SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549

                                   FORM 10-KSB


                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2002                File Number 333-76512

                          CAROLINA NATIONAL CORPORATION
                 (Name of Small Business Issuer in its Charter)

             South Carolina                              57-1101005
    (State or Other Jurisdiction of         (IRS Employer Identification Number)
     Incorporation or Organization)

                1350 Main Street, Columbia, South Carolina 29201
                (Address of Principal Executive Office, Zip Code)

         Issuer's Telephone Number, Including Area Code: (803) 779-0411

        Securities Registered Pursuant to Section 12(b) of the Act: None

        Securities Registered Pursuant to Section 12(g) of the Act: None

         Check whether the issuer (1) has filed all reports required to be filed
by  Section  13 or 15(d) of the  Exchange  Act during the past 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 [ ]

         Check if there is no  disclosure  of  delinquent  filers in response to
Item 405 of  Regulation  S-B contained in this form,  and no disclosure  will be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ] Not applicable.

         The issuer's revenues for its most recent fiscal year were $302,858.

         The aggregate  market value of the Common Stock held by  non-affiliates
on February 28, 2003, was  approximately  $11,383,030.  As of February 28, 2003,
there were  1,427,303  shares of the  Registrant's  Common Stock,  no par value,
outstanding.  For purposes of the foregoing  calculation only, all directors and
executive officers of the Registrant have been deemed affiliates.

                       DOCUMENTS INCORPORATED BY REFERENCE
None

Transitional Small Business Disclosure Format (check one): Yes [  ]  No [X]



<PAGE>


                           FORWARD LOOKING STATEMENTS

         This report contains "forward-looking statements" within the meaning of
the  securities   laws.  All  statements  that  are  not  historical  facts  are
"forward-looking  statements." You can identify these forward-looking statements
through  our  use of  words  such  as  "may,"  "will,"  "expect,"  "anticipate,"
"believe," "intend," "estimate," "project, " "continue," or other similar words.
Forward-looking statements include, but are not limited to, statements regarding
our future business prospects,  revenues,  working capital,  liquidity,  capital
needs, interest costs, income, business operations and proposed services.

         These  forward-looking  statements  are based on current  expectations,
estimates  and  projections  about  our  industry,   management's  beliefs,  and
assumptions made by management.  Such information includes,  without limitation,
discussions  as to estimates,  expectations,  beliefs,  plans,  strategies,  and
objectives  concerning  our future  financial and operating  performance.  These
statements  are not guarantees of future  performance  and are subject to risks,
uncertainties  and  assumptions  that are difficult to predict,  particularly in
light  of the  fact  that  we  are a new  company  with  no  operating  history.
Therefore,  actual  results  may  differ  materially  from  those  expressed  or
forecasted  in such  forward-looking  statements.  The risks  and  uncertainties
include, but are not limited to:

     o    our growth and our ability to maintain growth;

     o    governmental  monetary and fiscal policies, as well as legislative and
          regulatory changes;

     o    the effect of interest  rate changes on our level and  composition  of
          deposits,  loan  demand  and the  value  of our  loan  collateral  and
          securities;

     o    the effects of competition from other financial institutions operating
          in our market area and  elsewhere,  including  institutions  operating
          locally,  regionally,  nationally and  internationally,  together with
          competitors   that  offer  banking  products  and  services  by  mail,
          telephone and computer and/or the Internet;

     o    failure of assumptions  underlying the  establishment of our allowance
          for loan losses, including the value of collateral securing loans; and

     o    loss of consumer  confidence and economic  disruptions  resulting from
          terrorist activities.

         We  undertake  no   obligation   to  publicly   update  or  revise  any
forward-looking  statements,  whether  as a result  of new  information,  future
events or otherwise.  In light of these risks,  uncertainties,  and assumptions,
the forward-looking events discussed in this report might not occur.




                                       2
<PAGE>


                                     PART I

Item 1.  Description of Business.

General

         Carolina  National  Corporation,  (the  "Company")  is a  bank  holding
company  with no  operations  other  than those  carried on by its  wholly-owned
subsidiary, Carolina National Bank & Trust Company (the "Bank"). The Company was
organized in 2000 under the laws of South Carolina for the purpose of becoming a
holding company for the Bank. The Bank conducts a general banking business under
a charter  granted by the Office of the  Comptroller  of the Currency.  The Bank
opened on July 15, 2002. The Bank conducts its  activities  from its main office
and one branch office in Columbia, South Carolina.

         The Bank's business primarily consists of accepting deposits and making
loans.  The Bank seeks deposit  accounts from  households  and businesses in its
primary  market areas by offering a full range of savings  accounts,  retirement
accounts (including Individual Retirement  Accounts),  checking accounts,  money
market  accounts,  and time  certificates  of deposit.  It also makes  primarily
commercial,  real estate and installment loans, primarily on a secured basis, to
borrowers  in and  around  Richland  County,  South  Carolina  and  makes  other
authorized  investments.  Mortgage  loans are  primarily  made for resale in the
secondary  market.  As of December 31, 2002,  the Bank  employed 20 persons on a
full time equivalent basis.

Competition

         South Carolina law permits statewide branching by banks and savings and
loan  associations.  Consequently,  many  financial  institutions  have branches
located in several  communities.  The City of Columbia is currently served by 14
commercial banking  organizations  with approximately 100 branches,  one savings
bank and approximately 17 credit unions.  One additional  commercial bank serves
the Richland County area outside of Columbia. Since interstate banking was first
permitted,  an overwhelming  number of Columbia's locally based commercial banks
have been  acquired,  mostly by large  regional  out-of-state  banks.  Of the 14
commercial banks left in Columbia,  seven are owned and controlled out of state,
and only two of the  remaining  seven (one of which is Carolina  National Bank &
Trust Company) are headquartered in Columbia.

         Carolina National Bank & Trust Company  encounters  strong  competition
from most of these  financial  institutions.  In the conduct of certain areas of
its business,  Carolina  National Bank & Trust Company also competes with credit
unions,  insurance  companies,  money market  mutual  funds and other  financial
institutions, some of which are not subject to the same degree of regulation and
restrictions as the Bank. Most of these competitors have  substantially  greater
resources and lending  abilities than Carolina National Bank & Trust Company has
and offer certain services,  such as international banking,  investment banking,
and trust services, that the Bank does not currently provide.

         The principal areas and methods of competition in the banking  industry
are the  services  offered,  pricing  of those  services,  the  convenience  and
availability  of the services,  and the degree of expertise and personal  manner
with which those  services  are offered.  The  directors  believe that  Carolina
National  Bank & Trust Company will be able to exploit  opportunities  available
for a locally-owned  community bank so that the Bank can compete  effectively in
those areas, but no assurance can be given that it will be able to do so.

Effect of Government Regulation

         Bank  holding  companies  and banks  are  extensively  regulated  under
federal and state law. To the extent that the  following  information  describes
statutory  and  regulatory  provisions,  it is  qualified  in  its  entirety  by
reference to such  statutes and  regulations.  Any change in  applicable  law or
regulation  may have a material  effect on the  business  of the Company and the
Bank.


                                       3
<PAGE>

General

         As a bank holding  company under the Bank Holding Company Act ("BHCA"),
the  Company  obtained  the  approval of the Board of  Governors  of the Federal
Reserve System (the "Federal Reserve") to acquire the Bank and is subject to the
regulations of the Federal Reserve. Under the BHCA, the Company's activities and
those of its subsidiaries are limited to banking, managing or controlling banks,
furnishing  services to or performing  services for its subsidiaries or engaging
in any other  activity  which the Federal  Reserve  determines  to be so closely
related to banking or managing or controlling  banks as to be a proper  incident
thereto. The Company may engage in a broader range of activities if it becomes a
"financial  holding company"  pursuant to the  Gramm-Leach-Bliley  Act, which is
described below under the caption  "Gramm-Leach-Bliley."  The BHCA prohibits the
Company  from  acquiring  direct  or  indirect  control  of more  than 5% of the
outstanding  voting stock or substantially all of the assets of any bank or from
merging or  consolidating  with  another  bank  holding  company  without  prior
approval of the Federal  Reserve.  Additionally,  the BHCA prohibits the Company
from engaging in or from  acquiring  ownership or control of more than 5% of the
outstanding voting stock of any company engaged in a non-banking business unless
such business is determined by the Federal  Reserve to be so closely  related to
banking as to be properly  incident  thereto.  The BHCA generally does not place
territorial   restrictions  on  the  activities  of  such  non-banking   related
activities.

         The Company is also subject to limited  regulation  and  supervision by
the South Carolina State Board of Financial  Institutions (the "State Board"). A
South  Carolina bank holding  company may be required to provide the State Board
with information with respect to the financial condition, operations, management
and inter-company relationships of the holding company and its subsidiaries. The
State Board also may require  such other  information  as is  necessary  to keep
itself  informed  about  whether the  provisions  of South  Carolina law and the
regulations  and orders issued  thereunder by the State Board have been complied
with,  and the  State  Board  may  examine  any  bank  holding  company  and its
subsidiaries.

Obligations of the Company to its Subsidiary Bank

         A number of obligations  and  restrictions  are imposed on bank holding
companies  and their  depository  institution  subsidiaries  by Federal  law and
regulatory  policy that are designed to reduce  potential  loss  exposure to the
depositors of such  depository  institutions  and to the FDIC insurance funds in
the event the depository  institution  is in danger of becoming  insolvent or is
insolvent.  For example, under the policy of the Federal Reserve, a bank holding
company is required to serve as a source of financial strength to its subsidiary
depository  institutions and to commit resources to support such institutions in
circumstances  where it might not do so absent such  policy.  In  addition,  the
"cross-guarantee"  provisions of the Federal  Deposit  Insurance Act, as amended
("FDIA"),  require  insured  depository  institutions  under  common  control to
reimburse the FDIC for any loss suffered or reasonably anticipated by either the
Savings  Association  Insurance Fund ("SAIF") or the Bank Insurance Fund ("BIF")
of the  FDIC  as a  result  of the  default  of a  commonly  controlled  insured
depository  institution or for any assistance provided by the FDIC to a commonly
controlled  insured  depository  institution in danger of default.  The FDIC may
decline to enforce the cross-guarantee provisions if it determines that a waiver
is in the best  interest  of the SAIF or the BIF or both.  The FDIC's  claim for
damages  is  superior  to  claims  of  shareholders  of the  insured  depository
institution  or its holding  company but is subordinate to claims of depositors,
secured  creditors and holders of subordinated  debt (other than  affiliates) of
the commonly controlled insured depository institutions.

         The FDIA also provides that amounts  received from the  liquidation  or
other resolution of any insured  depository  institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit  liabilities of
the  institution  prior to payment  of any other  general  or  unsecured  senior
liability,   subordinated  liability,  general  creditor  or  shareholder.  This
provision  would give  depositors  a preference  over  general and  subordinated
creditors  and  shareholders  in the event a receiver is appointed to distribute
the assets of the Bank.

         Any capital  loans by a bank holding  company to any of its  subsidiary
banks are  subordinate  in right of payment  to  deposits  and to certain  other
indebtedness of such subsidiary  bank. In the event of a bank holding  company's
bankruptcy,  any  commitment  by the bank  holding  company  to a  federal  bank
regulatory  agency to maintain the capital of a subsidiary  bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.


                                       4
<PAGE>

         Under the National Bank Act, if the capital stock of a national bank is
impaired by losses or otherwise, the OCC is authorized to require payment of the
deficiency by assessment  upon the bank's  shareholders',  pro rata,  and to the
extent  necessary,  if any such assessment is not paid by any shareholder  after
three  months  notice,  to sell the stock of such  shareholder  to make good the
deficiency.

Capital Adequacy Guidelines for Bank Holding Companies and National Banks

         The various federal bank regulators,  including the Federal Reserve and
the FDIC have adopted  risk-based and leverage capital  adequacy  guidelines for
assessing bank holding company and bank capital adequacy. These standards define
what qualifies as capital and establish minimum capital standards in relation to
assets and off-balance sheet exposures, as adjusted for credit risks.

         Failure to meet capital  guidelines could subject the Bank to a variety
of enforcement  remedies,  including the termination of deposit insurance by the
FDIC and a prohibition on the taking of brokered deposits.

         The risk-based  capital standards of both the Federal Reserve Board and
the FDIC explicitly identify  concentrations of credit risk and the risk arising
from non-traditional  activities,  as well as an institution's ability to manage
these risks,  as  important  factors to be taken into account by the agencies in
assessing an institution's overall capital adequacy. The capital guidelines also
provide that an institution's exposure to a decline in the economic value of its
capital  due to changes in interest  rates be  considered  by the  agencies as a
factor in evaluating a bank's capital  adequacy.  The Federal Reserve Board also
has recently issued  additional  capital  guidelines for bank holding  companies
that engage in certain trading activities.

         The Company and the Bank exceeded all applicable  capital  requirements
at December 31, 2002.

Payment of Dividends

         The  Company is a legal  entity  separate  and  distinct  from its bank
subsidiary.  Most of the  revenues of the  Company  are  expected to result from
dividends  paid to the Company by the Bank.  There are statutory and  regulatory
requirements  applicable to the payment of dividends by subsidiary banks as well
as by the Company to its  shareholders.  It is not anticipated  that the Company
will pay cash dividends in the near future.

Certain Transactions by the Company with its Affiliates

         Federal  law   regulates   transactions   among  the  Company  and  its
affiliates,  including  the  amount of the  Bank's  loans to or  investments  in
non-bank  affiliates and the amount of advances to third parties  collateralized
by  securities  of an  affiliate.  Further,  a  bank  holding  company  and  its
affiliates  are  prohibited  from  engaging in certain  tie-in  arrangements  in
connection with any extension of credit, lease or sale of property or furnishing
of services.

FDIC Insurance Assessments

         Because the Bank's deposits are insured by the BIF, the Bank is subject
to insurance assessments imposed by the FDIC. Currently, the assessments imposed
on all FDIC deposits for deposit insurance have an effective rate ranging from 0
to 27 basis points per $100 of insured deposits,  depending on the institution's
capital position and other supervisory  factors.  However,  because  legislation
enacted in 1996 requires that both  SAIF-insured and BIF-insured  deposits pay a
pro rata portion of the interest due on the obligations  issued by the Financing
Corporation ("FICO"). To cover these obligations, during 2002, the FDIC assessed
both BIF-insured and SAIF-insured  deposits a range of 1.82 to 1.70 basis points
per  $100  of  deposits.   Currently  the  FDIC  is  assessing  BIF-insured  and
SAIF-insured  deposits  each 1.68 basis points per $100 of deposits to cover the
interest on FICO  obligations.  The FICO assessment will continue to be adjusted
quarterly to reflect  changes in the assessment  bases of the  respective  funds
based on quarterly Call Report and Thrift Financial Report submissions.


                                       5
<PAGE>

Regulation of the Bank

         The Bank is subject to examination by the OCC. In addition, the Bank is
subject to various other state and federal laws and regulations, including state
usury laws, laws relating to fiduciaries, consumer credit laws and laws relating
to branch  banking.  The  Bank's  loan  operations  are also  subject to certain
federal consumer credit laws and regulations promulgated thereunder,  including,
but not limited to: the federal  Truth-In-Lending  Act, governing disclosures of
credit terms to consumer borrowers;  the Home Mortgage Disclosure Act, requiring
financial  institutions to provide certain information concerning their mortgage
lending;  the Equal Credit Opportunity Act and the Fair Housing Act, prohibiting
discrimination on the basis of certain  prohibited  factors in extending credit;
the Fair Credit Reporting Act, governing the use and provision of information to
credit  reporting  agencies;  the Bank Secrecy Act,  dealing  with,  among other
things,  the  reporting  of  certain  currency  transactions;  and the Fair Debt
Collection Act, governing the manner in which consumer debts may be collected by
collection agencies.  The deposit operations of the Bank are also subject to the
Truth in Savings Act, requiring certain  disclosures about rates paid on savings
accounts;  the Expedited Funds  Availability Act, which deals with disclosure of
the availability of funds deposited in accounts and the collection and return of
checks by banks;  the Right to Financial  Privacy Act,  which  imposes a duty to
maintain  certain   confidentiality   of  consumer  financial  records  and  the
Electronic  Funds Transfer Act and  regulations  promulgated  thereunder,  which
govern  automatic   deposits  to  and  withdrawals  from  deposit  accounts  and
customers'  rights and  liabilities  arising  from the use of  automated  teller
machines and other electronic banking services.

         The  Bank  is  also  subject  to  the  requirements  of  the  Community
Reinvestment  Act (the  "CRA").  The CRA imposes on  financial  institutions  an
affirmative  and  ongoing  obligation  to meet the credit  needs of their  local
communities,  including low- and moderate-income neighborhoods,  consistent with
the safe and sound operation of those institutions. Each financial institution's
actual performance in meeting community credit needs is evaluated as part of the
examination process, and also is considered in evaluating mergers,  acquisitions
and applications to open a branch or facility.

Other Safety and Soundness Regulations

         Prompt  Corrective  Action.  The federal  banking  agencies  have broad
powers under  current  federal law to take prompt  corrective  action to resolve
problems of insured depository institutions.  The extent of these powers depends
upon whether the  institutions in question are "well  capitalized,"  "adequately
capitalized,"    "undercapitalized,"    "significantly    undercapitalized"   or
"critically undercapitalized."

         A bank that is "undercapitalized"  becomes subject to provisions of the
FDIA:   restricting  payment  of  capital  distributions  and  management  fees;
requiring the FDIC to monitor the condition of the bank; requiring submission by
the bank of a capital  restoration  plan;  restricting  the growth of the bank's
assets and requiring prior approval of certain expansion proposals.  A bank that
is  "significantly   undercapitalized"   is  also  subject  to  restrictions  on
compensation  paid  to  senior  management  of  the  bank,  and a bank  that  is
"critically   undercapitalized"  is  further  subject  to  restrictions  on  the
activities of the bank and restrictions on payments of subordinated  debt of the
bank.  The  purpose  of these  provisions  is to  require  banks  with less than
adequate  capital to act quickly to restore  their  capital and to have the FDIC
move  promptly  to take over  banks  that are  unwilling  or unable to take such
steps.

         Brokered Deposits.  Under current FDIC regulations,  "well capitalized"
banks may accept brokered deposits without restriction, "adequately capitalized"
banks may accept  brokered  deposits  with a waiver  from the FDIC  (subject  to
certain  restrictions on payment of rates), while  "undercapitalized"  banks may
not accept brokered  deposits.  The regulations  provide that the definitions of
"well capitalized", "adequately capitalized" and "undercapitalized" are the same
as the  definitions  adopted by the agencies to implement the prompt  corrective
action  provisions  described in the  previous  paragraph.  Management  does not
believe  that  these  regulations  will have a  material  adverse  effect on the
operations of the Bank.

Interstate Banking

         Under the Riegle-Neal  Interstate Banking and Branching  Efficiency Act
of 1994 the Company and any other  adequately  capitalized  bank holding company


                                       6
<PAGE>

located in South  Carolina can acquire a bank located in any other state,  and a
bank  holding  company  located  outside  South  Carolina  can acquire any South
Carolina-based  bank, in either case subject to certain  deposit  percentage and
other restrictions.  Unless prohibited by state law, adequately  capitalized and
managed bank holding  companies are permitted to  consolidate  their  multistate
bank operations into a single bank subsidiary and to branch  interstate  through
acquisitions. De novo branching by an out-of-state bank is permitted only if the
laws of the host state expressly permit it. The authority of a bank to establish
and operate  branches within a state continue to be subject to applicable  state
branching  laws.  South  Carolina law was amended,  effective  July 1, 1996,  to
permit such  interstate  branching but not de novo branching by an  out-of-state
bank.

         The  Riegel-Neal  Act,  together  with  legislation  adopted  in  South
Carolina,  resulted in a number of South  Carolina banks being acquired by large
out-of-state  bank  holding  companies.  Size  gives the  larger  banks  certain
advantages  in competing for business from larger  customers.  These  advantages
include  higher  lending limits and the ability to offer services in other areas
of South  Carolina  and the  region.  As a result,  the Bank does not  generally
attempt to compete  for the banking  relationships  of large  corporations,  but
concentrates its efforts on small to medium-sized businesses and on individuals.

Gramm-Leach-Bliley Act

         On November 12, 1999, the President signed the Gramm-Leach-Bliley  Act,
which  makes it easier for  affiliations  between  banks,  securities  firms and
insurance companies to take place. The Act removes Depression-era  barriers that
had separated  banks and securities  firms,  and seeks to protect the privacy of
consumers' financial information.

         Under provisions of the new legislation, which were effective March 11,
2000, and regulations adopted by the appropriate  regulators,  banks, securities
firms and insurance  companies are able to structure new affiliations  through a
holding  company  structure or through a financial  subsidiary.  The legislation
creates a new type of bank holding company called a "financial  holding company"
which has powers much more extensive than those of standard  holding  companies.
These  expanded  powers include  authority to engage in "financial  activities,"
which are  activities  that are (1)  financial  in  nature;  (2)  incidental  to
activities  that are financial in nature;  or (3)  complimentary  to a financial
activity and that do not impose a safety and soundness risk. Significantly,  the
permitted financial activities for financial holding companies include authority
to engage in merchant  banking and  insurance  activities,  including  insurance
portfolio  investing.  A bank holding company can qualify as a financial holding
company  and  expand  the  services  it  offers  only  if all of its  subsidiary
depository  institutions are well-managed,  well-capitalized and have received a
rating of "satisfactory" on their last Community Reinvestment Act examination.

         The  legislation  also  creates  another  new type of  entity  called a
"financial subsidiary." A financial subsidiary may be used by a national bank or
a group of national banks to engage in many of the same activities permitted for
a financial holding company, though several of these activities,  including real
estate development or investment,  insurance or annuity underwriting,  insurance
portfolio  investing and merchant  banking,  are reserved for financial  holding
companies.  A bank's  investment  in a financial  subsidiary  affects the way in
which the bank calculates its regulatory capital, and the assets and liabilities
of financial  subsidiaries  may not be consolidated  with those of the bank. The
bank must also be certain that its risk  management  procedures  are adequate to
protect it from  financial and  operational  risks created both by itself and by
any financial subsidiary.  Further, the bank must establish policies to maintain
the separate corporate  identities of the bank and its financial  subsidiary and
to prevent each from becoming liable for the obligations of the other.

         The Act also  establishes  the  concept  of  "functional  supervision,"
meaning that  similar  activities  should be  regulated  by the same  regulator.
Accordingly,  the Act spells out the regulatory authority of the bank regulatory
agencies,  the Securities and Exchange Commission and state insurance regulators
so that each type of activity is  supervised by a regulator  with  corresponding
expertise.  The Federal  Reserve Board is intended to be an umbrella  supervisor
with the  authority  to  require a bank  holding  company or  financial  holding
company  or any  subsidiary  of  either  to  file  reports  as to its  financial
condition,  risk management  systems,  transactions with depository  institution
subsidiaries  and  affiliates,  and compliance  with any federal law that it has
authority to enforce.

         Although the Act reaffirms that states are the regulators for insurance
activities  of  all  persons,  including   federally-chartered  banks,  the  Act
prohibits  states from preventing  depository  institutions and their affiliates
from conducting insurance activities.



                                       7
<PAGE>

         The Act also  establishes  a minimum  federal  standard  of  privacy to
protect the confidentiality of a consumer's  personal financial  information and
gives the consumer the power to choose how personal financial information may be
used by  financial  institutions.  The privacy  provisions  of the Act have been
implemented by adoption of regulations by various federal agencies.

         The  Company  anticipates  that  the Act and  the  regulations  adopted
pursuant to the Act will be likely to create new  opportunities  for it to offer
expanded  services to  customers  in the future,  though the Company has not yet
determined what the nature of the expanded services might be or when the Company
might find it feasible to offer them. The Company  further  expects that the Act
will increase competition from larger financial  institutions that are currently
more capable than the Company of taking  advantage of the opportunity to provide
a broader range of services.  However, the Company continues to believe that its
commitment to providing  high quality,  personalized  service to customers  will
permit it to remain competitive in its market area.

Legislative Proposals

         New proposed  legislation which could significantly affect the business
of banking has been  introduced  or may be  introduced  in Congress from time to
time.  Management  of  the  Bank  cannot  predict  the  future  course  of  such
legislative proposals or their impact on the Company and the Bank should they be
adopted.

Fiscal and Monetary Policy

         Banking is a business  which depends to a large extent 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 Bank 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 impact on the Company and the
Bank cannot be predicted.

Item 2.  Description of Property.

         The main offices of Carolina National Bank & Trust Company and Carolina
National  Corporation are located at 1350 Main Street, on the corner of Main and
Washington   Streets,   in  downtown   Columbia.   The  space,  which  comprises
approximately  9,718 square feet on three floors, was previously used as a bank,
and the directors,  therefore,  believe it is well-suited  for its purpose.  The
Bank has also opened a branch  office at 4840 Forest  Drive in a building  which
comprises  approximately  2,600 square feet, and which was previously  used as a
bank  branch.  This branch  facility  has ample  parking and four  drive-through
teller stations. Both properties have been leased pursuant to long term leases.

Item 3.  Legal Proceedings.

         The Bank may from time to time be a party to various legal  proceedings
arising in the ordinary  course of business,  but management is not aware of any
pending or threatened  litigation or unasserted  claims or assessments  that are
expected to result in losses,  if any,  that would be material to the  Company's
business and operations.

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

         No matters  were  submitted  to a vote of security  holders  during the
fourth quarter of 2002.

                                       8
<PAGE>

                                     PART II

Item 5.  Market for Common Equity and Related Shareholder Matters.

         Although  the common  stock of the  Company  may be traded from time to
time on an individual  basis,  no  established  trading market has developed and
none is expected to develop in the foreseeable  future.  The common stock is not
traded on any exchange or on the NASDAQ  National  Market System,  nor are there
any market makers known to management. In two public offerings in 2001 and 2002,
the Company sold an aggregate of 1,341,303 shares of its common stock for $10.00
per share. During 2002, management was also aware of a few transactions in which
the Company's common stock traded at $10.00 per share.  However,  management has
not  ascertained  that  these  transactions  are  the  result  of  arm's  length
negotiations  between the parties,  and because of the limited  number of shares
involved,  these prices may not be  indicative of the market value of the common
stock.

         As of February  28, 2003,  there were  approximately  1,005  holders of
record of the  Company's  common stock,  excluding  individual  participants  in
security position listings.

         The  Company  has never paid any cash  dividends,  and to  support  its
continued  capital  growth,  does not expect to pay cash  dividends  in the near
future.  The dividend  policy of the Company is subject to the discretion of the
Board of  Directors  and depends upon a number of factors,  including  earnings,
financial  conditions,  cash needs and general business  conditions,  as well as
applicable regulatory  considerations.  At present, the Company's only source of
funds with which it could pay  dividends  is  dividend  payments  from the Bank.
Federal  banking  regulations  restrict the amount of cash dividends that can be
paid to shareholders.

         See Item 11 for the  information  required by Item 201(d) of Regulation
S-B.

Item 6.  Management's Discussion and Analysis or Plan of Operation.

         This  discussion is intended to assist in  understanding  the financial
condition  and  results  of  operations  of the  Company,  and should be read in
conjunction with the financial  statements and related notes contained elsewhere
herein. Because the Bank is responsible for all of the Company's operations, the
discussion will refer to the results of operations of the Bank.

Basis of Presentation

The  following  discussion  should  be read in  conjunction  with the  preceding
"Selected Financial Data" and the Company's  Financial  Statements and the Notes
thereto and the other  financial data included  elsewhere in this Annual Report.
The financial  information  provided below has been rounded in order to simplify
its  presentation.  However,  the  ratios  and  percentages  provided  below are
calculated using the detailed financial  information  contained in the Financial
Statements, the Notes thereto and the other financial data included elsewhere in
this Annual Report.

General

Carolina   National   Corporation  (the  Company)  is  a  Bank  Holding  Company
headquartered in Columbia,  South Carolina.  It's subsidiary,  Carolina National
Bank and Trust  Company (the Bank),  opened for  business on July 15, 2002.  The
principal  business  activity  of the Bank is to  provide  banking  services  to
domestic markets, principally in the Columbia, South Carolina metropolitan area.
The  deposits  of  the  Bank  are  insured  by  the  Federal  Deposit  Insurance
Corporation.

The Company has recently  completed  the initial  public  offering of its common
stock in which it sold a total of  1,159,021  shares at $10.00 per share,  and a
second  offering  of its  common  stock in which it sold an  additional  133,282
shares at $10.00 per share.  Prior to the initial public  offering,  the Company
sold a total of  135,000  shares at $10.00  per  share to its  directors  and an
organizer  of the  Bank.  Proceeds  of the  three  offerings  were  used  to pay
organizational costs and provide the initial capital for the Bank.



                                       9
<PAGE>

Results of Operations

For the year ended December 31, 2002

Net interest  income for the year ended  December 31, 2002 was  $152,155.  Total
interest income for the period was $316,350 and was partially offset by interest
expense  of  $164,195.  The  components  of  interest  income  were from  loans,
including fees, of $141,281,  federal funds sold of $124,340,  investment income
of $34,363, and interest earned on escrow funds of $16,366.

The Company's net interest  spread and net interest margin were (.18%) and .61%,
respectively,  in  2002.  The  net  interest  spread  and  net  interest  margin
calculations  exclude  interest  income  earned on escrow  accounts  during  the
pre-opening  period from January 1, 2002 to July 14, 2002. The largest component
of average earning assets was federal funds.

The provision for loan losses was $152,000 in 2002. The charges to the provision
were  primarily to maintain the allowance for loan losses at a level  sufficient
to cover possible future losses in the loan portfolio.

Noninterest  income for the year ended December 31, 2002 totaled  $150,703.  The
largest  component  of  noninterest  income  was fees  from the  origination  of
mortgage loans which totaled $139,363 for the period. Service charges on deposit
accounts totaled $1,216 for the year ended December 31, 2002.

Noninterest  expense for the year ended  December 31, 2002  totaled  $1,502,863.
Noninterest expenses included $1,212,496 in pre-opening  expenses.  Salaries and
employee benefits totaled $834,306 for the period. Salaries included the cost of
key  personnel  employed  during  the  organizational  period.  Other  operating
expenses  totaled  $463,327  for  the  period.  These  expenses  included  costs
associated with the first year of operations of the Bank.

The  Company's net loss for the year ended  December 31, 2002 was $632,504.  The
net loss for the period is after the  recognization  of an income tax benefit of
$719,501 for the period.  The income tax benefit was based on an  effective  tax
rate of  34%.  The  benefit  was  based  on all  expenses  since  the  Company's
inception.  As stated  earlier,  the net loss includes  pre-opening  expenses of
$1,212,496.

For the year ended December 31, 2001

The  Company's  net  loss of  $542,094  for the year  ended  December  31,  2001
consisted solely of expenses to organize the Bank.  These expenses  consisted of
other  expenses of $317,913,  salaries and  employee  benefits of $179,388,  and
occupancy of $44,793.

Net Interest Income

General.  The largest  component of the Company's net income is its net interest
income, which is the difference between the income earned on assets and interest
paid on deposits and borrowings used to support such assets. Net interest income
is determined by the yields earned on the Company's  interest-earning assets and
the rates paid on its  interest-bearing  liabilities,  the  relative  amounts of
interest-earning  assets  and  interest-bearing  liabilities,  and the degree of
mismatch and the maturity and repricing  characteristics of its interest-earning
assets and interest-bearing  liabilities. Net interest income divided by average
interest-earning assets represents the Company's net interest margin.

Average Balances, Income and Expenses and Rates. The following tables set forth,
for the period indicated,  certain  information related to the Company's average
balance sheet and its average yields on assets and average costs of liabilities.
Such yields are derived by dividing  income or expense by the average balance of
the  corresponding  assets  or  liabilities  and are  then  annualized.  Average
balances  have been  derived  from the daily  balances  throughout  the  periods
indicated.  These amounts exclude pre-opening  activities for the period January
1, 2002 to July 14, 2002.

                                       10
<PAGE>

<TABLE>
<CAPTION>
                                                                                            July 15, 2002 to December 31, 2002
                                                                                            ----------------------------------
                                                                                       Average            Income/            Yield/
                                                                                       Balance            Expense             Rate
                                                                                       -------            -------             ----
Assets:
     Earning Assets:
<S>                                                                                 <C>                   <C>                 <C>
       Loans (1) .......................................................            $  4,653              $    141            6.56%
       Securities, taxable .............................................               3,184                    35            7.33
       Federal funds sold ..............................................              17,356                   124            1.55
                                                                                    --------              --------            ----
         Total earning assets ..........................................              25,193                   300            2.57
                                                                                    --------              --------            ====
     Cash and due from banks ...........................................                 828
     Premises and equipment ............................................                 439
     Other assets ......................................................                 129
     Allowance for loan losses .........................................                 (57)
                                                                                    --------
         Total assets ..................................................            $ 26,532
                                                                                    ========
Liabilities:
     Interest-Bearing Liabilities:
       Interest-bearing transaction accounts ...........................            $  1,054                     3             .59%
       Savings deposits ................................................               3,046                    25            1.78
       Time deposits ...................................................               8,803                   136            3.34
                                                                                    --------              --------            ----
         Total interest-bearing liabilities ............................              12,903                   164            2.75
                                                                                    --------              --------            ----
     Demand deposits ...................................................               1,427
     Accrued interest and other liabilities ............................                 382
     Shareholders' equity ..............................................              11,820
                                                                                    --------
         Total liabilities and shareholders' equity ....................            $ 26,532
                                                                                    ========
Net interest spread ....................................................                                                      (.18)%
                                                                                                                               ====
Net interest income ....................................................                                   $    136
                                                                                                           ========
Net interest margin (2) ................................................                                                        .54%
                                                                                                                               ====
</TABLE>

(1) There were no loans in nonaccrual  status.  The effect of fees  collected on
loans totaling  $27,006  increased the  annualized  yield on loans by 1.29% from
5.46%.  The effect on the annualized  yield on earning assets was an increase of
0.22% from 2.35%.  The effect on net interest spread and net interest margin was
an increase of 0.22% and 0.11% from (.40%) and .43%, respectively.
(2)  Interest  income  divided  by average  earning  assets.  Note:  Calculation
excludes  interest  income  earned on escrow  accounts and  interest  expense on
borrowed funds during pre-opening period (January 6, 2000 to February 19, 2001).

Analysis  of  Changes  in Net  Interest  Income.  Due to 2002  being the year of
commencement,  all interest  income and expense is attributable to the volume of
earning assets and interest-bearing liabilities, respectively.

Interest Sensitivity.  The Company monitors and manages the pricing and maturity
of its assets and liabilities in order to diminish the potential  adverse impact
that  changes in  interest  rates  could have on its net  interest  income.  The
principal monitoring technique employed by the Company is the measurement of the
Company's  interest  sensitivity "gap", which is the positive or negative dollar
difference  between  assets and  liabilities  that are subject to interest  rate
repricing  within a given  period  of time.  Interest  rate  sensitivity  can be
managed by repricing  assets or liabilities,  selling  securities  available for
sale,  replacing an asset or liability  at maturity,  or adjusting  the interest
rate during the life of an asset or liability. Managing the amount of assets and
liabilities  repricing  in this same time  interval  helps to hedge the risk and
minimize the impact on net interest income of rising or falling interest rates.


                                       11
<PAGE>

The  following  table sets forth the  Company's  interest  rate  sensitivity  at
December 31, 2002.
Interest Sensitivity Analysis

<TABLE>
<CAPTION>
                                                                           After Three                      Greater
                                                            Within           Through          One            Than
                                                             Three           Twelve         through          Five
  (Dollars in thousands)                                    Months           Months       five years         Years           Total
                                                            ------           ------       ----------         -----           -----
Assets
Earning Assets:
<S>                                                        <C>             <C>              <C>             <C>             <C>
   Loans ..........................................        $ 6,945         $   204          $ 2,992         $     4         $10,145
   Investment securities ..........................            271               -            5,373               -           5,644
   Federal funds sold .............................         14,798               -                -               -          14,798
                                                           -------         -------          -------         -------         -------
     Total earning assets .........................         22,014             204            8,365               4          30,587
                                                           -------         -------          -------         -------         -------
Liabilities
Interest-bearing liabilities:
   Interest-bearing deposits:
     Demand deposits ..............................          1,947               -                -               -           1,947
     Savings deposits .............................          4,825               -                -               -           4,825
     Time deposits ................................          2,481           3,888            4,765               -          11,134
                                                           -------         -------          -------         -------         -------
       Total interest-bearing deposits ............          9,253           3,888            4,765               -          17,906
                                                           -------         -------          -------         -------         -------
Period gap ........................................        $12,761         $(3,684)         $ 3,600         $     4         $12,681
                                                           =======         =======          =======         =======         =======
Cumulative gap ....................................        $12,761         $ 9,077          $12,677         $12,681         $12,681
                                                           =======         =======          =======         =======         =======
Ratio of cumulative gap
  to total earning assets .........................          41.72%          29.68%           41.45%          41.46%          41.46%
</TABLE>

The  above  table   reflects  the  balances  of   interest-earning   assets  and
interest-bearing  liabilities  at the  earlier of their  repricing  or  maturity
dates.  Overnight  federal funds are reflected at the earliest  pricing interval
due to the immediately available nature of the instruments.  Debt securities are
reflected at each instrument's ultimate maturity date. Scheduled payment amounts
of fixed rate  amortizing  loans are reflected at each  scheduled  payment date.
Scheduled  payment  amounts of variable rate  amortizing  loans are reflected at
each scheduled  payment date until the loan may be repriced  contractually;  the
unamortized  balance is  reflected at that point.  Interest-bearing  liabilities
with no  contractual  maturity,  such as savings  deposits and  interest-bearing
transaction  accounts,  are  reflected in the earliest  repricing  period due to
contractual  arrangements  which give the  Company the  opportunity  to vary the
rates paid on those deposits within a thirty-day or shorter  period.  Fixed rate
time  deposits,  principally  certificates  of deposit,  are  reflected at their
contractual maturity date.

The Company  generally  would benefit from  increasing  market rates of interest
when it has an  asset-sensitive  gap position and  generally  would benefit from
decreasing market rates of interest when it is liability-sensitive.  The Company
is  cumulatively  asset sensitive over all periods.  However,  the Company's gap
analysis is not a precise indicator of its interest  sensitivity  position.  The
analysis  presents only a static view of the timing of maturities  and repricing
opportunities,  without taking into consideration that changes in interest rates
do not affect all assets and  liabilities  equally.  Net interest  income may be
impacted by other  significant  factors in a given  interest  rate  environment,
including  changes in the volume and mix of earning assets and  interest-bearing
liabilities.

Provision and Allowance for Loan Losses

General.  The Bank has developed  policies and  procedures  for  evaluating  the
overall  quality  of its  credit  portfolio  and the  timely  identification  of
potential  problem  credits.  On a  quarterly  basis,  the  Company's  Board  of
Directors reviews and approves the appropriate level for the Company's allowance
for loan  losses  based upon  management's  recommendations,  the results of the
internal monitoring and reporting system, and an analysis of economic conditions
in its market.  The objective of  management  has been to fund the allowance for
loan losses at approximately 1.50% of total loans outstanding until a history is
established.

                                       12
<PAGE>

Additions to the allowance for loan losses,  which are expensed as the provision
for loan losses on the Company's  income  statement,  are made  periodically  to
maintain the allowance at an appropriate level based on management's analysis of
the risk inherent in the loan portfolio.  Loan losses and recoveries are charged
or credited directly to the allowance. The amount of the provision is a function
of the level of loans outstanding,  the level of nonperforming loans, historical
loan loss  experience,  the amount of loan losses  actually  charged against the
reserve during a given period, and current and anticipated economic conditions.

The Company's  allowance for loan losses is based upon judgments and assumptions
about risk elements in the  portfolio,  future  economic  conditions,  and other
factors affecting borrowers. The process includes identification and analysis of
loss  potential in various  portfolio  segments  utilizing a credit risk grading
process and specific reviews and evaluations of significant  problem credits. In
addition,  management  monitors the overall portfolio quality through observable
trends in delinquencies, charge-offs, and general and economic conditions in the
service   area.   The  adequacy  of  the  allowance  for  loan  losses  and  the
effectiveness of the Company's  monitoring and analysis system are also reviewed
periodically by the banking regulators and the Company's independent auditors.

Based on present information and an ongoing evaluation, management considers the
allowance  for loan losses to be adequate to meet  presently  known and inherent
risks in the loan  portfolio.  Management's  judgment  about the adequacy of the
allowance is based upon a number of  assumptions  about  future  events which it
believes to be reasonable but which may or may not be accurate.  Thus, there can
be no assurance that charge-offs in future periods will not exceed the allowance
for loan losses or that  additional  increases in the  allowance for loan losses
will not be  required.  The Company does not  allocate  the  allowance  for loan
losses to specific  categories of loans but evaluates the adequacy on an overall
portfolio basis utilizing a risk grading system.

The following table sets forth certain information with respect to the Company's
allowance for loan losses and the  composition of charge-offs and recoveries for
the year ended December 31, 2002.

                            Allowance for Loan Losses

(Dollars in thousands)                                                    2002
                                                                          ----
Total loans outstanding at end of period ..........................     $10,145
                                                                        =======
Average loans outstanding .........................................     $ 4,653
                                                                        =======
Balance of allowance for loan losses at beginning of period .......     $     -
Net loan losses ...................................................           -
Provision for loan losses .........................................         152
                                                                        -------
Balance of allowance for loan losses at end of year ...............     $   152
                                                                        =======

Allowance for loan losses to period end loans .....................        1.50%


Nonperforming Assets. There were no nonperforming assets at December 31, 2002.

The Company's policy with respect to nonperforming assets is as follows. Accrual
of interest  will be  discontinued  on a loan when  management  believes,  after
considering  economic and business  conditions and  collection  efforts that the
borrower's  financial  condition  is such that the  collection  of  interest  is
doubtful.  A delinquent loan will generally be placed in nonaccrual  status when
it becomes 90 days or more past due. When a loan is placed in nonaccrual status,
all  interest  which has been  accrued on the loan but  remains  unpaid  will be
reversed and deducted from current earnings as a reduction of reported  interest
income.  No  additional  interest  will be accrued on the loan balance until the
collection of both principal and interest  becomes  reasonably  certain.  When a
problem loan is finally resolved, there may ultimately be an actual writedown or
charge-off  of  the  principal  balance  of the  loan  which  would  necessitate
additional charges to earnings.

Potential  Problem  Loans.  At December 31, 2002, the Company had not identified
any criticized or classified loans through its internal review  mechanisms.  The


                                       13
<PAGE>

results  of  this  internal   review   process  are  considered  in  determining
management's  assessment  of the  adequacy  of the  allowance  for loan  losses.
However,  based on the prior  experience of management and other new banks,  the
Company has established the overall objective to maintain the allowance for loan
losses at 1.50% of total loans to provide  for the risk of loss  inherent in the
loan portfolio.

Noninterest Income and Expense

Noninterest  Income.  The largest  component of noninterest  income was mortgage
origination fees which totaled $139,363 for the year ended December 31, 2002.

The following  table sets forth the principal  components of noninterest  income
for the year ended December 31, 2002.

(Dollars in thousands)                                                      2002
                                                                            ----
Mortgage origination fees ......................................            $139
Service charges on deposit accounts ............................               2
Other income ...................................................              10
                                                                            ----
   Total noninterest income ....................................            $151
                                                                            ====

Noninterest  Expense.  Salaries  and  employee  benefits  comprised  the largest
component  of  noninterest  expense  which  totaled  $834,306 for the year ended
December  31, 2002.  Of this total,  $269,212  related to salaries  prior to the
Bank's opening on July 15, 2002.  Other operating  expenses totaled $463,327 for
the year ended December 31, 2002.  Pre-opening  expenses associated with forming
the Company comprise $444,081 of these expenses.

The following table sets forth the primary components of noninterest expense for
the years ended December 31, 2002, 2001 and 2000.

(Dollars in thousands)                               2002       2001       2000
                                                    ------     ------     ------
Salaries and employee benefits ................     $  834     $  179     $  123
Net occupancy expense .........................        151         45          8
Advertising and marketing expense .............        138         17          -
Office supplies, forms, and stationery ........         51          -          -
Data processing ...............................         24          -          -
Professional fees .............................        100         73         92
Furniture and equipment expense ...............         54          -          -
Telephone .....................................         20          -          -
Postage .......................................         11          -          -
Other .........................................        120        228          3
                                                    ------     ------     ------
   Total noninterest expense ..................     $1,503     $  542     $  226
                                                    ======     ======     ======

Earning Assets

Loans.  Loans are the largest  category of earning assets and typically  provide
higher yields than the other types of earning assets. Associated with the higher
loan  yields  are the  inherent  credit and  liquidity  risks  which  management
attempts to control and  counterbalance.  Loans averaged  $4,653,000 in 2002. At
December 31, 2002, total loans were $10,144,579.



                                       14
<PAGE>

The following table sets forth the composition of the loan portfolio by category
at December 31, 2002 and highlights the Company's  general  emphasis on mortgage
lending.

                          Composition of Loan Portfolio

                                                        December 31,
                                                        ------------
                                                             2002
                                                             ----
                                                                    Percent of
(Dollars in thousands) .......................       Amount           Total
                                                    -------           ------
Commercial and industrial ....................      $ 2,418           23.83%
Real estate:
  Mortgage-residential .......................        4,792           47.24
  Mortgage-nonresidential ....................        2,734           26.95
Consumer .....................................          201            1.98
                                                    -------          ------
    Total loans ..............................       10,145          100.00%
                                                                     ======
Allowance for loan losses ....................          152
                                                     ------
    Net loans ................................      $ 9,993
                                                     ======

The largest  component of loans in the Company's  loan  portfolio is real estate
mortgage  loans.  At  December  31,  2002 real  estate  mortgage  loans  totaled
$7,525,657 and represented 74% of the total loan portfolio.

In the context of this  discussion,  a "real estate mortgage loan" is defined as
any loan, other than a loan for construction  purposes,  secured by real estate,
regardless  of the  purpose of the loan.  It is common  practice  for  financial
institutions in the Company's market area to obtain a security  interest in real
estate whenever possible,  in addition to any other available  collateral.  This
collateral is taken to reinforce the likelihood of the ultimate repayment of the
loan and tends to increase  the  magnitude  of the real  estate  loan  portfolio
component.

Residential mortgage loans totaled $4,792,244 at December 31, 2002.  Residential
real  estate  loans  consist  of  first  and  second   mortgages  on  single  or
multi-family residential dwellings. Nonresidential mortgage loans, which include
commercial  loans  and  other  loans  secured  by  multi-family  properties  and
farmland,  totaled  $2,733,413 at December 31, 2002. The demand for  residential
and commercial real estate loans in the Columbia market has remained stable.

Commercial  and  industrial  loans  totaled  $2,417,829 at December 31, 2002 and
comprised 23.83% of the total portfolio.

The Company's loan portfolio also includes consumer loans. At December 31, 2002,
consumer  loans  totaled  $201,093  and  represented  1.98%  of the  total  loan
portfolio.

The Company's loan portfolio reflects the diversity of its market. The Company's
home office is located in Columbia,  South Carolina. The economy of the Columbia
metropolitan  area is significantly  influenced by officers of state and federal
government, a major state university, and a United States Army fort and training
center as well as numerous small and mid-sized  businesses.  Management  expects
the  area to  remain  stable  with  continued  growth  in the near  future.  The
diversity of the economy  creates  opportunities  for all types of lending.  The
Company does not engage in foreign lending.


                                       15
<PAGE>

The repayment of loans in the loan  portfolio as they mature is also a source of
liquidity for the Company.  The following  table sets forth the Company's  loans
maturing within specified intervals at December 31, 2002.

       Loan Maturity Schedule and Sensitivity to Changes in Interest Rates

<TABLE>
<CAPTION>
                                                                                    Over One
                                                                                        Year
  December 31, 2002                                                  One Year        Through           Over
  (Dollars in thousands)                                             or Less       Five Years     Five Years         Total
                                                                  -----------     -----------    -----------    -----------
<S>                                                               <C>             <C>            <C>            <C>
  Commercial and industrial ........................              $       867     $     1,551    $         -    $     2,418
  Real estate ......................................                      726           4,013          2,787          7,526
  Consumer and other ...............................                       74             103             24            201
                                                                  -----------     -----------    -----------    -----------
 ...................................................              $     1,667     $     5,667    $     2,811    $    10,145
                                                                  ===========     ===========    ===========    ===========

Loans maturing after one year with:
     Fixed interest rates ..........................                                                            $     3,244
     Floating interest rates .......................                                                                  5,234
                                                                                                                -----------
                                                                                                                $     8,478
</TABLE>

The  information  presented  in the  above  table is  based  on the  contractual
maturities  of the  individual  loans,  including  loans which may be subject to
renewal  at their  contractual  maturity.  Renewal  of such  loans is subject to
review and credit approval as well as modification of terms upon their maturity.
Consequently,  management  believes this treatment  presents fairly the maturity
and repricing structure of the loan portfolio shown in the above table.

Investment  Securities.  The investment securities portfolio is also a component
of the Company's total earning assets.  Total securities  averaged $4,521,018 in
2002. At December 31, 2002, the total securities  portfolio was $5,373,101.  All
securities were designated as held to maturity and were recorded at their cost.

The  following  table sets forth the fair  value of the  securities  held by the
Company at December 31, 2002.

                            Fair Value of Securities

                                                                December 31,
                                                                ------------
                                                                    2002
                                                                    ----
  (Dollars in thousands)
  U.S. government agencies .................................    $       5,378
  Nonmarketable equity securities ..........................              271
                                                                -------------
     Total investment securities ...........................    $       5,649
                                                                =============

The following  table sets forth the scheduled  maturities  and average yields of
securities held to maturity at December 31, 2002.

             Investment Securities Maturity Distribution and Yields

                                                           After One But
  December 31, 2002                                     Within Five Years
                                                        -----------------
  (Dollars in thousands)                           Amount              Yield
                                                   ------              -----
  U.S. government agencies ..................   $       5,373            1.58%
                                                =============


Nonmarketable  equity securities totaling $270,500 have no set maturity date and
had a yield of 6.0% at December 31, 2002.

                                       16
<PAGE>

Other attributes of the securities  portfolio,  including yields and maturities,
are discussed above in "---Net Interest Income--- Interest Sensitivity."

Short-Term  Investments.  Short-term  investments,  which  consist  primarily of
federal  funds  sold,  averaged  $17,356,355  in 2002.  At  December  31,  2002,
short-term investments totaled $14,798,000.  These funds are an important source
of the Company's  liquidity.  Federal funds are generally invested in an earning
capacity  on  an  overnight  basis.   The  significant   balance  in  short-term
investments  was partially  attributable to the investment in federal funds sold
as a  result  of  excess  funds  from the  Company's  recently  completed  stock
offerings.

Deposits

Average interest-bearing liabilities totaled $12,903,115 in 2002 which consisted
solely of interest-bearing deposits.

Deposits.  Average total deposits totaled  $14,330,142  during 2002. At December
31, 2002, total deposits were $20,151,627.

The  following  table sets forth the  deposits  of the Company by category as of
December 31, 2002.

                                    Deposits
                                                                   December 31,
                                                                   ------------
                                                                       2002
                                                                       ----
                                                                     Percent of
  (Dollars in thousands)                               Amount         Deposits
                                                       ------         --------
Demand deposit accounts .......................       $ 2,246           11%
NOW accounts ..................................         1,947           10
Savings accounts ..............................         4,825           24
Time deposits less than $100 ..................         7,204           36
Time deposits of $100 or over .................         3,930           19
                                                      -------          ---
   Total deposits .............................       $20,152          100%
                                                      =======          ===

Core  deposits,  which  exclude  certificates  of deposit of  $100,000  or more,
provide a relatively  stable funding source for the Company's loan portfolio and
other earning assets.  The Company's core deposits were  $16,221,647 at December
31, 2002.

Deposits, and particularly core deposits,  have been a primary source of funding
and have  enabled  the  Company to meet  successfully  both its  short-term  and
long-term  liquidity  needs.  Management  anticipates  that such  deposits  will
continue  to be the  Company's  primary  source of  funding in the  future.  The
Company's  loan-to-deposit  ratio was 50.34% at December 31, 2002.  The maturity
distribution  of the Company's time deposits over $100,000 at December 31, 2002,
is set forth in the following table:

            Maturities of Certificates of Deposit of $100,000 or More
<TABLE>
<CAPTION>
                                                                                                After Six
                                                                                 After Three      Through       After
                                                                  Within Three   Through Six       Twelve      Twelve
  (Dollars in thousands)                                              Months         Months        Months      Months        Total
                                                                  -----------    -----------  ------------   ---------  -----------
<S>                                                               <C>            <C>          <C>            <C>        <C>
  Certificates of deposit of $100 or more ...................     $     1,010    $       -    $      1,208   $   1,712  $     3,930
</TABLE>

Approximately  26% of the  Company's  time  deposits over $100,000 had scheduled
maturities  within three months,  and 56% had  maturities  within twelve months.
Large  certificate  of  deposit  customers  tend to be  extremely  sensitive  to
interest rate levels, making these deposits less reliable sources of funding for
liquidity planning purposes than core deposits.


                                       17
<PAGE>

Capital

The Bank is subject to various regulatory capital  requirements  administered by
the federal banking agencies.  Failure to meet minimum capital  requirements can
initiate  certain  mandatory and possibly  additional  discretionary  actions by
regulators  that,  if  undertaken,  could have a  material  effect on the Bank's
financial  statements.  Under capital  adequacy  guidelines  and the  regulatory
framework for prompt  corrective  action,  the Bank must meet  specific  capital
guidelines that involve quantitative measures of the Bank's assets, liabilities,
and certain  off-balance-sheet  items as calculated under regulatory  accounting
practices.  The Bank's capital amounts and  classifications  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 Bank to  maintain  minimum  ratios of Tier 1 and total  capital as a
percentage of assets and off-balance-sheet exposures,  adjusted for risk weights
ranging  from  0% to  100%.  Tier 1  capital  of the  Bank  consists  of  common
shareholders'  equity,  excluding  the  unrealized  gain or  loss on  securities
available-for-sale,  minus certain  intangible assets. The Bank's Tier 2 capital
consists of the allowance for loan losses subject to certain limitations.  Total
capital for purposes of computing the capital ratios consists of the sum of Tier
1 and Tier 2 capital.  The  regulatory  minimum  requirements  are 4% for Tier 1
capital and 8% for total risk-based capital.

The Bank is also  required  to  maintain  capital  at a minimum  level  based on
quarterly  average  assets,  which  is  known as the  leverage  ratio.  Only the
strongest  banks are allowed to maintain  capital at the minimum  requirement of
3%. All others are subject to maintaining ratios 1% to 2% above the minimum.

The Bank exceeded the regulatory  capital  requirements  at December 31, 2002 as
set forth in the following table.

                     Analysis of Capital and Capital Ratios

  December 31,                                                            2002
                                                                        -------
  (Dollars in thousands)
  Tier 1 capital ....................................................   $ 7,163
  Tier 2 capital ....................................................       152
                                                                        -------
     Total qualifying capital .......................................   $ 7,315
                                                                        =======

  Risk-adjusted total assets (including off-balance-sheet exposures)    $17,082
                                                                        =======

  Tier 1 risk-based capital ratio ...................................     41.93%
  Total risk-based capital ratio ....................................     42.82%
  Tier 1 leverage ratio .............................................     23.18%

Off-Balance Sheet Risk

Through its  operations,  the Bank was made  contractual  commitments  to extend
credit in the ordinary course of its business activities.  These commitments are
legally   binding   agreements  to  lend  money  to  the  Bank's   customers  at
predetermined  interest  rates for a specified  period of time.  At December 31,
2002,  the Bank had issued  commitments  to extend credit of $5,526,127  through
various types of commercial lending  arrangements.  Approximately  $5,389,460 of
these commitments to extend credit had variable rates.

The  following  table sets forth the  length of time until  maturity  for unused
commitments to extend credit and standby letters of credit at December 31, 2002.

                              After One After Three

<TABLE>
<CAPTION>
                                                                       Through      Through                   Greater
                                                        Within One       Three       Twelve      Within One      Than
(Dollars in thousands)                                      Month       Months       Months        Year       One Year        Total
                                                            -----       ------       ------        ----       --------        -----
<S>                                                          <C>        <C>           <C>          <C>         <C>           <C>
Unused commitments to extend credit .................        $133       $   -         $640         $773        $4,753        $5,526
                                                             ====       =====         ====         ====        ======        ======
</TABLE>

                                       18
<PAGE>

The Bank evaluates each customer's  credit  worthiness on a case-by-case  basis.
The  amount  of  collateral  obtained,  if  deemed  necessary  by the Bank  upon
extension  of  credit,  is  based  on its  credit  evaluation  of the  borrower.
Collateral  varies but may include  accounts  receivable,  inventory,  property,
plant and equipment, commercial and residential real estate.

Critical Accounting Policies

The Company has adopted various accounting policies which govern the application
of  accounting  principles  generally  accepted  in  the  United  States  in the
preparation of our financial statements. Its significant accounting policies are
described in the footnotes to the consolidated  financial statements at December
31,  2002 as filed with the  Company's  annual  report on Form  10-KSB.  Certain
accounting policies involve  significant  judgments and assumptions which have a
material impact on the carrying value of certain assets and  liabilities.  These
accounting  policies are  considered  to be critical  accounting  policies.  The
judgments  and  assumptions  used are based on historical  experience  and other
factors, which are believed to be reasonable under the circumstances. Because of
the nature of the judgments and  assumptions,  actual  results could differ from
these judgments and estimates which could have a material impact on the carrying
values of assets and liabilities and results of operations.

Management  believes  the  allowance  for loan  losses is a critical  accounting
policy that  requires  the most  significant  judgments  and  estimates  used in
preparation of the consolidated  financial  statements.  Refer to the portion of
this  discussion  that addresses the allowance for loan losses for a description
of our processes and methodology for determining our allowance for loan losses.

Liquidity Management and Capital Resources

Liquidity management involves monitoring the Company's sources and uses of funds
in order to meet its day-to-day cash flow requirements while maximizing profits.
Liquidity  represents  the  ability of a Company to convert  assets into cash or
cash  equivalents  without  significant  loss and to raise  additional  funds by
increasing liabilities.  Without proper liquidity management,  the Company would
not be able to perform the primary  function  of a  financial  intermediary  and
would, therefore, not be able to meet the needs of the communities it serves.

Liquidity  management  is made more  complex  because  different  balance  sheet
components are subject to varying  degrees of management  control.  For example,
the timing of maturities of the  investment  portfolio is very  predictable  and
subject to a high degree of control at the time  investment  decisions are made.
However,  net deposit inflows and outflows are far less  predictable and are not
subject to nearly the same degree of control.  The Company  also has the ability
to obtain funds from various financial institutions should the need arise.

Impact of Inflation

Unlike  most  industrial  companies,  the assets and  liabilities  of  financial
institutions  such as the Bank are  primarily  monetary  in  nature.  Therefore,
interest rates have a more significant  effect on the Bank's performance than do
the effects of changes in the general rate of inflation and change in prices. In
addition, interest rates do not necessarily move in the same direction or in the
same  magnitude as the prices of goods and  services.  As discussed  previously,
management seeks to manage the relationships  between interest  sensitive assets
and  liabilities  in order to protect  against wide interest rate  fluctuations,
including those resulting from inflation.

Item 7.  Financial Statements.





                                       19
<PAGE>








                          INDEPENDENT AUDITORS' REPORT


The Board of Directors
Carolina National Corporation
Columbia, South Carolina


We have  audited  the  accompanying  consolidated  balance  sheets  of  Carolina
National  Corporation  as  of  December  31,  2002  and  2001  and  the  related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for the years ended December 31, 2002 and 2001 and for the period February
14, 2000  (inception) to December 31, 2000.  These financial  statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the 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 financial  statements  referred to above present fairly, in
all material respects,  the financial position of Carolina National Corporation,
as of  December  31, 2002 and 2001 and the  results of its  operations  and cash
flows for the years ended December 31, 2002 and 2001 and for the period February
14,  2000  (inception)  to  December  31,  2000 in  conformity  with  accounting
principles generally accepted in the United States of America.


                                                        s/Elliott Davis, LLC


Elliott Davis, LLC
Columbia, South Carolina
February 6, 2003



                                       20
<PAGE>



                          CAROLINA NATIONAL CORPORATION

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                                                             December 31,
                                                                                                             ------------
                                                                                                      2002                  2001
                                                                                                      ----                  ----
Assets:
     Cash and cash equivalents:
<S>                                                                                              <C>                   <C>
         Cash and due from banks .......................................................         $    970,326          $    103,427
         Federal funds sold ............................................................           14,798,000                     -
                                                                                                 ------------          ------------
              Total cash and cash equivalents ..........................................           15,768,326               103,427
                                                                                                 ------------          ------------

     Investment securities:
         Securities held to maturity
           (fair value $5,377,718) .....................................................            5,373,101                     -
         Nonmarketable equity securities ...............................................              270,500                     -
                                                                                                 ------------          ------------
              Total investment securities ..............................................            5,643,601                     -
                                                                                                 ------------          ------------

     Loans receivable ..................................................................           10,144,579                     -
         Less allowance for loan losses ................................................              152,000                     -
                                                                                                 ------------          ------------
              Loans, net ...............................................................            9,992,579                     -
                                                                                                 ------------          ------------

     Premises, furniture and equipment, net ............................................              514,384                 4,560
     Accrued interest receivable .......................................................              103,023                     -
     Deferred tax asset ................................................................              719,501                     -
     Other assets ......................................................................               68,892                49,397
                                                                                                 ------------          ------------

              Total assets .............................................................         $ 32,810,306          $    157,384
                                                                                                 ============          ============

Liabilities:
     Deposits:
         Noninterest-bearing transaction accounts ......................................         $  2,245,732         $           -
         Interest-bearing transaction accounts .........................................            1,947,377                     -
         Savings and money market ......................................................            4,824,965                     -
         Time deposits $100,000 and over ...............................................            3,929,980                     -
         Other time deposits ...........................................................            7,203,573                     -
                                                                                                 ------------          ------------
              Total deposits ...........................................................           20,151,627                     -
                                                                                                 ------------          ------------

     Accrued interest payable ..........................................................               19,892                     -
     Other liabilities .................................................................               44,910                72,499
                                                                                                 ------------          ------------
              Total liabilities ........................................................           20,216,429                72,499
                                                                                                 ------------          ------------

Commitments and contingencies (Notes 9 and 11)

Shareholders' equity:
     Preferred stock, 10,000,000 shares authorized, none issued ........................                    -                     -
     Common stock, no par value, 20,000,000 shares authorized;
       and 1,427,303 shares issued, and 85,330 shares outstanding at
       December 31, 2002 and 2001, respectively ........................................           13,994,796               860,000
     Unearned stock compensation .......................................................                    -                (6,700)
     Retained deficit ..................................................................           (1,400,919)             (768,415)
                                                                                                 ------------          ------------
              Total shareholders' equity ...............................................           12,593,877                84,885
                                                                                                 ------------          ------------

              Total liabilities and shareholders' equity ...............................         $ 32,810,306          $    157,384
                                                                                                 ============          ============
</TABLE>

The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.



                                       21
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                      Consolidated Statements of Operations
                      for the years ended December 31, 2002
                 and 2001, and for the period February 14, 2000
                        (inception) to December 31, 2000

<TABLE>
<CAPTION>
                                                                                  2002               2001               2000
                                                                                  ----               ----               ----
Interest income:
<S>                                                                           <C>                <C>                  <C>
     Loans, including fees ..........................................         $   141,281        $           -        $           -
     Investment securities:
         Escrow interest ............................................              16,366
         Taxable ....................................................              26,938                    -                    -
         Nonmarketable equity securities ............................               7,425                    -                    -
     Federal funds sold .............................................             124,340                    -                    -
                                                                              -----------          -----------          -----------
              Total .................................................             316,350                    -                    -
                                                                              -----------          -----------          -----------

Interest expense:
     Time deposits $100,000 and over ................................              48,537                    -                    -
     Other deposits .................................................             115,658                    -                    -
                                                                              -----------          -----------          -----------
              Total .................................................             164,195                    -                    -
                                                                              -----------          -----------          -----------

Net interest income .................................................             152,155                    -                    -

Provision for loan losses ...........................................             152,000                    -                    -
                                                                              -----------          -----------          -----------

Net interest income after provision for loan losses .................                 155                    -                    -
                                                                              -----------          -----------          -----------

Noninterest income:
     Service charges on deposit accounts ............................               1,216                    -                    -
     Residential mortgage origination fees ..........................             139,363                    -                    -
     Other ..........................................................              10,124                    -                    -
                                                                              -----------          -----------          -----------
         Total noninterest income ...................................             150,703                    -                    -
                                                                              -----------          -----------          -----------

Noninterest expenses:
     Salaries and employee benefits .................................             834,306              179,388              123,189
     Net occupancy ..................................................             151,405               44,793                7,878
     Furniture and equipment ........................................              53,825                    -                    -
     Other operating ................................................             463,327              317,913               95,254
                                                                              -----------          -----------          -----------
         Total noninterest expense ..................................           1,502,863              542,094              226,321
                                                                              -----------          -----------          -----------

Loss before income taxes ............................................          (1,352,005)            (542,094)            (226,321)

Income tax benefit ..................................................            (719,501)                   -                    -
                                                                              -----------          -----------          -----------

Net loss ............................................................         $  (632,504)         $  (542,094)         $  (226,321)
                                                                              ===========          ===========          ===========

Earnings per share
Basic loss per share ................................................         $     (0.91)                 N/A                  N/A
                                                                              ===========          ===========          ===========

Average shares outstanding ..........................................             693,427               36,597                4,104
                                                                              ===========          ===========          ===========
</TABLE>

The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.


                                       22
<PAGE>

                          CAROLINA NATIONAL CORPORATION

           Consolidated Statements of Changes in Shareholders' Equity
                      for the years ended December 31, 2002
                 and 2001, and for the period February 14, 2000
                        (inception) to December 31, 2000


<TABLE>
<CAPTION>

                                                                                         Unearned
                                                              Common stock                stock
                                                              ------------                compen-        Retained
                                                           Shares        Amount           sation          deficit          Total
                                                           ------        ------           ------          -------          -----
<S>                                                 <C>              <C>              <C>              <C>              <C>
Balance, February 14, 2000 .....................                     $                $                $                $

Proceeds from the sale of stock ................          22,000          220,000                                           220,000

Net loss .......................................                                                           (226,321)       (226,321)
                                                    ------------     ------------     ------------     ------------    ------------

Balance, December 31, 2000 .....................          22,000          220,000                          (226,321)         (6,321)

Proceeds from the sale of stock ................          74,000          740,000                                           740,000

Redemption of stock (10,000 shares at
  $10.00 per share) ............................         (10,000)        (100,000)                                         (100,000)

Unearned stock compensation ....................            (670)                           (6,700)                          (6,700)

Net loss .......................................                                                           (542,094)       (542,094)
                                                    ------------     ------------     ------------     ------------     ------------

Balance, December 31, 2001 .....................          85,330          860,000           (6,700)        (768,415)         84,885

Proceeds from sale of stock ....................       1,341,303       13,413,030                                        13,413,030

Stock issuance costs ...........................                         (278,234)                                         (278,234)

Net loss .......................................                                                           (632,504)       (632,504)

Earned stock compensation ......................             670                             6,700                            6,700
                                                    ------------     ------------     ------------     ------------    ------------

Balance,
  December 31, 2002 ............................       1,427,303     $ 13,994,796     $          -     $ (1,400,919)    $12,593,877
                                                    ============     ============     ============     ============     ===========
</TABLE>

The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.

                                       23
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                      Consolidated Statements of Cash Flows
                      for the years ended December 31, 2002
                 and 2001, and for the period February 14, 2000
                        (inception) to December 31, 2000


<TABLE>
<CAPTION>
                                                                                   2002                2001                2000
                                                                                   ----                ----                ----
Cash flows from operating activities:
<S>                                                                          <C>                  <C>                  <C>
Net loss ............................................................        $   (632,504)        $   (542,094)        $   (226,321)
Adjustments to reconcile net loss to net cash used by
  operating activites:
     Provision for loan losses ......................................             152,000                    -                    -
     Depreciation and amortization expense ..........................              40,705                    -                    -
     Discount accretion and premium amortization ....................               7,711                    -                    -
     Deferred income tax benefit ....................................            (719,501)                   -                    -
     Increase in accrued interest receivable ........................            (103,023)                   -                    -
     Increase in accrued interest payable ...........................              19,892                    -                    -
     Increase in other assets .......................................             (19,495)                   -                    -
     Increase (decrease) in other liabilities .......................             (27,589)               4,513               26,889
                                                                             ------------         ------------         ------------
         Net cash used by operating activities ......................          (1,281,804)            (537,581)            (199,432)
                                                                             ------------         ------------         ------------

Cash flows from investing activities:
     Purchases of securities held to maturity .......................          (8,680,812)                   -                    -
     Purchases of nonmarketable equity securities ...................            (270,500)                   -                    -
     Calls of securities held to maturity ...........................           3,300,000                    -                    -
     Net increase in loans ..........................................         (10,144,579)                   -                    -
     Purchase of premises, furniture and equipment ..................            (550,529)              (4,560)                   -
                                                                             ------------         ------------         ------------
         Net cash used by investing activities ......................         (16,346,420)              (4,560)                   -
                                                                             ------------         ------------         ------------

Cash flows from financing activities:
     Net increase in demand deposits, interest-bearing
       transaction accounts and savings accounts ....................          11,133,553                                         -
     Net increase in certificates of deposit and
       other time deposits ..........................................           9,018,074                                         -
     Issuance of common stock, net of direct costs ..................          13,134,796              725,000              220,000
     Earned deferred stock compensation .............................               6,700                    -                    -
     Redemption of stock ............................................                   -             (100,000)                   -
                                                                             ------------         ------------         ------------
         Net cash provided by financing activites ...................          33,293,123              625,000              220,000
                                                                             ------------         ------------         ------------

Net increase in cash and cash equivalents ...........................          15,664,899               82,859               20,568

Cash and cash equivalents, beginning of period ......................             103,427               20,568                    -
                                                                             ------------         ------------         ------------

Cash and cash equivalents, end of period ............................        $ 15,768,326         $    103,427         $     20,568
                                                                             ============         ============         ============
</TABLE>

The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.


                                       24
<PAGE>


                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization - Carolina  National  Corporation (the Company) was incorporated on
February 14, 2000,  to be a bank holding  company for its  subsidiary,  Carolina
National Bank & Trust Company (the Bank). Carolina National Bank & Trust Company
commenced business on July 15, 2002. The principal business activity of the Bank
is to provide  banking  services to domestic  markets,  principally  in Richland
County,  South Carolina.  The Bank is chartered under the National Bank act, and
its  deposits  are insured by the Federal  Deposit  Insurance  Corporation.  The
consolidated financial statements include the accounts of the parent company and
its wholly-owned  subsidiary after  elimination of all significant  intercompany
balances and transactions.

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

Material  estimates that are  particularly  susceptible  to  significant  change
relate to the  determination  of the  allowance  for losses on loans,  including
valuation  allowances  for  impaired  loans,  and the  valuation  of real estate
acquired  in  connection  with  foreclosures  or in  satisfaction  of loans.  In
connection  with the  determination  of the  allowances  for losses on loans and
foreclosed  real  estate,   management   obtains   independent   appraisals  for
significant  properties.  Management must also make estimates in determining the
estimated useful lives and methods for depreciating premises and equipment.

While  management  uses available  information to recognize  losses on loans and
foreclosed  real estate,  future  additions to the  allowances  may be necessary
based on changes in local economic conditions. In addition, regulatory agencies,
as an  integral  part of their  examination  process,  periodically  review  the
Company's  allowances  for  losses on loans and  foreclosed  real  estate.  Such
agencies may require the Company to recognize  additions to the allowances based
on their  judgments  about  information  available  to them at the time of their
examination.  Because  of these  factors,  it is  reasonably  possible  that the
allowances for losses on loans and foreclosed real estate may change  materially
in the near term.

Significant  Group  Concentrations  of  Credit  Risk  - Most  of  the  Company's
activities  are with  customers  located  within the  Columbia,  South  Carolina
metropolitan  area.  The types of  securities  in which the Company  invests are
discussed  in Note 3. The types of  lending  in which the  Company  engages  are
discussed in Note 4. The Company does not have any significant concentrations to
any one industry or customer.

Securities Held to Maturity - Investment securities are stated at cost, adjusted
for  amortization  of  premium  and  accretion  of  discount   computed  by  the
straight-line  method. The Company has the ability and management has the intent
to hold investment securities to maturity. Reductions in market value considered
by management  to be other than  temporary are reported as a realized loss and a
reduction in the cost basis of the security. The Company does not actively trade
securities  and has no  securities  classified as available for sale at December
31, 2002.

Nonmarketable  Equity Securities - Nonmarketable  equity securities  include the
cost of the  Company's  investment  in the stock of the Federal  Reserve Bank of
Richmond  and the Federal  Home Loan Bank of Atlanta.  The stocks have no quoted
market value and no ready  market  exists.  Investment  in the Federal Home Loan
Bank is a condition of borrowing  from the Federal Home Loan Bank, and the stock
is pledged to collateralize  such  borrowings.  At December 31, 2002, the Bank's
investment in Federal Home Loan Bank stock was $500.  The  investment in Federal
Reserve Bank stock totaled $270,000 at December 31, 2002.  Dividends received on
these stocks are included as a separate component of interest income.


                                       25
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Pre-opening  expenses - The activities  associated with organizing the Bank were
conducted  in the name of the  Company  during the  developmental  stage  period
(February 14, 2000 to July 14, 2002).

On July 14, 2002,  the close of the  development  stage  period,  the  Company's
financial position was as follows:

                  Prepaid expenses ...........................  $      39,896
                  Premises and equipment .....................         48,648
                  Deferred stock offering costs ..............        256,262
                  Pre-opening expenses .......................     (1,212,497)
                                                                -------------

                  Net pre-opening expenses ...................  $    (867,691)
                                                                =============

Loans receivable - Loans are stated at their unpaid principal balance.  Interest
income is  computed  using the simple  interest  method and is  recorded  in the
period earned.

When  serious  doubt  exists as to the  collectibility  of a loan or when a loan
becomes  90 days  past due as to  principal  or  interest,  interest  income  is
generally  discontinued  unless the estimated net realizable value of collateral
exceeds the principal balance and accrued  interest.  When interest accruals are
discontinued, income earned but not collected is reversed.

The Company  identifies  impaired loans through its normal  internal loan review
process.  Loans  on  the  Company's  problem  loan  watch  list  are  considered
potentially impaired loans. These loans are evaluated in determining whether all
outstanding  principal and interest are expected to be collected.  Loans are not
considered  impaired if a minimal  payment  delay  occurs and all  amounts  due,
including  accrued  interest at the contractual  interest rate for the period of
delay,  are  expected to be  collected.  At December 31,  2002,  management  has
determined that no impairment of loans existed.

Allowance  for Loan Losses - An  allowance  for loan losses is  maintained  at a
level deemed  appropriate  by  management  to provide  adequately  for known and
inherent losses in the loan portfolio.  The allowance is based upon a continuing
review of past loan loss  experience,  current  and future  economic  conditions
which may affect the borrowers'  ability to pay, and the  underlying  collateral
value of the loans.  Loans which are deemed to be uncollectible  are charged off
and deducted  from the  allowance.  The  provision  for possible loan losses and
recoveries of loans previously charged off are added to the allowance.

Premises, Furniture and Equipment - Premises, furniture and equipment are stated
at cost,  less  accumulated  depreciation.  The  provision for  depreciation  is
computed by the  straight-line  method,  based on the estimated useful lives for
furniture and equipment of 5 to 10 years.  Leasehold  improvements are amortized
over the life of the lease. The cost of assets sold or otherwise disposed of and
the related  allowance for depreciation are eliminated from the accounts and the
resulting  gains or losses are reflected in the income  statement when incurred.
Maintenance  and  repairs  are  charged to current  expense.  The costs of major
renewals and improvements are capitalized.

Income Taxes - Income taxes are the sum of amounts  currently  payable to taxing
authorities  and the net changes in income taxes payable or refundable in future
years.  Income  taxes  deferred  to future  years  are  determined  utilizing  a
liability   approach.   This  method  gives  consideration  to  the  future  tax
consequences  associated with differences  between financial  accounting and tax
bases of certain assets and liabilities  which are principally the allowance for
loan losses and depreciable premises and equipment.



                                       26
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Stock-Based  Compensation - The Company has a stock-based employee  compensation
plan which is further  described  in Note 13. The Company  accounts for the plan
under the recognition and measurement  principles of Accounting Principles Board
("APB")  Opinion No. 25,  Accounting for Stock Issued to Employees,  and related
Interpretations.  No stock-based employee  compensation cost is reflected in net
income,  as all stock options  granted  under these plans had an exercise  price
equal to the market value of the  underlying  common stock on the date of grant.
In addition,  the Company has stock  warrants which were issued to organizers of
the  Bank  in  connection  with  the  initial  offering.   The  following  table
illustrates  the effect on net income (loss) and earnings  (losses) per share if
the  Company  had applied the fair value  recognition  provisions  of  Financial
Accounting  Standards Board ("FASB") Statement of Financial Accounting Standards
("SFAS")  No. 123,  Accounting  for  Stock-Based  Compensation,  to  stock-based
employee compensation for both the stock options and stock warrants.

                                                                     Year Ended
                                                                    December 31,
                                                                    ------------
                                                                       2002
                                                                       ----

Net loss, as reported ......................................        $  (632,504)
Deduct: Total stock-based employee
  compensation expense determined
  under fair value based method
  for all awards, net of related tax effects ...............           (415,522)
                                                                    -----------

Pro forma net loss .........................................        $(1,048,026)
                                                                    ===========

Loss per share:
  Basic - as reported ......................................        $     (0.91)
                                                                    ===========
  Basic - pro forma ........................................        $     (1.51)
                                                                    ===========

In calculating the pro forma  disclosures,  the fair value of options granted is
estimated as of the date granted using the  Black-Scholes  option  pricing model
with  the  following  weighted-average  assumptions  used  for  grants  in 2002:
dividend yield of 0 percent for the year;  expected  volatility of 0 percent for
the year; risk-free interest rate of 3.84 percent for 2002; and expected life of
10 years.

Loss  Per  Share  -  Basic  loss  per  share  represents   income  available  to
shareholders divided by the weighted-average number of common shares outstanding
during the period.  Dilutive loss per share  reflects  additional  common shares
that would have been  outstanding if dilutive  potential  common shares had been
issued. Potential common shares that may be issued by the Company relate to both
outstanding  warrants and stock options,  and are determined  using the treasury
stock method.  The  outstanding  warrants and stock  options are not  considered
common  stock  equivalents  and  therefore,  dilutive  loss  per  share  are not
presented.

Statement of Cash Flows - For purposes of reporting  cash flows in the financial
statements,  the  Company  considers  certain  highly  liquid  debt  instruments
purchased with a maturity of three months or less to be cash  equivalents.  Cash
equivalents  include  amounts due from banks and federal funds sold.  Generally,
federal funds are sold for one-day periods.

Interest  paid on deposits and other  borrowings  totaled  $164,195 for the year
ended  December 31, 2002.  No interest was paid for the year ended  December 31,
2001 or for the period February 14, 2000 to December 31, 2000, respectively.

There were no income tax payments  during the years ended  December 31, 2002 and
2001, or for the period February 14, 2000 to December 31, 2000.



                                       27
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Off-Balance-Sheet  Financial  Instruments - In the ordinary  course of business,
the Company enters into  off-balance-sheet  financial instruments  consisting of
commitments to extend credit and letters of credit. These financial  instruments
are  recorded  in the  financial  statements  when they  become  payable  by the
customer.

Recent  Accounting  Pronouncements  - In October 2002,  the FASB issued SFAS No.
147,  Accounting  for Certain  Financial  Institutions  - an  amendment  of FASB
Statements  No. 72 and 144 and FASB  Interpretation  No.  9,  which  brings  all
business combinations involving financial institutions,  except mutual financial
institutions,  into the  scope  of SFAS No.  141,  Business  Combinations.  This
statement requires that all acquisitions of financial institutions that meet the
definition  of a  business,  including  acquisitions  of  part  of  a  financial
institution  that meet the  definition  of a business,  must be accounted for in
accordance  with  SFAS No.  141 and the  related  intangibles  accounted  for in
accordance  with SFAS No. 142. SFAS No. 147 removes such  acquisitions  from the
scope of SFAS No. 72,  Accounting for Certain  Acquisitions of Banking or Thrift
Institutions.  SFAS No.  147 also  amends  SFAS No.  144 to include in its scope
long-term customer relationship intangibles of financial institutions.  SFAS No.
147 was effective  upon  issuance and had no impact on the  Company's  financial
statements.

In December  2002,  the FASB issued SFAS No.  148,  Accounting  for  Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123.
This  Statement  amends FASB  Statement  No.  123,  Accounting  for  Stock-Based
Compensation,  to provide  alternative  methods of  transition  for a  voluntary
change to the fair value based method of  accounting  for  stock-based  employee
compensation.  In addition, this statement amends the disclosure requirements of
Statement  123 to require  prominent  disclosures  in both  annual  and  interim
financial  statements  about the method of accounting for  stock-based  employee
compensation and the effect of the method used on reported results.  The Company
adopted this standard  effective December 31, 2002 and has included the required
disclosures in the footnotes to the financials.  The Company has not elected the
fair value  treatment  of  stock-based  compensation  and the  adoption  of this
standard had no impact on its financial position.

Other  accounting  standards  that have been  issued or  proposed by the FASB or
other standards-setting  bodies that do not require adoption until a future date
are not  expected  to  have a  material  impact  on the  consolidated  financial
statements upon adoption.

Reclassifications  - Certain captions and amounts in the 2001 and 2000 financial
statements were reclassified to conform with the 2002 presentation.


NOTE 2 - CASH AND DUE FROM BANKS

The Company is required to maintain cash balances with The Bankers Bank to cover
all cash letter  transactions.  At December 31, 2002, the requirement was met by
the cash balance in the account and by the line available for federal funds.


NOTE 3 - INVESTMENT SECURITIES

The  amortized  cost and estimated  fair values of  securities  held to maturity
were:



                                       28
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

<TABLE>
<CAPTION>
                                                                                             Gross Unrealized
                                                                     Amortized               ----------------            Estimated
                                                                        Costs             Gains            Losses        Fair Value
                                                                        -----             -----            ------        ----------
December 31, 2002
<S>                                                               <C>               <C>               <C>              <C>
U.S. government agencies and corporations                         $    5,373,101    $       4,617     $           -    $   5,377,718
                                                                  ==============    =============     =============    =============
</TABLE>

There were no sales of securities in 2002.

NOTE 3 - INVESTMENT SECURITIES (continued)

The following is a summary of  maturities  of securities  held to maturity as of
December 31, 2002. The amortized cost and estimated fair values are based on the
contractual  maturity  dates.  Actual  maturities  may differ  from  contractual
maturities  because  borrowers may have the right to call or prepay  obligations
with or without penalty.

                                                Amortized        Estimated
                                                   Cost          Fair Value
                                                   ----          ----------

Due after one year but within five years ...  $   5,373,101    $   5,377,718
                                              =============    =============


NOTE 4 - LOANS RECEIVABLE

Major classifications of loans receivable are summarized as follows:

                                                                    December 31,
                                                                       2002
                                                                       ----
Real estate - mortgage .................................             $ 7,525,657
Commercial and industrial ..............................               2,417,829
Consumer and other .....................................                 201,093
                                                                     -----------

     Total gross loans .................................             $10,144,579
                                                                     ===========

Transactions in the allowance for loan losses during 2002 are summarized below:

                                                                          2002
                                                                          ----
Balance, beginning of year .................................       $           -
Provision charged to operations ............................             152,000
                                                                        --------

         Balance, end of year ..............................            $152,000
                                                                        ========

At December 31, 2002, the Bank had no loans in nonaccrual status.  There were no
loans past due ninety days or more and still  accruing  interest at December 31,
2002.

Management is not aware of any significant concentrations of loans to classes of
borrowers or industries that would be affected similarly by economic conditions.
Although the Company's loan portfolio is diversified,  a substantial  portion of
its  borrowers'  ability to honor the terms of their loans is  dependent  on the
economic conditions in the Columbia, South Carolina metropolitan area.


                                       29
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 5 - PREMISES, FURNITURE AND EQUIPMENT

Premises, furniture and equipment consisted of the following:

                                                                 December 31,
                                                                 ------------
                                                             2002          2001
                                                             ----          ----
Leasehold improvements ...............................     $ 75,415     $      -
Furniture and equipment ..............................      479,674        4,560
                                                           --------     --------
         Total .......................................      555,089        4,560
Less, accumulated depreciation .......................       40,705            -
                                                           --------     --------

         Premises, furniture and equipment, net ......     $514,384     $  4,560
                                                           ========     ========


NOTE 6 - DEPOSITS

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

Maturing In:                                                       Amount
-----------                                                    -------------
2003 .....................................................     $   6,370,562
2004 .....................................................         4,269,019
2005 .....................................................           162,079
2006 .....................................................           232,450
2007 .....................................................            99,443
                                                               -------------

         Total ...........................................     $  11,133,553
                                                               =============


NOTE 7 - OTHER OPERATING EXPENSES

Other operating expenses for the years ended December 31, 2002 and 2001, and for
the period February 14, 2000 to December 31, 2000 are summarized below:

                                                     2002      2001       2000
                                                     ----      ----       ----
Professional fees .............................   $100,018   $ 73,044   $ 92,500
Telephone expenses ............................     20,015          -          -
Office supplies, stationery, and printing .....     50,573          -          -
Service bureau and related expenses ...........     23,928          -          -
Advertising and public relations ..............    137,834     17,185          -
Postage .......................................     11,247          -          -
Other (including pre-opening expenses) ........    119,712    227,684      2,754
                                                  --------   --------   --------

         Total ................................   $463,327   $317,913   $ 95,254
                                                  ========   ========   ========


                                       30
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 8 - INCOME TAXES

Income tax expense for 2002 is summarized as follows:

                                                                          2002
                                                                          ----
Current portion
  Federal ...............................................               $      -
  State .................................................                      -
                                                                        --------
     Total current ......................................                      -
                                                                        --------
Deferred:
  Federal ...............................................                719,501
  State .................................................                      -
                                                                        --------
     Total deferred .....................................                719,501
                                                                        --------
Income tax benefit ......................................               $719,501
                                                                        ========


The gross  amounts of deferred tax assets and deferred  tax  liabilities  are as
follows:

                                                                    December 31,
                                                                    ------------
                                                                         2002
                                                                         ----
Deferred tax assets:
     Allowance for loan losses ...............................        $ 50,290
     Net operating loss carryforward .........................         343,930
     Organization and start-up costs .........................         371,024
                                                                      --------
         Total deferred tax assets ...........................         765,244
                                                                      --------

Deferred tax liabilities:
     Accumulated depreciation ................................          45,743
                                                                      --------
         Total deferred tax liabilities ......................          45,743
                                                                      --------

         Net deferred tax asset ..............................        $719,501
                                                                      ========

Deferred tax assets  represent the future tax benefit of deductible  differences
and,  if it is more  likely  than not that a tax asset will not be  realized,  a
valuation  allowance is required to reduce the  recorded  deferred tax assets to
net realizable value. As of December 31, 2002, management believes it will fully
realize 100% of the Company's deferred tax asset.

The Company has a net operating loss for income tax purposes of $2,115,362 as of
December 31, 2002. This net operating loss expires in the year 2022.

A  reconciliation  between  the income tax  expense  and the amount  computed by
applying  the Federal  statutory  rate of 34% for 2002 to income  before  income
taxes follows:

                                                                         2002
                                                                         ----
Tax expense (benefit) at statutory rate .......................       $(651,688)
State income tax, net of federal income tax effect ............         (67,813)
                                                                      ---------
    Income tax benefit ........................................       $(719,501)
                                                                      =========



                                       31
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 9 - LEASES

The Company leases part of a building as its main branch location and its center
of operations.  The operating lease has an initial five-year term, which expires
January 31, 2007, and is renewable,  at the Company's option, for five five-year
terms at a 10% increased monthly rental.  The lease requires monthly payments of
$7,289 for years 1 and 2 of the initial lease period, and $8,098 a month for the
three years  thereafter.  The monthly  payments  upon the first  renewal will be
$8,908.

Additionally,  the Company leases  another  building as a branch  location.  The
operating lease has an initial  ten-year,  two-month term, which expires January
31, 2012. The lease requires monthly payments of $4,000 for the first five years
of the initial lease period, and $4,400 a month for the remainder of the lease.

Rental expense under these operating lease  agreements was $123,673 for the year
ended December 31, 2002.

Minimal future rental  payments  under  non-cancelable  operating  leases having
remaining  terms in excess of one year,  for each of the next five  years in the
aggregate are:

    2003                                                                $135,462
    2004                                                                 144,370
    2005                                                                 145,180
    2006                                                                 145,580
    2007                                                                  60,898
    Thereafter                                                           215,600
                                                                        --------
    Total minimum future rental payments                                $847,090
                                                                        ========


NOTE 10 - RELATED PARTY TRANSACTIONS

Certain parties  (principally  certain  directors and executive  officers of the
Company, their immediate families and business interests) were loan customers of
and had other  transactions  in the normal  course of business with the Company.
Related party loans are made on substantially the same terms, including interest
rates  and  collateral,   as  those   prevailing  at  the  time  for  comparable
transactions with unrelated persons and do not involve more than the normal risk
of collectibility.  As of December 31, 2002, the Company had related party loans
totaling  $710,718.  During  2002,  advances  on  related  party  loans  totaled
$716,968, and repayments were $6,250.


NOTE 11 - COMMITMENTS AND CONTINGENCIES

The  Company is subject to claims and  lawsuits  which  arise  primarily  in the
ordinary  course of business.  Management is not aware of any legal  proceedings
which  would  have a  material  adverse  effect  on the  financial  position  or
operating results of the Company.


                                       32
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 12 - STOCK WARRANTS

The  organizers of the Bank  received  stock  warrants  giving them the right to
purchase  two  shares for every  three  shares  they  purchased  in the  initial
offering of the Company's common stock at a price of $10 per share. The warrants
vest one-third on July 15 of each of 2003,  2004 and 2005 and expire on July 15,
2012.  Warrants  held by  directors  of the Bank will  expire 90 days  after the
director  ceases to be a  director  or  officer  of the Bank (365 days if due to
death or disability).

A summary of the status of the Company's stock warrants as of December 31, 2002,
and changes during the year is presented below:

                                                                          2002
                                                                          ----
                                                                        Warrants
                                                                        --------
Outstanding at beginning of year ............................                  -
Granted .....................................................            193,333
Exercised ...................................................                  -
Cancelled ...................................................                  -
                                                                         -------

Outstanding at end of year ..................................            193,333
                                                                         =======

At December 31, 2002, none of the warrants were exercisable.


NOTE 13 - STOCK COMPENSATION PLAN

Under the terms of an employment  agreement with the Company's  Chief  Executive
Officer (CEO), stock options were granted to him as part of his compensation and
benefits package. Under the agreement,  the CEO was granted 64,701 stock options
on July 15,  2002.  These  options  will vest at a rate of 20% per year for five
years,  beginning  with the grant date.  The options  have an exercise  price of
$10.00 per share and terminate ten years after the date of grant.

The  Company  has also  committed  and  expects  to issue  stock  options to key
employees. At December 31, 2002, none of these options had been issued.

A summary of the status of the Bank's stock option plan as of December 31, 2002,
and changes during the period is presented below:

                                                                2002
                                                                ----
                                                                        Weighted
                                                                         Average
                                                                        Exercise
                                                           Shares         Price
                                                           ------         -----
Outstanding at beginning of year .................              -       $      -
Granted ..........................................         64,701          10.00
Exercised ........................................              -              -
Forfeited ........................................              -              -
                                                           ------

Outstanding at end of year .......................         64,701
                                                           ======

There were 12,940 options exercisable at December 31, 2002.


                                       33
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 14- LOSS PER SHARE

Basic  loss  per  share  is  computed  by  dividing  net  income  (loss)  by the
weighted-average number of common shares outstanding.  Diluted loss per share is
computed by dividing net income (loss) by the weighted-average  number of common
shares  outstanding  and dilutive  common share  equivalents  using the treasury
stock method.  Dilutive common share equivalents  include common shares issuable
upon exercise of outstanding  stock  warrants and stock  options.  There were no
dilutive common share equivalents  outstanding  during 2002 due to the net loss;
therefore, basic loss per share and diluted earnings per share were the same.

                                                                         2002
                                                                         ----
Net loss per share - basic computation:

Net loss to common shareholders .............................         $(632,504)
                                                                      =========

Average common shares outstanding - basic ...................           693,427
                                                                      =========

Basic loss per share ........................................         $   (0.91)
                                                                      =========


NOTE 15 - REGULATORY MATTERS

The Bank is subject to various regulatory capital  requirements  administered by
the federal banking agencies.  Failure to meet minimum capital  requirements can
initiate certain mandatory,  and possibly  additional  discretionary  actions by
regulators  that, if undertaken,  could have a direct adverse material effect on
the Bank's  financial  statements.  Under capital  adequacy  guidelines  and the
regulatory  framework for prompt corrective  action, the Bank must meet specific
capital  guidelines  that involve  quantitative  measures of the Bank's  assets,
liabilities,  and certain off-balance-sheet items as calculated under regulatory
accounting  practices.  The Bank'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 Bank to  maintain  minimum  ratios of Tier 1 and total  capital as a
percentage of assets and off-balance-sheet exposures,  adjusted for risk weights
ranging from 0% to 100%. Tier 1 capital consists of common shareholders' equity,
excluding the unrealized  gain or loss on securities  available-for-sale,  minus
certain  intangible  assets.  Tier 2 capital  consists of the allowance for loan
losses subject to certain  limitations.  Total capital for purposes of computing
the  capital  ratios  consists  of the sum of  Tier 1 and  Tier 2  capital.  The
regulatory  minimum  requirements  are 4% for Tier 1 and 8% for total risk-based
capital.

The Bank is also required to maintain  capital at a minimum level based on total
assets,  which is known as the  leverage  ratio.  Only the  strongest  banks are
allowed to  maintain  capital at the minimum  requirement  of 3%. All others are
subject to maintaining ratios 1% to 2% above the minimum.

As of December 31, 2002,  the most recent  notification  from the Bank's primary
regulator categorized it as well-capitalized  under the regulatory framework for
prompt  corrective  action.  There are no conditions  or events that  management
believes have changed the Bank's category.


                                       34
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 15 - REGULATORY MATTERS (continued)

The following  table  summarizes the capital  amounts and ratios of the Bank and
the regulatory minimum requirements at December 31, 2002.

<TABLE>
<CAPTION>
                                                                                                                     To Be Well-
                                                                                                                 Capitalized Under
                                                                                          For Capital            Prompt Corrective
                                                                     Actual            Adequacy Purposes         Action Provisions
                                                                     ------            -----------------         -----------------
                                                              Amount        Ratio      Amount       Ratio      Amount         Ratio
                                                              ------        -----      ------       -----      ------         -----

December 31, 2002
<S>                                                         <C>            <C>       <C>            <C>      <C>              <C>
     Total capital (to risk-weighted assets) ..........     $7,315,000     42.82%    $1,337,040     8.00%    $1,671,300       10.00%
     Tier 1 capital (to risk-weighted assets) .........      7,163,000     41.93        668,520     4.00      1,002,780        6.00
     Tier 1 capital
     (to average assets) ..............................      7,163,000     23.18      1,236,200     4.00      1,545,250        5.00
</TABLE>

The Federal Reserve has similar  requirements  for bank holding  companies.  The
Company is not  currently  subject to these  requirements  because  the  Federal
Reserve applies its guidelines on a bank-only  basis for bank holding  companies
with less than $150,000,000 in consolidated assets.

NOTE 16 - UNUSED LINES OF CREDIT

As of December  31,  2002,  the  Company had unused  lines of credit to purchase
federal funds from unrelated  banks totaling  $2,000,000.  These lines of credit
are available on a one to fourteen day basis for general corporate purposes. The
Company  also has a line of credit to borrow  funds from the  Federal  Home Loan
Bank up to 10% of the  Bank's  total  assets,  which  totaled  $3,224,000  as of
December 31, 2002. As of December 31, 2002,  the Bank had not drawn any advances
on this line.


NOTE 17 - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS, OR ADVANCES

The ability of Carolina National  Corporation to pay cash dividends is dependent
upon  receiving  cash in the  form of  dividends  from its  banking  subsidiary.
However,  there are  restrictions  on the ability of the  subsidiary to transfer
funds to Carolina National Corporation in the form of cash dividends,  loans, or
advances.  The  approval  of the Office of the  Comptroller  of the  Currency is
required to pay  dividends  in excess of the Bank's net profits (as defined) for
the current year plus  retained net profits (as defined) for the  preceding  two
years,  less any  required  transfers to surplus.  As of December 31, 2002,  the
banking subsidiary had no retained earnings available for dividends.


                                       35
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 18 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

The Company is a party to financial instruments with  off-balance-sheet  risk in
the normal  course of business  to meet the  financing  needs of its  customers.
These financial  instruments consist of commitments to extend credit and standby
letters of credit.  Commitments  to extend  credit are  agreements  to lend to a
customer as long as there is no violation of any  condition  established  in the
contract. Commitments generally have fixed expiration dates or other termination
clauses  and may require  payment of a fee. A  commitment  involves,  to varying
degrees,  elements  of credit  and  interest  rate risk in excess of the  amount
recognized in the balance  sheet.  The Company's  exposure to credit loss in the
event of  nonperformance  by the other party to the instrument is represented by
the contractual notional amount of the instrument. Since certain commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company uses the same credit
policies in making commitments to extend credit as it does for  on-balance-sheet
instruments. Letters of credit are conditional commitments issued to guarantee a
customer's  performance  to a third party and have  essentially  the same credit
risk as other lending facilities.

Collateral  held for  commitments  to extend credit and letters of credit varies
but may include accounts receivable,  inventory,  property, plant, equipment and
income-producing commercial properties.

The  following   table   summarizes  the  Bank's   off-balance-sheet   financial
instruments whose contract amounts represent credit risk:

                                                                   December 31,
                                                                        2002
                                                                        ----

Commitments to extend credit                                       $   5,526,127
                                                                   =============

There were no outstanding letters of credit at December 31, 2002.

NOTE 19 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair  value of a  financial  instrument  is the amount at which the asset or
obligation could be exchanged in a current  transaction between willing parties,
other than in a forced or liquidation  sale.  Fair value estimates are made at a
specific  point in time based on relevant  market  information  and  information
about  the  financial  instruments.   Because  no  market  value  exists  for  a
significant portion of the 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.

The following  methods and  assumptions  were used to estimate the fair value of
significant financial instruments:

Cash and Due from Banks - The carrying  amount is a reasonable  estimate of fair
value.

Federal  Funds  Sold -  Federal  funds  sold are for a term of one day,  and the
carrying amount approximates the fair value.

Investment Securities - The fair values of securities held to maturity equal the
carrying  amounts,  which are the quoted market prices.  If quoted market prices
are not  available,  fair values are based on quoted market prices of comparable
securities.  The carrying value of nonmarketable equity securities  approximates
the fair value since no ready market exists for the stocks.


                                       36
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

Loans receivable - For certain  categories of loans, such as variable rate loans
which are repriced  frequently  and have no  significant  change in credit risk,
fair values are based on the carrying amounts.  The fair value of other types of
loans is estimated by discounting  the future cash flows using the current rates
at which similar loans would be made to borrowers  with similar  credit  ratings
and for the same remaining maturities.

NOTE 19 - FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

Deposits - The fair value of demand deposits, savings, and money market accounts
is the  amount  payable  on demand at the  reporting  date.  The fair  values of
certificates of deposit are estimated  using a discounted cash flow  calculation
that  applies  current  interest  rates to a  schedule  of  aggregated  expected
maturities.

Accrued  Interest   Receivable  and  Payable  -  The  carrying  value  of  these
instruments is a reasonable estimate of fair value.

Off-Balance-Sheet   Financial   Instruments  -  The  carrying  amount  for  loan
commitments which are off-balance-sheet  financial instruments  approximates the
fair value since the obligations are typically based on current market rates.

The  carrying  values  and  estimated  fair  values of the  Company's  financial
instruments are as follows:

                                                            December 31,
                                                            ------------
                                                                2002
                                                                ----
                                                      Carrying        Estimated
Financial Assets: ..............................        Amount        Fair Value
                                                     -----------     -----------
     Cash and due from banks ...................     $   970,326     $   970,326
     Federal funds sold ........................      14,798,000      14,798,000
     Securities held to maturity ...............       5,373,101       5,377,718
     Nonmarketable equity securities ...........         270,500         270,500
     Loans receivable ..........................      10,144,579      10,150,508
     Accrued interest receivable ...............         103,023         103,023

Financial Liabilities:
     Demand deposit, interest-bearing
       transaction, and savings accounts .......     $ 9,018,074     $ 9,018,074
     Certificates of deposit and other
       time deposits ...........................      11,133,553      11,337,959
     Accrued interest payable ..................          19,892          19,892

                                                        Notional      Estimated
                                                         Amount       Fair Value
                                                         ------       ----------
Off-Balance Sheet Financial Instruments:
      Commitments to extend credit ...............     $5,526,127     $5,526,127


                                       37
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 20 - CAROLINA NATIONAL CORPORATION (PARENT COMPANY ONLY)

Presented  below are the condensed  financial  statements for Carolina  National
Corporation (Parent Company Only).

                            Condensed Balance Sheets

                                                              December 31,
                                                              ------------
                                                          2002            2001
                                                          ----            ----
Assets
     Cash ..........................................   $ 4,745,836   $   103,427
     Investment in banking subsidiary ..............     7,882,041             -
     Other assets ..................................             -        53,957
                                                       -----------   -----------
         Total assets ..............................   $12,627,877   $   157,384
                                                       ===========   ===========

Liabilities and shareholders' equity
     Other liabilities .............................   $    34,000   $    72,499
     Shareholders' equity ..........................    12,593,877        84,885
                                                       -----------   -----------

         Total liabilities and shareholders' equity    $12,627,877   $   157,384
                                                       ===========   ===========



                       Condensed Statements of Operations
                 for the years ended December 31, 2002 and 2001,
            and for the period February 14, 2000 to December 31, 2000

<TABLE>
<CAPTION>
                                                                                       2002              2001               2000
                                                                                       ----              ----               ----
<S>                                                                                 <C>                <C>                <C>
Income ....................................................................         $  16,368          $       -          $       -

Expenses
     Other expenses .......................................................                 -            542,094            226,321
                                                                                    ---------          ---------          ---------

Income (loss) before income taxes and equity in
  undistributed earnings of banking subsidiary ............................            16,368           (542,094)          (226,321)

     Income tax benefit ...................................................                 -                  -                  -

     Equity in undistributed losses of banking subsidiary .................          (648,872)                 -                  -
                                                                                    ---------          ---------          ---------

     Net loss .............................................................         $(632,504)         $(542,094)         $(226,321)
                                                                                    =========          =========          =========
</TABLE>


                                       38
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 20 - CAROLINA NATIONAL CORPORATION (PARENT COMPANY ONLY) (continued)

                       Condensed Statements of Cash Flows
                 for the years ended December 31, 2002 and 2001,
            and for the period February 14, 2000 to December 31, 2000


<TABLE>
<CAPTION>
                                                                                      2002              2001               2000
                                                                                      ----              ----               ----
Cash flows from operating activities:
<S>                                                                              <C>                <C>                <C>
     Net loss .............................................................      $   (632,504)      $   (542,094)      $   (226,321)
     Adjustments to reconcile net loss to net cash
       provided (used) by operating activities:
         Decrease in other assets .........................................            53,957                  -                  -
         Equity in undistributed losses of banking subsidiary .............           648,872                  -                  -
         Pre-opening expenses transferred to the Bank .....................           769,087                  -                  -
         (Decrease) increase in other liabilities .........................           (38,499)             4,513             26,889
                                                                                 ------------       ------------       ------------
         Net cash provided (used) by operating activities .................           800,913           (537,581)          (199,432)
                                                                                 ------------       ------------       ------------

Cash flows from investing activities:
     Purchase of Bank stock ...............................................      $ (9,300,000)     $           -      $           -
     Purchase of premises and equipment ...................................                 -             (4,560)                 -
                                                                                 ------------       ------------       ------------
         Net cash used by operating activities ............................        (9,300,000)            (4,560)                 -
                                                                                 ------------       ------------       ------------

Cash flows from financing activities:
     Earned deferred stock ................................................             6,700                  -                  -
     Issuance of common stock, net of direct costs ........................        13,134,796            725,000            220,000
     Redemption of stock ..................................................                 -           (100,000)                 -
                                                                                 ------------       ------------       ------------
         Net cash provided by financing activities ........................        13,141,496            625,000            220,000
                                                                                 ------------       ------------       ------------

Net increase in cash and cash equivalents .................................         4,642,409             82,859             20,568

Cash and cash equivalents, beginning of period ............................           103,427             20,568                  -
                                                                                 ------------       ------------       ------------

Cash and cash equivalents, end of period ..................................      $  4,745,836       $    103,427       $     20,568
                                                                                 ============       ============       ============
</TABLE>


                                       39
<PAGE>


Item 8.  Changes  In  and  Disagreements  With  Accountants  on  Accounting  and
         Financial Disclosure.

         Not Applicable.

                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
        With Section 16(a) of the Exchange Act.

                                   MANAGEMENT

Directors

         Each of the persons named below is currently a director of the Company.
Each director will serve until the 2003 annual meeting of  shareholders or until
his or her successor is chosen and  qualifies.  The directors of the Company are
also the directors of Carolina National Bank & Trust Company. Set forth below is
information about the business experience for the past five years of each of the
directors and the other  positions held with the Company,  if any. Each director
has been a director of the Company since 2001.


         Charlotte  J.  Berry,  age 71, is a  philanthropist  active in numerous
local and national charitable organizations.

         I. S. Leevy Johnson, age 61, has been an attorney with Johnson,  Toal &
Battiste, P.A. since 1976. Mr. Johnson is also an owner of Leevy Funeral Home.

         C. Whitaker Moore,  age 55, has been a real estate broker with Coldwell
Banker Tom Jenkins  Realty  since 1970.  Mr. Moore has also been an owner of the
firm since 1994.

         William  H.  Stern,  age 46,  has been  President  of Stern & Stern and
Associates, a commercial real estate development company, since 1984.

         Kirkman Finlay,  III, age 32, has been Vice President,  Chief Executive
Officer and an owner of Rising High Natural Bread Co., a bakery and  restaurant,
since 1996.  Mr. Finlay is also Managing  Member or an officer and an owner of a
number of companies involved in the real estate business, farming or investment.

         R. C. McEntire, Jr., age 59, has been President and operator of each of
R. C.  McEntire & Co.,  Inc.  (produce  processing  and sales),  R. C.  McEntire
Trucking, Inc. (produce hauling), Lands Inn, Inc. (hotels) and Long Branch Farm,
Inc. (waste management) since 1996.

         Joel A. Smith,  III, age 57, has been Dean of the Darla Moore School of
Business  since  October of 2000.  From June of 1998 until  August of 2000,  Mr.
Smith was  President of the East Region of Bank of America.  Prior to that time,
from 1991 until  acquisition of the Bank by Bank of America in June of 1998, Mr.
Smith was  President of  NationsBank  Carolinas.  Additionally  he serves on the
Board of Directors of Avanex Corporation,  chairing the Audit Committee, and the
Board of Directors for NETBANK, Inc.

         Robert E. Staton, Sr., age 56, is currently President of the United Way
of SC and was Chairman, President and Chief Executive Officer of Colonial Life &
Accident Insurance Company from 1994 until his retirement in July of 2001.

         William P. Cate, age 59, represents Milliken Forestry Co. in timberland
and farm land sales.  Mr. Cate is also a farmer and was General Manager of South
Carolina operations for Snider Tire, Inc., Greensboro, North Carolina, from 2000
until his  retirement  January 1, 2002.  From 1968 until sale of the  Company to
Snider Tire in 2000, Mr. Cate was Chairman, Chief Executive Officer and an owner
of Cate-McLaurin Co., Inc., a commercial tire sales and retreading business.



                                       40
<PAGE>

         Angus B. Lafaye,  age 59, has been President of Milliken  Forestry Co.,
Inc., a forestry consulting business,  since 1998. Mr. Lafaye was Vice President
and Treasurer of Milliken Forestry Co. from 1985 to 1998.

         Leon Joseph Pinner, Jr., age 68, has been in radio and television since
1950 and has been with WIS-TV since 1963. In January 2001, he semi-retired  from
WIS and became a freelance broadcaster.

         Joe E. Taylor,  Jr. age 44, has been  President  and owner of Southland
Log Homes, Inc. since 1980.

         Roger B. Whaley, age 56, has served as a director,  President and Chief
Executive Officer of the Company since November,  2001, and of Carolina National
Bank & Trust Company since 2002.  Mr. Whaley was employed by an investment  firm
from November of 2000 until  November,  2001.  From 1971 until his retirement in
August of 2000,  Mr.  Whaley was with Bank of  America,  where for the last four
years of employment he served as President of Bank of America, Oklahoma, and, in
1999, also assumed  responsibilities as Small Business Banking Executive for the
Midwest (Arkansas, Illinois, Iowa, Kansas, Missouri and Oklahoma).

Executive Officers

         Roger B.  Whaley and John W. Hobbs are the only  executive  officers of
the Company. Information about Mr. Whaley is set forth above under "Management -
Directors."  Mr.  Hobbs,  age 41,  is the  Chief  Operations  Officer  and Chief
Financial  Officer of the Company,  a position he has held since January,  2002.
Mr. Hobbs is a certified public accountant.  From August, 1996 to January,  2002
he was the Chief Financial  Officer and Senior Vice President of FNB Bancshares,
Inc., a bank holding company located in Gaffney, South Carolina.

Item 10. Executive Compensation.

                             MANAGEMENT COMPENSATION

Executive Officer Compensation

         The following  table sets forth  information  about the Chief Executive
Officer's  compensation for the year ended December 31, 2002. No other executive
officers earned $100,000 or more during the year ended December 31, 2002.

                           Summary Compensation Table

<TABLE>
<CAPTION>
                                                                                      Long Term
                                                                                    Compensation
                                                                                    ------------
                                        Annual Compensation(1) Awards
                                        ---------------------- ------
                                                                                      Number of
                                                                                     Securities
                                                                                     Underlying          All Other
                                                                                       Options            Compen-
Name and Principal Position         Year         Salary              Bonus             Awarded            sation
---------------------------         ----         ------              -----           -----------          ------

<S>                                 <C>         <C>                    <C>              <C>              <C>
Roger B. Whaley                     2002        $135,000               -0-              64,701           $31,379
 President and Chief                2001          21,548               -0-                 -0-               -0-
 Executive Officer
</TABLE>
---------------

(1)  Perquisites  and personal  benefits did not exceed the lesser of $50,000 or
     10% of total salary plus bonus.

                        Option Grants in Last Fiscal Year

         The following table sets forth information about options granted to the
Chief Executive Officer in 2002.

                                       41
<PAGE>

<TABLE>
<CAPTION>
                                               Individual Grants
                                               -----------------
                                      Number of           % of Total
                                      Securities            Options
                                      Underlying          Granted to            Exercise
                                       Options             Employees             Price              Expiration
        Name                          Granted(1)            in 2002           (per share)               Date
                                      ----------            -------           -----------               ----

<S>                                     <C>                  <C>                 <C>              <C>
Roger B. Whaley                         64,701               100%                $10.00           July 15, 2012
     President, Chief
     Executive Officer
</TABLE>

--------------------
(1)  Options on 64,701  shares were  granted on July 15, 2002 and  became/become
     exercisable in 12,940 share  increments on July 15, 2002,  2003, 2004, 2005
     and 2006.

          Option Exercises and Year End Options Outstanding and Values

         No options were exercised by the Chief  Executive  Officer during 2002.
The  following  table sets forth  information  about  options  held by the Chief
Executive Officer at December 31, 2002.

<TABLE>
<CAPTION>
                                                        Number of Securities           Value of Unexercised
                                                       Underlying Unexercised              In-the-Money
                       Shares Acquired     Value          Options 12/31/02              Options 12/31/02(1)
Name                     on Exercise     Realized   Exercisable     Unexercisable   Exercisable      Unexercisable
                       ---------------   --------   -----------     -------------   -----------      -------------

<S>                          <C>            <C>         <C>                <C>              <C>                <C>
Roger B. Whaley              -0-            -0-          12,940            51,761           -0-                -0-
</TABLE>
-----------------

(1)      Based on a price of $10.00 per share,  the price at which the Company's
         Common Stock sold in two public  offerings in 2001 and 2002. The Common
         Stock  is  not,  however,  widely  traded  and  such  price  may not be
         indicative of market value.

Employment Agreement

         The Company has entered into an employment  agreement  with Mr. Whaley,
which  provides for his employment as President and Chief  Executive  Officer of
the Company and Carolina National Bank & Trust Company.  The agreement commenced
on the date of  opening  of the Bank,  July 15,  2002,  and is for a term of two
years.  Beginning on the first  anniversary  of opening of the Bank, and on each
day thereafter,  the term of the Agreement will automatically be extended for an
additional day unless,  prior to such extension,  Mr. Whaley, the Company or the
Bank gives written  notice to the other  parties that the Agreement  will not be
extended.

         The  Agreement  provides  for payment to Mr.  Whaley of an initial base
salary of  $135,000  per year,  which  the Board of  Directors  of the Bank will
periodically  review and may (but is not required to) increase.  Mr. Whaley will
also be entitled  to receive an annual  cash bonus if the  Company and  Carolina
National Bank & Trust Company achieve certain  performance levels established by
the Board of Directors  from time to time.  The Company also provided Mr. Whaley
with stock options for a number of shares of the Company's common stock equal to
5% of the common  stock  subscribed  for in the  initial  public  offering.  The
options provide for an exercise price of $10.00 per share, termination ten years
after  the date of  grant,  and  vesting  one-fifth  at the  time of  grant  and
one-fifth  on  each  anniversary  thereafter.   If  Mr.  Whaley  terminates  his
employment without Good Reason (as defined in the Agreement) or is terminated by
the Bank with Cause (as defined in the  agreement) the options will terminate 30
days after the date of  termination  of  employment.  The Bank also provides Mr.
Whaley with group medical, dental,  disability and life insurance; an automobile
allowance;  dining club dues and country club dues;  and such other  benefits as
the Bank provides to its employees generally.



                                       42
<PAGE>

         If Mr. Whaley's employment is terminated by the Company or the Bank for
Cause  during the term of the  Agreement,  by Mr.  Whaley's  action not for Good
Reason or as a result of Mr.  Whaley 's death,  disability  or  retirement,  Mr.
Whaley will be paid his base  salary  through the last day of the month in which
termination  occurs at the annual rate then in effect,  together  with any bonus
that has been awarded prior to the date of termination, any benefits to which he
may be entitled as a result of the  termination  under terms and  conditions  of
plans or arrangements then in effect,  and any automobile  expenses or club dues
due to him as of the date of  termination  of the  Agreement.  If Mr.  Whaley 's
employment is terminated  during the term of the Agreement  other than by death,
disability or  retirement,  and (i) by action of Mr. Whaley for Good Reason,  or
(ii) by action of the Bank other than for Cause,  Mr. Whaley will be paid all of
the  foregoing  compensation.  In addition,  for a period of two years after the
date of termination, the Bank will continue to pay Mr. Whaley his base salary in
effect at the date of termination;  the Bank will continue to provide Mr. Whaley
with insurance coverage; and all unexercised stock options granted to Mr. Whaley
will immediately vest and become exercisable.

         The  provisions of the Agreement are subject to certain  limitations if
required by the  provisions  of the Federal  Deposit  Insurance  Act. Mr. Whaley
agrees to abide by the Bank's and the Company's rules and procedures designed to
protect their  Confidential  Information  (as defined in the  Agreement)  and to
preserve  and  maintain  such  information  in  strict   confidence  during  his
employment and as long thereafter as the Confidential  Information  remains,  in
the sole opinion of the Bank or the Company, proprietary and confidential.

         Mr. Whaley agrees that (i) for a period of 12 months after  termination
of the  agreement  by him  other  than  for  Good  Reason,  or (ii)  during  the
continuation of any base salary payments to him, whichever is later, he will not
manage, operate or be employed by, participate in, or be connected in any manner
with the management,  operation,  or control of any banking  business  conducted
within a 25 mile  radius of any  operating  office of the  Company or any of its
subsidiaries.  Mr.  Whaley  further  agrees that for a period of 12 months after
termination  of  his  employment  by him  other  than  for  Good  Reason  or the
completion of base salary payments,  whichever is later, he will not solicit the
business  of,  or  patronage   from,   any  customers  of  the  Company  or  its
subsidiaries,  and he will  not seek to,  or  assist  others  to,  persuade  any
employee of the Bank to discontinue  employment with the Bank or seek employment
or engage in any business of the Bank. Any  controversies  or claims arising out
of or relating to the Employment Agreement are required to be settled by binding
arbitration.

         The  foregoing  is  merely  a  summary  of  certain  provisions  of the
Employment  Agreement,  and is  qualified  in its  entirety by reference to such
Agreement.  In addition to the foregoing Employment  Contract,  the Company paid
Mr. Whaley $50,000.00 to cover costs and expenses associated with his relocating
from Charleston, South Carolina to Columbia, South Carolina.

Compensation of Directors

         Directors  of the  Company  are not  presently  compensated  for  their
service as directors, though they may be reimbursed for reasonable expenses. The
Company has granted stock warrants to the directors to compensate  them for: (a)
their time and efforts as organizers  and  directors;  (b) their purchase of and
subscription  to  purchase  the  Company's  common  stock to fund the  operating
expenses  during the  organizational  period of Carolina  National  Bank & Trust
Company and to provide capital for the Bank; and (c) their continued  service as
directors.  Directors  received  two stock  warrants for every three shares they
purchased  prior to the  opening  of  Carolina  National  Bank & Trust  Company.
One-third of the warrants vest and become exercisable on each of the first three
anniversaries of the opening of the Bank (July 15, 2002). Vested warrants expire
on the  earlier  of 90 days  after  termination  of the  director's  status as a
director (one year after death or  disability) or ten years after opening of the
Bank and have an exercise  price of $10.00 per share.  The  Company  may, in the
future  and by act of the Board of  Directors,  compensate  directors  with cash
payments, grants of stock or stock options.

         Assuming all of the warrants  issued to the directors are exercised and
that  the  Company  issues  no  further  common  stock,   the  directors   would
beneficially own an aggregate of 478,997, or 29.6% of the Company's  outstanding
common stock upon exercise of all warrants.


                                       43
<PAGE>

Item 11.  Security  Ownership of Certain  Beneficial  Owners and  Management and
          Related Stockholder Matters.

         The  following  table  sets  forth  information  about  the  beneficial
ownership of the Company's common stock as of February 28, 2003, by each current
director,  the Chief Executive Officer, and all directors and executive officers
as a group.  Management knows of no person who beneficially owns more than 5% of
the Company's common stock.

<TABLE>
<CAPTION>
                                                      Number of Shares               % of Common Stock
                                                    Beneficially Owned(1)               Outstanding
                                                    ---------------------               -----------
Name

<S>                                                            <C>
Charlotte J. Berry                                             10,500(2)                          *
William P. Cate                                                15,000                           1.0
Kirkman Finlay, III                                            50,000                           3.5
I. S. Leevy Johnson                                            10,000(3)                          *
Angus B. Lafaye                                                10,000                             *
R. C. McEntire, Jr.                                            27,000(4)                        1.9
C. Whitaker Moore                                              15,000                           1.0
Leon Joseph Pinner, Jr.                                         4,000(5)                          *
Joel A. Smith, III                                             15,000                           1.0
Robert E. Staton, Sr.                                          12,500(6)                          *
William H. Stern                                               50,000(7)                        3.5
Joe E. Taylor, Jr.                                             50,000                           3.5
Roger B. Whaley                                                32,940(8)                        2.3
All directors and executive officers as a
group (14 persons)                                            302,190                          21.0
</TABLE>

----------------------
*less than 1%
(1)  Does not include  for each  director  warrants  to purchase  two shares for
     every three shares purchased in the Company's prior stock offerings because
     none of such warrants  becomes  exercisable  prior to July 15, 2003. See" -
     Management Compensation -- Director Compensation."
(2)  Includes 500 shares held by Mrs. Berry as custodian for her grandchildren.
(3)  Includes 2,000 shares owned by Mr. Johnson's wife.
(4)  Includes  4,208  shares  owned in an IRA for the benefit of Mr.  McEntire's
     wife and 1,000 shares owned by each of Mr. McEntire's daughters.
(5)  Includes 1,000 shares owned jointly with Mr. Pinner's wife.
(6)  Includes 2,500 shares owned jointly with Mr. Staton's wife.
(7)  Includes 7,500 shares held by Mr. Stern as custodian for his sons.
(8)  Includes options to purchase 12,940 shares.


                                       44
<PAGE>


Equity Compensation Plan Information

         The following  table sets forth  aggregated  information as of December
31, 2002 about all of the Company's  compensation  plans  (including  individual
compensation  arrangements)  under which  equity  securities  of the Company are
authorized for issuance. This table does not include information relating to the
2003 Stock Option Plan.

<TABLE>
<CAPTION>
Plan category                   Number of securities         Weighted-average             Number of securities
                                to be issued upon            exercise price of            remaining available
                                exercise of                  outstanding options,         for future issuance
                                outstanding options,         warrants and rights          under equity
                                warrants and rights                                       compensation plans
                                                                                          (excluding securities
                                                                                          reflected in column(a))
                                (a)                          (b)                          (c)
------------------------------- ---------------------------- ---------------------------- ----------------------------
<S>                             <C>                          <C>                          <C>
Equity compensation
plans approved by
security holders                0                            0                            0

Equity compensation
plans not approved
by security holders             263,586                      $10.00                       0
                                -------                      ------                       -

Total                           263,586                      $10.00                       0
                                =======                      ======                       =
</TABLE>

         See "Management  Compensation -- Compensation of Directors" above for a
brief discussion of the material features of the foregoing warrants.

Item 12. Certain Relationships and Related Transactions.

         The Company, in the ordinary course of its business, makes loans to and
has other transactions with directors,  officers,  principal  shareholders,  and
their  associates.  Loans are made on  substantially  the same terms,  including
rates  and  collateral,   as  those   prevailing  at  the  time  for  comparable
transactions  with other persons and do not involve more than the normal risk of
collectibility  or present other  unfavorable  features.  The Company expects to
continue  to enter into  transactions  in the  ordinary  course of  business  on
similar  terms  with  directors,  officers,  principal  stockholders,  and their
associates.  The aggregate  dollar amount of such loans  outstanding at December
31, 2002 was  $710,718.  During  2002,  $716,968 of new  advances  were made and
repayments totaled $6,250.

         During the Bank's  organizational  period,  the Company entered into an
agreement with Leon Joseph Pinner, Jr., one of its directors and an organizer of
the  Bank,  pursuant  to which Mr.  Pinner  is  available  to  market,  serve as
spokesperson  for,  and make  promotional  appearances  on behalf  of,  Carolina
National Bank & Trust Company. For his services, Mr. Pinner was paid $200.00 per
month for the first  four  months,  and  $1,500  per  month  thereafter  for the
following 20 months, and is reimbursed for his expenses. The Company also agreed
to issue  Mr.  Pinner  1,500  shares  of its  common  stock in lieu of the first
$15,000 of payments  due under the  agreement.  These shares have been issued to
Mr. Pinner.

         The Company  granted stock  warrants to purchase 6,666 and 2,222 shares
of common stock to David A. Ward and Harold Hunt, respectively.  Both of Messrs.
Ward and  Hunt  were  organizers  of the Bank  and Mr.  Hunt was a  director  of
Carolina National  Corporation.  These warrants were granted to Messrs. Ward and
Hunt to compensate  them for: (a) their time and efforts as organizers;  and (b)
their  purchase of and  subscription  to purchase the Company's  common stock to
fund the operating expenses during the organizational  period of the Bank and to
provide capital for the Bank. The warrants expire ten years after opening of the
Bank and have an exercise price of $10.00 per share.

         On November 5, 2001, James A. Gunter, who had served as Chief Executive
Officer of the  Company  since its  organization,  resigned  as an  officer  and
director. The Company and Mr. Gunter entered into a Severance Agreement pursuant


                                       45
<PAGE>

to which the Company  was  required,  for a period of one year from  November 5,
2001, to continue to pay Mr. Gunter's salary and benefits,  which payments total
approximately  $145,000.  The agreement  also provided for the Company to redeem
5,000  shares of its common  stock from Mr.  Gunter for an aggregate of $50,000,
which is the amount Mr. Gunter paid for the shares.  The agreement  released Mr.
Gunter from his obligations not to compete with the Company or Carolina National
Bank & Trust Company,  but requires him to maintain in confidence all non-public
information about the Company and Bank.

Item 13. Exhibits and Reports on Form 8-K.

(a)      Description of Exhibits.

         Exhibit No. in
         Item 601 of
         Regulation S-B)                    Description

          *3.1                Articles of  Incorporation  of  Carolina  National
                              Corporation

          *3.2                Bylaws of Carolina National Corporation

          *4                  Form of stock certificate

          **10.1              Form of Stock Warrant Agreement (revised)

          *10.2               Employment  Agreement  between  Carolina  National
                              Corporation and Roger B. Whaley

          *10.3               Memorandum  of   Understanding   between  Carolina
                              National Corporation and Joe Pinner

          *10.4               Severance   Agreement  between  Carolina  National
                              Corporation and James A. Gunter

          *10.5               Lease  between  Carolina  National  Bank  &  Trust
                              Company and HHB Associates, LLC.

          *10.6               Lease  between  Carolina  National  Bank  &  Trust
                              Company and Carolina First Bank

          21                  Subsidiaries of Carolina National Corporation


*Incorporated by reference to Exhibits to Registrant's Registration Statement on
Form SB-2 (File No. 333-76512)

**Incorporated  by  reference  to  Exhibit  10.1  to  Registrant's  Registration
statement on Form SB-2 (File No. 333-97397).

(b)      Reports on Form 8.K.

         No  reports  on Form 8-K were  filed by the  registrant  in the  fourth
quarter of 2002.


                                       46
<PAGE>


Item 14. Controls and Procedures.

(a) Based on their evaluation of the issuer's disclosure controls and procedures
(as defined in 17 C.F.R. Sections  240.13a-14(c) and 240.15d-14(c)) as of a date
within 90 days prior to the filing of this annual  report,  the  issuer's  chief
executive  officer and chief financial  officer concluded that the effectiveness
of such controls and procedures was adequate.

(b) There were no significant  changes in the issuer's  internal  controls or in
other factors that could  significantly  affect these controls subsequent to the
date of their  evaluation,  including  any  corrective  actions  with  regard to
significant deficiencies and material weaknesses.



                                       47
<PAGE>

                                   SIGNATURES

         In  accordance  with  Section  13 or 15(d)  of the  Exchange  Act,  the
registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized.

                                 Carolina National Corporation


March 28, 2003                   By: s/Roger B. Whaley
                                    --------------------------------------------
                                     Roger B. Whaley
                                     President and Chief Executive Officer


                                  By: s/John W. Hobbs
                                     -------------------------------------------
                                      John W. Hobbs
                                      Executive Vice President
                                      (Principal Financial and Principal
                                      Accounting Officer)

         In accordance  with the Exchange Act, this Report has been signed below
by the following  persons on behalf of the  registrant and in the capacities and
on the dates indicated:
<TABLE>
<CAPTION>

Signature                                Title                                              Date

<S>                                      <C>                                                <C>

s/Charlotte J. Berry
--------------------------               Director                                           March 26, 2003
Charlotte J. Berry

s/William P. Cate
--------------------------               Director                                           March 26, 2003
William P. Cate

s/Kirkman Finlay, III
--------------------------               Director                                           March 26, 2003
Kirkman Finlay, III

s/I. S. Leevy Johnson
--------------------------               Director                                           March 26, 2003
I. S. Leevy Johnson

s/Angus B. Lafaye
--------------------------               Director                                           March 26, 2003
Angus B. Lafaye

s/R. C. McEntire, Jr.
--------------------------               Director                                           March 26, 2003
R. C. McEntire, Jr.

s/C. Whitaker Moore
--------------------------               Director                                           March 26, 2003
C. Whitaker Moore

s/Leon Joseph Pinner, Jr.
--------------------------               Director                                           March 26, 2003
Leon Joseph Pinner, Jr.

s/Joel A. Smith, III
--------------------------               Director                                           March 26, 2003
Joel A. Smith, III

s/Robert E. Staton, Sr.
--------------------------               Director                                           March 26, 2003
Robert E. Staton, Sr.

s/William H. Stern
--------------------------               Director                                           March 26, 2003
William H. Stern

s/Joe E. Taylor, Jr.
--------------------------               Director                                           March 26, 2003
Joe E. Taylor, Jr.

s/Roger B. Whaley
--------------------------               President, Chief Executive Officer, Director       March 26, 2003
Roger B. Whaley
</TABLE>

                                       48
<PAGE>

                                 CERTIFICATIONS

I, Roger B. Whaley, certify that:

1. I have  reviewed  this annual  report on Form 10-KSB of First South  Bancorp,
Inc.;

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

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

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

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

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

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

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

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

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

6. The  registrant's  other  certifying  officers  and I have  indicated in this
annual report whether there were significant  changes in internal controls or in
other factors that could  significantly  affect internal controls  subsequent to
the date of our most recent  evaluation,  including any corrective  actions with
regard to significant deficiencies and material weaknesses.


                                        s/Roger B. Whaley
Dated:   March 28, 2003                 ----------------------------------------
                                        Roger B. Whaley
                                        President & Chief Executive Officer






                                       49
<PAGE>




                                 CERTIFICATIONS

I, John W. Hobbs, certify that:

1. I have  reviewed  this annual  report on Form 10-KSB of First South  Bancorp,
Inc.;

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

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

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

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

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

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

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

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

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

6. The  registrant's  other  certifying  officers  and I have  indicated in this
annual report whether there were significant  changes in internal controls or in
other factors that could  significantly  affect internal controls  subsequent to
the date of our most recent  evaluation,  including any corrective  actions with
regard to significant deficiencies and material weaknesses.


                                  s/John W. Hobbs
Dated:   March 28, 2003           ----------------------------------------------
                                  John W. Hobbs
                                  Executive Vice President & Chief
                                  Financial Officer



                                       50
<PAGE>

      SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT
          TO SECTION 15(d) OF THE EXCHANGE ACT BY NON-REPORTING ISSUERS

         The Registrant  will furnish an annual report and proxy material to its
security  holders  after the  filing of this  report and  furnish  copies to the
Commission when they are sent to security holders.



                                  EXHIBIT INDEX

         Exhibit No. in
         Item 601 of
         Regulation S-B)                    Description

          *3.1                Articles of  Incorporation  of  Carolina  National
                              Corporation

          *3.2                Bylaws of Carolina National Corporation

          *4                  Form of stock certificate

          **10.1              Form of Stock Warrant Agreement (revised)

          *10.2               Employment  Agreement  between  Carolina  National
                              Corporation and Roger B. Whaley

          *10.3               Memorandum  of   Understanding   between  Carolina
                              National Corporation and Joe Pinner

          *10.4               Severance   Agreement  between  Carolina  National
                              Corporation and James A. Gunter

          *10.5               Lease  between  Carolina  National  Bank  &  Trust
                              Company and HHB Associates, LLC.

          *10.6               Lease  between  Carolina  National  Bank  &  Trust
                              Company and Carolina First Bank

          21                  Subsidiaries of Carolina National Corporation


*Incorporated by reference to Exhibits to Registrant's Registration Statement on
Form SB-2 (File No. 333-76512)

**Incorporated  by  reference  to  Exhibit  10.1  to  Registrant's  Registration
statement on Form SB-2 (File No. 333-97397).




                                       51