<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549



                                   FORM 10-Q

          [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                      FOR QUARTER ENDED SEPTEMBER 30, 1998

                                       OR

    [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                          COMMISSION FILE NO. 0-16461

                           COMMUNITY BANCSHARES, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                                   <C>
        DELAWARE                                                   63-0868361
------------------------                              ------------------------------------
(STATE OF INCORPORATION)                              (I.R.S. EMPLOYER IDENTIFICATION NO.)
</TABLE>


MAIN STREET, P. O. BOX 1000, BLOUNTSVILLE, AL                           35031
---------------------------------------------                           -----
      (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)                         (ZIP CODE)


       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (205) 429-1000
                                                            -------------


                                   NO CHANGE
                                   ---------
  (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
                                    REPORT)

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 THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S CLASS OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.

          CLASS                               OUTSTANDING AT SEPTEMBER 30, 1998
----------------------------                  ---------------------------------
COMMON STOCK, $.10 PAR VALUE                             4,231,320



<PAGE>   2



                                     INDEX

                  COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>

PART I. FINANCIAL INFORMATION                                                                                 PAGE
-----------------------------
<S>                                                                                                           <C>
Item 1. Financial Statements (Unaudited)

           Consolidated balance sheets - September 30, 1998 and December 31, 1997.........................       3

           Consolidated statements of income and consolidated statements of comprehensive income-
           Three  months ended September 30,1998 and 1997.................................................       4

           Consolidated statements of income and consolidated statements of comprehensive income-
           Nine  months ended September 30,1998 and 1997..................................................       6


           Consolidated statements of cash flows - Nine months ended September 30,
           1998 and 1997..................................................................................       8

           Notes to consolidated financial statements - September 30, 1998................................      10


Item 2.  Management's Discussion and Analysis of Financial Condition and
   Results of Operations..................................................................................      13

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.......................................      18

PART II.  OTHER INFORMATION
---------------------------

Item 4.  Submission of Matters to a Vote of Security Holders .............................................      19

Item 6.  Exhibits and Reports on Form 8-K.................................................................      19

EXHIBIT II - Statement RE: Computation of Earnings per Share..............................................      21
</TABLE>



SIGNATURES



<PAGE>   3



                         PART I - FINANCIAL INFORMATION
                   ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED)
                  COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                             SEPTEMBER 30,      December 31,
                                                                                 1998              1997
                                                                           ---------------    ---------------
<S>                                                                        <C>                <C>
ASSETS
  Cash.................................................................    $     7,474,109    $     6,359,331
  Due from banks.......................................................         12,164,648         13,292,647
  Interest-bearing deposits with banks.................................            950,000          2,514,558
  Federal funds sold...................................................                -0-         26,600,000
  Securities available for sale........................................         91,760,138         85,092,069
  Loans................................................................        418,197,067        327,084,688
  Less: Unearned income................................................          1,611,552            950,205
         Allowance for loan losses.....................................          3,232,563          2,131,354
                                                                           ---------------    ---------------
          NET LOANS....................................................        413,352,952        324,003,129

  Premises and equipment, net..........................................         27,125,713         22,362,432
  Accrued interest.....................................................          5,762,606          5,089,765
  Intangibles, net.....................................................          5,912,307          4,117,825
  Other real estate....................................................            699,656            656,271
  Other assets.........................................................          2,787,242          1,750,819
                                                                           ---------------    ---------------

          TOTAL ASSETS.................................................    $   567,989,371    $   491,838,846
                                                                           ===============    ===============

LIABILITIES AND SHAREHOLDERS' EQUITY
  Deposits:
     Noninterest-bearing...............................................    $    57,563,658    $    52,356,858
     Interest-bearing..................................................        447,453,717        388,531,773
                                                                           ---------------    ---------------
          TOTAL DEPOSITS...............................................        505,017,375        440,888,631

  Other short-term borrowings..........................................          7,924,053          2,630,387
  Accrued interest.....................................................          3,771,410          2,912,286
  Long-term debt.......................................................          6,726,391          7,397,612
  Other liabilities....................................................          4,492,505          2,012,500
                                                                           ---------------    ---------------
          TOTAL LIABILITIES............................................        527,931,734        455,841,416

  Minority interest in consolidated subsidiary.........................                -0-             18,382

  Shareholders' equity
     Common stock, par value $.10 per share, 5,000,000
          shares authorized, 4,231,320 shares issued as of September 30,
          1998 and 2,031,606 shares issued as of December 31, 1997 ...             423,132            203,161
     Capital surplus...................................................         21,054,751         18,524,301
     Retained earnings.................................................         19,306,069         18,824,795
     Unearned ESOP shares - 189,886 and 204,610 shares
          unreleased at September 30, 1998 and December 31,1997                 (1,909,428)        (2,002,902)
     Accumulated comprehensive income: unrealized gains on
          investment securities available for sale, net of deferred taxes        1,183,113            429,693
                                                                           ---------------    ---------------
          TOTAL SHAREHOLDERS' EQUITY...................................         40,057,637         35,979,048
                                                                           ---------------    ---------------

          TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...................    $   567,989,371    $   491,838,846
                                                                           ===============    ===============
</TABLE>

                 See notes to consolidated financial statements


                                       3

<PAGE>   4




                  COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF INCOME
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                     Three Months Ended
                                                                                        September 30,
                                                                          -----------------------------------
                                                                                 1998               1997
                                                                          ----------------    ---------------
<S>                                                                       <C>                 <C>
REVENUE FROM EARNING ASSETS
    Interest and fees on loans.........................................    $    10,315,562    $     8,039,900
    Interest on investment securities:
    Taxable securities.................................................          1,129,264          1,084,307
      Securities exempt from federal income taxes......................            188,420            175,950

    Interest on federal funds sold.....................................             27,779            289,332
    Interest on deposits in other banks................................             15,594             36,437
                                                                           ---------------    ---------------
                  TOTAL REVENUE FROM EARNING ASSETS....................         11,676,619          9,625,926
                                                                           ---------------    ---------------

INTEREST EXPENSE
    Interest on deposits...............................................          5,701,346          4,867,064
    Interest on other short-term borrowings............................             35,152             34,055
    Interest on long-term debt.........................................             14,525            151,957
                                                                           ---------------    ---------------
                  TOTAL INTEREST EXPENSE...............................          5,751,023          5,053,076
                                                                           ---------------    ---------------

NET INTEREST INCOME....................................................          5,925,596          4,572,850
Provision for loan losses..............................................            225,653            302,477
                                                                           ---------------    ---------------

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES....................          5,699,943          4,270,373

NONINTEREST INCOME
    Service charges on deposits........................................            794,519            621,825
    Insurance commissions..............................................            536,124            208,489
    Bank club dues.....................................................            159,146            144,795
    Other operating income.............................................            546,512            231,650
    Investment securities gains........................................              7,200                -0-
                                                                           ---------------    ---------------

                  TOTAL NONINTEREST INCOME.............................          2,043,501          1,206,759
                                                                           ---------------    ---------------

NONINTEREST EXPENSES
    Salaries and employee benefits.....................................          3,806,813          2,621,206
    Occupancy expense..................................................            572,625            396,445
    Furniture and equipment expense....................................            380,424            311,086
    Director and committee fees........................................            189,300            162,450
    Other operating expenses...........................................          1,469,459          1,021,819
                                                                           ---------------    ---------------
                  TOTAL NONINTEREST EXPENSES...........................          6,418,621          4,513,006
                                                                           ---------------    ---------------

Income before income taxes.............................................          1,324,823            964,126
Provision for income taxes.............................................            400,940            255,890
                                                                           ---------------    ---------------
                  NET INCOME BEFORE MINORITY INTEREST..................    $       923,883    $       708,236
Minority Interest in consolidated subsidiaries.........................    $           -0-    $         2,802
                                                                           ---------------    ---------------

                  NET INCOME...........................................    $       923,883    $       705,434
                                                                           ===============    ===============
EARNINGS PER COMMON SHARE
    Net income    .....................................................    $           .24    $           .19
EARNINGS PER COMMON SHARE-ASSUMING DILUTION
    Net income    .....................................................    $           .23    $           .18
</TABLE>

                 See notes to consolidated financial statements


                                       4

<PAGE>   5





                  COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                 Three Months Ended
                                                                                   September 30,
                                                                          ------------------------------
                                                                              1998               1997
                                                                          ------------      ------------
<S>                                                                       <C>               <C>
Net income ............................................................   $    923,883      $    705,434

Other comprehensive income, net of tax:
    Realized investment security gains.................................          7,200               -0-
      Unrealized gains (losses) on securities..........................      1,130,885           306,276
      Less income tax effect...........................................       (455,235)         (122,571)
                                                                          ------------      ------------
                  Total other comprehensive income.....................        682,850           183,705
                                                                          ------------      ------------

Comprehensive income...................................................   $  1,606,733      $    889,139
                                                                          ============      ============
</TABLE>

                 See notes to consolidated financial statements

                                       5

<PAGE>   6




                  COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF INCOME
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                    Nine Months Ended
                                                                                      September 30,
                                                                           --------------------------------
                                                                                 1998               1997
                                                                           --------------    --------------
<S>                                                                        <C>               <C>
REVENUE FROM EARNING ASSETS
    Interest and fees on loans.........................................    $   27,761,457    $   23,663,472
    Interest on investment securities:
      Taxable securities...............................................         3,277,780         3,290,221
      Securities exempt from federal income taxes......................           542,436           534,877

    Interest on federal funds sold.....................................           553,080           485,013
    Interest on deposits in other banks................................            51,020            85,871
                                                                           --------------    --------------
                  TOTAL REVENUE FROM EARNING ASSETS....................        32,185,773        28,059,454
                                                                           --------------    --------------

INTEREST EXPENSE
    Interest on deposits...............................................        16,114,086        13,988,046
    Interest on other short-term borrowings............................            88,091           114,028
    Interest on long-term debt.........................................           307,358           476,270
                                                                           --------------    --------------
                  TOTAL INTEREST EXPENSE...............................        16,509,535        14,578,344
                                                                           --------------    --------------

NET INTEREST INCOME....................................................        15,676,238        13,481,110
Provision for loan losses..............................................           622,397           796,724
                                                                           --------------    --------------

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES....................        15,053,841        12,684,386

NONINTEREST INCOME
    Service charges on deposits........................................         2,217,292         1,858,402
    Insurance commissions..............................................         1,623,448           541,097
    Bank club dues.....................................................           459,671           421,702
    Other operating income.............................................         1,367,636           708,130
    Investment securities gains........................................            18,708           (2,590)
                                                                           --------------    --------------

                  TOTAL NONINTEREST INCOME.............................         5,686,755         3,526,741
                                                                           --------------    --------------

NONINTEREST EXPENSES
    Salaries and employee benefits.....................................        10,334,033         7,538,368
    Occupancy expense..................................................         1,497,160         1,093,592
    Furniture and equipment expense....................................         1,071,217           879,787
    Director and committee fees........................................           514,858           474,320
    Other operating expenses...........................................         3,782,656         2,723,849
                                                                           --------------    --------------
                  TOTAL NONINTEREST EXPENSES...........................        17,199,924        12,709,916
                                                                           --------------    --------------

Income before income taxes.............................................         3,540,672         3,501,211
Provision for income taxes.............................................         1,023,623           968,621
                                                                           --------------    --------------
                  NET INCOME BEFORE MINORITY INTEREST..................         2,517,049         2,532,590
Minority interest in consolidated subsidiary...........................             4,167             2,802
                                                                           --------------    --------------

                  NET INCOME...........................................    $    2,512,882    $    2,529,788
                                                                           ==============    ==============

EARNINGS PER COMMON SHARE
    Net income    .....................................................    $          .65    $          .67
EARNINGS PER COMMON SHARE-ASSUMING DILUTION
    Net income    .....................................................    $          .64    $          .66
</TABLE>

                 See notes to consolidated financial statements



                                       6

<PAGE>   7



                  COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                    Nine Months Ended
                                                                                      September 30,
                                                                           -------------------------------
                                                                                 1998             1997
                                                                           --------------    -------------
<S>                                                                        <C>               <C>
Net income ............................................................    $    2,512,882    $   2,529,788

Other comprehensive income, net of tax:
    Realized investment security gains.................................            18,708           (2,590)
    Unrealized gains on securities.....................................         1,236,993           83,029
      Less income tax effect...........................................          (502,281)         (32,236)
                                                                           --------------    -------------
                  Total other comprehensive income.....................           753,420    $      48,203
                                                                           --------------    -------------
Comprehensive income...................................................    $    3,266,302    $   2,577,991
                                                                           ==============    =============
</TABLE>


                 See notes to consolidated financial statements



                                       7

<PAGE>   8



                  COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)


<TABLE>
<CAPTION>
                                                                                    Nine Months Ended
                                                                                      September 30,
                                                                           -------------------------------
                                                                                 1998             1997
                                                                           --------------    -------------
<S>                                                                        <C>               <C>
OPERATING ACTIVITIES:
    Net income.........................................................    $    2,512,882    $   2,529,788
    Adjustments to reconcile net income to net
      cash provided by operating activities:
         Provision for loan losses.....................................           622,397          796,724
         Provision for depreciation and amortization...................           967,446        1,143,347
         Amortization of investment security premiums and
          accretion of discounts.......................................           114,790           48,191
         Deferred tax expense  ........................................           156,409           62,452
         Loss on sale of premises and equipment .......................             4,607            1,058
         Realized investment security losses (gains) ..................           (18,708)           2,590
         Increase (decrease) in accrued interest receivable............          (672,841)          38,151
         Increase in accrued interest payable..........................           859,124          717,270
         Other.........................................................           101,010       (1,168,975)
                                                                           --------------    -------------
                 NET CASH PROVIDED BY OPERATING ACTIVITIES.............         4,647,116        4,170,596
                                                                           --------------    -------------

INVESTING ACTIVITIES:
    Proceeds from sales of investment securities.......................         6,773,700        5,007,863
    Proceeds from maturity of investment securities....................         7,121,562        5,588,513
    Purchase of investment securities..................................       (19,403,712)      (4,656,676)
    Decrease (increase) in interest-bearing deposits with other banks..         1,564,558         (729,678)
    Cash disbursed in acquisition of finance offices ..................        (6,543,108)             -0-
    Cash disbursed in acquisition of insurance operations .............          (930,219)             -0-
    Cash received in acquisition of branch office .....................         2,763,393              -0-
    Net increase in loans to customers.................................       (82,111,874)      (2,577,415)
    Proceeds from sale of premises and equipment.......................           237,544          312,900
    Net proceeds from sale of other real estate........................            42,500              -0-
    Capital expenditures...............................................        (5,304,696)      (5,673,721)
                                                                           --------------    -------------
                  NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES.....       (95,790,352)      (2,728,214)


FINANCING ACTIVITIES:
    Net increase in demand deposits, NOW accounts,
      and savings accounts.............................................        19,920,413        3,821,677
    Net increase in certificates of deposit............................        38,564,181       23,391,368
    Net increase/(decrease) in short-term borrowings.....................       5,904,355       (5,246,356)
    Issuance and sale of common stock..................................         2,750,421          462,740
    Repayment of long-term debt........................................          (577,747)        (574,772)
    Cash dividends.....................................................        (2,031,608)      (1,500,000)
                                                                           --------------    -------------
                  NET CASH PROVIDED BY FINANCING ACTIVITIES............        64,530,015       20,354,657
                                                                           --------------    -------------

Net increase in cash and cash equivalents..............................       (26,613,221)      21,797,039


Cash and cash equivalents at beginning of period.......................        46,251,978       17,612,177
                                                                           --------------    -------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD.............................    $   19,638,757    $  39,409,216
                                                                           ==============    =============
</TABLE>


                 See notes to consolidated financial statements



                                       8

<PAGE>   9



                  COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)


<TABLE>
<CAPTION>
                                                                                    Nine Months Ended
                                                                                      September 30,
                                                                           -------------------------------
                                                                                 1998             1997
                                                                           --------------    -------------
<S>                                                                        <C>               <C>

Supplemental disclosures of cash flow information:
 Cash paid during the period for:
      Interest.........................................................    $   16,573,210    $  13,861,074
      Income taxes.....................................................           569,986        1,623,340
</TABLE>

Supplemental schedule of non-cash investing and financing activities:

     Other real estate of $374,000 and $87,500 was acquired in 1998 and 1997,
respectively, from employees as a result of the Company's relocation program.

     Upon the pledging of purchased shares to obtain additional ESOP debt of
     $137,918 on October 2, 1995, long-term debt was increased and equity was
     decreased. The debt was reduced and shares were released by $93,474 and
     $86,954 during the nine month periods ended September 30, 1998 and 1997,
     respectively, as a result of payments made by the Company's ESOP on the
     outstanding ESOP debt.

     Unrealized gains on investment securities available for sale increased by
     $1,255,701 during the nine months ended September 30, 1998.


                 See notes to consolidated financial statements



                                       9
<PAGE>   10



                  COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

                               SEPTEMBER 30, 1998



NOTE A - BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine month and three month periods
ended September 30, 1998 are not necessarily indicative of the results that may
be expected for the year ended December 31, 1998. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.


NOTE B - INCOME TAXES

The effective tax rates of approximately 28.9 percent and 27.7 percent for the
nine months ended September 30, 1998 and 1997 are less than the statutory rate
principally because of the effect of tax-exempt interest income.

NOTE C - INVESTMENT SECURITIES

Effective January 1, 1994, the Company applied the accounting and reporting
requirements of Statement of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities ("SFAS 115"). This
pronouncement requires that all investments in debt securities be classified as
either HELD-TO-MATURITY SECURITIES, which are reported at amortized cost;
TRADING SECURITIES, which are reported at fair value, with unrealized gains and
losses included in earnings; or AVAILABLE-FOR-SALE SECURITIES, which are
reported at fair value, with unrealized gains and losses excluded from earnings
and reported in a separate component of stockholders' equity (net of deferred
tax effect).

At September 30, 1998, the Company had net unrealized gains of $1,971,856 in
available-for-sale securities which are reflected in the presented assets and
resulted in a increase in stockholders' equity of $1,183,113, net of deferred
tax liability. There were no trading securities. The net increase in
stockholders' equity as a result of the SFAS 115 adjustment from December 31,
1997 to September 30, 1998 was $753,420.


NOTE D - SHAREHOLDERS' EQUITY

In January of 1997, the Board of Directors of the Company declared a dividend
of $.75 per share to shareholders of record as of January 8, 1997, and another
dividend of $1.00 per share was declared in January of 1998 to shareholders of
record as of January 26, 1998. Additionally, a one-for-one stock dividend was
declared and distributed to stockholders of record as of the same date. The
payment of dividends on common stock is subject to the prior payment of
principal and interest on the Company's long-term debt, maintenance of
sufficient earnings and capital of the subsidiaries and to regulatory
restrictions.

All per share disclosures have been adjusted to reflect the impact of the
one-for-one stock dividend in the first quarter of 1998.



                                       10
<PAGE>   11



NOTE D - SHAREHOLDERS' EQUITY (CONTINUED)


On March 26, 1998, March 27, 1997, and March 28, 1996, the Company issued
203,331, 103,000, and 270,000 options, respectively, to purchase its common
shares to its directors and or senior managers. The options were distributed
among the directors and or senior managers based upon their years of service
and their positions of leadership with the Company. Each of the stock option
agreements contained an option price of $15.00 per share (1998 issuance),
$12.50 per share (1997 issuance) or $10.00 per share (1996 issuance), the
market value of the shares at the time of issuance. The options are exercisable
between April 1, 1996 and March 31, 2003, and are treated as non-qualified
options under the provisions of the Internal Revenue Code. The agreements also
contain a provision whereby the Company shall compensate the optionee in cash
for any federal or state tax liability incurred upon the exercise of the
options.

These options have been treated as common stock equivalents and have been
included in the calculation of average common shares outstanding, for the
purpose of calculating diluted earnings per share, in Exhibit 11, causing the
equivalent average number of shares outstanding for the first three quarters to
rise by 55,083 shares and 17,352 shares, respectively, in 1998 and 1997. There
was no dilutive effect on book value per share at September 30, 1998, nor on
the book value of the Company's common shares at September 30, 1997.

In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123, Accounting and Disclosure
of Stock-Based Compensation ("SFAS 123"). SFAS 123 is effective for years
beginning after December 15, 1995, and allows for the option of continuing to
follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees, and the related Interpretations or selecting the minimum value
method of expense recognition as described in SFAS 123. The Company has elected
to apply APB Opinion No. 25 in accounting for its incentive stock options;
accordingly, no compensation expense cost has been recognized by the Company.
The Company's net income, earnings per share - basic, and earnings per share -
diluted would have been reduced by $ 236,677, $ 0.06, and $ 0.06, respectively,
for the nine months ended September 30, 1998, had compensation cost for the
Company's stock option plan been determined based on the fair value ("minimum
value method") at the grant date for options under the plan. The effect would
have been $ 129,162, $ 0.04, and $ 0.03, respectively, for the same period in
1997.

NOTE E - EMPLOYEE STOCK OWNERSHIP PLAN

The Company adopted an Employee Stock Ownership Plan (the "ESOP") effective as
of January 1, 1985, which enables eligible employees of the Company and its
subsidiaries to own Company common stock. Employees who work 1,000 hours in any
consecutive twelve month period become participants in the ESOP on December 31
of that year, and remain eligible in every subsequent year in which 1,000 hours
of work are completed. Employer contributions, which are made at the discretion
of the Company's Board of Directors, are allocated to eligible participants in
proportion to their eligible pay, which equals W-2 wages plus pre-tax
reductions for the Company's cafeteria plan. The Internal Revenue Service
imposes a limit ($160,000 in 1998) on the maximum amount of eligible pay under
the plan.

On November 3, 1993, the ESOP's Trustees executed a promissory note of
$1,200,000 in order to purchase common stock from the Company's public offering
of new common stock. The note was originally secured by 80,000 shares of
purchased stock. On October 2, 1995, the ESOP acquired 7,455 additional shares
with the proceeds of a second promissory note, collateralized by the acquired
shares. On May 17, 1996, these two notes were refinanced and an additional
58,000 shares of stock were obtained by the ESOP. These shares were funded with
the same promissory note which provided funds to refinance the previously
executed notes. This new note was originally secured by 117,847 shares of the
Company's common stock. The shares securing the note are released proratably by
the lender as monthly payments of principal and interest are made. The note is
guaranteed by the Company. As of September 30, 1998, there were 189,886
unreleased shares with a fair value of approximately $3,600,000. These shares
are subtracted from outstanding shares for earnings per share calculations.

Effective January 1, 1994, the Company applied the accounting and reporting
requirements of Statement of Position No. 93-6, Employers' Accounting for
Employee Stock Ownership Plans ("SOP 93-6"). Under the provisions of SOP



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<PAGE>   12


93-6, the employer must recognize the indebtedness of its sponsored ESOP on its
financial statement and reduce its stockholder's equity for shares of stock
which have not been released by a lender to the ESOP for allocation to its
participating employees. The portion of payments made by the Company to the
ESOP on behalf of its participating employees which are used to pay interest on
the ESOP debt is classified as interest expense on the Company's income
statement.

NOTE E - EMPLOYEE STOCK OWNERSHIP PLAN (CONTINUED)

Dividends paid on released ESOP shares are credited to the accounts of the
participants to whom the shares are allocated. Dividends on unreleased shares
are treated as other income of the ESOP.

At September 30, 1998, the Company's financial statements reflect long term
debt and a corresponding contra-equity account, as a result of the ESOP debt,
of $1,909,428.



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<PAGE>   13



                                    ITEM 2.
          MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS


This discussion is intended to assist an understanding of the Company and its
Subsidiaries' financial condition and results of operations. Unless the context
otherwise indicates, "the Company" shall include the Company and its
Subsidiaries. This analysis should be read in conjunction with the financial
statements and related notes appearing in Item 1 of the September 30, 1998 Form
10-Q and Management's Discussion and Analysis of Financial Condition and
Results of Operations appearing in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.


FINANCIAL CONDITION

LOANS

Loans comprised the largest single category of the Company's earning assets on
September 30, 1998. Loans, net of unearned income and reserve for loan losses,
were 72.8% of total assets at September 30, 1998 and 65.9% of total assets at
December 31, 1997. Total net loans were $413,352,952 at September 30, 1998,
representing a 27.6% increase from the December 31, 1997 total of $324,003,129.


INVESTMENT SECURITIES AND OTHER EARNING ASSETS

Investment securities and federal funds sold decreased $ 19,931,931 or 17.9%
from December 31, 1997 to September 30, 1998. This decrease was due primarily
to loan growth in excess of deposit growth .The investment securities portfolio
is used to make various term investments, to provide a source of liquidity and
to serve as collateral to secure certain government deposits. Investment
securities at September 30, 1998 were $91,760,138 compared with $85,092,069 at
December 31, 1997, reflecting a 7.8% increase of $6,668,069. Short-term
investments in the form of interest-bearing deposits with banks were $950,000
at September 30, 1998 and $2,514,558 at December 31, 1997.


ASSET QUALITY

Between December 31, 1997 and September 30, 1998, the Company experienced a
slight decline in the quality of its assets. The ratio of loan loss allowance to
total nonperforming assets (defined as nonaccrual loans, loans past due 90 days
or greater, restructured loans, nonaccruing securities, and other real estate)
decreased from 0.78 to 0.71. The ratio of total nonperforming assets to total
assets increased from 0.006 to 0.008, and the ratio of nonperforming loans to
total loans increased to 0.009 from 0.006 at 12/31/97. These ratios declined due
to an increase in past due and nonaccrual loans, and an increase in other real
estate due to the purchase of employees' homes who were relocated by the
Company. All three of these ratios remain favorable as compared with industry
averages, and management is aware of no factors which would suggest that they
are prone to erosion in future periods.

DEPOSITS

Total deposits of $505,017,375 at September 30, 1998 increased $64,128,744 or
14.6% over total deposits of $440,888,631 at year-end 1997. Deposits are the
Company's primary source of funds with which to support its earning assets.
Noninterest-bearing deposits increased $5,206,800 or 9.9% from year-end 1997 to
September 30, 1998, and interest-bearing deposits increased $58,921,944 or
15.2% from year-end 1997. Certificates of deposit of $100,000 or more increased
$18,578,270 or 27.2%.

OTHER SHORT-TERM BORROWINGS

Other short-term borrowings totaled $7,924,053 at September 30, 1998, a
$5,293,666 increase from the December 31, 1997 total of $2,630,387 and was
primarily due to an increase in short-term borrowings from the Federal Home



                                       13

<PAGE>   14



Loan Bank.


LONG-TERM DEBT

At September 30, 1998 and December 31, 1997, the Company had notes payable
totaling $6,726,391, and $7,397,612, respectively.

On December 17, 1992, the Company entered into a loan agreement with a regional
bank for amounts up to $6,500,000. At September 30, 1998 and December 31, 1997,
the amounts outstanding were $3,023,882 and $3,557,509, respectively, due
December 17, 2002, bearing interest at a floating prime, and collateralized by
100% of the common stock of the subsidiary banks. The note agreement contains
provisions which limit the Company's right to transfer or issue shares of
subsidiary banks' stock. Principal payments of $59,292 are due monthly;
however, the Company has the option of postponing up to twenty-four monthly
principal payments, provided that no more than six consecutively scheduled
installments are deferred.

On November 3, 1993, the ESOP's Trustees executed a promissory note of
$1,200,000 in order to purchase common stock from the Company's public offering
of new common stock. The note was originally secured by 80,000 shares of
purchased stock. On October 2, 1995, the ESOP acquired 7,455 additional shares
with the proceeds of a second promissory note, collateralized by the acquired
shares. On May 17, 1996, these two notes were refinanced and an additional
58,000 shares of stock were obtained by the ESOP with a promissory note with a
beginning balance of $2,183,805. The Company has guaranteed this debt;
accounting and reporting guidelines mandate that the debt be recognized on the
Company's statement of condition, with an offsetting charge against equity. As
principal payments are made by the ESOP, the debt and offsetting charge against
equity are reduced. This note was originally secured by 117,847 shares of the
Company's common stock. The note bears interest at a floating rate, with
principal and interest payments of $23,948 due monthly through June 17, 2018,
with all remaining principal, if any, due upon that date. The shares securing
the note are released proratably by the lender as monthly payments of principal
and interest are made. The outstanding balance of this note was $1,909,428 at
September 30, 1998, secured by 189,886 of unreleased shares of Company stock
(adjusted for the one-for-one stock split in March of 1998.).

On October 4, 1994, the Company entered into a twenty year, subordinated
installment capital note due October 1, 2014 for the purchase of treasury stock.
Monthly principal and interest payments of $15,506 are made on the note, which
bears interest at the fixed rate of 7%. The Company maintains the right to
prepay the note at its sole discretion. The balance of the note was $1,793,081
at September 30, 1998.

Maturities of long-term debt for the years ending December 31 are as follows:

                  1998......................     $     270,708
                  1999......................           907,869
                  2000......................           923,767
                  2001......................           941,467
                  2002......................           961,013
                  Thereafter................         2,721,567
                                                 -------------

                                                 $   6,726,391
                                                 =============


SHAREHOLDERS' EQUITY

Company shareholders' equity increased $4,078,589 from December 31, 1997 to
September 30, 1998, due to: net earnings of $2,512,882, the payment of a cash
dividend of $2,031,607, the reduction of unearned ESOP shares by $93,474, the
issuance of additional common stock for $2,750,421, and the increase of
unrealized gains on securities available for sale totaling $753,420, net of
deferred tax liability.



                                       14

<PAGE>   15



CAPITAL RESOURCES

A strong capital position is vital to the continued profitability of the
Company because it promotes depositor and investor confidence and provides a
solid foundation for future growth of the organization. The Company has
provided the majority of its capital requirements through the retention of
earnings.

Bank regulatory authorities are placing increased emphasis on the maintenance
of adequate capital. In 1990, new risk-based capital requirements became
effective. The guidelines take into consideration risk factors, as defined by
regulators, associated with various categories of assets, both on and off the
balance sheet. Under the guidelines, capital strength is measured in two tiers
which are used in conjunction with risk-adjusted assets to determine the risk-
based capital ratios. The Company's Tier I capital, which consists of common
equity less goodwill, amounted to $34.9 million at September 30, 1998. Tier II
capital components include supplemental capital components such as qualifying
allowance for loan losses and qualifying subordinated debt. Tier I capital plus
the Tier II capital components is referred to as Total Risk-Based capital and
was $39.8 million at September 30, 1998.

The Company's current capital positions exceed the new guidelines. Management
has reviewed and will continue to monitor the Company's asset mix and product
pricing, and the loan loss allowance, which are the areas determined to be most
affected by these new requirements.



                                       15

<PAGE>   16



RESULTS OF OPERATIONS


SUMMARY

Net earnings of the Company for the nine months ended September 30, 1998, were
$2,512,882 compares to $2,529,788 for the same period in 1997, relatively
unchanged. Earnings for the nine months remained relatively unchanged as
earnings from increased earning assets and fee based services offset increased
noninterest expenses from expansion activities.

Net earnings of the Company for the quarter ended September 30, 1998, were
$923,883 or 30.6% higher than the $705,434 reported for the quarter ended
September 30, 1997. The increase in quarterly earnings, as compared to the same
quarter of the preceding year, was due to revenues from earning assets and fee
based services growing more that the increase in noninterest expenses.


NET INTEREST INCOME

Net interest income, the difference between interest earned on assets and the
cost of interest-bearing liabilities, is the largest component of the Company's
net income. Revenue from earning assets of the Company during the nine months
ended September 30, 1998 increased $4,126,319 or 14.7% from the same period in
1997. This increase was due to higher average outstanding balances of earning
assets. Average earning assets outstanding during the first nine months of 1998
were $68,197,462 higher than during the first nine months of 1997. Interest
expense for the nine months ended September 30, 1998 increased $1,931,191 or
13.2% over the corresponding period of 1997. As a result of these factors, net
interest income increased $2,195,128 or 16.3%, in the nine months ended
September 30, 1998, compared to the same period of 1997.

Net interest income for the quarter ended September 30, 1998, was $5,925,596 or
29.6% greater than the $4,572,850 for the quarter ended September 30, 1997. The
increase in the current year quarter is primarily due to increased earning
assets, principally loans, over the same quarter in the previous year.


PROVISION FOR LOAN LOSSES

The provision for loan losses represents the charge against current earnings
necessary to maintain the reserve for loan losses at a level which management
considers appropriate. This level is determined based upon Community Bank's
historical charge-offs, management's assessment of current economic conditions,
the composition of the loan portfolio and the levels of nonaccruing and past
due loans. The provision for loan losses was $622,397 for the nine months ended
September 30, 1998 compared to $796,724 for the same period of 1997.
Charge-offs exceeded recoveries by $795,020 for the nine months ended September
30, 1998. The reserve for loan losses as a percent of outstanding loans, net of
unearned income, was 0.78% at September 30, 1998 compared to 0.65% at year-end
1997.

The provisions for loan losses for the third quarter of 1998, was $225,653
compared to $302,477 for the same quarter of 1997. Charge-offs exceeded
recoveries by $348,921 for the quarter ended September 30, 1998.

NONINTEREST INCOME

Noninterest income for the nine months ended September 30, 1998 was $5,686,755
compared to $3,526,741 for the same period of 1997. This 61.3% increase was
primarily due to an increase in insurance commissions realized of $1,082,351 in
the first nine months of 1998 as compared to the same period of 1997, and an
increase in fees on debt cancellation contracts of $629,549 reported as other
income. Significant components of noninterest income are as follows: Service
charges on deposits increased $358,890 or 19.3%, insurance commissions
increased $1,082,351 or 200%; security gains of $18,708 were realized, as
opposed to a loss of $2,590 in the first quarter of 1997; and other operating
income, primarily dues for the bank club account, fees on debt cancellation
contracts, and appraisal fees, increased $659,506 or 93.1% to $1,367,636.



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<PAGE>   17



Noninterest income for the three months ended September 30, 1998, increased
$836,742 or 69.3% to $2,043,501 as compared to $1,206,759 for the same quarter
of 1997. Significant components of noninterest income are as follows: Service
charges on deposits increased $172,694 or 27.8%; insurance commissions
increased $327,635 or 157.2%; and other operating income, primarily dues of the
bank club account, fees on debt cancellation contracts and appraisal fees,
increased $314,862 or 135.9%.



NONINTEREST EXPENSES

Noninterest expenses for the nine months ended September 30, 1998 were
$17,199,924, reflecting a 35.3% increase over the same period of 1997. The
primary components of noninterest expenses are salaries and employee benefits,
which increased to $10,334,033 for the nine months ended September 30, 1998,
37.1% higher than in the same period of 1997. The increases in salaries and
employee benefits are due to staffing for new banking locations and future
expansion as well as merit increases and incentive payments. Occupancy costs
increased $403,568 or 36.9%, furniture and equipment expenses rose by $191,430
or 21.8%, and director and committee fees increased by $40,538 or 8.6%.
Other operating expenses rose by 38.9% to $3,782,656.

Noninterest expense increased $1,905,615 or 42.2 % to $6,418,621 for the third
quarter of 1998 as compared to $4,513,006 for the third quarter of 1997. All
major categories of noninterest expense increased during the quarter with the
largest increase reflected in salaries and benefits.

The substantial increase in the Company's size has necessitated increased
expenditures for data processing and other support activities and personnel,
which will continue.

The majority of these expenses should continue at or above the levels for the
nine months ended September 30, 1998, since management intends to continue its
growth policies.

The Company's strategy is to make each office of its subsidiary bank a vital
part of the community it serves. Each office has management and personnel as
similar to a full service, stand-alone bank as possible. Although more
expensive, we believe this strategy has been successful for Community Bank, and
will best serve our communities, customers and shareholders.

INCOME TAXES

The Company attempts to maximize its net income through active tax planning.
The provision for income taxes of $1,023,623 for the nine months ended
September 30, 1998 increased $55,002 compared to the same period of 1997, due
to the slight increase in income before tax. Taxes as a percent of earnings
increased from 27.7% in 1997 to 28.9% in 1998. The effective tax rates for the
quarters ended September 30, 1998, and September 30, 1997 , were 30.3% and
26.5%, respectively. The effective tax rate of approximately 29% is less than
the statutory rate principally because of the effect of tax-exempt interest
income.



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<PAGE>   18



                                    ITEM 3.
           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    Based on the Company's interest sensitivity analysis, a 200 basis points 
decrease in the interest rate environment results in a 3.0% improvement in 
net-interest income for the twelve month period from September 30, 1998. 
Conversely, a 200 basis points increase in the interest rates would result in a 
10.0% decrease in net-interest income for the same period. This shift in 
interest sensitivity is primarily due to an increase in fixed rate loans in a 
declining interest rate environment.



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<PAGE>   19



                          PART II - OTHER INFORMATION



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

There were no matters submitted to the stockholders of the Company during the
third quarter of 1998.







                   ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:

    Exhibit Number            Description of Exhibit           Page Number
    --------------            -----------------------          -----------
         11                   Computation of Earnings
                                  Per Share

         27                   Financial Data Schedule
                               (for the SEC use only)
(b) Reports on Form 8-K

    The Company did not file any reports on Form 8-K during the quarter ended
September 30, 1998.



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<PAGE>   20



SIGNATURES

Pursuant to the requirements 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.



                           COMMUNITY BANCSHARES, INC.



November 12, 1998                   /s/ Kennon R. Patterson, Sr.
-----------------                   --------------------------------
Date                                Kennon R. Patterson, Sr., as its
                                    President and Chief Executive
                                    Officer



November 12, 1998                   /s/ Michael A.Bean
-----------------                   ----------------------------------
Date                                Michael A. Bean, as its Executive
                                    Vice President and Chief Financial
                                    Officer



                                       20