held to be affiliates upon judicial determination.
     As of March 20, 1999,  5,438,567 shares of the registrant's $2.50 par value
common stock were issued and outstanding.

<PAGE>



                            SPECIAL CAUTIONARY NOTICE
                      REGARDING FORWARD LOOKING STATEMENTS

     Certain of the  statements  made  herein  under the  caption  "Management's
Discussion and Analysis of Financial  Condition and Results of  Operations"  and
elsewhere in this Annual Report are  forward-looking  statements for purposes of
the  Securities  Act of  1933,  as  amended  (the  "Securities  Act"),  and  the
Securities  Exchange Act of 1934, as amended (the "Exchange  Act"),  and as such
may involve known and unknown risks,  uncertainties  and other factors which may
cause the actual  results,  performance  or  achievements  of the  Company to be
materially different from future results,  performance or achievements expressed
or implied by such forward-looking  statements.  Such forward-looking statements
include  statements  using  the  words  such  as  "may,"  "will,"  "anticipate,"
"should," "would," "believe,"  "contemplate,"  "expect," "estimate," "continue,"
"may," "intend" or other similar words and expressions of the future. Our actual
results  may  differ   significantly  from  the  results  we  discuss  in  these
forward-looking statements.

     These  forward-looking  statements  involve risks and uncertainties and may
not be realized due to a variety of factors, including,  without limitation: the
effects  of  future  economic  conditions;   governmental  monetary  and  fiscal
policies, as well as legislative and regulatory changes; the risks of changes in
interest rates on the level and  composition of deposits,  loan demand,  and the
values of loan collateral,  securities,  and other interest-sensitive assets and
liabilities;  interest  rate  risks;  the  effects  of  competition  from  other
commercial banks,  thrifts,  mortgage banking firms, consumer finance companies,
credit unions, securities brokerage firms, insurance companies, money market and
other mutual funds and other financial  institutions  operating in the Company's
market  area  and  elsewhere,  including  institutions  operating,   regionally,
nationally and internationally,  together with such competitors offering banking
products  and  services  by mail,  telephone,  computer  and the  Internet;  the
possible  effects  of the Year  2000  problem  on the  Company,  including  such
problems  at the  Company's  vendors,  counter-parties  and  customers;  and the
failure of  assumptions  underlying the  establishment  of reserves for possible
loan losses. All written or oral forward-looking  statements attributable to the
Company  are  expressly   qualified  in  their  entirety  by  these   cautionary
statements.

                                     PART I

ITEM 1.  BUSINESS

     Carolina  First  BancShares,   Inc.  (the  "Company"),   a  North  Carolina
corporation, is registered as a bank holding company with the Board of Governors
of the Federal Reserve System ("Federal Reserve") under the Bank Holding Company
Act of 1956,  as amended (the "BHC Act").  Carolina  First was  incorporated  on
November 8, 1988, for purposes of becoming a bank holding company,  and acquired
Lincoln Bank of North Carolina  ("Lincoln Bank"), a North Carolina bank, on June
6, 1989. The Company owns all the  outstanding  common stock of Cabarrus Bank of
North  Carolina  ("Cabarrus  Bank") and Community  Bank & Trust Co.  ("Community
Bank"),  both of which are North Carolina banks.  Community Bank was acquired on
December 23, 1998. Lincoln Bank, Cabarrus Bank and Community Bank, (collectively
the "Banks") operate 31 branch offices,  and through them the Company provides a
broad  range of  banking  and  financial  services  principally  in the  greater
Charlotte,  North Carolina area, including Lincoln County,  southeastern Catawba
County,  Iredell County,  Cabarrus County and north and west Mecklenburg County.
Community Bank operates in Avery, Buncombe,  Jackson,  McDowell,  Rutherford and
Transylvania  Counties,  North  Carolina in the western  part of the state.  The
Banks are members of the Federal Deposit  Insurance  Corporation  ("FDIC"),  and
Lincoln Bank's and Community  Bank's  deposits are insured by the Bank Insurance
Fund ("BIF") and Cabarrus Bank's deposits are insured by the Savings Association
Insurance Fund ("SAIF").

     Lincoln Bank and Cabarrus  Bank  jointly own a mortgage  company,  Carolina
First  Mortgage  Corp.,  which  originates  mortgage  loans  for  resale  in the
secondary market,  and a financial  services  company,  Carolina First Financial
Services Corporation,  ("Financial Services"), which offers, as an agent for its
customers,  mutual funds and annuity products. During the third quarter of 1997,
the Company became the majority  owner of Lincoln Center at Mallard Creek,  LLC.
Lincoln  Center is a  three-story  office  building  occupied in part by Lincoln
Bank. This branch opened in the third quarter of 1998.

     The  Company  owns  approximately  17% of the total  common  stock of First
Gaston  Bank of North  Carolina,  Gastonia,  North  Carolina  ("First  Gaston").
Gastonia,  which is located just west of Charlotte and south of  Lincolnton,  is
contiguous to the markets  served by Lincoln  Bank.  First Gaston opened in July
1995 and operates three branches in markets not currently served by the Company.
The Company provides certain operational functions for First Gaston. The Federal
Reserve, in approving this investment under the BHC Act, required the Company to
enter into a commitment to serve as a "source of strength" for First Gaston. The
Company's investment in First Gaston is accounted for under the equity method of
accounting  and thus the  Company's  portion of income or losses is reflected in
current period  earnings.  See "Supervision and Regulation." The Company engages
in no significant  operations other than the ownership of its subsidiaries.  The
Company  maintains  its  principal  executive  offices at 236 East Main  Street,
Lincolnton, North Carolina 28092, and its telephone number is (704) 732-2222.
<PAGE>

     The Banks provide a wide range of commercial banking products and services.
Services  include  checking  accounts,  NOW  accounts,  savings  and other  time
deposits of various types,  including  retirement  accounts and  certificates of
deposit.  Loan services include mortgage loan originations,  loans for business,
real estate, personal and household purposes,  lines of credit and credit cards.
Considering  the  volatility  of quality loan demand,  the Company  maintains an
investment  portfolio.  Other services include safe deposit boxes, wire transfer
facilities,  and electronic banking  facilities.  At year-end 1994, Lincoln Bank
began exercising trust powers,  and at December 31, 1998, Lincoln Bank had trust
assets under management of $31.0 million.

COMPETITION

     Commercial  banking is highly  competitive.  The Banks  compete  with other
financial  institutions  located in  metropolitan  Charlotte  and  elsewhere  in
western  North  Carolina.  Other  competitors  include  banks,  savings and loan
associations,  finance  companies,  credit  unions,  mortgage  bankers,  pension
trusts,  out-of-state  banks  and  other  institutions  that  provide  loan  and
investment services and money market funds. Competition between commercial banks
and  thrift  institutions  has  intensified  significantly  as a  result  of the
elimination of many previous distinctions between the various types of financial
institutions. The Banks also compete for interest-bearing funds with a number of
other financial  intermediaries  and investment  alternatives,  including mutual
funds,  brokerage and insurance  firms,  investment  advisors,  governmental and
corporate  bonds,  and short-term  money market  securities.  The ability of the
Banks to retain deposits depends on their ability to generally provide a rate of
return,  liquidity and risk  comparable to that offered by competing  investment
opportunities.

     The Banks compete for deposits,  loans and other  business with a number of
major  banks  and  bank  holding  companies  which  have  numerous  offices  and
affiliates  operating over wide  geographic  areas.  Other  competitors  such as
thrifts, credit unions, mortgage companies,  brokerage firms, finance companies,
and specialty lenders and other local and non-local financial  institutions also
compete with the Banks,  through a local presence or through  offerings by mail,
telephone  or  over  the  Internet.   Among  the  advantages  certain  of  these
institutions  may  have  compared  to the  Banks,  are the  ability  to  finance
extensive advertising campaigns, and the ability to allocate and diversify their
assets among loans and  securities  of the highest  yield in locations  with the
greatest  demand.  Some of such  competitors  are subject to less regulation and
more  favorable tax  treatment  than the Company.  Many of the major  commercial
banks, or their affiliates, in the Company's service area offer services such as
international banking and investment services, which are not offered directly by
the Banks. Such competitors, because of their greater capitalization,  also have
substantially  higher lending  limits than the Banks,  and because of their size
and geographic diversification are better able to absorb risk.

SUPERVISION AND REGULATION

     Bank holding  companies and banks are  extensively  regulated under federal
and state law. This  discussion is qualified in its entirety by reference to the
particular  statutory  and  regulatory  provisions  referred to below and is not
intended to be an exhaustive description of the status or regulations applicable
to  the  Company's  and  the  Banks'  business.  Supervision,   regulation,  and
examination of the Company and the Banks and their  respective  subsidiaries  by
the bank  regulatory  agencies  are intended  primarily  for the  protection  of
depositors  rather  than  holders  of  Company  capital  stock.  Any  change  in
applicable  law or  regulation  may  have a  material  effect  on the  Company's
business.
<PAGE>

     BANK HOLDING COMPANY REGULATION The Company,  as a bank holding company, is
subject to  supervision  and regulation by the Board of Governors of the Federal
Reserve  System  (the  "Federal  Reserve")  under the BHC Act.  The  Company  is
required  to file with the  Federal  Reserve  periodic  reports  and such  other
information as the Federal Reserve may request. The Federal Reserve examines the
Company,  and may  examine  the  Company's  Subsidiaries.  The  Company  is also
registered as a bank holding  company with the North  Carolina  Commissioner  of
Banks (the "Commissioner"), and files reports with the Commissioner.

     The BHC Act  requires  prior  Federal  Reserve  approval  for,  among other
things,  the  acquisition  by a bank  holding  company  of  direct  or  indirect
ownership or control of more than 5% of the voting shares or  substantially  all
the  assets of any  bank,  or for a merger or  consolidation  of a bank  holding
company with another bank holding company. With certain exceptions,  the BHC Act
prohibits a bank holding company from acquiring direct or indirect  ownership or
control  of voting  shares of any  company  which is not a bank or bank  holding
company and from  engaging  directly or  indirectly  in any activity  other than
banking  or  managing  or  controlling  banks  or  performing  services  for its
authorized  subsidiaries.  A bank holding company,  may,  however,  engage in or
acquire an interest in a company  that engages in  activities  which the Federal
Reserve  has  determined  by  regulation  or order to be so  closely  related to
banking or managing or  controlling  banks as to be a proper  incident  thereto.
Certain  acquisitions  by bank holding  companies are subject to approval by the
Commissioner.

     The Company is a legal entity  separate and distinct from the Banks and its
other subsidiaries. Various legal limitations restrict the Banks from lending or
otherwise  supplying  funds to the  Company or its  non-bank  subsidiaries.  The
Company and the Banks are subject to Section  23A of the  Federal  Reserve  Act.
Section 23A defines "covered transactions",  which include extensions of credit,
and  limits a bank's  covered  transactions  with any  affiliate  to 10% of such
bank's capital and surplus.  All covered and exempt transactions  between a bank
and its  affiliates  must be on terms and  conditions  consistent  with safe and
sound banking  practices and banks and their  subsidiaries  are prohibited  from
purchasing low-quality assets from the bank's affiliates.  Finally,  Section 23A
requires  that  all  of a  bank's  extensions  of  credit  to  an  affiliate  be
appropriately  secured  by  acceptable   collateral,   generally  United  States
government or agency  securities.  The Company and the Banks also are subject to
Section 23B of the Federal Reserve Act, which generally limits covered and other
transactions among affiliates to terms and under circumstances, including credit
standards,  that are substantially the same or at least as favorable to the bank
or its subsidiary as prevailing at the time for transactions  with  unaffiliated
companies.

     The BHC  Act,  as  amended  by the  interstate  banking  provisions  of the
Reigle-Neal   Interstate   Banking  and  Branch  Efficiency  Act  of  1994  (the
"Interstate  Banking  Act"),  which  became  effective  on  September  29, 1995,
repealed the prior statutory restrictions on interstate acquisitions of banks by
bank holding companies, such that the Company and any other bank holding company
located in North Carolina may now acquire a bank located in any other state, and
any bank holding company located outside North Carolina may lawfully acquire any
bank based in another state,  regardless of state law to the contrary, in either
case subject to certain  deposit-percentage,  age of bank charter  requirements,
and other restrictions. The Interstate Banking Act also generally provides that,
after June 1, 1997,  national and  state-chartered  banks may branch  interstate
through  acquisitions of banks in other states. By adopting legislation prior to
that date,  a state has the ability to either "opt in" and  accelerate  the date
after  which  interstate  branching  is  permissible  or "opt out" and  prohibit
interstate branching altogether.  North Carolina adopted legislation opting into
interstate  branching  effective  July 1,  1995,  including  de novo  interstate
branching  prior to July 1, 1997  with  states  where  reciprocal  branching  is
permitted, and thereafter without limit.

     Federal  Reserve policy  requires a bank holding company to act as a source
of  financial  strength  and to take  measures  to  preserve  and  protect  bank
subsidiaries in situations where  additional  investments in a troubled bank may
not  otherwise be  warranted.  In  addition,  under the  Financial  Institutions
Reform,  Recovery and Enforcement Act of 1989  ("FIRREA"),  where a bank holding
company has more than one bank or thrift  subsidiary,  each of the bank  holding
company's subsidiary  depository  institutions are responsible for any losses to
the Federal Deposit Insurance  Corporation ("FDIC") as a result of an affiliated
depository  institution's  failure.  As a result,  a bank holding company may be
required to loan money to its subsidiaries in the form of capital notes or other
instruments which qualify as capital under regulatory rules.  However, any loans
from the holding company to such  subsidiary  banks likely will be unsecured and
subordinated  to such bank's  depositors  and perhaps to other  creditors of the
bank.  The Company  owns  approximately  17% of the total  common stock of First
Gaston Bank of North Carolina ("First Gaston").
<PAGE>

     The  Federal  Reserve has amended its  Regulation  Y  implementing  certain
provisions of The Economic Growth and Regulatory Paperwork Reduction Act of 1996
("EGRPRA"). Among other things, these amendments to Federal Reserve Regulation Y
reduced the notice and application  requirements  applicable to bank and nonbank
acquisitions and de novo expansion by  well-capitalized  and  well-managed  bank
holding companies;  expanded the list of nonbanking  activities  permitted under
Regulation Y; reduced certain  limitations on previously  permitted  activities;
and amended  Federal  Reserve  anti-tying  restrictions  to allow banks  greater
flexibility to package products and services with their affiliates.  The Federal
Reserve has advised the Company  informally  that,  as a result of actions by D.
Mark Boyd, III, the Company's  former Chairman and Chief Executive  Officer,  in
connection  with his purchases of Community Bank common stock,  that the Company
should not expect to receive expedited processing of any expansion  applications
submitted to the Federal Reserve.

     BANK AND BANK  SUBSIDIARY  REGULATION  GENERALLY  The Banks are  subject to
supervision,  regulation, and examination by the FDIC and the Commissioner which
monitor all areas of the  operations of the Banks,  including  reserves,  loans,
mortgages,  issuances of  securities,  payment of  dividends,  establishment  of
branches,  capital adequacy,  and compliance with laws. The Banks are members of
the FDIC and  their  deposits  are  insured  by the FDIC to the  maximum  extent
provided by law. Lincoln Bank's and Community Bank's deposits are insured by the
FDIC's Bank  Insurance Fund ("BIF") and Cabarrus  Bank's  deposits are primarily
insured by the Savings Association Insurance Fund ("SAIF").  See "FDIC Insurance
Assessments".

     Under  present  North  Carolina  law, the Banks may  establish  and operate
branches  throughout the State of North Carolina,  subject to the maintenance of
adequate  capital for each branch and the receipt of the necessary  approvals of
the FDIC and the Commissioner.

     In  December,  1996,  the FDIC adopted the Federal  Financial  Institutions
Examination  Council's  ("FFIEC")  updated statement of policy entitled "Uniform
Financial  Institutions  Rating System"  ("UFIRS"),  effective  January 1, 1997.
UFIRS is an internal rating system used by the federal and state  regulators for
assessing  the  soundness of financial  institutions  on a uniform basis and for
identifying those institutions  requiring special supervisory  attention.  Under
the previous  UFIRS,  each  financial  institution  was assigned a  confidential
composite rating based on an evaluation and rating of five essential  components
of  an  institution's  financial  condition  and  operations  including  capital
adequacy, asset quality, management,  earnings, and liquidity. The major changes
include an increased  emphasis on the quality of risk  management  practices and
the addition of a sixth  component  for  sensitivity  to market  risk.  For most
institutions,  the FFIEC has  indicated  that  market  risk  primarily  reflects
exposures to changes in interest rates. When regulators evaluate this component,
consideration is expected to be given to: (i) management's  ability to identify,
measure,  monitor,  and control market risk; (ii) the institution's  size; (iii)
the nature and complexity of its  activities and its risk profile;  and (iv) the
adequacy  of its  capital  and  earnings in relation to its level of market risk
exposure.  Market risk is rated based upon, but not limited to, an assessment of
the sensitivity of the financial institution's earnings or the economic value of
its  capital to adverse  changes in  interest  rates,  foreign  exchange  rates,
commodity prices, or equity prices;  management's ability to identify,  measure,
monitor and control  exposure to market risk;  and the nature and  complexity of
interest rate risk exposure arising from nontrading positions.

     COMMUNITY  REINVESTMENT  ACT The  Company  and the Banks are subject to the
provisions of the Community Reinvestment Act of 1977, as amended (the "CRA") and
the federal banking agencies' regulations  thereunder.  Under the CRA, all banks
and thrifts have a continuing and affirmative obligation,  consistent with their
safe and  sound  operation  to help  meet the  credit  needs  for  their  entire
communities,  including low and moderate income neighborhoods.  The CRA does not
establish specific lending requirements or programs for financial  institutions,
nor does it limit an  institution's  discretion to develop the types of products
and  services  that it  believes  are best suited to its  particular  community,
consistent  with the CRA. The CRA requires a  depository  institution's  primary
federal  regulator,  in connection with its examination of the  institution,  to
assess the institution's record of assessing and meeting the credit needs of the
community  served  by  that  institution,  including  low-  and  moderate-income
neighborhoods. The regulatory agency's assessment of the institution's record is
made  available  to the  public.  Further,  such  assessment  is required of any
institution  which has  applied  to: (i)  charter a national  bank;  (ii) obtain
deposit insurance coverage for a newly-chartered institution;  (iii) establish a
new branch office that accepts  deposits;  (iv) relocate an office; or (v) merge
or  consolidate  with,  or acquire  the assets or assume the  liabilities  of, a
federally regulated financial institution. In the case of a bank holding company
applying  for  approval  to acquire a bank or other bank  holding  company,  the
Federal  Reserve  will  assess  the  records  of  each   subsidiary   depository
institution of the applicant bank holding  company,  and such records may be the
basis for  denying the  application.  A less than  satisfactory  CRA rating will
slow, if not preclude the expansion of banking activities.
<PAGE>

     The Banks also are subject to, among other  things,  the  provisions of the
Equal Credit  Opportunity Act (the "ECOA") and the Fair Housing Act (the "FHA"),
both of which prohibit discrimination based on race or color, religion, national
origin,  sex,  and  familial  status in any aspect of a consumer  or  commercial
credit or  residential  real estate  transaction.  Based on recently  heightened
concerns  that  some   prospective  home  buyers  and  other  borrowers  may  be
experiencing  discriminatory  treatment in their  efforts to obtain  loans,  the
Department  of Housing and Urban  Development,  the  Department  of Justice (the
"DOJ"),  and the federal  banking  agencies in April 1994 issued an  Interagency
Policy  Statement on  Discrimination  in Lending in order to provide guidance to
financial  institutions in determining  whether  discrimination  exists, how the
agencies  will respond to lending  discrimination,  and what steps lenders might
take to prevent discriminatory lending practices. The DOJ also has increased its
efforts to prosecute what it regards as violations of the ECOA and FHA.

     PAYMENT OF DIVIDENDS  The Company is a legal  entity  separate and distinct
from its  banking  and other  subsidiaries.  The prior  approval  of the FDIC is
required if the total of all dividends declared by a state non-member bank (such
as the  Banks) in any  calendar  year will  exceed  the sum of such  bank's  net
profits for the year and its retained net profits for the preceding two calendar
years, less any required transfers to surplus. North Carolina law also prohibits
any state  non-member bank from paying dividends if its surplus is less than 50%
of its paid-in capital stock.

     The  Company  and the Banks  are  subject  to  various  general  regulatory
policies  and  requirements  relating  to the  payment of  dividends,  including
requirements  to  maintain  adequate  capital  above  regulatory  minimums.  The
appropriate  federal  regulatory  authority is  authorized  to  determine  under
certain circumstances  relating to the financial condition of a state non-member
bank or a bank holding  company that the payment of dividends would be an unsafe
or unsound practice and to prohibit payment thereof. The FDIC has indicated that
paying  dividends  that  deplete a state  non-member  bank's  capital base to an
inadequate level would be an unsound and unsafe banking  practice.  The FDIC and
the Federal Reserve have each indicated that financial  depository  institutions
and their holding companies,  respectively,  should generally pay dividends only
out of current operating earnings.

     CAPITAL The Federal Reserve and the FDIC have risk-based capital guidelines
for bank holding  companies  and state  non-member  banks,  respectively.  These
guidelines require a minimum ratio of capital to risk-weighted assets (including
certain off-balance-sheet  activities, such as standby letters of credit) of 8%.
At least  half of the total  capital  must  consist of common  equity,  retained
earnings and a limited amount of qualifying  preferred stock,  less goodwill and
certain core deposit  intangibles ("Tier 1 capital").  The remainder may consist
of non-qualifying  preferred stock, qualifying subordinated,  perpetual,  and/or
mandatory  convertible  debt,  term  subordinated  debt  and  intermediate  term
preferred  stock  and  up  to  45%  of  pretax   unrealized   holding  gains  on
available-for-sale  equity  securities with readily  determinable  market values
that are prudently  valued,  and a limited amount of any loan loss allowance and
up to 45% of pretax ("Tier 2 capital" and, together with Tier 1 capital,  "Total
Capital").

     In  addition,  the Federal  Reserve and the FDIC have  established  minimum
leverage ratio guidelines for bank holding companies and state non-member banks,
which provide for a minimum leverage ratio of Tier 1 capital to adjusted average
quarterly assets ("leverage  ratio") equal to 3%, plus an additional  cushion of
1.0% - 2.0%, if the institution has less than the highest regulatory rating. The
guidelines also provide that institutions experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions substantially
above the minimum supervisory levels without significant  reliance on intangible
assets. Higher capital may be required in individual cases, and depending upon a
bank holding  company's risk profile.  All bank holding  companies and banks are
expected to hold capital  commensurate  with the level and nature of their risks
including the volume and severity of their problem  loans.  Lastly,  the Federal
Reserve's guidelines indicate that the Federal Reserve will continue to consider
a "tangible Tier 1 leverage  ratio"  (deducting all  intangibles)  in evaluating
proposals for expansion or new activity.  None of the Federal Reserve,  the FDIC
or the  Commissioner  have  advised  the  Company  or the Banks of any  specific
minimum leverage ratio or tangible Tier 1 leverage ratio applicable to them.

     The  Federal  Deposit  Insurance   Corporation   Improvement  Act  of  1991
("FDICIA"),  among other things,  requires the federal banking  agencies to take
"prompt  corrective action" regarding  depository  institutions that do not meet
minimum capital  requirements.  FDICIA establishes five capital tiers: (i) "well
capitalized";  (ii) "adequately  capitalized";  (iii)  "undercapitalized";  (iv)
"significantly  undercapitalized";  and  (v)  "critically  undercapitalized".  A
depository  institution's  capital tier will depend upon how its capital  levels
compare to various  relevant  capital  measures and certain  other  factors,  as
established by regulation.
<PAGE>
     All of the federal banking agencies have adopted  regulations  establishing
relevant  capital  measures and relevant  capital levels.  The relevant  capital
measures are the Total Capital  ratio,  Tier 1 capital  ratio,  and the leverage
ratio.  Under  the  regulations,  a state  non-member  bank  will  be:  (i) well
capitalized if it has a Total Capital ratio of 10% or greater,  a Tier 1 capital
ratio of 6% or  greater,  and is not subject to any  written  agreement,  order,
capital  directive,  or prompt  corrective  action  directive  by a federal bank
regulatory  agency to meet and maintain a specific capital level for any capital
measure;  (ii)  adequately  capitalized if it has a Total Capital ratio of 8% or
greater, a Tier 1 capital ratio of 4% or greater,  and a leverage ratio of 4% or
greater (3% in certain circumstances);  (iii) undercapitalized if it has a Total
Capital  ratio of less  than 8%, a Tier 1  capital  ratio of less than 4% (3% in
certain  circumstances);  or (iv)  critically  undercapitalized  if its tangible
equity is equal to or less than 2% of average quarterly tangible assets.

     As of December 31, 1998, the consolidated capital ratios of the Company and
the Banks were as follows:
<TABLE>
<CAPTION>
                                Regulatory                      Lincoln        Cabarrus       Community 
                                 Minimum          Company         Bank           Bank            Bank  
                                 --------        ---------      --------       --------       -----------
<S>                              <C>               <C>           <C>            <C>               <C> 
Tier 1 capital ratio               4.0%            11.6%         10.6%           9.5%             11.8%
Total capital ratio                8.0%            12.8%         11.8%          10.7%             13.0%
Leverage ratio                   3.0-5.0%           8.3%          7.6%           7.0%              6.5%
</TABLE>

     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 growth
limitations and are required to submit a capital  restoration plan for approval.
For a capital  restoration plan to be acceptable,  the depository  institution's
parent  holding  company must guarantee  that the  institution  comply with such
capital  restoration plan. The aggregate liability of the parent holding company
is limited to the lesser of 5% of the depository  institution's  total assets at
the time it  became  undercapitalized  and the  amount  necessary  to bring  the
institution into compliance with applicable capital  standards.  If a depository
institution  fails to submit  an  acceptable  plan,  it is  treated  as if it is
significantly  undercapitalized.  If the  controlling  holding  company fails to
fulfill  its  obligations  under  FDICIA and files (or has filed  against  it) a
petition  under the federal  Bankruptcy  Code,  the claim would be entitled to a
priority in such bankruptcy  proceeding over  third-party  creditors of the bank
holding company.  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  institutions  are subject to the  appointment of a
receiver or  conservator.  Because the Company and the Banks  exceed  applicable
capital requirements,  the respective management of the Company and the Banks do
not believe that the  provisions  of FDICIA have had any material  impact on the
Company and the Banks or their respective operations.

     FDICIA FDICIA directs that each federal banking regulatory agency prescribe
standards  for  depository   institutions  and  depository  institution  holding
companies relating to internal  controls,  information  systems,  internal audit
systems, loan documentation,  credit underwriting, interest rate exposure, asset
growth compensation,  a maximum ratio of classified  assets-to-capital,  minimum
earnings  sufficient to absorb losses,  a minimum ratio of market  value-to-book
value for  publicly  traded  shares,  and such other  standards  as the  federal
regulatory agencies deem appropriate.
<PAGE>

     FDICIA  also  contains  a variety of other  provisions  that may affect the
operations of the Company and the Banks,  including new reporting  requirements,
regulatory standards for real estate lending, "truth in savings" provisions, the
requirement that a depository institution give 90 days prior notice to customers
and regulatory  authorities  before closing any branch, and a prohibition on the
acceptance or renewal of brokered  deposits by depository  institutions that are
not well  capitalized  or are  adequately  capitalized  and have not  received a
waiver from the FDIC. Under regulations relating to brokered deposits, the Banks
are well capitalized and not restricted.

     ENFORCEMENT  POLICIES  AND ACTIONS The  Federal  Reserve,  the FDIC and the
Commissioner  monitor  compliance with laws and regulations.  Violations of laws
and  regulations,  or other  unsafe and unsound  practices,  may result in these
agencies  imposing fines or penalties,  cease and desist orders, or taking other
enforcement  actions.  Under certain  circumstances,  these agencies may enforce
these  remedies  directly  against  officers,  directors,  employees  and others
participating in the affairs of a bank or bank holding company.

     DEPOSITOR PREFERENCE The Omnibus Budget Reconciliation Act of 1993 provides
that  deposits  and certain  claims for  administrative  expenses  and  employee
compensation  against  an insured  depository  institution  would be  afforded a
priority over other general  unsecured claims against such an institution in the
"liquidation or other resolution" of such an institution by any receiver.

     FISCAL AND MONETARY  POLICY Banking is a business which depends on interest
rate  differentials.  In general,  the difference between the interest paid by a
bank on its deposits and its other  borrowings,  and the interest  received by a
bank on its loans and securities  holdings,  constitutes  the major portion of a
bank's earnings.  Thus, the earnings and growth of the Company and the Banks are
subject to the  influence of economic  conditions  generally,  both domestic and
foreign,  and also to the monetary and fiscal  policies of the United States and
its agencies,  particularly the Federal Reserve.  The Federal Reserve  regulates
the supply of money through  various means,  including  open market  dealings in
United States government securities, the discount rate at which banks may borrow
from the Federal Reserve, and the reserve  requirements on deposits.  The nature
and timing of any changes in such  policies  and their effect on the Company and
its subsidiaries cannot be predicted.

     FDIC INSURANCE  ASSESSMENTS The Banks are subject to FDIC deposit insurance
assessments.  Lincoln Bank's and Community Bank's deposits are primarily insured
by BIF.  Having  converted from a thrift  charter,  Cabarrus Bank's deposits are
insured by SAIF The FDIC assesses deposits under a risk-based  premium schedule.
Each financial institution is assigned to one of three capital groups: (i) "well
capitalized";  (ii) "adequately capitalized";  or (iii) "undercapitalized",  and
further  assigned to one of three subgroups within a capital group, on the basis
of  supervisory  evaluations  by  the  institution's  primary  federal  and,  if
applicable, state regulators and other information relevant to the institution's
financial  condition and the risk posed to the  applicable  insurance  fund. The
actual  assessment  rate  applicable  to a  particular  institution,  therefore,
depends  in part upon the risk  assessment  classification  so  assigned  to the
institution  by the FDIC. In the third quarter of 1996, a special  one-time SAIF
assessment  of $0.657 per $100 of deposits  was levied,  resulting in a $500,000
charge to the Banks.  During the years ended  December 31, 1998,  and 1997,  the
Banks paid no insurance deposit premiums, but paid $133,570 and $124,845 of FICO
assessments in 1998 and 1997, respectively.

         The  FDIC's  Board of  Directors  has  continued  the 1998 BIF and SAIF
assessment  schedule  of  zero to 27  basis  points  per  annum  for  the  first
semiannual period of 1999. EGRPRA recapitalized the FDIC's SAIF fund to bring it
into parity with BIF. As part of this  recapitalization,  The Deposit  Insurance
Funds Act of 1996 (the "Funds Act") authorized FICO to levy assessments  through
the  earlier  of  December  31,  1999  or  the  merger  of  BIF  and  SAIF,   on
BIF-assessable deposits at a rate equal to one-fifth of the FICO assessment rate
applied to SAIF deposits. The FICO assessments are set quarterly and ranged from
1.256 and 6.28 basis points for BIF and SAIF, respectively, in the first quarter
of 1998,  to 1.164 and 5.82  basis  points in the last  quarter  of 1998.  These
assessment  rates are 1.22 basis points for BIF, and 6.10 basis points for SAIF,
for the first quarter of 1999.
<PAGE>

     LEGISLATIVE AND REGULATORY  CHANGES Various changes have been proposed with
respect to restructuring  and changing the regulation of the financial  services
industry.  FIRREA required a study of the deposit  insurance system. On February
5, 1991,  the  Department of the Treasury  released  "Modernizing  the Financial
System; Recommendations for Safer, More Competitive Banks". Among other matters,
this  study   analyzed   and  made   recommendations   regarding   reduced  bank
competitiveness and financial strength,  overextension of deposit insurance, the
fragmented regulatory system and the undercapitalized deposit insurance fund. It
proposed  restoring   competitiveness  by  allowing  banking   organizations  to
participate in a full range of financial  services outside of insured commercial
banks.   Deposit  insurance   coverage  would  be  narrowed  to  promote  market
discipline.

     The  Interstate  Banking Act also directed the Secretary of the Treasury to
take a  broad  look  at the  strengths  and  weaknesses  of the  United  States'
financial  services  system.  In June 1997,  the  Treasury  Department  proposed
legislation to eliminate what it deemed outmoded  barriers to competition  among
financial services providers. On November 17, 1997, the United States Department
of the Treasury released its study "American Finance for the 21st Century" which
considered  changes in the financial  services industry during the next 10 years
and beyond and reviewed the adequacy of existing statutes and legislation.

     Other legislative and regulatory proposals regarding changes in banking and
the regulation of banks,  thrifts and other financial  institutions and bank and
bank holding company powers are being  considered by the executive branch of the
federal  government,  Congress and various state  governments,  including  North
Carolina.  Among other items under consideration are the possible combination of
the BIF and SAIF, changes in or repeal of the Glass-Steagall Act which separates
commercial  banking  from  investment  banking,  and  changes  in the BHC Act to
broaden  the  powers  of  "financial  services"  companies  to own  and  control
depository institutions and engage in activities not closely related to banking.
The FDIC is considering  possibly  adding risk measures in  determining  deposit
insurance   assessments.   Certain  of  these  proposals,   if  adopted,   could
significantly  change  the  regulation  of  banks  and  the  financial  services
industry. It cannot be predicted whether any of these proposals will be adopted,
and, if adopted, how these proposals will affect the Company and the Banks.

PERSONNEL

     As of December  31,  1998,  the Company and its  subsidiaries  employed 334
full-time equivalent employees.

ITEM 2.  PROPERTIES

     The  Company's  principal  executive  office  is  located  at 236 East Main
Street,  Lincolnton,  North Carolina.  The Company leases four branch offices of
Cabarrus  Bank,  five branch  offices of Lincoln Bank and two branch  offices of
Community  Bank;  however,  the Company owns all other branch  locations and the
Company's  operation  center  located at 207 South Poplar Street in  Lincolnton,
North Carolina.  Lincoln Bank currently  leases the principal  executive  office
building in  Lincolnton,  North  Carolina from D. Mark Boyd,  III, the Company's
former  Chairman and Chief  Executive  Officer,  and his wife,  Diane Boyd.  The
buildings  of  Lincoln  Bank  were  purchased  beginning  in 1983 and have  been
renovated as necessary to  accommodate  the  Company's  needs.  The buildings of
Cabarrus Bank were acquired as a result of the  acquisition of Cabarrus  Savings
Bank in 1992 and Community  Bank's  buildings were purchased in 1998 as a result
of the acquisition of Community  Bank. For Cabarrus Bank, the Kannapolis  branch
building is leased from Atlantic American  Properties,  Inc. in Kannapolis,  and
the Super-K Kmart branch is leased from International Banking Technologies, Inc.
For Lincoln Bank, the SouthPark branch building is leased from Colony Associates
Limited  Partnership,  and the Troutman  branch is leased from Vernon and Jackie
Overcash. For Community Bank, the Black Mountain branch building and the Brevard
branch  building is leased from  NationsBank.  At December 31, 1998, the Company
had  book  values  of  $2,896,148   for  land,   $6,776,775  for  buildings  and
improvements and $3,989,815 for furniture, fixtures and equipment.

ITEM 3.  LEGAL PROCEEDINGS

     The  Company  learned on  September  23, 1998 that D. Mark Boyd,  III,  the
Company's   former  Chairman  and  Chief  Executive   Officer  and  the  largest
shareholder   of  the  Company,   was  the  subject  of  various   "true  bills"
(indictments)  rendered by grand juries in Haywood,  Jackson and Swain Counties,
North Carolina in late September 1998. These indictments  alleged  violations of
the antifraud  provisions of the North  Carolina  Securities  Act, which provide
that such  violations are felonies,  punishable upon conviction by possible jail
sentences and/or monetary fines.  Such indictments  followed an investigation by
the North Carolina  Securities  Division into Mr. Boyd's  purchases of Community
Bank common stock prior to the public  announcement  of a  nonbinding  letter of
intent regarding the Company's possible  acquisition of Community Bank. Mr. Boyd
caused  certain of the Community  Bank shares he purchased to be  transferred to
the Company (the "Transferred Shares").
<PAGE>

     One lawsuit was filed against Mr. Boyd and the Company in  connection  with
purchases of Community  Bank shares by Mr. Boyd. The Company also placed all the
Transferred  Shares in a  Settlement  Trust  with an  independent  trustee.  The
Settlement Trust permitted the nine former Community Bank shareholders that sold
Community Bank shares to Mr. Boyd and which became Transferred  Shares, to elect
to rescind  their  sales,  or receive  the  difference  between and the value of
Carolina  First  common  stock  issuable in respect of such shares in the merger
with Carolina First,  and the cash price received from Mr. Boyd,  based upon the
price of such  Carolina  First common  stock as of December  23, 1998,  when the
Company closed the merger with Community Bank. The one shareholder suit has been
settled,  and all but one of the former Community Bank shareholders whose shares
comprised  the  Transferred  Shares  has  elected to  participate  in one of the
options under the Settlement  Trust. The Company  understands that Mr. Boyd also
established a settlement  trust to resolve  related claims with respect to other
shares of  Community  Bank common  stock that he  purchased  and retained in his
name.

     The Company incurred costs of approximately  $215,000 through year-end 1998
in  connection  with issues  related to Mr. Boyd's  purchases of Community  Bank
shares.  The Company  also  delivered  $6,000 in cash and  approximately  13,626
shares of Company  Common  Stock  into the  Settlement  Trust to address  claims
related to the Transferred  Shares.  It is estimated that the aggregate net cost
to the  Company  pursuant  to the  terms of the  Settlement  Trust to place  the
holders of Transferred  Shares in the same position as if they had not sold such
shares will be  approximately  $243,000,  based upon the value of Company Common
Stock on December 23, 1998, when the Community Bank merger was completed.  Since
year-end 1998, the Company has incurred  additional costs related to this issue,
and the  total  costs  to the  Company  of  resolving  these  issues  cannot  be
determined  at this  time.  The  Company  does not  believe  it has any  further
material  liability  to former  holders of  Community  Bank  shares  that became
Transferred Shares.

     Mr.  Boyd's  criminal  trial(s)  have not yet been  held,  but the  Company
believes  they are  currently  scheduled  for Spring  1999.  The outcome of such
trials,  or the  possibility of a pretrial  diversion or  settlement,  cannot be
predicted.

     The matters related to Mr. Boyd's  purchases of Community Bank common stock
were  investigated  by the North  Carolina  Banking  Commissioner,  the  Federal
Reserve staff and the FDIC, in connection with their  consideration and approval
of the Company's  applications  to acquire  Community Bank. Mr. Boyd has entered
into written agreements with the FDIC, suspending his services as an officer and
director of Carolina First and its  subsidiaries,  as well as First Gaston,  and
that  prohibit  his  participation  in  the  affairs  of  the  Company  and  its
subsidiaries,  and agreed to have the Board of Directors of Carolina  First vote
all shares of Carolina First common stock  beneficially owned by him pro-rata to
the votes of all shareholders,  generally.  In addition,  Mr. Boyd resigned as a
director of Carolina  First and its  subsidiaries,  as well as First Gaston,  on
November  27, 1998.  Mr. Boyd cannot be an officer,  director or employee of the
Company or any of its subsidiaries at any time without the prior approval of the
Federal Reserve. Similar restrictions have been imposed by the FDIC and preclude
Mr. Boyd's  participation in the affairs of the Banks and First Gaston,  for the
period specified in Section 8(g) of the Federal Deposit Insurance Act.

     The Federal  Reserve has advised the Company that as a result of Mr. Boyd's
transactions,  it should  not  expect to  receive  expedited  processing  of any
expansion  applications  submitted  under the BHC Act. The Company's  compliance
with the  conditions  and  commitments  related  to Mr.  Boyd that were given in
connection  with the  acquisition  of Community Bank will be reviewed as part of
the  Federal  Reserve's  examinations  of  the  Company.  The  Company  and  its
subsidiaries  also may be subject to closer  regulatory  scrutiny as a result of
Mr.  Boyd's   transactions  in  Community  Bank  shares.  See  "Supervision  and
Regulation."

     In January 1999,  the Company was advised by the United  States  Securities
and Exchange  Commission  ("SEC") that it had begun an informal inquiry that the
Company believes  relates to Mr. Boyd's purchases of Community Bank shares.  The
Company has been  cooperating with the SEC, and five officers of the Company and
its  subsidiaries  have either  provided  voluntary  testimony  to, or have been
interviewed  by, the SEC. The Company has  insufficient  information to evaluate
the scope of the SEC's  informal  inquiry,  and the timing  and  outcome of this
inquiry cannot be predicted.

<PAGE>

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS

     No matter  was  submitted  to a vote of the  shareholders  of the  Company,
through the solicitation of proxies, or otherwise,  during the fourth quarter of
the fiscal year ended December 31, 1998.


                                     PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
         SHAREHOLDER MATTERS

     The Company's common stock is traded in the over-the-counter  market and is
quoted in the "pink sheets" (the "Pink  Sheets")  under the symbol  "CAFP".  The
following  table  set forth the high and low bid  quotations  for  shares of the
Company's  common  stock as  reported  in The  Charlotte  Observer  and the cash
dividends declared per share for the periods indicated.  Such quotations reflect
inter-dealer  prices  without  markup,   markdown  or  commission  and  may  not
necessarily  represent actual  transactions.  The prices and dividends have been
adjusted  to reflect the 5-for-4  stock split paid on August 23,  1996,  and the
2-for-1 stock split paid on August 22, 1997.

     The Company's  application  to have its common stock approved for quotation
on the Nasdaq  National  Market is pending.  However,  there can be no assurance
such application will be approved or that any active trading market will develop
for the Company's common stock or, if developed, will be maintained.
<TABLE>
<CAPTION>
                                                                                         Cash Dividends
Quarter Ended                               High                     Low                     per Share
-------------------------------     ---------------------    ---------------------     ----------------------
<S>                                        <C>                      <C>                        <C>    
March 31, 1998                             $31.00                   $28.00                     $.08
June 30, 1998                              $34.00                   $31.00                     $.08
September 30, 1998                         $34.00                   $34.00                     $.09
December 31, 1998                          $34.00                   $25.00                     $.09

March 31, 1997                             $17.00                   $16.00                     $.06
June 30, 1997                              $19.25                   $17.00                     $.06
September 30, 1997                         $22.00                   $19.25                     $.08
December 31, 1997                          $28.00                   $22.00                     $.08
</TABLE>


<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

     The following  selected  financial data should be read in conjunction  with
the Company's  consolidated  financial  statements  and the  accompanying  notes
presented elsewhere herein.  Prior year information has been restated to reflect
the 1998 merger with Community  Bank.  Cash dividends have not been restated for
the merger.
<TABLE>
<CAPTION>
                                                       1998          1997          1996          1995          1994
                                                       ----          ----          ----          ----          ----
<S>                                                 <C>           <C>           <C>           <C>           <C>    
Earnings
         Interest income                             $52,051,833   $45,236,993   $39,128,283   $32,820,087   $26,982,197
         Interest expense                             22,070,734    19,572,746    17,009,779    14,522,348    10,992,568
         Net interest income                          29,981,099    25,664,247    22,118,504    18,297,739    15,989,629
         Provision for loan losses                     1,365,000       997,333     1,178,925       710,200       667,303
         Operating earnings*                           8,494,510     6,720,785     5,220,774     4,393,563     3,913,148
         Net income                                    6,708,929     6,720,785     5,220,774     4,393,563     3,913,148
Per Share
         Operating earnings per share - basic*             $1.58         $1.32         $1.03         $0.92         $0.85           
         Operating earnings per share - diluted*            1.54          1.30          1.03          0.92          0.85           
         Net income per share - basic                       1.25          1.32          1.03          0.92          0.85           
         Net income per share - diluted                     1.22          1.30          1.03          0.92          0.85           
         Cash dividends per share                           0.34          0.28          0.21          0.18          0.17
         Shareholders' equity (book value)                 11.48         10.55          8.76          7.94          6.54
Balance Sheet Data at Year End
         Total assets                               $731,626,244  $618,076,746  $520,227,733  $459,157,713  $368,486,681
         Loans                                       476,109,833   404,025,180   361,888,469   299,223,658   244,892,345
         Allowance for possible loan losses            6,723,516     5,837,328     5,313,424     4,406,705     3,662,523
         Securities                                  187,690,188   159,387,578   110,250,169   113,264,241    91,366,338
         Deposits                                    652,602,570   545,050,400   463,971,919   413,611,684   333,500,123
         Shareholders' equity                         61,977,731    56,210,800    44,464,067    40,237,599    32,281,001
Ratios
         Return on average assets:
               Operating earnings*                         1.27%         1.18%         1.07%         1.08%         1.09%
               Net income                                  1.00%         1.18%         1.07%         1.08%         1.09%
         Return on average equity :
               Operating earnings*                        14.63%        13.98%        12.56%        12.37%        12.52%
               Net income                                 11.55%        13.98%        12.56%        12.37%        12.52%
         Average equity to average assets                  8.67%         8.47%         8.49%         8.72%         8.70%
         Allowance for possible loan losses to
         loans, net of unearned income                     1.41%         1.44%         1.47%         1.47%         1.50%
         Dividend payout:
               Operating earnings*                        21.52%        21.21%        20.39%        19.57%        20.00%
               Net income                                 27.20%        21.21%        20.39%        19.57%        20.00%
</TABLE>


         *Operating  earnings in 1998 reflects  earnings prior to merger-related
         and  restructuring  charges  associated  with  the  December  23,  1998
         acquisition of Community Bank & Trust Co. of $2.1 million ($1.8 million
         after  tax).  All per  share  amounts,  shown  herein,  for  all  years
         presented  reflect the 5% stock dividends paid on November 29, 1994 and
         December 22, 1995,  the 5-for-4 stock split effected on August 23, 1996
         and the 2-for-1 stock split effected on August 22, 1997.

<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

     The  following   discussion   should  be  read  in  conjunction   with  the
consolidated  financial  statements  and  related  notes and  other  information
appearing  elsewhere  in this Annual  Report and the more  detailed  information
provided in the  Company's  Annual  Report on Form 10-K and are  discussed  as a
single business segment.  The Company  consummated one merger in 1998, which has
been accounted for as a  pooling-of-interest.  In accordance with the accounting
for  pooling-of-interest,  the  financial  statements  of the Company  have been
restated to reflect the respective  merger as if it had been effective as of the
earliest period presented.

GENERAL

     The Company owns all of the outstanding  stock of three  commercial  banks,
Lincoln Bank of North Carolina ("Lincoln Bank"), Cabarrus Bank of North Carolina
("Cabarrus   Bank")  and  Community   Bank  &  Trust  Co.   ("Community   Bank")
(collectively,  the "Banks"). The Banks are North Carolina-chartered  commercial
banks  that are  members  of the  FDIC.  Cabarrus  Bank is also a member  of the
Federal Home Loan Bank of Atlanta  ("FHLB").  The primary  business of the Banks
includes retail and commercial  banking and mortgage lending.  Jointly,  Lincoln
Bank and Cabarrus Bank own a mortgage  company,  Carolina  First  Mortgage Corp.
("Mortgage"),  which  originates  mortgage  loans for  resale  in the  secondary
market,  and a financial  services  company,  Carolina First Financial  Services
Corporation,  ("Financial Services"),  which offers, as agent for its customers,
mutual funds and annuity products.  Financial Services began business in October
1994.

     Lincoln Bank, which commenced  operations in 1983, currently operates in 18
offices  located in 12 communities  in areas  primarily to the north and west of
Charlotte,  North  Carolina with three offices in southeast  Charlotte.  Lincoln
Bank had assets of $453 million at December 31, 1998,  after opening a branch in
Weddington  and another in  Matthews.  The  Mallard  Creek  branch in  northwest
Charlotte was opened during the third quarter of 1998. During the fourth quarter
of 1998, the Plaza Drive branch in Mooresville was acquired with $9.0 million in
deposits.

     Cabarrus  Bank was  organized in 1889 as Cabarrus  Savings Bank. In January
1992,  the Company  acquired  Cabarrus  Savings,  and in October 1992,  Cabarrus
Savings was converted from a state savings bank to a commercial  bank.  Cabarrus
Bank operates six full service  branches in Cabarrus  County.  Cabarrus Bank had
assets of $162 million at December 31, 1998.

     Community  Bank  was  organized  in 1987 and  acquired  by the  Company  in
December 1998. Community Bank operates seven branches in Marion,  Rutherfordton,
Forest City,  Sylva,  Banner Elk,  Black Mountain and Brevard,  North  Carolina.
Community Bank had assets of $110 million at December 31, 1998.

     The Company also owns  approximately 17% of the total common stock of First
Gaston Bank of North Carolina,  Gastonia, North Carolina ("First Gaston"). First
Gaston opened in July 1995 and operates three branches in markets  contiguous to
Lincoln Bank's markets.  (Certain  operational  functions are provided for First
Gaston by Carolina First.) The Federal Reserve,  under the BHC Act, has required
Carolina  First to enter into a commitment  to serve as a source of strength for
First Gaston.  The  Company's  investment in First Gaston is accounted for under
the equity  method of  accounting  and thus its  portion of income or losses are
reflected  in current  period  earnings.  During  1998,  the Company  recognized
income,  net of  applicable  income  taxes,  of $59,156.  See  "Supervision  and
Regulation".

     The Company continues to actively consider possible acquisitions, including
purchases of branches and deposits. In 1997 the Company purchased three branches
and related  deposits,  in 1998 purchased one branch and related  deposits,  and
acquired  Community  Bank & Trust  through a tax-free  exchange of stock whereby
each outstanding  share of Community Bank was exchanged for .72716 of a share of
the  Company's   common  stock.   The   transaction   was  accounted  for  as  a
pooling-of-interest method of accounting.
<PAGE>

RESULTS OF OPERATIONS

     In 1998 operating  earnings,  or earnings  before merger and  restructuring
charges  were $8.5  million or $1.54 per  share-diluted  in 1998, a 26% increase
over 1997. Earnings after merger and restructuring  charges,  were $6.7 million,
or $1.22 per  share-diluted  in 1998, an .18% decrease from 1997.  Earnings were
$6.7 million,  or $1.30 per share-diluted in 1997, a 29% increase over 1996. The
Company's  strategy of strong growth in consumer and small commercial  customers
has been the basis for these results.  The  economically  vibrant  locations and
sound loan  philosophy  has rewarded the Company with solid growth and earnings.
The growth in current markets has been achieved by growth in existing  branches,
de novo branches and  acquisitions  of deposits from  competitors as they divest
branch sites.

     The Company's primary source of income is net interest income, which is the
difference between interest earned and interest paid. The net interest margin is
calculated as net interest income as a percentage of average earning assets. The
Company's net interest  margin has been  indicative of the strong balance sheets
the three banks have  assembled.  The growth  within the counties  served by the
Company's three banks has significantly outpaced the overall growth within North
Carolina.  Such positive demographics translate into increased opportunities for
building banking relationships which enhance deposit and loan growth.

     Net interest  income as a percentage of average earning assets was 4.89% in
1998,  down from  5.00% in 1997 and  5.02% in 1996.  Interest  income,  which is
substantially  comprised of interest  received from loans and to a lesser degree
the interest earned on the Company's security portfolio  decreased from 8.78% in
1997 to 8.46% in 1998.  Interest  expense,  which is  primarily  the  amount  of
interest paid to depositors,  has decreased to 4.22% in 1998 from 4.31% in 1997.
Interest  rates  declined   generally  in  1998,   which  affects  loans  almost
immediately  causing a declining net interest  margin.  With the passage of time
interest  expense will decrease and the net interest  margin should  strengthen,
subject to  competitive  pressures.  This decrease came primarily as a result of
the  securities  portfolio  earning less in 1998 than in 1997. The Company's net
interest  income is  expected  to grow as a result of  increases  in loan volume
anticipated  from the new and expanding  markets.  The rate earned on assets and
the rate paid on  liabilities  is  expected  to  continue  to be  influenced  by
competition for solid customers as well as economic  conditions and governmental
fiscal and monetary policies.

     The  Company's  allowance  for  loan  losses  is  analyzed  monthly.   This
judgmental  analysis is based upon a model that  considers the current status of
the loan portfolio,  historical  experience and key market indicators within the
counties served by the Company.  Additionally,  the Company monitors the overall
portfolio as well as current economic  conditions and other factors which affect
the allowance.  The monthly  provision for loan losses  fluctuates  based on the
results of this analysis.

     Noninterest income has continued to grow as reflected in the 19.0% increase
from  1997 to 1998 and the  20.1%  increase  from  1996 to 1997.  Our  growth in
deposit accounts has led the way for this increase. Additionally,  Cabarrus Bank
has been successful in changing from a savings and loan with few deposit service
charges to that of a commercial bank with fees for services rendered.  Insurance
commissions  relate to the fees generated by Financial Services from the sale of
annuity  products and mutual funds,  which totaled  $603,025 in 1998 compared to
$725,474 in 1997 and $606,848 in 1996. This decrease is due to the restructuring
of Financial  Services and the transition to outsourcing the sales department to
a new third party vendor.  Although sales of nondeposit  investment products are
growing  generally,   recently  proposed  tax  legislation,  if  enacted,  could
adversely affect annuity sales. Other service fees and commissions relate to the
Company's  growth in the trust and  credit/debit  card divisions as well as fees
for non-customers using the Banks' automated teller machines. Included in 1998's
other  income are fees of $161,895  generated  from  services  provided to First
Gaston. These services include account operations, item processing,  bookkeeping
and internal auditing that are terminable by either party.

     Operating  expenses  decreased as a percentage  of average  assets in 1996,
1997 and 1998, but total operating  expenses increased in general because of the
additional growth experienced from 1997 to 1998.  Specifically,  four new branch
locations  were opened  during 1997 and another  four  locations  were opened in
1998.  Management will continue to be challenged to maintain  operating expenses
at a level  adequate to support  growth while  maintaining  favorable  operating
efficiency ratios. One method of improving operating efficiencies is through the
use of technology. Expenses associated with technology are included in equipment
expense and  represent a capital  outlay of  $476,738  and  $740,923 in 1997 and
1998, respectively.

     The Company's operating efficiency ratio has continued to improve,  falling
from 71% in 1993 to 68% in 1998.  Absent unusual  expenses,  management seeks to
further reduce the operating  efficiency  ratio,  however unusual  expenses will
effect this ratio.  Management  believes this ratio is adversely affected in the
short  term by  growth  into new  market  areas  and  acquisitions  and  related
transition  costs.  However,  as these markets  mature the operating  efficiency
ratio should continue to improve.
<PAGE>
YEAR 2000 ISSUE

     The  Company  is  aware  of and is  making  every  effort  to  address  the
potentially  severe  implications  of the Year 2000.  The "Year 2000 Issue" is a
general  term used to describe  problems  that may arise as a result of improper
processing of dates and date-sensitive calculations as the Year 2000 approaches.
The Year  2000  Issue  is due to the  fact  that  many of the  world's  existing
computer programs use only two digits to identify the year in a date field. When
these programs were developed there was a lack of consideration of the impact of
the upcoming century date change.  These programs could experience  malfunctions
when the last two  digits of the year  change to "00" and  interpret  it as 1900
rather than 2000.  This  misinterpretation  could result in disruption to normal
business operations. Due to these possible ramifications,  the Company is taking
the Year 2000 Issue very seriously.

     The Company's Year 2000  Preparedness Team is comprised of a representative
from all the major areas of the Company.  The  Company's  Board of Directors has
approved  a plan  submitted  by the Year 2000  Preparedness  Team.  The plan was
developed  in  accordance  with  the  guidelines  set by the  Federal  Financial
Institutions Examination Council ("FFIEC").

     The first phase of the plan required the Company to assess or inventory all
known processes that could be impacted by the Year 2000 Issue and their vendors,
if applicable.  The inventory included not only typical computer processes,  but
all  systems  and  equipment  that  could be  impacted  by  embedded  micro-chip
malfunctions.  These  include,  but are not  limited  to,  the  Company's  alarm
systems,  telephone systems,  elevators, and ATM machines. This assessment phase
is complete, and is being updated as needed.

     The second  phase of the plan  required  the  Company to contact  all third
party vendors and service  providers.  Documentation  regarding  their Year 2000
efforts was  required.  This is  significant  for the Company due to its extreme
dependence on external  sources.  This is an ongoing phase to track the vendors'
and service providers' continuing efforts.

     Additionally,   the  Company's  plan  deals  with  the  assessment  of  its
significant  borrowers and  depositors  and their Year 2000  readiness.  Through
letters, questionnaires, and personal contacts, the Company is in the process of
assessing  the Year 2000 risk  associated  with these  customers,  but is behind
where the FFIEC Interagency  Statements  regarding Year 2000 state it should be.
The Year 2000 Issue is being  addressed  as an  addendum to the  Company's  loan
policy.  New  loans  will be  subject  to Year  2000  assessment  as part of the
approval process.

     Another  important  phase of the plan is the  comprehensive  testing of all
known processes.  The testing of hardware and all mission-critical  applications
has been  completed.  All  upgrades  to  software  and other  processes  will be
complete by March 31, 1999.  All upgrades to software and test scripts have been
received from the vendors and service  providers.  If any problems  arise during
testing, the Company will request a fix from the providers.

     The Company  believes that the potential  effects of the Year 2000 Issue on
internal  operations  can and will be addressed  prior to the Year 2000.  In the
event that required  modifications  or conversions are not completed on a timely
basis prior to the Year 2000,  normal  business  operations  could be disrupted.
Even after tests have been completed and results are  satisfactory,  the Company
must  consider  the fact that  systems  could  still fail when the  actual  date
arrives.  Therefore,  the  Company  is in the  process of  preparing  a Business
Resumption  Contingency  Plan that  addresses all areas of  operations,  such as
power,  telecommunications,  etc. and how it will resume  business if any or all
areas experience difficulties, until the Year 2000 problems are fixed.

     The costs  associated  with the Year 2000  project and the date the Company
plans to complete its Year 2000  compliance  are based on management  estimates.
Management  currently  believes the Company has limited exposure and expects the
cost of  addressing  all Year 2000 issues to be less than $75,000 in 1999.  Such
expenses were $28,202 in 1998.
<PAGE>

ASSET/LIABILITY MANAGEMENT

     The Banks'  Asset/Liability  Committees  are  responsible  for managing the
risks associated with changing interest rates and their impact on earnings.  The
regular  evaluation  of the  sensitivity  of net  interest  income to changes in
interest  rates  is an  integral  part  of  the  Company's  interest  rate  risk
management.

     The following  table  summarizes net interest income and average yields and
rates paid for the years indicated.  For purposes of this analysis, the interest
on non-taxable  investment  securities has been adjusted to a taxable-equivalent
amount to facilitate  comparison with other asset yields.  The adjustment  gives
effect to the exemption from federal income taxes for earnings on obligations of
state  and  political  subdivisions  and  assumes  a  marginal  tax rate of 34%.
Non-accrual loans are excluded from the interest-earning loan balances shown.
<TABLE>
<CAPTION>
                                          1998                             1997                               1996

                                        Interest                         Interest                           Interest
                              Average   Income/   Average     Average     Income/    Average    Average     Income/    Average
                              Balance   Expense    Rate       Balance     Expense     Rate      Balance     Expense     Rate
                              -------   -------   -------     -------     -------    -------    -------     --------   -------
                                                                        (Thousands)
<S>                            <C>       <C>         <C>      <C>          <C>        <C>         <C>       <C>         <C>
ASSETS
Interest bearing deposits
   in other banks.............     $714      $43     6.02%        $574         $56     9.76%         $457        $46    10.07%
Taxable securities............  162,674    9,555     5.87%     121,499       7,335     6.04%       98,313      6,005     6.11%
Non-taxable securities........    5,569      500     8.98%       6,972         722    10.36%        9,712        891     9.17%
Federal funds sold............   24,772    1,276     5.15%      15,117         818     5.41%        9,711        498     5.13%
Loans.........................  423,246   40,848     9.65%     373,910      36,552     9.78%      328,517     31,990     9.74%
                                -------   -------    -----    --------     -------     -----     --------    -------     -----

   Interest earning assets      616,975   52,222     8.46%     518,072      45,483     8.78%      446,710     39,430     8.83%
                                          -------    -----                  ------     -----                 -------     -----


Other assets.................    53,004                         49,461                             42,937
                               --------                       --------                             ------

Total assets.................  $669,979                       $567,533                            $489,647
                               ========                       =========                           ========


LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest bearing deposits

Demand.......................  $145,141   $3,341     2.30%    $125,583      $3,028     2.41%     $106,967     $2,435     2.28%
Savings......................    61,516    1,426     2.32%      55,459       1,425     2.57%       51,848      1,318     2.54% 
Time.........................   306,807   16,805     5.48%     266,301      14,769     5.55%      230,616     12,931     5.61%
Notes payable and other
Interest bearing liabilities.     9,084      499     5.49%       7,221         351     4.86%        6,835        326     4.77%
                                 ------     ----     -----     -------      -------    -----      -------     -------    -----

Interest bearing
Liabilities..................   522,548   22,071     4.22%     454,564      19,573     4.31%      396,266     17,010     4.29%
                                          ------     -----                  -------    -----                  -------    -----

Other                            
liabilities..................    89,362                         64,900                             51,821   
Shareholders' equity.........    58,069                         48,069                             41,560
                                -------                        -------                             ------

Total liabilities and
Shareholders' equity.........   $669,979                       $567,533                           $489,647
                                ========                       ========                           ========

Interest rate spread.........                        4.24%                             4.47%                             4.54%
                                                     =====                             =====                             =====

Net interest earned and
   net yield on earning
   assets (Margin)...........             $30,151    4.89%                 $25,910     5.00%                $22,420      5.02%
                                          =======    =====                 ========    =====                =======      =====
</TABLE>


<PAGE>

     The  following  table  presents  the dollar  amount of changes in  interest
income  and  interest   expense  on  a   taxable-equivalent   basis.  The  table
distinguishes  between the changes  related to average  outstanding  (volume) of
earning assets and interest-bearing  liabilities, as well as the changes related
to  average  interest  rates  (rate) on such  assets  and  liabilities.  Changes
attributable to both volume and rate have been allocated proportionately.
<TABLE>
<CAPTION>
                                              1998                             1997                             1996
                                             Income/                          Income/                          Income/
                                             Expense    Volume     Rate       Expense     Volume     Rate      Expense
                                             -------    ------     ----       --------    ------     ----      -------
                                                                             (Thousands)
<S>                                        <C>        <C>        <C>         <C>          <C>        <C>      <C>
Interest earning assets:
Interest bearing deposits in other banks..     $43        $8      ($21)          $56         $11       ($1)       $46
Taxable investment securities.............   9,555     2,419      (199)        7,335       1,400       (70)     6,005
Non-taxable investment securities.........     500      (126)      (96)          722        (284)      115        891
Federal funds sold and securities
 purchased with agreements to resell......   1,276       497       (39)          818         293        27        498
Loans.....................................  40,848     4,761      (465)       36,552       4,437       125     31,990            
                                            ------     -----      -----       ------       -----      -----    ------
     Total interest income................  52,222     7,559      (820)       45,483       5,857       196     39,430         
                                            ------     -----      -----       ------       -----      -----    ------

Interest bearing liabilities:
Interest bearing demand deposits..........   3,341       450      (137)        3,028         449      144       2,435
Savings deposits..........................   1,426       140      (139)        1,425          95       12       1,318
Time deposits.............................  16,805     2,219      (183)       14,769       1,979     (141)     12,931
Notes payable and other interest
bearing liabilities.......................     499       102        46           351          19        6         326
                                            ------     -----      -----       ------      ------     -----     ------

    Total interest expense................  22,071     2,911      (413)       19,573       2,542       21      17,010
                                            ------     -----      -----       ------      ------     -----     ------


    Net interest income................... $30,151    $4,648     ($407)      $25,910      $3,315     $175     $22,420
                                           ========   =======    ======     ========     =======     =====    =======
</TABLE>


     Financial institutions are subject to interest rate risk to the degree that
their interest bearing liabilities (consisting principally of customer deposits)
mature or reprice more or less frequently,  or on a different basis,  than their
interest earning assets (generally consisting of intermediate or long-term loans
and  investment  securities).  The match  between the  scheduled  repricing  and
maturities of the Company's  earning assets and liabilities  within defined time
periods is referred to as "gap"  analysis.  At December 31, 1998, the cumulative
one-year  gap for the  consolidated  Company was a positive  or asset  sensitive
$17.2  million,  or 2.35% of total assets.  At December 31, 1998, the cumulative
five-year gap was a negative $31.9 million, or 4.36% of total assets. A negative
gap means that  liabilities  would reprice  faster than assets if interest rates
changed.  Accordingly, an increase in rates would adversely affect the Company's
earnings.  The Company's  one-year gap is considered  immaterial  and pretax net
income would be virtually unchanged with a one percent change in interest rates.
The Company's five year cumulative gap would result in a change of $424,000 with
a one percent change in interest  rates. As interest rates declined during 1998,
depositors were unwilling to extend the maturity of time deposits,  as the yield
curve was somewhat flat and did not reward  depositors  sufficiently  for longer
maturities.  Intense  competition in the Company's markets continues to pressure
quality loan rates downward while conversely pressuring deposit rates upward.

     The  following  table  reflects the  Company's  rate  sensitive  assets and
liabilities  by maturity as of December 31, 1998.  Variable rate loans are shown
in the  category of due "within one year"  because  they reprice with changes in
the prime lending  rate.  These  variable  rate loans have actual  maturities of
$61.8  million  maturing  within  one year,  with an  additional  $47.8  million
maturing within five years, and $80.5 million  maturing after five years.  Fixed
rate loans are presented assuming the entire loan matures on the final due date.
Actually,  payments are made at regular  intervals and are not reflected in this
schedule.  Additionally,  demand  deposits and savings  accounts  have no stated
maturity,  however, it has been the Company's experience that these accounts are
not totally rate  sensitive,  and thus,  are  presented in the  categories  that
management  believes  best  identifies  their actual  repricing  patterns.  This
analysis assumes 20% of these deposits reprice within one year and the remaining
80% within one to five years.



<PAGE>
<TABLE>
<CAPTION>
                                            Prime       Within One      1-5       Over 5        Non
                                            Loans          Year        Years       Years       Market       Total
                                            -----       ----------    -------     -------      ------       ------
<S>                                        <C>           <C>          <C>         <C>         <C>          <C>
ASSETS:
Securities held to maturity:
   U.S. Treasury..........................    $--          $4,015       $1,995       $--          $--        $6,010
   U.S. government agencies...............     --           1,756        1,279        --           --         3,035
   States and political subdivisions......     --              20        1,139       6,996         --         8,155
   Mortgage-backed securities.............     --             387        3,280      12,439         --        16,106
                                            ---------    ---------    --------    --------     --------    --------
     Total securities held to maturity....     --           6,178        7,693      19,435         --        33,306
Securities available for sale:
   U.S. Treasury..........................     --          30,438       12,776        --           --        43,214
   U.S. government agencies...............     --          55,769       45,945       7,399         --       109,113
   Mortgage-backed securities.............     --            --           --           767         --           767
   Other (1)..............................     --            --           --           --         1,290       1,290
                                            ---------    ---------    --------    --------     --------    --------
     Total securities available for sale..     --          86,207       58,721       8,166        1,290     154,384
Federal funds sold........................     --          13,221         --           --          --        13,221
Loans:
   Commercial and financial...............   29,113        10,781       22,475       5,664         --        68,033
   Real estate:
    Construction..........................   33,067         7,886        6,319       7,169         --        54,441
    Mortgage (2)..........................  124,175        12,726       71,163      91,332         --       299,396
   Consumer (3)...........................    3,818        11,832       36,211       2,239          140      54,240          
                                           ---------     ---------    --------    --------     --------    --------
     Total loans..........................  190,173        43,225      136,168     106,404          140     476,110
Other (4).................................     --            --           --           --           777         777
                                           ---------     ---------    --------    --------     --------    --------
     Total earning assets.................  190,173       148,831      202,582     134,005        2,207     677,798
Noninterest-earning assets................     --            --           --           --        53,828      53,828
                                           =========     =========    ========    ========     ========    ========
     Total assets......................... $190,173      $148,831     $202,582    $134,005      $56,035    $731,626
                                           =========     =========    ========    ========     ========    ========
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Deposits:
    Interest-bearing checking.............    $--          $7,631      $30,523        $--         $--       $38,154
    Savings...............................     --          12,767       51,067         --          --        63,834
    Market deposit accounts...............     --          25,795      103,182         --          --       128,977
    Time, $100,000 and over...............     --          72,781       15,067         100         --        87,948
    Other time (5)........................     --         192,277       51,724          22         --       244,023
Total interest-bearing deposits...........     --         311,251      251,563         122         --       562,936
    Borrowed funds........................     --          10,400         --           --          --        10,400
Other liabilities.........................     --             149          100          88         --           337
                                           ---------     ---------    --------    --------     --------    --------
    Total interest-bearing liabilities....     --         321,800      251,663         210         --       573,673
    Noninterest-bearing liabilities.......     --            --           --           --       $95,975      95,975
    Shareholders' equity..................     --            --           --           --        61,978      61,978
                                           ---------     ---------    --------    --------     --------    --------
    Total liabilities and
shareholders' equity......................    $--         $321,800    $251,663        $210     $157,953    $731,626
                                           ---------     ---------    --------    --------     --------    --------
Gap                                        $190,173      ($172,969)   ($49,081)   $133,795    ($101,918)      --
                                           =========     =========    ========    ========     ========    ========
Cumulative Gap                             $190,173        $17,204    ($31,877)   $101,918         --         --
                                           =========     =========    ========    ========     ========    ========
Adjustments:
    Exclude noninterest-earning assets,
    noninterest-bearing liabilities and
    Shareholders' equity.................      --            --           --           --       78,362         --

                                           ---------     ---------    --------    --------     --------    --------
    Adjusted cumulative gap..............  $190,173        $17,204    ($31,877)   $101,918     $78,362         --
                                           =========     =========    ========    ========     ========    ======== 
</TABLE>
-------------------------
(1) The nonmarket column consists of Federal Home Loan Bank stock, mutual funds,
and Peoples Bank stock.  (2) Mortgage  loans  consist  primarily of  residential
loans and home equity lines of credit.
(3) The nonmarket column consists of overdrafts.
(4) The nonmarket  column consists of  interest-bearing  deposits due from other
banks.
(5) Other time deposits within one year consist of $41,164 maturing within three
months and $46,554 maturing after three months but within six months.
<PAGE>

LIQUIDITY

     Liquidity  refers  to the  Company's  ability  to meet  the  needs of daily
operations.  The Company relies  primarily on dividends and management fees from
the Banks for liquidity.  These sources have provided adequate liquidity for the
Company. The Banks' liquidity refers to the ability or financial  flexibility to
adjust its future cash flows to meet the withdrawal needs of depositors,  and to
fund loans to borrowers and operations on a timely and cost effective basis. The
Banks' primary  sources of funds are cash generated by repayments of outstanding
loans,  interest  payments on loans and new  deposits.  Additional  liquidity is
available  from the maturity and earnings on securities  and liquid  assets,  as
well as the ability to liquidate  securities  available for sale. The Banks also
had federal  funds lines of credit of $33.4 million at year end under which they
can borrow funds to meet short-term liquidity needs. Lines available for Lincoln
Bank are: through Wachovia Bank, $2 million, The Banker's Bank, Atlanta Georgia,
$5 million and  NationsBank,  $10 million.  Cabarrus  Bank has  unsecured  lines
available  through  the  FHLB of $8.5  million  and  through  NationsBank  of $5
million.  Community Bank has unsecured lines available  through Wachovia of $1.5
million and through NationsBank of $1.4 million. These sources have been and are
presently considered adequate to provide appropriate liquidity for the Banks.

     Net cash  provided  from  operations  results  primarily  from net  income,
adjusted for the following noncash  accounting items: the provision for possible
loan  losses,  depreciation  and  amortization,  and  deferred  income  taxes or
benefits. These items amounted to $3.0 million in 1998 and $2.4 million in 1997.
This cash was  available  during  1998 to  increase  earning  assets  and to pay
dividends.  As of December 31, 1998, the Banks had combined retained earnings of
approximately  $35,461,000  all of which are  available  to be paid as dividends
without prior regulatory approval, provided the Banks maintain adequate capital.

FINANCIAL CONDITION

     The Company's  consolidated  assets increased 18.3%, 18.8% and 13.3% during
1998, 1997 and 1996,  respectively.  Asset growth is directly related to deposit
growth, both internally and through acquisitions, and the funds available to the
Company for investment.  The Company has been  successful in expanding  existing
market  share as well as  adding  new  branch  locations,  and the  1998  growth
reflects  the  acquisition  of  Community  Bank and its $110  million of assets.
During  1998 and 1997,  the  Company  purchased  approximately  $9.0 and  $30.0,
million,  respectively,  of deposit  accounts  pursuant to branch  acquisitions.
During  1996,  Cabarrus  Bank  purchased  approximately  $3.5 million of deposit
accounts  and  consolidated  them with its  Copperfield  branch.  This  acquired
growth, as well as the strong growth expected of the Company's  existing markets
is expected to produce  continued strong growth trends for the Company.  Deposit
growth will allow the Company to continue to take advantage of the vibrant local
economy and quality loan demand experienced over the past several years.

     The  Company's  commercial  loan  portfolio has grown over the past several
years as the Company has employed seasoned  commercial  lenders to develop these
opportunities.  Also, loans secured by real estate have increased as the Company
believes real estate has provided attractive collateral for loans with different
purposes.  Management  believes  the  Company  is not  dependent  on any  single
customer or group of customers  concentrated in a particular industry,  the loss
of whose deposits or whose  insolvency  would have a material  adverse effect on
operations.

     As interest  rates reflect a relatively  flat yield curve,  customers  have
continued  to select  shorter  terms for their  deposits and in many cases chose
transaction deposit accounts,  including  negotiable order of withdrawal ("NOW")
and money market deposit ("MMDA") accounts without a stated maturity. This shift
from  longer-term  deposits allows the depositor to react more quickly to rising
rates.  Conversely,  the  Company  should  be able to  restore  the  traditional
interest spread as short-term  deposits reprice downward.  Fluctuating  interest
rates and  competitive  pressure  enforce the need for effective asset liability
management.

     Securities have been segregated into two categories, "held to maturity" and
"securities  available for sale".  While the Company has no plans to liquidate a
significant amount of any securities,  the securities  available for sale may be
used for liquidity purposes should management deem it to be in the best interest
of the Company.  Due to declines in interest  rates,  the majority of securities
purchased have been relatively  short term and categorized as available for sale
in  anticipation  that these would be available to the Company if interest rates
begin to rise or if quality loan demand  accelerates.  United States  government
and  government  agency  securities  continue to represent  the majority of both
securities  held to maturity and  securities  available  for sale.  During 1998,
securities  available for sale increased as a percentage of total assets, due to
in part to a shift from the held to maturity category, but more significantly in
1997 from the reinvestment of cash received from branch acquisitions.
<PAGE>

ASSET QUALITY

     Management  considers the Banks' asset quality to be of primary importance.
The allowance for possible loan losses  represents  management's  estimate of an
amount  adequate  to  absorb  estimated  probable  losses  inherent  in the loan
portfolio. The allowance is comprised of both allocated and general reserves.

     The  allocation  of the allowance is based on  management's  grading of the
loan  portfolio  and the  assignment  of risk factors to compute the  respective
reserves.  All  commercial  loans of  $25,000  and  greater  are  risk  rated at
inception,  at renewal,  and at any point at which  management  becomes aware of
information  that may affect the risk rating  (e.g.  deterioration  in financial
condition,  payment delinquency,  loss of collateral value). To accomplish this,
an eleven-grade  risk rating system,  ranging from superior to loss is utilized.
The risk grades  assigned are determined  based on several  elements,  including
current  and  historical  financial  strength  and  cash  flow of the  borrower,
collateral  value,  terms  of  financing,   and  compliance  with  loan  policy.
Additionally, on a semi-annual basis, a historical loss analysis is preformed on
the loan portfolio, utilizing three running years of historical loss experience.
This historical  loss  information is then utilized to assign reserve factors to
each major segment of the loan portfolio.

     For the general  reserve,  management  determines the appropriate  level of
general  reserve  to  absorb  estimated  probable  losses  inherent  in the loan
portfolio.  Management considers the Banks' historical loan losses, past due and
non-performing loans, current economic conditions,  underlying collateral values
securing loans and other factors which affect the allowance.  This evaluation is
heavily dependent upon estimates and appraisals,  which are susceptible to rapid
changes because of economic conditions and the economic prospects of borrowers.

     The general  reserve has increased  over the past year.  The trend of loans
made over the past several years has been toward larger  commercial loans and as
a result,  the loan  portfolio has had limited  historical  loss  experience for
which to base a specific  reserve.  Thus, the general reserve has been increased
to  compensate  for loan growth and the lack of historical  experience  with the
volume of such loans.  In addition,  nonaccrual  loans have  increased  over the
prior year. This also supports the increased level of general reserve.


<PAGE>

     The following table depicts the allocation of the allowance for loan losses
at December 31, 1998, 1997, 1996, 1995 and 1994.
<TABLE>
<CAPTION>

                         1998                1997                1996                1995               1994
                         ----                ----                ----                ----               ----
                                                              (Thousands)
                         Amount              Amount              Amount               Amount              Amount
                           of                  of                  of                  of                  of
                        Allowance  Loan     Allowance  Loan     Allowance  Loan      Allowance  Loan     Allowance  Loan
                          For      Type        For     Type        For     Type         For     Type        For     Type
                        Possible    to      Possible    to      Possible    to       Possible    to      Possible    to
                          Loan     Total      Loan     Total      Loan     Total       Loan     Total      Loan     Total
                         Losses    Loans     Losses    Loans     Losses    Loans      Losses    Loans     Losses    Loans
                         ------    -----     ------    -----     ------    -----      ------    -----     ------    ------
<S>                    <C>         <C>     <C>         <C>     <C>         <C>      <C>         <C>     <C>         <C>
Commercial and
financial ...........    $617       14%      $182       12%      $269       12%       $347       10%      $302       10%
Real Estate:
  Residential
  construction.......     205        11        12         8       157         8         44         5        48         5
  Commercial
  construction ......      --        --        --        --        --        --         --        --        --        --
  Residential
  mortgage...........     413        35       482        33       511        46        428        40       504        48
  Commercial
  mortgage...........     347        29       501        34       237        21        338        31       237        23
Consumer ............     986        11       949        13       353        13        356        14       291        14
General .............   4,156        --     3,711        --     3,786        --      2,894        --     2,281        --
                        -----      -----    -----      -----    -----      -----     -----      -----    -----      -----
Total allowance for
possible loan
losses ............    $6,724      100%    $5,837      100%    $5,313      100%     $4,407      100%    $3,663      100%
                       ======     ======   ======     ======   ======     ======    ======     ======   ======     ======
</TABLE>

     In addition,  various  regulatory  agencies,  as an integral  part of their
examination  process,  periodically  review  the  Company's  allowance  for loan
losses.  Such  agencies  may  require the  Company to  recognize  changes to the
allowance  based on their  judgment about  information  available at the time of
examination.

     Non-performing   assets   include   non-accrual   loans,   accruing   loans
contractually past due 90 days or more,  restructured  loans, other real estate,
and other real estate under  contract for sale.  Loans are placed on non-accrual
status when management has concerns  relating to the ability to collect the loan
principal and interest,  and generally  when such loans are 90 days or more past
due.  Interest  of  $77,817  was  reported  on these  loans  during  1998 and an
additional  amount of  $50,652  would have been  earned if these  loans had been
performing. At December 31, 1998 and 1997, the recorded investment in loans that
are considered to be impaired was $1,432,000 and $872,000, respectively, (all of
which  $1,432,000  and $720,000 were on a nonaccrual  basis at December 31, 1998
and 1997,  respectively).  Included in this amount is $854,000  and  $305,000 in
1998 and 1997,  respectively,  of impaired loans for which the related allowance
for credit  losses is $346,000  and $82,000 in 1998 and 1997,  respectively.  No
amount of loans  that have been  classified  by  regulatory  examiners  as loss,
substandard,  doubtful  or  special  mention  has  been  excluded  from  amounts
disclosed  as  non-performing   loans.  While  non-performing  assets  represent
potential  losses to the Company,  management  does not  anticipate any material
losses  thereon,  since most are believed to be adequately  secured.  Management
believes the current  allowance for loan losses is sufficient to absorb probable
losses  inherent  in the  portfolio.  No  assurance  can be given  that  adverse
economic  conditions will not adversely affect borrowers and result in increased
losses.


<PAGE>
<TABLE>
<CAPTION>

                                       -------------------------------------------------------------------------
                                                                     December 31,
                                            1998            1997          1996            1995           1994
                                       -------------------------------------------------------------------------
                                                                         (Thousands)
<S>                                        <C>             <C>             <C>           <C>            <C>    
Nonaccrual loans....................       $1,432            $720          $690            $812           $693
Loans 90 days or more past due and
still accruing interest.............          111             152            51             106             29
                                       ------------   -------------  ------------    ------------   ------------
Total non-performing loans..........        1,543             872           741             918            722
Other real estate...................          326             514           144             686          1,021
                                       ------------   -------------  ------------    ------------   ------------
Total non-performing assets.........       $1,869          $1,386          $885          $1,604         $1,743
                                       ============   =============  ============    ============   ============
</TABLE>

     Net  charge-offs  as a percentage  of average loans  outstanding  decreased
slightly from .13% in 1997 to .11% in 1998.  This ratio continues to reflect the
moderate level of losses experienced by the Company.
<TABLE>
<CAPTION>
                                                   1998            1997            1996            1995            1994
                                               -------------   -------------   -------------   -------------    -----------
<S>                                             <C>             <C>             <C>             <C>            <C>    
Balance at beginning of year................      $5,837          $5,313          $4,407          $3,662         $3,072
  Charge-offs:
    Commercial, financial and agricultural..        (119)            (29)            (46)           (101)           (12)
  Real estate:
Construction................................        --               --              --              --             --
Mortgage....................................         (72)            (93)            (24)            (77)           (24)
Consumer....................................        (489)           (516)           (350)           (229)          (150)
                                               -------------   -------------   -------------   -------------   -----------

Total charge-offs...........................        (680)           (638)           (420)           (407)          (186)
Recoveries:
    Commercial, financial and agricultural..          20              41              28              14             38
    Real estate:
Construction................................         --              --              --              --             --
Mortgage....................................          51              27              48              87             12
Consumer....................................         131              97              71              95             60
                                               -------------   -------------   -------------   -------------   -----------
Total recoveries............................         202             165             147             196            110
                                               -------------   -------------   -------------   -------------   -----------
Net charge-offs.............................        (478)           (473)           (273)           (211)           (76)
Provision for loan losses...................       1,365             997           1,179             956            667
                                               -------------   -------------   -------------   -------------   -----------
Balance at end of year......................      $6,724          $5,837          $5,313          $4,407         $3,663
                                               =============   =============   =============   =============   ===========

Loans, net of unearned interest at end
     of year................................    $476,110        $404,025        $361,888        $299,224       $244,892
Ratio of allowance for loan losses to net
    loans at end of year....................       1.41%           1.44%           1.47%           1.47%          1.50%
Average loans, net of unearned interest.....    $423,246        $373,910        $328,517        $262,685       $228,605
Ratio of net charge-offs to average loans
    outstanding during the year.............       0.11%           0.13%           0.08%           0.08%          0.03%
</TABLE>

CAPITAL RESOURCES

     Banks and bank  holding  companies,  as regulated  institutions,  must meet
required  levels of  capital.  The FDIC and the  Federal  Reserve,  the  primary
Federal  regulators  for the Banks and the Company,  respectively,  have adopted
minimum capital  regulations or guidelines  that  categorize  components and the
level of risk  associated with various types of assets.  Financial  institutions
are expected to maintain a level of capital  commensurate  with the risk profile
assigned to its assets in accordance with the guidelines.  The Company,  Lincoln
Bank, Cabarrus Bank and Community Bank all maintain capital levels exceeding the
minimum levels for well capitalized bank holding companies and banks.

<PAGE>

<TABLE>
<CAPTION>
                                               Well         Carolina      Lincoln      Cabarrus      Community
                                           Capitalized       First          Bank         Bank           Bank
                                          --------------- ------------- ------------- ------------ ---------------
<S>                                            <C>            <C>           <C>          <C>            <C>    
Tier I capital to risk adjusted assets..        6.0%          11.6%         10.6%         9.5%          11.8%
Total capital to risk adjusted assets...       10.0%          12.8%         11.8%        10.7%          13.0%
Leverage ratio..........................        5.0%           8.3%          7.6%         7.0%           6.5%
</TABLE>


ACCOUNTING AND REGULATORY MATTERS

     In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employees Disclosures about Pensions
and Other  Postretirement  Benefits" ("SFAS No. 132"). SFAS No. 132 standardizes
the disclosure requirements of pensions and other postretirement  benefits. SFAS
No. 132 is effective  for fiscal year  beginning  after  December 15, 1997.  The
Company adopted SFAS No. 132 in 1998 with no impact on its financial statements.

     In June 1998, the Financial  Accounting Standards Board issued Statement of
Financial Accounting  Standards No. 133, "Accounting for Derivative  Instruments
and Hedging  Activities".  SFAS No. 133  establishes  accounting  and  reporting
standards for derivative instruments and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
The  Company  plans to adopt  SFAS No.  133 in 2000  without  any  impact on its
financial  statements  as the  Company  does not have any  derivative  financial
instruments and is not involved in any hedging activities.

     In October 1998, the Financial  Accounting Standards Board issued Statement
of Financial  Accounting  Standards  No. 134,  "Accounting  for  Mortgage-Backed
Securities  Retained after the Securitization of Mortgage Loans Held for Sale by
a  Mortgage  Banking  Enterprise".  SFAS  No.  134  establishes  accounting  and
reporting  standards for certain  mortgage  banking  activities.  SFAS No 134 is
effective for financial  statements for the first fiscal quarter beginning after
December 15, 1998.  The Company  plans to adopt SFAS No. 134 in 1999 without any
impact on its financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Market risk is  inherent to all  industries,  and  financial  institutions'
assets and liabilities all are affected by market risks.  The Company  considers
credit  to be the  most  significant,  however,  interest  rate  risk is a close
second.  There are eight risks that must be  considered in managing the Company.
These risks are listed in order of the perceived  level of risk imposed upon the
Company.  The Company does not believe  foreign  exchange risk to be significant
and thus,  does not address it in this  assessment.  The Company has  identified
certain critical risks to these subsidiary banks.

     CREDIT RISK.  Credit risk is the risk to the Company's  earnings or capital
from the  potential of an obligator or related  group of  obligators  failing to
fulfill its or their  contractual  commitments to the bank.  Credit risk is most
closely  associated with a bank's lending.  It encompasses the potential of loss
on a particular  loan as well as the  potential for loss from a group of related
loans,  i.e.,  a  credit  concentration.   Credit  risk  extends  also  to  less
traditional bank activities. It includes the credit behind the bank's investment
portfolio,  the credit of  counterparties  to interest rate  contracts,  and the
credit of securities brokers the bank's investment portfolio in street name.

     INTEREST  RATE RISK.  Interest rate risk is the risk to earnings or capital
from the potential of movement in interest  rates.  It is the sensitivity of the
bank's future earnings to interest rate changes. Interest rate risk is generally
measured on the basis of duration  analysis or gap analysis.  Duration  analysis
measures the degree of risk in a  particular  instrument  or  portfolio  and gap
analysis  defines  the  timing  when loss may occur.  The  Company is willing to
accept a modified  duration of 5% and a one-year  cumulative gap or +/- 5% and a
one- to five-year cumulative gap of +/- 8%. As of December 31, 1998, the Company
had a modified  duration of 2.18% and a one-year  cumulative  gap of 2.35% and a
one to five year cumulative gap of 4.36%.  The major components of interest rate
risk are described as repricing risk,  basis risk, yield curve risk, and options
risk.

     PRICE RISK.  Price risk is the risk to earnings or capital  from changes in
the value of portfolios of financial instruments. Frequently this is referred to
as market risk.  Price risk is  generally  reflected as the risk of a decline in
market value of its securities  portfolio and the Company is willing to accept a
7.5% change in value  after  experiencing  a 300 basis point rate shock,  either
positive or negative.  At December 31, 1998, the price change was less than 5.8%
with such a rate shock.
<PAGE>

     LIQUIDITY RISK.  Liquidity risk is the risk to earnings or capital from the
Company's inability to meet its obligations when they come due without incurring
unacceptable  losses or costs.  Depositors  withdraw their deposits and the bank
does not have the  liquid  assets to fund the  withdrawals  and to meet its loan
funding obligations. The risk is particularly great with brokered deposits which
the Company currently has none.

     TRANSACTION RISK.   Transaction  risk is the risk to  earnings  or  capital
arising from problems with service or product delivery.  Transaction risk is the
risk of a failure in a bank's operating processes.  It is a risk of failure in a
bank's automation, its employee integrity, or its internal controls.

     COMPLIANCE RISK.   Compliance  risk is the risk to earnings or capital from
noncompliance with laws, rules, and regulations.

     STRATEGIC RISK.   Strategic risk is the risk to earnings or capital arising
from adverse business decisions or improper implementation of those decisions.

     REPUTATION RISK.   Reputation  risk is the risk to earnings or capital from
negative public opinion.

     Most of these risks are  interrelated  and thus all must be  considered  by
management  regardless of the implied risk.  Management  reviews the performance
against these ranges on a quarterly  basis.  See  "Management's  Discussion  and
Analysis of Financial  Condition  and Results of  Operations"  for the Company's
quantitative sensitivity analyses.

     The fair value 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. The estimated fair
market value of loans outstanding is approximately $480,244,000 and $401,885,000
at   December   31,   1998  and   1997,   respectively.   The   fair   value  of
noninterest-bearing  demand deposits and NOW,  savings and money market deposits
is the amount  payable on demand at the  reporting  date.  The fair value of the
time  deposits is estimated  using the rates  currently  offered for deposits of
similar  remaining  maturities.  The estimated  fair market value of deposits is
approximately  $652,617,000  and  $542,306,000  at  December  31, 1998 and 1997,
respectively



<PAGE>


                          INDEPENDENT AUDITORS' REPORT



The Shareholders and the Board of Directors of
     Carolina First BancShares, Inc.

     We have audited the  accompanying  consolidated  balance sheets of Carolina
First BancShares, Inc. and subsidiaries as of December 31, 1998 and 1997 and the
related consolidated  statements of income,  changes in shareholders' equity and
comprehensive  income  and cash  flows for each of the  years in the  three-year
period ended December 31, 1998. These consolidated  financial statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

     We conducted  our audits in accordance  with  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 audits provide a reasonable basis for our opinion.

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly,  in all material  respects,  the financial  position of Carolina
First  BancShares,  Inc. and subsidiaries at December 31, 1998 and 1997, and the
results  of their  operations  and their cash flows for each of the years in the
three-year period ended December 31, 1998 in conformity with generally  accepted
accounting principles.



                                             /s/ KPMG, LLP
                                             ---------------
                                                 KPMG, LLP
                                                  




Charlotte, North Carolina
January 20, 1999



<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Carolina First BancShares, Inc.
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
                                                                                     1998                 1997
                                                                               ------------------    ----------------
<S>                                                                                 <C>                 <C> 
                                        ASSETS
Cash and due from banks......................................................        $28,611,146         $28,146,377
Federal funds sold...........................................................         13,220,957           1,800,000
                                                                               ------------------    ----------------
Total cash and cash equivalents..............................................         41,832,103          29,946,377
Interest bearing deposits in other banks.....................................            777,346             673,860
Securities held to maturity (market value $33,609,910  in 1998 and
     $37,024,089 in 1997)....................................................         33,306,113          36,708,867
Securities available for sale (cost of $153,255,268 in 1998 and
     $121,716,598 in 1997)...................................................        154,384,075         122,678,711
Loans, net of unearned income ($565,714 in 1998; $539,329 in 1997)...........        476,109,833         404,025,180
     Allowance for loan losses...............................................         (6,723,516)         (5,837,328)
                                                                               ------------------    ----------------
     Loans, net..............................................................        469,386,317         398,187,852
Premises and equipment, net..................................................         13,662,738          13,101,070
Other real estate owned......................................................            326,206             513,757
Other assets.................................................................         17,951,346          16,266,252
                                                                               ------------------    ----------------
Total assets.................................................................       $731,626,244        $618,076,746
                                                                               ==================    ================

                 LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand.......................................................................        $89,666,447         $67,833,505
     Interest bearing transaction accounts...................................        167,131,413         137,889,248
     Savings.................................................................         63,833,667          57,626,789
     Time, $100,000 and over.................................................         87,947,784          60,123,071
     Other time..............................................................        244,023,259         221,577,787
                                                                               ------------------    ----------------
Total deposits...............................................................        652,602,570         545,050,400
Borrowed funds...............................................................         10,399,634          10,923,498
Other liabilities............................................................          6,646,309           5,892,048
                                                                               ------------------    ----------------
Total liabilities............................................................        669,648,513         561,865,946
Shareholders' equity:
     Preferred  stock,  $1.00 par value;  authorized  - 5,000,000  shares;  
        none issued and outstanding; Common stock, $2.50 par value; author-
        ized-20,000,000 shares; issued and outstanding - 5,396,736 in 1998,                       
        and 5,325,769 shares in 1997.........................................         13,491,840          13,314,423
     Additional paid in capital..............................................         22,758,001          22,335,466
     Retained earnings.......................................................         25,031,771          19,980,565
Accumulated other comprehensive income.......................................            696,119             580,346
                                                                               ------------------    ----------------
Total shareholders'equity....................................................         61,977,731          56,210,800
                                                                               ------------------    ----------------
Commitments and contingent liabilities.......................................            ---                  ---
Total liabilities and shareholders' equity...................................       $731,626,244        $618,076,746
                                                                               ==================    ================
</TABLE>

See accompanying notes to consolidated financial statements.


<PAGE>

Consolidated Statements of Income
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
                                                                               1998               1997               1996
                                                                         ----------------   ----------------   ----------------
<S>                                                                         <C>                <C>                <C>    
INTEREST INCOME:
Interest and fees on loans.............................................     $40,848,120        $36,552,020        $31,990,042
Interest and dividends on securities:
     Taxable income....................................................       9,554,933          7,334,682          6,005,498
     Non-taxable income................................................         329,685            476,200            588,209
Other interest income..................................................       1,319,095            874,091            544,534
                                                                         ----------------   ----------------   ----------------
   Total interest income...............................................      52,051,833         45,236,993         39,128,283
                                                                         ----------------   ----------------   ----------------
INTERESE EXPENSE:
Interest on deposits...................................................      21,571,800         19,221,687         16,683,702
Interest on borrowed funds.............................................         498,934            351,059            326,077
                                                                         ----------------   ----------------   ----------------
   Total interest expense..............................................      22,070,734         19,572,746         17,009,779
                                                                         ----------------   ----------------   ----------------
NET INTEREST INCOME....................................................      29,981,099         25,664,247         22,118,504      
PROVISION FOR LOAN LOSSES..............................................       1,365,000            997,333          1,178,925
                                                                         ----------------   ----------------   ----------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES....................      28,616,099         24,666,914         20,939,579
                                                                         ----------------   ----------------   ----------------
NONINTEREST INCOME:
Charges on deposit accounts............................................       3,864,796          3,357,917          3,062,360
Insurance commissions..................................................         603,025            725,474            606,848
Other service fees and commissions.....................................       1,445,217          1,203,393            845,858
Mortgage banking commission income.....................................         671,448            483,047            416,302
Securities gains (losses), net.........................................         267,304             82,508            (10,482)
Other income...........................................................       1,196,584            910,447            712,061
                                                                         ----------------   ----------------   ----------------
   Total noninterest income............................................       8,048,374          6,762,786          5,632,947
                                                                         ----------------   ----------------   ----------------
NONINTEREST EXPENSE:
Salaries and benefits..................................................      12,037,794         11,251,266          9,546,647
Occupancy and equipment................................................       3,252,949          2,810,863          2,299,468
Federal and other insurance premiums...................................         208,822            185,798            857,366
Office supplies........................................................         938,063            857,966            676,571
Data processing........................................................         680,130            546,395            485,665
Restructuring and merger related expenses..............................       2,069,570              ---                ---
Other expenses.........................................................       6,667,773          5,566,486          4,517,508
                                                                         ----------------   ----------------   ----------------
   Total noninterest expense...........................................      25,855,101         21,218,774         18,383,225
                                                                         ----------------   ----------------   ----------------
INCOME BEFORE INCOME TAXES.............................................      10,809,372         10,210,926          8,189,301

INCOME TAXES...........................................................       4,100,443          3,490,141          2,968,527
                                                                         ----------------   ----------------   ----------------
NET INCOME.............................................................      $6,708,929         $6,720,785         $5,220,774
                                                                         ================   ================   ================
Earnings per share
Net Income Per Common Share - Basic....................................           $1.25              $1.32              $1.03
                                                                         ================   ================   ================
Net Income Per Common Share - Diluted..................................           $1.22              $1.30              $1.03
                                                                         ================   ================   ================
</TABLE>

See accompanying notes to consolidated financial statements.



<PAGE>

Consolidated Statements of Changes in Shareholders' Equity and 
Comprehensive Income
For The Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>

                                            Common Stock                                           Accumulated
                                     ----------------------------   Additional                        Other       
                                                                      Paid-in       Retained      Comprehensive    Shareholders'
                                         Shares         Amount        Capital        Earnings         Income           Equity
                                     -------------- -------------- -------------- -------------- ---------------  ---------------
<S>                                    <C>           <C>           <C>            <C>                <C>          <C>
Carolina First BancShares, Inc.......  1,632,458     $4,081,145    $17,377,333     $9,585,436         $79,065     $31,122,979
Community Bank & Trust Co............  1,331,223      3,328,057      4,934,895        776,761          74,907       9,114,620      
Adjustments for                                                     
pooling-of-interest..................   (363,211)      (908,027)       908,027          ---              ---             ---
                                     -------------- -------------- -------------- --------------  --------------  --------------
BALANCE DECEMBER 31, 1995,            
RESTATED.............................  2,600,470     $6,501,175    $23,220,255    $10,362,197        $153,972     $40,237,599
Exercise of stock options............      9,412         23,531         68,748          ---              ---           92,979 
Cash dividend ($.48 per share).......       ---            ---            ---        (991,997)           ---         (991,997)
5-for-4 stock split..................    409,586      1,023,965     (1,049,260)         ---              ---          (25,295)
Retirement of stock..................     (3,589)        (8,973)      (102,103)         ---              ---         (111,076)     
Dividend reinvestment plan...........      5,104         12,760        148,092          ---              ---          160,852
Net income...........................       ---            ---            ---       5,220,774            ---        5,220,774
Other comprehensive income -
   Unrealized gain (loss) on
   Securities available for sale,
   net of taxes of $(46,377).........       ---            ---            ---            ---         (119,069)       (119,069)
                                                                                                                  --------------
Total comprehensive income...........       ---            ---            ---            ---             ---        5,101,705
                                     -------------- -------------- -------------- --------------  --------------  --------------
BALANCE DECEMBER 31, 1996............  3,020,983      7,552,458     22,285,732     14,590,974         $34,903     $44,464,067

Issuance of stock in public                                                                                        
offering.............................    225,000        562,500      4,988,907            ---             ---       5,551,407
Exercise of stock options............     18,311         45,778         32,432            ---             ---          78,210      
Cash dividend ($.28 per share).......       ---            ---            ---       (1,331,194)           ---      (1,331,194)
2-for-1 stock split..................   2,054,569      5,136,422    (5,136,422)           ---             ---            ---
Retirement of stock..................      (1,412)        (3,530)      (38,174)           ---             ---         (41,704)     
Dividend reinvestment plan...........       8,318         20,795       202,991            ---             ---         223,786      
Net income...........................       ---            ---            ---        6,720,785            ---       6,720,785
Other comprehensive income -                                                                                     
   Unrealized gain (loss)on                                                                                          
   securities available for sale,                        
   net of taxes of $341,498..........       ---            ---            ---            ---          545,443         545,443
                                                                                                                  --------------
Total comprehensive income...........       ---            ---            ---            ---             ---        7,266,228
                                     -------------- -------------- -------------- --------------  --------------  --------------
BALANCE, DECEMBER 31, 1997...........   5,325,769     13,314,423     22,335,466     19,980,565       $580,346     $56,210,800

Exercise of stock options.............     70,229        175,572        210,055           ---            ---          385,627      
Cash dividend ($.34 per share)........      ---            ---            ---       (1,657,723)          ---       (1,657,723)
Retirement of stock...................     (3,694)        (9,235)      (112,707)          ---            ---         (121,942)     
Dividend reinvestment plan............      4,432         11,080        110,049           ---            ---          121,129     
Settlement of merger-related                                                                                       
claims................................      ---            ---          215,138           ---            ---          215,138
Net income............................      ---            ---            ---         6,708,929          ---        6,708,929
Other comprehensive income -
   Unrealized gain (loss) on                                                                                       
   Securities available for sale,                                                  
   net of taxes of $50,921............      ---            ---            ---             ---         115,773         115,773
                                                                                                                  --------------
Total comprehensive income............      ---            ---            ---             ---             ---       6,824,702
                                     -------------- -------------- -------------- --------------  --------------  --------------
BALANCE, DECEMBER 31, 1998............  5,396,736    $13,491,840    $22,758,001     $25,031,771      $696,119     $61,977,731
                                     ============== ============== ============== ==============  ==============  ==============
</TABLE>

See accompanying notes to consolidated financial statements.
<PAGE>


Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
                                                                                         1998              1997             1996
                                                                                  ---------------- ------------------ --------------
<S>                                                                                  <C>              <C>               <C>   
OPERATING ACTIVITIES:
Net Income ......................................................................      $6,708,929       $6,720,785       $5,220,774

Adjustments  to  reconcile net  income  to  net  cash  provided  by
   operating activities:
     Depreciation and amortization ..............................................       2,297,164        2,125,307        1,683,899
     Accretion and amortization of securities discounts and premiums,net ........        (326,143)         701,698          250,074
     Provision for loan losses ..................................................       1,365,000          997,333        1,178,925
     Deferred taxes (benefit)....................................................        (699,363)        (771,281)        (556,979)
     Gains on sales of securities available for sale ............................        (287,166)         (99,938)          16,841
     Losses on sales of securities available for sale ...........................          19,862           19,106             --
     Gains on calls and maturities of securities held to maturity ...............            --             (1,812)          (8,490)
     Losses on calls and maturities of securities held to maturity ..............            --                136            2,131
     Losses (gains) on sales of equipment, net ..................................             309           (4,810)         (63,273)
     Losses (gains) on sales of real estate, net ................................          71,501          (65,702)        (141,750)
     Increase in other assets ...................................................        (634,362)      (1,588,494)        (193,955)
     Increase in other liabilities ..............................................         829,437        1,289,214          943,110
     Settlement of merger-related claims ........................................         215,138             --               --
                                                                                     -------------    -------------    -------------
         Net cash provided by operating activities .............................        9,560,306        9,321,542        8,331,307
                                                                                     -------------    -------------    -------------
INVESTING ACTIVITIES:
Proceeds from maturities of securities available for sale .......................      70,451,327       35,612,012       10,201,659
Proceeds from sales of securities available for sale ............................         599,964        5,809,688        6,543,161
Purchases of securities available for sale ......................................    (101,960,784)    (101,121,315)     (35,699,300)
Proceeds from calls and maturities of securities held to maturity ...............      16,662,401       18,320,504       26,549,774
Purchases of securities held to maturity.........................................     (13,295,379)      (7,490,547)      (5,074,375)
Purchases and maturities of certificates of deposit, net.........................        (103,486)        (247,094)         (76,638)
Originations of loans, net.......................................................     (72,922,802)     (43,072,427)     (63,251,666)
Proceeds from sale of real estate................................................         509,903          211,609          999,241
Proceeds from sale of premises and equipment.....................................           2,115          611,477          221,380
Cash acquired, net of cash paid, in purchase of branches ........................       7,674,161       26,556,399             --
Capital expenditures.............................................................      (1,899,152)      (2,147,923)      (2,373,112)
                                                                                     -------------    -------------    -------------
          Net cash used in investing activities..................................     (94,281,732)     (66,957,617)     (61,959,876)
                                                                                     -------------    -------------    -------------
FINANCING ACTIVITIES:
Increase in time deposits .......................................................      44,876,631      20,560,322        30,353,343
Net increase in other deposits ..................................................      53,602,469      30,945,214        20,006,892
Net increase (decrease) in borrowed funds .......................................        (523,864)      3,754,186         5,558,751
Repayment of notes payable ......................................................         (75,176)        (19,601)          (18,544)
Repurchase of stock .............................................................        (121,942)        (41,704)         (111,076)
Payment of cash dividends and fractional shares .................................      (1,657,723)     (1,331,194)       (1,017,292)
Issuance of stock................................................................         506,756       5,853,403           253,131
                                                                                     -------------    -------------    -------------
          Net cash  provided by financing activities ............................       96,607,151      59,720,626       55,025,205
                                                                                     -------------    -------------    -------------

NET INCREASE IN CASH AND CASH EQUIVALENTS .......................................       11,885,725       2,084,551        1,396,636
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.....................................       29,946,377      27,861,826       26,465,190
                                                                                     =============    =============    =============
CASH AND CASH EQUIVALENTS, END OF YEAR...........................................      $41,832,102     $29,946,377      $27,861,826
                                                                                     =============    =============    =============
Supplemental disclosures of cash flow information:
     Interest paid ..............................................................      $21,540,710     $19,177,341      $16,835,027
     Income taxes paid ..........................................................       $4,791,163      $4,340,169       $3,603,382
                                                                                     =============    =============    =============
Supplemental disclosure of noncash investing and financing activities:
     Increase (decrease) in net unrealized loss .................................         $115,773        $545,443        $(119,069)
     Assets transferred to other real estate ....................................         $359,337        $533,687         $317,449

</TABLE>



<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998

Carolina First BancShares, Inc. and Subsidiaries

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Principles  of  Consolidation  --  The  consolidated  financial  statements
include the accounts of the Company, the Banks, and their subsidiaries (referred
to herein collectively as the "Company"). All significant intercompany items and
transactions  have  been  eliminated  in  consolidation.  Certain  1997 and 1996
amounts  have  been  reclassified  to  conform  with 1998  classifications.  The
reclassifications  have no  effect  on  shareholders'  equity  or net  income as
previously  reported.  The Company's chief operating  decision maker reviews the
results  of  operations  of  the  Company  and  its  subsidiaries  as  a  single
enterprise.

     The preparation of the consolidated financial statements in conformity with
generally accepted  accounting  principles requires management to make estimates
and assumptions  that affect  reported  amounts of assets and liabilities at the
date of the financial  statements and the amounts of income and expenses  during
the reporting period. Actual results could differ from those estimates.

     Cash and Cash  Equivalents  -- Cash and cash  equivalents  include  cash on
hand, due from banks and overnight federal funds sold.

     Securities  -- Securities  are  classified  in  accordance  with  Financial
Accounting  Standards Board ("FASB") Statement of Financial Accounting Standards
("SFAS")  No.  115,  "Accounting  for  Certain  Investments  in Debt and  Equity
Securities"  which  prescribes the  accounting and reporting for  investments in
equity  securities  that  have  readily  determinable  fair  values  and for all
investments  in debt  securities.  Securities  that the Company has the positive
intent and ability to hold to maturity  are  classified  as held to maturity and
reported at cost.  Securities  held for current resale are classified as trading
securities and reported at fair value, with unrealized gains and losses included
in  income.  The  Company  currently  has no  such  securities.  Securities  not
classified as held to maturity or trading securities are classified as available
for sale and reported at fair value, with unrealized gains and losses net of the
related tax effect excluded from income and reported as a separate  component of
shareholders'  equity.  The effect of the foregoing will cause  fluctuations  in
shareholders'  equity based on changes in values of debt and equity  securities.
The  classification of securities as held to maturity,  trading or available for
sale is determined at the date of purchase.

     Realized  gains or losses on the sale of securities  are  recognized on the
specific identification method. Premiums and discounts are amortized to interest
income over the life of the security using a method  approximating a level yield
method.  The market  value of  securities  is generally  based on quoted  market
prices or dealer quotes.

     As a member of the  Federal  Home Loan Bank of Atlanta  (the  "FHLB"),  the
Company is required to maintain  an  investment  in the stock of the FHLB.  This
stock,  which is classified in the other asset category at December 31, 1998, is
carried at cost since it has no quoted market value.

     Allowance  for Loan Losses -- The  provision  for loans  losses  charged to
operations  is an amount that  management  believes is  sufficient  to bring the
allowance for loan losses to an amount  considered  adequate to absorb estimated
probable losses  inherent in the portfolio.  Management's  determination  of the
adequacy of the allowance is based on an evaluation of the  portfolios,  current
economic  conditions,  historical  loan loss  experience and other risk factors.
This  evaluation is heavily  dependent upon  estimates and  appraisals  that are
susceptible  to rapid changes  because of economic  conditions  and the economic
prospects of borrowers.

     In addition,  various  regulatory  agencies,  as an integral  part of their
examination  process,  periodically  review  the  Company's  allowance  for loan
losses.  Such  agencies  may  require the  Company to  recognize  changes to the
allowance  based on their  judgment about  information  available at the time of
examination.
<PAGE>

     Nonaccrual  Loans -- Generally,  a loan is classified as nonaccrual and the
accrual of interest on such loan (including impaired loans) is discontinued when
the contractual  payment of principal or interest has become 90 days past due or
management has doubts about further collectibility of principal or interest even
though the loan currently is performing.  A loan may remain on accrual status if
it is in the process of  collection  and is either  guaranteed  or well secured.
When a loan is placed on nonaccrual  status,  unpaid interest credited to income
in the current  year is reversed and unpaid  interest  accrued in prior years is
charged against the allowance for credit losses. Interest received on nonaccrual
loans (including  impaired loans) generally is either applied against  principal
or reported as interest  income  according  to  management's  judgment as to the
collectibility  of principal.  Generally,  loans are restored to accrual  status
when the  obligation is brought  current,  has performed in accordance  with the
contractual   terms  for  a   reasonable   period  of  time  and  the   ultimate
collectibility of the total  contractual  principal and interest is no longer in
doubt.

      Premises and  Equipment -- Premises and  equipment are stated at cost less
accumulated depreciation.  Additions and major replacement or betterments, which
extend the useful lives of premises and equipment, are capitalized. Maintenance,
repairs  and minor  improvements  are  expensed  as  incurred.  Depreciation  of
buildings  and  improvements  is  computed on the  straight-line  method over 15
years.  Depreciation  of  furniture,  fixtures and  equipment is computed on the
straight-line method over periods that approximate the estimated useful lives of
the assets.  Accelerated  depreciation methods are used for tax purposes.  Gains
and losses on dispositions of premises and equipment are reflected in income.

      Other Real Estate Owned -- Other real estate owned is carried at the lower
of cost  (principal  balance  of the loan  plus  costs of  obtaining  title  and
possession)  or fair value less selling  costs.  Subsequent  to  acquisition,  a
provision for loss, if required, is recorded to reduce the carrying value of the
asset to fair value.

     Intangible  Assets -- Deposit  based  premiums  and  goodwill  arising from
branch  acquisitions  result from the Company  paying  amounts in excess of fair
value for the branches and core deposits acquired.  Such amounts are included in
other assets and deposit based  premiums are amortized on an  accelerated  basis
over 10 years and goodwill is amortized on a straight-line basis over 25 years.

     Earnings  Per Share -- The  Company  adopted  SFAS No. 128,  "Earnings  per
Share,  during  1997.  SFAS No. 128  establishes  standards  for  computing  and
presenting earnings per share ("EPS"). SFAS No. 128 simplifies the standards for
computing EPS previously found in APB Opinion No. 15, "Earnings Per Share",  and
makes  them  comparable  to  international   EPS  standards.   It  replaces  the
presentation of primary EPS with a basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income  statement  for all  entities
with complex capital  structures and requires a reconciliation  of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS  computation.  In accordance with SFAS No. 128, all prior period
EPS data has been restated.  In addition,  the weighted average number of shares
for each year  presented  has been  retroactively  adjusted for the  two-for-one
stock split in 1997 and the five-for-four stock split in 1996.

     Financial  Instruments  -- Financial  instruments  are valued in accordance
with SFAS No. 107, "Disclosure about Fair Value of Financial Instruments", which
requires  disclosure  of the estimated  fair values of the  Company's  financial
instruments.  Such instruments include investment securities (see note 3), loans
(see note 4), and deposit accounts (see note 7). Fair value estimates,  methods,
and assumptions for each of these  instruments are set forth in their respective
footnotes.

     The carrying  amounts for cash,  overnight  federal funds sold and interest
bearing  deposits in other banks  approximate  fair value because they mature in
less than 90 days and do not present unanticipated credit concerns. The carrying
amounts for  borrowed  funds also  approximate  fair value  because of the daily
maturity of most of these items.

     Fair  value  estimates  are made at a  specific  point  in  time,  based on
relevant  market  information and  information  about the financial  instrument.
These  estimates  do not reflect any premium or discount  that could result from
offering  for sale at one time the  Company's  entire  holdings of a  particular
financial  instrument.  Because no active market readily exists for a portion of
the Company's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience,  current  economic  conditions,  risk
characteristics  of various  financial  instruments,  and other  factors.  These
estimates  are  subjective  in nature and involve  uncertainties  and matters of
significant judgment and therefore cannot be determined with precision.  Changes
in assumptions could significantly affect the estimates.

     Fair value estimates are based on existing  financial  instruments  without
attempting to estimate the value of anticipated future business and the value of
assets and  liabilities  that are not considered  financial  instruments.  Other
significant  assets and liabilities that are not considered  financial assets or
liabilities include the mortgage banking operation,  property, plant, equipment,
and goodwill.  In addition,  the tax ramifications related to the realization of
the  unrealized  gains and  losses can have a  significant  effect on fair value
estimates and have not been considered in the estimates.
<PAGE>

      SFAS No. 107 specifies that fair values should be calculated  based on the
value of one unit without regard to any premium or discount that may result from
concentration   of   ownership   of  a  financial   instrument,   possible   tax
ramifications, or estimated transaction cost.

    Stock  Options -- On January 1, 1996,  the  Company  adopted  SFAS No.  123,
"Accounting  for Stock-Based  Compensation,"  which requires either the (i) fair
value of employee  stock-based  compensation plans be recorded as a component of
compensation  expense  in the  statement  of  income  as of the date of grant of
awards  related  to such  plans,  or (ii),  the impact of such fair value on net
income and earnings per share be disclosed on a pro forma basis in a footnote to
financial  statements  for  awards  granted  after  December  15,  1994,  if the
accounting  for  such  awards  continues  to be in  accordance  with  Accounting
Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to Employees "
("APB Opinion 25").  The Company has elected to continue to apply the provisions
of APB Opinion 25 and provide the pro forma  disclosure  provisions  of SFAS No.
123.

     Income and Expense -- The Company utilizes the accrual method of accounting
except for  immaterial  amounts of loan income and other  minor fees,  which are
recorded as income when collected.  Substantially all loans earn interest on the
level  yield  method  based on the daily  outstanding  balance.  The  accrual of
interest is discontinued when, in management's judgment, the interest may not be
collected.

     The Banks defer the recognition of the net amounts of loan origination fees
and certain loan origination  costs and amortize these deferred amounts over the
life of each related loan as an adjustment to the loan yield.

     Income  Taxes --  Income  taxes  are  accounted  for  under  SFAS No.  109,
"Accounting  for Income Taxes".  According to SFAS No. 109,  deferred tax assets
and liabilities are recognized for the future tax  consequences  attributable to
differences  between the financial statement carrying amounts of existing assets
and  liabilities  and their  respective  tax  bases.  Deferred  tax  assets  and
liabilities  are measured  using the statutory tax rates  expected to apply to a
taxable income in the years in which those temporary differences are expected to
be  recovered  in income in the period that  includes the  enactment  date.  The
Company files consolidated Federal income tax returns with its subsidiaries.

     Comprehensive  Income - On January 1, 1998 the Company adopted SFAS No. 130
"Reporting  Comprehensive  Income".  As required by the SFAS No. 130, prior year
information has been modified to conform to the new presentation.  Comprehensive
income  includes net income and all non-owner  changes to the Company's  equity.
The  Company's  only  component of other  comprehensive  income is the change in
unrealized gains and losses on available-for-sale securities.

     The Company's total comprehensive income for the three years ended December
31, 1998, 1997, and 1996 was $6,824,702, $7,266,228 and $5,101,705 respectively.
Information  concerning the  Corporation's  other  comprehensive  income for the
three years ended December 31, 1998, 1997, and 1996 is as follows:



<PAGE>
<TABLE>
<CAPTION>
                                                                                               1998          1997            1996
                                                                                           -----------    -----------    -----------
<S>                                                                                          <C>            <C>           <C>    


Unrealized holding gains (losses) arising during the period ..........................       $281,501       $596,598      ($125,568)
Less: reclassification adjustment for realized gains (losses), net of tax ............        165,728         51,155         (6,499)
                                                                                            ---------      ---------      ----------
Unrealized gains (losses) on securities available for
sale, net of applicable income taxes .................................................       $115,773       $545,443      ($119,069)
                                                                                            =========      =========      ==========
</TABLE>


     Disclosures  Regarding  Segments  -- The  Company  adopted  SFAS  No.  131,
"Disclosures  about Segments of an Enterprise and Related  Information" in 1998.
SFAS No. 131  establishes  standards for the way that public  businesses  report
information about operating segments in annual financial statements and requires
that those enterprises  report selected  information about operating segments in
interim financial reports issued to shareholders.  It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers.  The  Company  adopted  SFAS No.  131  without  any  impact  on their
consolidated  financial statements as the chief operating decision maker reviews
the  results of  operations  of the  Company  and its  subsidiaries  as a single
enterprise.

2.  MERGERS ACCOUNTED FOR AS POOLING-OF-INTERESTS

      On December  23,  1998,  the Company  merged with  Community  Bank, a $110
million  community bank  headquartered  in  Rutherfordton,  North Carolina.  The
merger  was  effected  through  a  tax-free   exchange  of  stock  whereby  each
outstanding  share of Community  Bank was exchanged for .72716 of a share of the
Company's common stock. Consequently,  the Company issued and reserved for issue
approximately  1,021,202  shares of common stock and cash in-lieu of  fractional
shares for all of the outstanding  shares of Community  Bank.  Community Bank is
continuing to operate as a  wholly-owned  subsidiary of the Company.  The merger
with Community Bank has been accounted for as a pooling-of-interests.

      Certain  charges were brought against the Company and one of the Company's
officers  related to the merger.  In connection  with the litigation the Company
formed a  settlement  trust and  irrevocably  transferred  all of the  shares of
Community  Bank which it owned to the trustee to be available for  settlement of
the  claims.  The  Company  incurred  costs of  approximately  $215,000  for the
settlement   of  the   merger-related   claims.   Such  costs  are  included  in
restructuring and merger related expenses as discussed below.

      The financial  statements of the Company have been restated to reflect the
Community  Bank merger as if it had been  effective  as of the  earliest  period
presented.  The respective  contributions of the pooled entities to consolidated
total income, net interest income after provision for loan losses and net income
for the three years ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>

Total income:                                                            1998                     1997                     1996
                                                                   -----------------------------------------------------------------
<S>                                                                 <C>                       <C>                       <C> 
Carolina First BancShares, Inc. ......................              $51,575,670               $44,037,368               $37,124,545
Community Bank & Trust Co. ...........................                8,524,537                 7,962,411                 7,636,685
                                                                  -------------              -------------            -------------
Combined .............................................              $60,100,207               $51,999,779               $44,761,230

Net interest income after provision for loan losses:

Carolina First BancShares, Inc. ......................              $24,482,693               $20,508,156               $17,058,775
Community Bank & Trust Co. ...........................                4,133,406                 4,158,758                 3,880,804
                                                                  -------------              -------------            -------------
Combined .............................................              $28,616,099               $24,666,914               $20,939,579
</TABLE>



<PAGE>
<TABLE>
<CAPTION>
                                                                         1998                     1997                     1996
                                                                   -----------------------------------------------------------------
<S>                                                                  <C>                      <C>                        <C>    
Net income:

Carolina First BancShares, Inc. ......................               $7,349,951                $6,159,839                $4,678,299
Community Bank & Trust Co. ...........................                 (641,022)                  560,946                   542,475
                                                                   -------------              -------------            -------------
Combined .............................................               $6,708,929                $6,720,785                $5,220,774

Earnings per share - basic:

Carolina First BancShares, Inc. ......................                    $1.67                     $1.49                     $1.14
Community Bank & Trust Co. ...........................                    (0.42)                    (0.17)                    (0.11)
                                                                   -------------              -------------            ------------
Combined .............................................                    $1.25                     $1.32                     $1.03

Earnings per share - diluted:

Carolina First BancShares, Inc. ......................                    $1.65                     $1.47                     $1.14
Community Bank & Trust Co. ...........................                    (0.43)                    (0.17)                    (0.11)
                                                                   -------------              -------------            ------------
Combined .............................................                    $1.22                     $1.30                     $1.03
</TABLE>

     In  connection  with  the  Community  Bank  merger,  the  Company  incurred
restructuring  and merger  related  expenses of  $2,070,000  in 1998.  The after
tax-effect of the restructuring and merger-related expense was $1,786,000.  Such
expenses  were  comprised  of  severance   payments  and  other  payments  under
employment  contracts,  professional  fees,  costs for the  settlement of merger
related claims,  systems  conversion  costs and other  restructuring  and merger
related expenses as follows:
<TABLE>
<S>                                                                   <C>    
Severance payments.................................................     $171,000
Employment contracts...............................................      489,000
System conversion costs and write-off of old equipment.............      190,000
Settlement of merger related claims................................      215,000
Professional fees..................................................      897,000
Other..............................................................      108,000
                                                                      ==========
Total..............................................................   $2,070,000
                                                                      ==========
</TABLE>

      At  December  31,  1998,  the  remaining  accruals  related  to the  above
captioned  charges,  consisting mainly of severance  payments and payments under
employment contracts,  totaled approximately  $563,000 and are included in other
liabilities in the accompanying consolidated balance sheet.

<PAGE>

3.  SECURITIES

     Amortized cost, market values and unrealized gains and losses of securities
as of December 31, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1998                                                       
-----------------                                                  Amortized        Unrealized         Unrealized           Market
                                                                      Cost             Gains             Losses             Value
                                                                 ------------      ------------       ------------      ------------
<S>                                                              <C>                 <C>                <C>             <C>    
HELD TO MATURITY
     U.S. Treasury securities .............................        $6,010,186           $68,878              --           $6,079,064
     U.S. government agencies .............................         3,034,710            14,266              --            3,048,976
     Mortgage-backed securities ...........................        16,105,620           112,974           (17,244)        16,201,350
   State and political subdivisions .......................         8,155,597           163,271           (38,348)         8,280,520
                                                                 ------------      ------------       ------------      ------------
Total .....................................................       $33,306,113          $359,389          ($55,592)       $33,609,910
                                                                 ============      ============       ============      ============

AVAILABLE FOR SALE
     U.S. Treasury securities .............................       $42,663,530          $550,230              --          $43,213,760
     U.S. government agencies .............................       108,964,028           424,080          (275,303)       109,112,805
     Mortgage-backed securities ...........................           743,928            23,695              --              767,623
     Mutual funds and marketable equity securities ........           883,782           416,155           (10,050)         1,289,887
                                                                 ------------      ------------       ------------      ------------
Total .....................................................      $153,255,268        $1,414,160         ($285,353)      $154,384,075
                                                                 ============      ============       ============      ============


December 31, 1997                                                  Amortized        Unrealized         Unrealized           Market
-----------------                                                     Cost             Gains             Losses             Value  
                                                                 ------------      ------------       ------------      ------------
Held to Maturity
     U.S. Treasury securities . ...........................        $6,538,398           $33,766           ($4,984)        $6,567,180
     U.S. government agencies .............................         9,400,620            26,157            (6,461)         9,420,316
     Mortgage-backed securities ...........................        14,253,008            99,506           (18,524)        14,333,990
     State and political subdivisions .....................         6,516,841           185,762              --            6,702,603
                                                                 ------------      ------------       ------------      ------------
Total .....................................................       $36,708,867          $345,191          ($29,969)       $37,024,089
                                                                 ============      ============       ============      ============

Available For Sale
     U.S. Treasury securities ... .........................       $46,659,093          $358,543          ($14,849)       $47,002,787
     U.S. government agencies .............................        73,113,843            85,814           (94,656)        73,105,001
     Mortgage-backed securities ...........................           848,888            24,738              --              873,626
     Mutual funds and marketable equity securities ........         1,094,774           647,643           (45,120)         1,697,297
                                                                 ------------      ------------       ------------      ------------
Total .....................................................      $121,716,598        $1,116,738         ($154,625)      $122,678,711
                                                                 ============      ============       ============      ============
</TABLE>

<PAGE>

Amortized  cost and  market  values of  securities  at  December  31,  1998,  by
maturity, are shown below.
<TABLE>
<CAPTION>

                                                                        Held to Maturity                   Available for Sale
                                                                -------------------------------     --------------------------------
                                                                 Amortized           Market           Amortized           Market
                                                                    Cost              Value              Cost              Value
                                                                ------------       ------------     -------------      -------------
<S>                                                             <C>                <C>               <C>                <C>   
Due within one year ....................................         $6,178,147         $6,207,073        $85,839,018        $86,206,700

Due after one year but within 5 years ..................          7,692,474          7,830,518         58,316,771         58,721,007
Due after 5 years but within 10 years ..................          2,347,629          2,435,088          7,504,789          7,431,877
Due after 10 years .....................................         17,087,863         17,137,231            710,908            734,604
Mutual funds and marketable equity
securities .............................................               --                 --              883,782          1,289,887
                                                               ------------       ------------       ------------       ------------
Total ..................................................        $33,306,113        $33,609,910       $153,255,268       $154,384,075
                                                               ============       ============       ============       ============
</TABLE>


     Investment securities with an amortized cost of $42,551,311 at December 31,
1998 were pledged to secure public  deposits and for other purposes  required or
permitted by law.

     Included  in other  assets is an  investment  in the common  stock of First
Gaston Bank of North Carolina with a carrying amount of approximately $1,151,000
at December 31, 1998. Although the investment only represents an approximate 17%
interest in the bank, the Company  accounts for the investment  under the equity
method as the Company has committed to serve as a source of strength, as defined
by the Federal Reserve,  for First Gaston Bank; has representation on the bank's
board of directors;  and provides certain operational  functions to First Gaston
Bank.  Under the equity  method,  the Company  adjusts the carrying value of the
investment for its portion of the First Gaston Bank's earnings or losses. During
1998, the Company recognized income, net of applicable income taxes, of $59,156.
Also  included in other assets is an investment in the stock of the Federal Home
Loan Bank of Atlanta  ("FHLB") of $915,000  at December  31, 1998 and 1997,  and
which is pledged as  collateral  for  advances  from the FHLB.  No ready  market
exists for the FHLB stock, which is carried at cost.

4.  LOANS

     Major  classifications  of loans as of  December  31,  1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
                                                                                            1998                           1997
                                                                                      --------------                ----------------
<S>                                                                                     <C>                           <C>   
Commercial ...........................................................                   $68,033,080                    $49,063,298
Real estate:
Construction .........................................................                    54,441,169                     34,245,805
Mortgage .............................................................                   299,396,025                    269,373,722
Consumer .............................................................                    48,630,111                     46,870,845
Other ................................................................                     5,609,448                      4,471,510
                                                                                       -------------                  -------------
                 Total loans .........................................                   476,109,833                    404,025,180

Allowance for loan losses ............................................                    (6,723,516)                    (5,837,328)
                                                                                       -------------                  -------------
                 Total loans,net .....................................                  $469,386,317                   $398,187,852
                                                                                       =============                  =============
</TABLE>


     Included in real estate  mortgage  loans at December  31, 1998 and 1997 are
approximately  $144,138,000  and  $136,928,000,  respectively,  in 1 - 4  family
residential loans.

     Certain  officers and  directors,  and  companies in which they have 10% or
more beneficial ownership, were indebted to the Banks in the aggregate amount of
$4,817,455  and $4,641,112 at December 31, 1998 and 1997,  respectively.  During
1998, additions to such loans were $3,539,938 and repayments totaled $3,363,595.
These loans represented 7.8% and 8.3% of the Company's total shareholder  equity
at December 31, 1998 and 1997, respectively. In the opinion of management, these
loans do not involve  more than the normal risk of  collectibility,  nor do they
present other unfavorable features.
<PAGE>

     Loans past due 90 days or more and still accruing interest totaled $111,272
as of December 31, 1998 and $151,620 as of December 31, 1997,  while  nonaccrual
loans  as  of  December  31,  1998  and  1997  were   $1,432,086   and  $720,411
respectively.  Nonaccrual  loans at December 31, 1998  consist of 61 loans,  the
largest of which had a balance of $496,000.  Management  considers collateral on
nonaccrual  loans to be adequate to avoid any  significant  losses on the loans,
exclusive  of  allowance  for loan  losses.  Additional  interest of $50,652 and
$18,519 would have been earned in 1998 and 1997, respectively, if the nonaccrual
loans as of each  year-end  had been  earning  throughout  each year.  Income of
$77,817  and  $41,535  was  recognized  on these  loans  during  1998 and  1997,
respectively.

     The fair value 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. The estimated fair
market value of loans outstanding is approximately $480,244,000 and $401,885,000
at December 31, 1998 and 1997, respectively.

5.  ALLOWANCE FOR LOAN LOSSES

     Changes in the allowance  for loan losses for the years ended  December 31,
1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
                                                                         1998                      1997                     1996
                                                                     -------------            -------------            -------------
<S>                                                                    <C>                      <C>                      <C>    
Balance at beginning of year ............................              $5,837,328               $5,313,424               $4,406,705

Charge-offs .............................................                (680,309)                (638,266)                (419,688)
Recoveries ..............................................                 201,497                  164,837                  147,482
                                                                      -----------              -----------              -----------
Net charge-offs .........................................                (478,812)                (473,429)                (272,206)
                                                                      -----------              -----------              -----------
Provision for loan losses ...............................               1,365,000                  997,333                1,178,925
                                                                      -----------              -----------              -----------
Balance at end of year ..................................              $6,723,516               $5,837,328               $5,313,424
                                                                      ===========              ===========              ===========
</TABLE>


     At December 31, 1998 and 1997,  the recorded  investment  in loans that are
considered  to be  impaired  under  SFAS 114 was  approximately  $1,432,000  and
$872,000,  respectively  (of which  $1,432,000 and $720,000 were on a nonaccrual
basis at December 31, 1998 and 1997,  respectively).  Included in this amount is
$854,355  and  $304,910 in 1998 and 1997,  respectively,  of impaired  loans for
which the related  allowance  for loan losses is $345,720 and 81,633 in 1998 and
1997,  respectively.  The amount of interest income recognized on impaired loans
was not considered material during the year.

6.  PREMISES AND EQUIPMENT

     Major  classifications of these assets as of December 31, 1998 and 1997 are
as follows:
<TABLE>
<CAPTION>
                                                                                              1998                          1997
                                                                                         -------------                 -------------
<S>                                                                                       <C>                            <C> 
Land .................................................................                     $2,896,148                     $2,905,313
Buildings and improvements ...........................................                      9,409,296                      9,020,586
Furniture, fixtures and equipment ....................................                     10,315,467                      8,422,759
                                                                                          -----------                    -----------
Total cost ...........................................................                    $22,620,911                    $20,348,658
Accumulated depreciation .............................................                      8,958,173                      7,247,588
                                                                                          -----------                    -----------
Carrying value .......................................................                    $13,662,738                    $13,101,070
                                                                                          ===========                    ===========
</TABLE>




<PAGE>

7.  LIABILITIES

     The fair value of noninterest-bearing  demand deposits and NOW, savings and
money market deposits is the amount payable on demand at the reporting date. The
fair value of time deposits is estimated using the rates  currently  offered for
deposits of similar  remaining  maturities.  The estimated  fair market value of
deposits is approximately $652,617,000 and $542,306,000 at December 31, 1998 and
1997, respectively.

     Time deposits maturing in each of the five years subsequent to December 31,
1998 are as follows: 1999, $265,622,000;  2000, $43,533,000;  2001, $14,175,000;
2002, $4,633,000; 2003, $3,878,000; and subsequent years, $130,000.

     Borrowed funds primarily  consist of repurchase  agreements of $10,400,000.
Repurchase agreements generally mature daily. On December 31, 1998, the rate for
repurchase agreements for Lincoln and Cabarrus Banks was 3.96% for balances less
than or equal to $250,000  and 4.40% for  balances  greater  than  $250,000  and
approximately 4.33% for Community Bank.

     Treasury,  tax and loan funds on deposit are payable on demand to the U. S.
Treasury and are  collateralized by U. S. Treasury  securities.  At December 31,
1998 and 1997, these funds totaled $484,000 and $639,000,  respectively, and had
weighted average interest rates of approximately 4.41% and 5.10% at December 31,
1998 and 1997, respectively.

     At December  31,  1998,  the Banks had  available  federal  funded lines of
credit of $33.4  million  at  various  financial  institutions.  Such  lines are
subject to annual renewal and bear varying interest rates.

8.  BRANCH ACQUISITIONS

     During 1998, the Company acquired one branch office with approximately $9.0
million in deposits and in 1997 the Company  acquired  three branch offices with
$30 million in deposits.  These acquisitions were accounted for as purchases and
the excess of the purchase  price over the fair value of the assets and the core
deposits produced approximately $670,000 and $2,197,725 in goodwill and $195,000
and  $645,000 in deposit  based  premiums in 1998 and 1997,  respectively.  Such
amounts are included in other assets and deposit based premiums are amortized on
an accelerated  basis over 10 years and goodwill is amortized on a straight-line
basis over 25 years.  Total goodwill was $4,839,733 and $4,437,709 at the end of
1998 and 1997,  respectively.  Total deposit based premiums were  $1,313,622 and
$1,173,093 at the end of 1998 and 1997, respectively.


<PAGE>


9.  INCOME TAXES

      Income tax expense consists of:
<TABLE>
<CAPTION>

                                                                       Current                   Deferred                 Total
                                                                    -------------             --------------          --------------
<S>                                                                   <C>                        <C>                      <C>    
Year ended December 31, 1998
             Federal ..................................               $4,386,184                 ($584,781)               $3,801,403
             State ....................................                  413,622                  (114,582)                  299,040
                                                                     -----------                -----------              -----------
                  Total ...............................               $4,799,806                 ($699,363)               $4,100,443
                                                                     ===========                ===========              ===========

Year ended December 31, 1997
             Federal ..................................               $3,796,329                 ($565,699)               $3,230,630
             State ....................................                  465,093                  (205,582)                  259,511
                                                                     -----------                -----------              -----------
                   Total ..............................               $4,261,422                 ($771,281)               $3,490,141
                                                                     ===========                ===========              ===========

Year ended December 31, 1996
             Federal ..................................               $3,091,356                 ($478,691)               $2,612,665
             State ....................................                  434,150                   (78,288)                  355,862
                                                                     -----------                -----------              -----------

                  Total ..............................                $3,525,506                 ($556,979)               $2,968,527
                                                                     ===========                ===========              ===========
</TABLE>


     A  reconciliation  of total income tax expense for the years ended December
31, to the amount of tax expense  computed by  multiplying  income before income
taxes by the statutory  federal  income tax rate of 34 percent for 1996 and 1997
and 35 percent for 1998 is as follows:
<TABLE>
<CAPTION>
                                                                                     1998                1997               1996
                                                                                 -------------      -------------     --------------
<S>                                                                                <C>                <C>                <C>    

Tax provision at statutory rate ...........................................        $3,783,280         $3,471,715         $2,784,363

Increase (reduction) in income taxes resulting from:
     Tax-exempt interest income ...........................................          (126,217)          (160,883)          (203,354)
     Merger expenses ......................................................           432,007               --                 --
     Change in the beginning-of-the-year balance of the
        valuation allowance for deferred tax assets allocated
        to income tax expense .............................................              --              (71,355)            35,030
     State income taxes, net of federal tax benefit .......................           194,376            171,278            234,869
 Other ....................................................................          (183,003)            79,386            117,619
                                                                                  -----------        -----------        -----------
            Total Income taxes ............................................        $4,100,443         $3,490,141         $2,968,527
                                                                                  ===========        ===========        ===========
</TABLE>




<PAGE>


     The tax  effects of  temporary  differences  that give rise to  significant
portions of the deferred tax assets and  (liabilities)  at December 31, 1998 and
1997, respectively, are presented below:

<TABLE>
<CAPTION>
                                                                                                   1998                      1997
                                                                                               ------------            -------------
<S>                                                                                              <C>                     <C>    
Deferred tax assets:
     Loan loss reserves ............................................................             $2,607,716              $1,949,381
     Accrued expenses, deductible when paid ........................................                153,601                    --
     Deferred compensation .........................................................                684,202                 784,166
     Intangible assets .............................................................                158,795                 127,030
     Other .........................................................................                105,184                  86,291
                                                                                                -----------             -----------
       Total gross deferred tax assets .............................................              3,709,498               2,946,868
       Less valuation allowance ....................................................                   --                      --
                                                                                                -----------             -----------
       Net deferred tax assets .....................................................              3,709,498               2,946,868
                                                                                                -----------             -----------
Deferred tax (liabilities):
     Bad debt reserve recapture, tax accounting adjustment .........................               (290,189)                   --
     Financial reporting stock basis in excess of tax basis ........................               (177,480)               (150,712)
     Depreciable basis of fixed assets .............................................               (232,622)               (399,690)
     Unrealized gains on securities available for sale .............................               (430,876)               (379,955)
     Other .........................................................................                (78,765)               (165,387)
                                                                                                -----------             -----------
       Total gross deferred tax liability ..........................................             (1,209,932)             (1,095,744)
                                                                                                -----------             -----------
       Net deferred tax asset included in other assets .............................             $2,499,566              $1,851,124
                                                                                                ===========             ===========
</TABLE>


     A portion of the change in the net deferred tax asset relates to unrealized
gains and losses on securities  available for sale.  The related  current period
deferred  tax expense of $50,921  has been  recorded  directly to  shareholders'
equity. The balance of the change in the net deferred tax asset results from the
current period deferred tax benefit of $699,363.  It is management's  contention
that  realization  of the net deferred tax asset is more likely than not,  based
upon the Company's  history of taxable  income and  estimates of future  taxable
income.

10.  SHAREHOLDERS' EQUITY

     Earnings per share - Basic net income per share is computed by dividing net
income by the  weighted  average  number of common  shares  outstanding  for the
period.  Diluted net income per share reflects the potential dilution that could
occur if the Company's  dilutive stock options were exercised.  The numerator of
the basic net income per share  computation  is the same as the numerator of the
diluted  net  income  per  share  computation  for  all  periods  presented.   A
reconciliation  of the denominator of the basic net income EPS computation is as
follows:

<TABLE>
<CAPTION>
                                                                                         1998              1997              1996
                                                                                      -----------      ------------      -----------
<S>                                                                                    <C>               <C>               <C>    
Basic EPS denominator:  weighted average number of common
shares outstanding ...........................................................         5,371,686         5,102,854         5,064,347
Dilutive  effect  arising from assumed  exercise of stock
options ......................................................................           137,212            62,436            13,603
                                                                                       =========         =========         =========
Diluted EPS denominator ......................................................         5,508,898         5,165,290         5,077,950
                                                                                       =========         =========         =========
</TABLE>




<PAGE>

     Stock Based  Compensation  - In 1990, the Board of Directors of the Company
adopted  the  Carolina  First  BancShares,  Inc.  1990  Stock  Option  and Stock
Appreciation  Rights Plan (the "1990 Plan"),  and certain amendments to the 1990
Plan were  approved in 1991 (as amended,  "the Plan").  In January  1991,  stock
appreciation  rights were granted in accordance with the 1990 Plan. These rights
were  granted  at market  value on the date of the  grant and 20% of each  grant
becomes  exercisable  on each  anniversary  of the date of the grant and expires
five years after they become  exercisable.  Stock  appreciation  rights totaling
50,139 are currently outstanding, with a measurement price of $4.71. The expense
related to these  rights is included in  compensation  expense and for the years
ended  December 31, 1998,  1997 and 1996 was $92,181,  $826,606,  and  $504,000,
respectively.

     Since  inception of the Plan,  options to purchase shares of Company common
stock have been granted to key  employees of the Company and 52,110 such options
are still available.  The Plan provides that options are granted at market value
on the date of the  grant  and 20% of each  grant  becomes  exercisable  on each
anniversary  of the date of the grant.  All currently  outstanding  options have
been granted for a ten-year  term,  unless the  recipient  leaves the  Company's
employment  earlier.  A summary of all stock  option  activity  for 1998 and the
status at  December  31,  1998  follows.  All share and per share  amounts  give
retroactive effect to stock dividends and splits declared by the Company.

EMPLOYEE STOCK OPTION PLAN:

<TABLE>
<CAPTION>

                                                                        Outstanding Options                 Exercisable Options
                                                                  ------------------------------------------------------------------
                                                                                       Average                            Average
                                                                   Shares            Option Price         Shares        Option Price
                                                                  ---------          ------------        --------       ------------
<S>                                                                <C>                    <C>             <C>                 <C>  
Balance, December 31, 1995 ...........................             245,487                 $5.81          152,709             $5.09
Additional Options Granted............................              44,124                 12.54             --                --
Became Exercisable....................................                --                     --            31,553              7.27
Less:
Exercised ............................................             (22,144)                 4.16          (22,144)             4.16
Forfeited ............................................              (4,608)                 9.07             --                --
                                                                  --------                ------          --------            ------
Balance, December 31, 1996 ...........................             262,859                 $7.03          162,118             $5.69
Additional Options Granted ...........................               9,200                 18.42             --                --
Became Exercisable ...................................                --                     --            36,384              6.67
Less:
Exercised ............................................             (18,310)                 4.27          (18,310)             4.27
Forfeited ............................................              (1,631)                 8.90             (873)            12.61
                                                                  --------                ------          --------           ------
Balance, December 31, 1997 ...........................             252,118                $13.16          179,319             $6.18
Additional Option Granted ............................              18,450                 30.05             --                --
Became Exercisable ...................................                --                    --             16,702              9.47
Less:
Exercised ............................................             (70,230)                 5.51          (70,230)             5.51
Forfeited ............................................              (5,943)                 9.93             --                --
                                                                  --------                ------          --------            ------

Balance, December 31, 1998 ...........................             194,395                $10.45          125,791             $6.80
                                                                  ========                ======          ========            ======
</TABLE>




<PAGE>

The following table summarizes information about fixed stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
                                                      Options Outstanding
                           --------------------------------------------------------------------------
                                Number              Weighted-Average
      Range of                Outstanding               Remaining                Weighted-Average
  Exercise Prices             At 12/31/98           Contractual Life              Exercise Price
---------------------      ------------------    ------------------------     -----------------------
<S>                              <C>                      <C>                        <C>  
Less than $5                      80,522                  2.63                        $4.70
6 to 10                           45,221                  2.55                         9.13
11 to 15                          40,002                  7.28                        12.50
16 to 20                           8,000                  8.19                        17.00
21 to 29                           9,700                  9.68                        27.53
30 to 32                          10,950                  9.63                        30.76
---------------------      ------------------    ------------------------     -----------------------
$1 to 32                         194,395                  4.54                        $10.45
=====================      ==================    ========================     =======================
</TABLE>



     The  Company  applies  APB  Opinion  25 in  accounting  for its  Plan  and,
accordingly,  no compensation  cost has been recognized for its stock options in
the financial statements.  Had the Company determined compensation cost based on
the fair value at the grant date for its stock  options  under SFAS No. 123, the
Company's net income would have been reduced to the pro forma amounts  indicated
below.

     The  weighted-average  fair value per share of options  granted in 1998 and
1997 amounted to $5.94 and $7.55,  respectively.  Fair values were  estimated on
the  date of  grant  using  the  Black-Scholes  Option-Pricing  Model  with  the
following weighted average assumptions:
<TABLE>
<CAPTION>
                                     1998               1997
                               -----------------   ----------------
<S>                                <C>                  <C>    
Risk-free interest rate                   4.56%              6.31%
Dividend yield                             1.00               1.00
Volatility                                20.00              29.20
Expected life                           7 years            7 years

Net Income
     As reported                     $6,708,929         $6,720,785
     Pro forma                        6,291,036          6,528,843

Net Income per share
     As reported - diluted                $1.22              $1.30
     Pro forma - diluted                  $1.14              $1.26
</TABLE>

     Pro forma net income reflects only options granted since December 31, 1994.
Therefore, the effects of applying SFAS No. 123 pro forma disclosures during the
initial phase-in period may not be representative of the effects on reported net
income in future years.

11.  BENEFIT PLANS

      The Company  sponsors a contributory  profit-sharing  plan, which provides
for  participation  by  substantially  all  employees.   Participants  may  make
voluntary contributions resulting in salary deferrals in accordance with Section
401(k)  of  the  Internal   Revenue   Code.   The  plan  provides  for  employee
contributions  up to 15% of the  participant's  annual  salary  and an  employer
contribution  of 50%  matching  of  the  employee  contribution  up to 6% of the
participant's salary. Contributions to the plan for the years ended December 31,
1998, 1997 and 1996 were $793,500, $703,000 and $607,000, respectively.

       A deferred  compensation plan allows the directors of the Company and the
Banks to defer the  compensation  they earn for  attendance  at  meetings of the
Board or various  committees.  Each director  elects  annually to either receive
that  year's  compensation  currently  or to  defer  receipt  until  his  death,
disability or retirement as a director.  The amount  deferred is credited to the
director's account and invested in various options available through the Lincoln
Bank Trust  Department.  The  obligation  of the Company under the plan is fully
funded.
<PAGE>
     The  Company  does not  provide  benefits  contemplated  by SFAS  No.  106,
"Employers' Accounting for Post-retirement Benefits Other Than Pensions".

12.  REGULATION AND REGULATORY RESTRICTIONS

     As a bank holding company, Carolina First BancShares,  Inc. is regulated by
the Federal  Reserve.  The Company also must file  periodic  reports  with,  and
comply with securities  regulations of, the Securities and Exchange  Commission.
The Banks are subject to the  regulations  of the FDIC, the North Carolina State
Banking Commission and the Federal Reserve.

     The primary  source of funds for the payment of dividends by the Company is
excess cash or dividends  received from the Banks.  The Banks, as North Carolina
banking  corporations,  may pay  dividends  only  out of  retained  earnings  as
determined  pursuant to the North Carolina General Statutes.  As of December 31,
1998, the Banks had combined retained earnings of approximately $35,461,000, all
of which is available to be paid as dividends without prior regulatory approval,
provided the Banks maintain adequate capital.

     The Company is required by federal  regulations to maintain  various ratios
of capital  to assets.  Failure to meet the  minimum  capital  requirements  can
initiate certain mandatory - and possibly additional  discretionary - actions by
regulators  that,  if  undertaken,  could have a direct  material  effect on the
Company's  financial  statements.  Under  capital  adequacy  guidelines  and the
regulatory  framework  for  prompt  corrective  action,  the  Company  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 to  maintain  minimum  amounts and ratios (set forth in the
table  below) of total and Tier I capital  (as  defined in the  regulations)  to
risk-weighted  assets (as defined),  and of Tier I capital to average assets (as
defined).  Management  believes that, as of December 31, 1998, the Company meets
all capital adequacy requirements to which it is subject.

     As of  December  31,  1998,  the  Company  was well  capitalized  under the
regulatory  framework for prompt  corrective  action.  To be categorized as well
capitalized,  a bank holding  company must  maintain at least the minimum  total
risk-based,  Tier I risk-based,  and Tier I leverage  ratios as set forth in the
table.  There have been no  conditions  or events since that  notification  that
management believes have changed the institution's category.

<PAGE>


     The table below also presents the actual capital amounts and ratios for the
Company,  Lincoln  Bank,  Cabarrus  Bank,  and  Community  Bank as computed  for
regulatory purposes.

<TABLE>
<CAPTION>
                                                                             Minimum                  Minimum
                                                                           For Capital               To be Well
                                                         Actual         Adequacy Purposes:          Capitalized:
                                                --------------------  ----------------------  ------------------------
                                                   Amount     Ratio      Amount     Ratio        Amount        Ratio
                                                ------------ -------  -----------  ---------  ------------   ---------
As of December 31, 1998:
<S>                                             <C>           <C>     <C>            <C>      <C>              <C>
Total Capital to Risk Weighted
Assets 
CONSOLIDATED ................................   $61,098,000   12.8%   >$38,145,000   >8.0%
                                                                      -              -
Lincoln Bank ................................    37,175,000   11.8%   > 25,195,000   >8.0%    >$31,493,000     >10.0%
                                                                      -              -        -                -
Cabarrus Bank ...............................    12,614,000   10.7%   >  9,429,000   >8.0%    > 11,786,000     >10.0%
                                                                      -              -        -                -
Community Bank ..............................     7,326,000   13.0%   >  4,493,000   >8.0%    >  5,616,000     >10.0%
                                                                      -              -        -                -
Tier I Capital to Risk
Weighted Assets
Consolidated ................................   $55,128,000   11.6%   >$19,072,000   >4.0%
                                                                      -              -    
Lincoln Bank ................................    33,235,000   10.6%   > 12,597,000   >4.0%    >$18,896,000     > 6.0%
                                                                      -              -        -                -
Cabarrus Bank ...............................    11,138,000    9.5%   >  4,714,000   >4.0%    >  7,072,000     > 6.0%
                                                                      -              -        -                -
Community Bank ..............................     6,623,000   11.8%   >  2,247,000   >4.0%    >  3,370,000     > 6.0%
                                                                      -              -        -                -
Tier I Capital to Average Assets
CONSOLIDATED ................................   $55,128,000    8.3%   >$26,553,000   >4.0%
                                                                      -              -    
Lincoln Bank ................................    33,235,000    7.6%   > 17,606,000   >4.0%    >$22,007,000     > 5.0%
                                                                      -              -        -                -
Cabarrus Bank ...............................    11,138,000    7.0%   >  6,345,000   >4.0%    >  7,932,000     > 5.0%
                                                                      -              -        -                -
Community Bank ..............................     6,623,000    6.5%   >  4,058,000   >4.0%    >  5,072,000     > 5.0%
                                                                      -              -        -                -
As of December 31, 1997:

Total Capital to Risk Weighted
Assets
CONSOLIDATED ................................   $54,792,000   13.8%   >$31,688,000   >8.0%
                                                                      -              -     
Lincoln Bank ................................    30,338,000   11.7%   > 20,722,000   >8.0%    >$25,902,000     >10.0%
                                                                      -              -        -                -
Cabarrus Bank ...............................    10,432,000   11.4%   >  7,332,000   >8.0%    >  9,166,000     >10.0%
                                                                      -              -        -                -
Community Bank ..............................     7,630,000   14.8%   >  4,115,000   >8.0%    >  5,144,000     >10.0%
                                                                      -              -        -                -
Tier I Capital (to Risk
Weighted Assets)
CONSOLIDATED ................................   $49,830,000   12.6%   >$15,844,000   >4.0%
                                                                      -              -    
Lincoln Bank ................................    27,095,000   10.5%   > 10,361,000   >4.0%    >$15,541,000     > 6.0%
                                                                      -              -        -                -
Cabarrus Bank ...............................     9,283,000   10.1%   >  3,666,000   >4.0%    >  5,499,000     > 6.0%
                                                                      -              -        -                -
Community Bank ..............................     6,985,000   13.6%   >  2,058,000   >4.0%    >  3,086,000     > 6.0%
                                                                      -              -        -                -
Tier I Capital (to Average Assets)
CONSOLIDATED ................................   $49,830,000    8.9%   >$22,469,000   >4.0%
                                                                      -              -    
Lincoln Bank ................................    27,095,000    7.4%   > 14,705,000   >4.0%    >$18,381,000     > 5.0%
                                                                      -              -        -                -
Cabarrus Bank ...............................     9,283,000    6.7%   >  5,560,000   >4.0%    >  6,950,000     > 5.0%
                                                                      -              -        -                -
Community Bank ..............................     6,985,000    7.8%   >  3,589,000   >4.0%    >  4,486,000     > 5.0%
                                                                      -              -        -                -
</TABLE>


<PAGE>


13.  COMMITMENTS AND CONTINGENT LIABILITIES

     In the  normal  course  of  business  there  are  various  commitments  and
contingent  liabilities  outstanding which are not reflected in the accompanying
consolidated financial statements.  The Company's exposure to credit loss in the
event of  nonperformance  by the other  party to the  financial  instrument  for
commitments to extend credit and standby letters of credit is represented by the
contract  amount of these  instruments.  Management does not expect any material
loss  as  a  result  of  these  transactions.  The  following  is a  summary  of
commitments and contingent liabilities:
<TABLE>
<CAPTION>

                                                                                                          December 31,
                                                                                          ------------------------------------------
                                                                                              1998                          1997
                                                                                          ------------                   -----------
<S>                                                                                       <C>                            <C>    
Commitments for additional loans .......................................                  $127,931,000                   $90,076,000
Standby letters of credit ..............................................                     1,445,000                     1,010,000
</TABLE>


     The Banks make contractual  commitments to extend credit, which are legally
binding  agreements to lend money to customers at  predetermined  interest rates
for a specified  period of time.  The same credit  standards used in the lending
process are applied when issuing these commitments.  Additional risks arise when
these commitments are drawn upon, such as the demands on the Banks' liquidity if
a significant  portion were drawn down at once.  This is considered  unlikely as
many commitments expire without being used.

     The fair value of commitments to extend credit is considered to approximate
carrying  value,  since the large  majority of these would  result in loans that
have  variable  rates  and/or  relatively  short  terms to  maturity.  For other
commitments,  generally of a short-term nature, the carrying value is considered
to be a reasonable estimate of fair value.

     Minimum  operating lease payments due in each of the five years  subsequent
to December  31, 1998 are as follows:  1999,  $718,000;  2000,  $717,000;  2001,
$698,000;  2002,  $654,000;  2003, $427,000;  and subsequent years,  $2,209,000.
Rental  expense for all operating  leases for the three years ended December 31,
was $665,000, 1998; $426,000, 1997; $321,000, 1996.



<PAGE>


14. CONDENSED BALANCE SHEET
     PARENT COMPANY ONLY
<TABLE>
<CAPTION>
                                                                                                           December 31,
                                                                                              --------------------------------------
CONDENSED BALANCE SHEET                                                                           1998                       1997
                                                                                              --------------------------------------
<S>                                                                                           <C>                        <C>   
Assets:
     Cash on deposit with subsidiary banks ...................................                   $639,052                 $5,192,035
     Investment in subsidiary banks ..........................................                 57,597,401                 49,387,357
     Other investments .......................................................                  1,289,887                  1,473,829
     Other assets ............................................................                  5,149,521                  2,767,748
                                                                                              -----------                -----------
     Total ...................................................................                $64,675,861                $58,820,969
                                                                                              ===========                ===========
Liabilities ..................................................................                 $2,698,130                 $2,610,169
Shareholders'equity ..........................................................                 61,977,731                 56,210,800
                                                                                              -----------                -----------
     Total ...................................................................                $64,675,861                $58,820,969
                                                                                              ===========                ===========
</TABLE>
<TABLE>
<CAPTION>
                                                                                              Years ended December 31,
                                                                                ----------------------------------------------------
                                                                                    1998                1997                1996
                                                                                -----------         -----------        -------------
<S>                                                                              <C>                 <C>                 <C>    
CONDENSED RESULTS OF OPERATIONS 
Equity in earnings of subsidiary Banks:
     Dividends .........................................................               $---          $3,807,871                $---
     Undistributed .....................................................          8,005,656           3,877,921           6,143,494
Other income ( expense), net ...........................................         (1,296,727)           (965,007)           (922,720)
                                                                                -----------         -----------         -----------
Net income .............................................................         $6,708,929          $6,720,785          $5,220,774
                                                                                ===========         ===========         ===========
CONDENSED CASH FLOW 
Cash flows from operating activities:
     Net income ........................................................         $6,708,929          $6,720,785          $5,220,774
Adjustments  to reconcile net income to net cash provided
by (used in) operating activities:
     Equity in undistributed earnings of subsidiary banks ..............         (8,005,656)         (3,877,921)         (6,143,494)
     Settlement of merger-related claims ...............................            215,138                --                  --
     Increase in other assets ..........................................           (268,185)         (3,952,290)            (12,961)
     Increase in liabilities ...........................................             87,962           1,277,295             752,681
                                                                                -----------         -----------         -----------
Net cash provided by (used in) operating activities ....................         (1,261,812)            167,869            (183,000)
                                                                                -----------         -----------         -----------
Cash flows from investing activities:
     Purchase of investments ...........................................           (349,500)           (150,000)           (306,000)
     Proceeds from sales of investments ................................            349,657             539,085                --
     Originations of loans, net ........................................         (2,018,419)           (347,588)               --
                                                                                -----------         -----------         -----------
Net cash used in investing activities ..................................         (2,018,262)             41,497            (306,000)
                                                                                -----------         -----------         -----------
Cash flows from financing activities:
     Proceeds from issuance of common stock ............................            506,756           5,853,403             253,131
     Dividends and fractional shares paid ..............................         (1,657,723)         (1,331,194)         (1,017,292)
     Repurchase of stock ...............................................           (121,942)            (41,704)           (111,076)
                                                                                -----------         -----------         -----------
Net cash provided by (used in) financing activities ....................         (1,272,909)          4,480,505            (875,237)
                                                                                -----------         -----------         -----------
Net increase (decrease) in cash ........................................         (4,552,983)          4,689,871          (1,364,237)
Cash at beginning of year ..............................................          5,192,035             502,164           1,866,401
                                                                                -----------         -----------         -----------
Cash at end of year ....................................................           $639,052          $5,192,035            $502,164
                                                                                ===========         ===========         ===========
</TABLE>


<PAGE>

ITEM 9.  CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND 
         FINANCIAL DISCLOSURE

         Not applicable.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS

     See the Company's Proxy Statement for the Annual Meeting of Shareholders to
be held on April 20, 1999, which is incorporated herein by reference.

ITEM 11.  EXECUTIVE COMPENSATION

     See the Company's Proxy Statement for the Annual Meeting of Shareholders to
be held on April 20, 1999, which is incorporated herein by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     See the Company's Proxy Statement for the Annual Meeting of Shareholders to
be held on April 20, 1999, which is incorporated herein by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     See the Company's Proxy Statement for the Annual Meeting of Shareholders to
be held on April 20, 1999, which is incorporated herein by reference.


                                     PART IV

ITEM 14.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)  Financial Statements  

     See the following financial statements included herein at Item 8.

               o    Independent Auditors' Report
               o    Consolidated Balance Sheets at December 31, 1998 and 1997
               o    Consolidated  Statements  of Income for each of the years in
                    the three-year period ended December 31, 1998
               o    Consolidated  Statements of Changes in Shareholders'  Equity
                    and  Comprehensive  Income  for  each  of the  years  in the
                    three-year period ended December 31, 1998
               o    Consolidated  Statements of Cash Flows for each of the years
                    in the three-year period ended December 31, 1998
               o    Notes to Consolidated Financial Statements

         (b)  Reports on Form 8-K

     The  following  reports  on Form 8-K were filed by the  Company  during the
fourth quarter of the fiscal year ended December 31, 1998.

               o    On  October  21,  1998,  the  Registrant  filed  a Form  8-K
                    describing the voluntary suspension of the Chairman, CEO and
                    Director,  D. Mark Boyd, III, pending the outcome of certain
                    alleged violations of the North Carolina  securities laws in
                    connection with certain  purchases of Community Bank & Trust
                    Co. common stock.

               o    On  October  21,  1998,  the  Registrant  filed  a Form  8-K
                    containing  the earnings  press  release for the nine months
                    ended  September  30,  1998,  and the  delay of the  pending
                    acquisition  of  Community  Bank & Trust Co.  due to certain
                    charges brought against the Company and D. Mark Boyd, III.
<PAGE>

               o    On  December  7,  1998,  the  Registrant  filed  a Form  8-K
                    announcing  the  resignation  of D.  Mark  Boyd,  III as the
                    Chairman of the Board and Chief  Executive  Officer and as a
                    director  of the  Registrant  and its  subsidiaries  and the
                    extension of the Merger Agreement between the Registrant and
                    Community Bank & Trust Co through December 31, 1998.

         (c)  Exhibits 

                  The following  Exhibits are attached hereto or incorporated by
         reference  herein  (numbered to  correspond  to Item 601 of  Regulation
         S-K).

          Exhibit
            No.       Description of Exhibit

             2.0      Agreement  and Plan of Merger  dated as of June 4, 1998 by
                      and between the  Registrant and Community Bank & Trust Co.
                      (incorporated   by   reference   to  Exhibit  2.1  to  the
                      Registrant's   Current   Report  on  Form  8-K  (File  No.
                      0-17939), dated June 19, 1998).

             3.0      Amended  and  Restated  Articles of  Incorporation  of the
                      Registrant,  (incorporated  by reference to Exhibit 3.1 to
                      the Registrant's  Registration Statement on Form S-4 (File
                      No. 333-59729), dated July 23, 1998).

             3.1      Amended and Restated Bylaws of the Registrant (incorporat-
                      ed by reference to Exhibit 3.2 to the Registrant's Current
                      Report on  Form 8-K  (File No. 0-17939),  dated January 6,
                      1999).

             4.0      Specimen of Common  Stock  Certificate  of the  Registrant
                      (incorporated    by   reference   to   the    Registrant's
                      Registration Statement (File No. 33-26861).

            10.0      Registrant's Deferred Compensation Plan for Directors (in-
                      corporated  by  reference  to  Registrant's   Registration
                      Statement (File No. 33-26861).

            10.1      Registrant's Profit  Sharing  Plan (incorporated by refer-
                      ence  to Registrant's Registration Statement (File No. 33-
                      26861).

            10.2      Registrant's  1990  Stock  Option  and Stock  Appreciation
                      Rights Plan, as amended  (incorporated by reference to the
                      Registrant's  Registration  Statement (File No.  33-43037)
                      dated October 1, 1991).

            10.3      Registrant's 1999 Long-Term Incentive Plan.

            10.4      Employment Agreement dated December 31, 1996, and Deferred
                      Compensation  Agreement  dated as of December  31, 1996 by
                      and between Carolina First  BancShares,  Inc. and James E.
                      Burt,  III  (incorporated  by  reference  to  Registrant's
                      Annual  Report on Form 10-K  (File  No.  0-17939)  for the
                      fiscal year ended December 31, 1997).

            10.5      Employment Agreement dated November 10, 1998 by  and  bet-
                      ween   Lincoln  Bank  of  North  Carolina  and  Stephen S.
                      Robinson.

            10.6      Employment  Agreement dated October 21, 1996 by and bet-
                      ween Cabarrus Bank of North Carolina and  Ronald D. Smith.

            10.7      Deferred  Compensation  Agreement dated as of February 18,
                      1993 by and  between  Cabarrus  Bank of North Carolina and
                      Ronald D. Smith.
<PAGE>

            10.8      Employment Agreement dated February 1, 1999 by and between
                      the Registrant and Janet H. Hollar.

            10.9      Lease  Agreement  dated  September 1,  1997 by and between
                      Lincoln Bank of North Carolina and D. Mark  Boyd,  III and
                      Diane H. Boyd.

            10.10     Addendum  to Lease  Agreement  dated  October 30,  1998 by
                      and  between  Lincoln  Bank  of North Carolina and D. Mark
                      Boyd, III and Diane H. Boyd.

            10.11     Employment  Agreement  dated  June 4, 1998 by and  between
                      Community   Bank  &  Trust  Co.  and  Ronnie  D.   Blanton
                      (incorporated   by  reference  to  Exhibit  10.10  to  the
                      Registrant's  Registration Statement on Form S-4 (File No.
                      333-59729) dated July 23, 1998).

             13       Annual  Report   to  Security  Holders   (incorporated  by
                      reference  to Registrant's Proxy Statement dated March 30,
                      1999 (File No. 0-17939).
                           
             11       Statement regarding computation of earnings per share.

             21       List of subsidiaries of the Registrant.

             23       Consent of KPMG LLP.

             27       Financial Data Schedule.





<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,  thereunto  duly  authorized,  in the  City of
Lincolnton, State of North Carolina, on the 26th day of March, 1999.

                                                 CAROLINA FIRST BANCSHARES, INC.


                                                 By:       \s\ L.D. Warlick, Jr.
                                                     --------------------------
                                                           L.D. Warlick, Jr.
                                                           Chairman of the Board

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated:
<TABLE>
<CAPTION>

Signatures                                           Title                              Date
----------                                           -----                              -----
<S>                                                  <C>                               <C>  
Principal Executive Officers:

\s\ L.D. Warlick, Jr.                                Chairman of the Board              March 26, 1999
------------------------------------                 of Directors  
L.D. Warlick, Jr.                                    

\s\ James E. Burt, III                               President, CEO                     March 26, 1999
------------------------------------                 and Director
James E. Burt, III                                   

Principal Financial Officer and
Principal Accounting Officer:

\s\ Jan H. Hollar                                    Sr. Vice President, CFO            March 26, 1999
------------------------------------                 Treasurer & Secretary  
Jan H. Hollar                                        

Directors:
\s\ Harold D. Alexander                              Director                           March 26, 1999
------------------------------------
Harold D. Alexander

\s\ John R. Boger, Jr.                               Director                           March 26, 1999
------------------------------------
John R. Boger, Jr.

\s\ Charles A. James                                 Director                           March 26, 1999
------------------------------------
Charles A. James

\s\ Samuel C. King, Jr.                              Director                           March 26, 1999
------------------------------------
Samuel C. King, Jr.

\s\ Jack L. Lutz                                     Director                           March 26, 1999
------------------------------------
Jack L. Lutz

\s\ Harry D. Ritchie                                 Director                           March 26, 1999
------------------------------------
Harry D. Ritchie

\s\ Thomas M. Robbins                                Director                           March 26, 1999
------------------------------------
Thomas M. Robbins

\s\ Estus B. White                                   Director                           March 26, 1999
------------------------------------
Estus B. White
</TABLE>

<PAGE>
          Exhibit
            No.       Description of Exhibit

             2.0      Agreement  and Plan of Merger  dated as of June 4, 1998 by
                      and between the  Registrant and Community Bank & Trust Co.
                      (incorporated   by   reference   to  Exhibit  2.1  to  the
                      Registrant's   Current   Report  on  Form  8-K  (File  No.
                      0-17939), dated June 19, 1998).

             3.0      Amended  and  Restated  Articles of  Incorporation  of the
                      Registrant,  (incorporated  by reference to Exhibit 3.1 to
                      the Registrant's  Registration Statement on Form S-4 (File
                      No. 333-59729), dated July 23, 1998).

             3.1      Amended and Restated Bylaws of the Registrant (incorporat-
                      ed by reference to Exhibit 3.2 to the Registrant's Current
                      Report on  Form 8-K  (File No. 0-17939),  dated January 6,
                      1999).

             4.0      Specimen of Common  Stock  Certificate  of the  Registrant
                      (incorporated    by   reference   to   the    Registrant's
                      Registration Statement (File No. 33-26861).

            10.0      Registrant's Deferred Compensation Plan for Directors (in-
                      corporated  by  reference  to  Registrant's   Registration
                      Statement (File No. 33-26861).

            10.1      Registrant's Profit  Sharing  Plan (incorporated by refer-
                      ence  to Registrant's Registration Statement (File No. 33-
                      26861).

            10.2      Registrant's  1990  Stock  Option  and Stock  Appreciation
                      Rights Plan, as amended  (incorporated by reference to the
                      Registrant's  Registration  Statement (File No.  33-43037)
                      dated October 1, 1991).

            10.3      Registrant's 1999 Long-Term Incentive Plan.

            10.4      Employment Agreement dated December 31, 1996, and Deferred
                      Compensation  Agreement  dated as of December  31, 1996 by
                      and between Carolina First  BancShares,  Inc. and James E.
                      Burt,  III  (incorporated  by  reference  to  Registrant's
                      Annual  Report on Form 10-K  (File  No.  0-17939)  for the
                      fiscal year ended December 31, 1997).

            10.5      Employment Agreement dated November 10, 1998 by  and  bet-
                      ween   Lincoln  Bank  of  North  Carolina  and  Stephen S.
                      Robinson.

            10.6      Employment  Agreement dated October 21, 1996 by and bet-
                      ween Cabarrus Bank of North Carolina and  Ronald D. Smith.

            10.7      Deferred  Compensation  Agreement dated as of February 18,
                      1993 by and  between  Cabarrus  Bank of North Carolina and
                      Ronald D. Smith.
<PAGE>

            10.8      Employment Agreement dated February 1, 1999 by and between
                      the Registrant and Janet H. Hollar.

            10.9      Lease  Agreement  dated  September 1,  1997 by and between
                      Lincoln Bank of North Carolina and D. Mark  Boyd,  III and
                      Diane H. Boyd.

            10.10     Addendum  to Lease  Agreement  dated  October 30,  1998 by
                      and  between  Lincoln  Bank  of North Carolina and D. Mark
                      Boyd, III and Diane H. Boyd.

            10.11     Employment  Agreement  dated  June 4, 1998 by and  between
                      Community   Bank  &  Trust  Co.  and  Ronnie  D.   Blanton
                      (incorporated   by  reference  to  Exhibit  10.10  to  the
                      Registrant's  Registration Statement on Form S-4 (File No.
                      333-59729) dated July 23, 1998).

             11       Statement regarding computation of earnings per share.

             13       Annual  Report   to  Security  Holders   (incorporated  by
                      reference  to Registrant's Proxy Statement dated March 30,
                      1999 (File No. 0-17939).

             21       List of subsidiaries of the Registrant.

             23       Consent of KPMG LLP.

             27       Financial Data Schedule.